Bubble-omics Reborn?

Mix liquidity with greed and blow

Yesterday, the Dow exploded for its sixth biggest percentage gain ever. Happy times are here again, right? Wrong. All one had to do was glance on the other side of the front page to see that the Consumer Confidence Index plunged in October from an already dour, “put your money under your mattress and leave it there until the storm blows over” 61.4 in September to “bury your cash in coffee tins and start siphoning your neighbor’s gas” 38 (38!) in October. That’s the lowest reading in the history of the survey. Last year at this time, it was over 90.

Consumer spending drives more than two-thirds of our economy. Yet the fact that consumers are in their worst mood in recent memory didn’t stop Wall Street from partying like it was 1999. Why not? Because despite  Alan Greenspan’s recent, all too tardy recantation of his free-market zealotry, it looks like his former outfit, the Federal Reserve, can’t get Greenspan’s old song and dance out of their head.

The markets ignored the grim economic news all around them yesterday (ie: reality) and rallied because they knew the Fed was about to give them a Greenspan special: a fat cut in interest rates. Today the Fed answered their prayers and dropped the Fed Funds Rate to a measly 1 percent. The last time rates were that low was in 2004, when Greenspan was still considered a wizard instead of a sad, broken down goat who spent his entire adult life stubbornly adhering to a failed ideology.

Greenspan’s former love for low rates unleashed oceans of debt-fueled liquidity into the markets which, when mixed with the sudsy lubricant of greed, blew up first the dotcom bubble, then the housing bubble. Now, it looks like the Fed is trying to crank up the bubble machine again with its latest round of rate cuts and Wall Street is eager to start the fun.

Let’s see. How do we respond to this completely unsurprising crisis that was brought on by a lethal cocktail of shortsighted speculation and artificially cheap money? A) Through fiscal discipline, belt tightening and sacrifice or B) By soaking the market with more artificially cheap money and encouraging more shortsighted speculation? If you guessed A, I’m sorry, you’re obviously not qualified to operate the world’s most powerful central bank.