[PEN-L:29984] RE: Re: RE: Greenspan at Jackson Hole

["Devine, James" <jdevine@xxxxxxx>]

Title: RE: [PEN-L:29979] Re: RE: Greenspan at Jackson Hole

It seems to me that driving out the little guy could be a good thing. After all, it's Wall Street Wisdom that a sign of a bubble is when the "widows and orphans" (the small speculators) are getting in. They also need to be protected more than the Market-wise folks.

Further, it's likely true that jaw-boning without doing anything is weak, but when AG used the phrase "irrational exuberance," it made the market go down, even though the Fed didn't actually do anything. In fact, AG is the one who got scared and retreated from that rhetoric -- and later started praising the "new economy" to the stars, seeming to deny the existence of a bubble.

Further, adding a rise in margin requirements to irrational exuberance rhetoric would have an effect. Even if the margin requirement is pretty weak, people do care about what the Fedmeister thinks.

------------------------
Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine

I wrote:
> does he explain why he couldn't fight the stock market bubble
> using margin requirements or his own words, so that he didn't need
> to raise interest rates?

Ian responded, quoting
> the footnotes:
>
> ...the preponderance of research suggests that changes in
> margins are not an effective
> tool for reducing stock market volatility. It is possible
> that margin requirements inhibit
> very small investors whose access to other forms of credit is
> limited. If so, the only
> effect of raised margin requirements is to price out the very
> small investor without
> addressing the broader issue of stock price bubbles.
>
> If a change in margin requirements were taken by investors as
> a signal that the central
> bank would soon tighten monetary policy enough to burst a
> bubble, then there might be the
> appearance of a causal effect. But it is the prospect of
> monetary policy action, not the
> margin increase, that should be viewed as the trigger. In a
> similar manner, history tells
> us that "jawboning" asset markets will be ineffective unless
> backed by action.