|Stock Market Bloodbath and Greenspan’s Retreat
By Mike Whitney
03/05/07 "ICH" -- - The contagion in the global markets is
spreading like a brushfire and the shakeup that many of us have
anticipated for over a year appears to be unfolding. Whether
this is the “Big One” or not is irrelevant; a major downturn in
the stock market will expose many of the systemic
vulnerabilities in America’s “matchstick” economy and,
hopefully, trigger greater congressional involvement.
Last night Japan's Nikkei 225 index fell for a fifth day in a
row wiping out 8.6 % off the value of shares since hitting a
seven-year high a week ago. The market declined by 3.34 percent
to 16,642.25 points -- its biggest one-day fall in nine months.
(CNN). The mood in the market is decidedly grim and normally
enthusiastic investors are quickly dumping over-inflated shares
of popular stocks.
It’s a bloodbath and it’s bound to carry over into US markets
where the damage could be considerably worse.
The catalyst for the global correction is the growing strength
of the yen and its effects on the “carry trade”. Americans will
be hearing a lot about the carry trade in the next few weeks as
well as other unfamiliar terms. In fact, we’re all about to get
a crash course in sub-prime loans, hedge funds, derivatives and
the “global liquidity crisis”. These are the main factors
involved in what appears to be the beginnings of a major stock
In the next few weeks, we’re going to hear industry mandarins
and banking chieftains blame everyone else for the disaster
they’ve created. Overstretched and underpaid Americans will be
blamed for not saving their paltry wages and people with poor
credit will be assailed for taking out loans they had no
realistic chance of paying back.
But the real culprits are Alan Greenspan and the Federal
Reserve. These are the guys who engineered the lethal “low
interest” policy (after the dot.com meltdown) and flushed nearly
$10 trillion into the flagging economy. Greenspan created the
biggest equity bubble in history and put America’s economic
future on a treadmill to oblivion. Recent gains in stocks have
been predicated on margin debt, shaky hedge funds, and a
plethora of cheap money that has nested in the market; all of
these are directly related to Fed policy.
The Fed increased the money supply at such a furious rate over
the last 6 years that it's inevitable that a certain amount of
it would wind up in the stock market. That tells us that the
skyrocketing market had less to do with growth (GDP) and
confidence, than it did with the bundles of cheap greenbacks
Greenspan sluiced into the system.
The American economy is built on a mountain of debt and an ocean
of red ink. The masterminds at the Federal Reserve and the US
Treasury think they can stem the tide of economic Armageddon by
keeping the printing presses well-lubricated and running at
full-tilt; flooding the market with worthless scrip.
Perhaps, they can! (As I am writing this the market has
magically jumped from negative to positive territory!)
But is anyone taken in by this charlatan’s game? Institutional
investors are not scarfing up teetering US equities after an
Asian freefall! Something else is going on here and it stinks to
“Faith based” policy has its limits as we’re finding out in
Iraq. The men who control the economic levers can only achieve
so much with smoke and mirrors. They can prime the pump and
churn out the fiat-money faster then anyone imagined, but
eventually, reality will set in and the market will begin its
inexorable march into the void.
Greenspan anticipated this crackup. Hell, he probably oiled the
presses himself. That’s why he ambled off into retirement on a
high-note leaving the rest of us to clean up his mess. He knows
that Bernanke’s cheery braying on Capital Hill will amount to
nothing; just like he knows that Paulson’s baling-wire approach
to the economy is doomed to failure.
The “Maestro” has left us all in a major pickle. The stock
market is flat-lining, the recession is bearing down on us like
a laser-guided missile, and Dear Alan is slathering on the
sun-block at his favorite resort on the Riviera.
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