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Greenspan Putlessness

Summary:
In the 1990s, there was the idea that equities were made safe because activist monetary policy would always be able to respond to a plunge, saving the real economy, and thus expectations of a sharp recession were thereby stabilised in the first place, making crashes less likely. The recent days’ trading takes place in a different world. First, the tools to back up the threat implicit in the put are not there to the extent that they once were.  Monetary policy in the West is still at practically maximal stimulus.  Fiscal policy is not to be depended on.   In the US, Japan, the Euro Area and the UK, there are idiosyncratic reasons why we would have to be really optimistic to expect the local politics to rustle up an adequate fiscal stimulus to take the place of monetary policy.   In

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In the 1990s, there was the idea that equities were made safe because activist monetary policy would always be able to respond to a plunge, saving the real economy, and thus expectations of a sharp recession were thereby stabilised in the first place, making crashes less likely.

The recent days’ trading takes place in a different world.

First, the tools to back up the threat implicit in the put are not there to the extent that they once were.  Monetary policy in the West is still at practically maximal stimulus.  Fiscal policy is not to be depended on.   In the US, Japan, the Euro Area and the UK, there are idiosyncratic reasons why we would have to be really optimistic to expect the local politics to rustle up an adequate fiscal stimulus to take the place of monetary policy.   In the US, Congress is at war with itself.  In the UK, the government is divided, paralysed by Brexit and the wisdom of a large further stimulus is controversial [the Tory brand rules it out].  In Japan, fiscal policy has done as much as it can.  In the Euro Area, the North is temperamentally opposed to counter-cyclical fiscal policy, and many other countries cannot afford it.

Further, the Great Financial Crisis rather unravelled, such as it was, public perceptions about the capability, even when the tools are available, of policymakers to keep the business cycle under control.  It would be much harder to publish a paper nowadays entitled  ‘The Science of Monetary Policy’.

It’s arguable whether the Greenspan put was ever more than an idea.  But both because the tools are lacking, and a reasonable person’s estimation of the authorities’ ability to wield them to good effect has fallen, it makes even less sense now.  For this reason, we might expect equities to be more jittery now than they were pre-2008.

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Tony Yates
Economist. Consulting, lecturing, a book. Ex Prof at Bham, Ex BoE staffer. Macro, policy, monetary econ, occasional nonsense.

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