Alan Greenspan comes under fire in The Economist’s write-up of the policy response to the October 19, 1987, stock market collapse known as Black Monday:
The biggest mistake was to do with monetary policy. Central banks around the world responded quickly to the crash, some cutting interest rates, others pumping money into the system. “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system,” said Alan Greenspan, recently appointed as head of the Fed. Calming a fraught financial system made sense at the time, but it introduced the idea of the “Greenspan put”, the notion that central banks would always intervene to support the markets when they fell sharply.
Perhaps the biggest conclusion of all is that any extended period of rapidly rising prices is an indication of a bubble—and that sadly there is no painless way to clean up the mess after the bubble pops.
2 Responses to “The Economist: The Wrong Lessons Were Taken From Black Monday”
IT IS INTERESTING TO NOTE THAT GREENSPAN ADMITS THAT IT IS THE FAULTY MONETARY POLICY OF CENTRAL BANKS THAT CAUSES VARIOUS TYPES OF ECONOMIC BUBBLES, SUCH AS, THE HOUSING BUBBLE, THE STOCK MARKET BUBBLE AND THE REAL ESTATE BUBBLE. FLUCTUATIONS IN MONEY SUPPLY HAVE ALSO BEEN BLAMED FOR CREATING BUSINESS CYCLES. THAT IS WHY MILTON FRIEDMAN ADVOCATED THAT THE SUPPLY OF MONEY SHOULD BE LINKED TO THE LONG TERM GROWTH OF THE U.S ECONOMY WHICH IS 2.5 PERCENT PER YEAR.
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