Ben Bernanke, current captain of the Federal Reserve, is praised for having steered the ship out of stormy waters. Not too long ago, Alan Greenspan enjoyed the same praise and recognition. Greenspan’s financial alchemy averted a deep and prolonged post-tech bust bear market.
How? Nothing makes investors happier than rising prices. Lower interest rates and easy money brought about the biggest real estate boom in decades. You probably know where this is going … the real estate boom didn’t last. In fact, it ended abruptly and took stocks with it.
Where did Greenspan go wrong? He tried to stop the burst of one bubble by creating another. What is Bernanke trying to do know? As per his own admission, he wants to inflate the stock market. After all, if stocks go up, everyone is happy. In essence he’s creating another bubble.
If you think rising stock prices are validated, consider how unemployment, earnings and dividends today compare to a few years ago.
First off, unemployment. In August 2007, when the Fed lowered the discount rate, the unemployment rate was 4.7%.
December 2008: The Fed reduced rates to just north of zero, when the unemployment rate stood at 7.4%.
March 2009: Fed launched QE1 with unemployment at 8.6%.
November 2010: Fed rolled out QE2, and unemployment stands at 9.6%.