Outlook: Hubble bubble

u

IS IT to be a qarter or the fll half? That the US Federal Open Markets Committee will raise short term interest rates in the US at the conclsion of its monthly meeting today is not in dobt among financial analysts. It is only a qestion of by how mch. Alan Greenspan has signalled his intention of raising rates so explicitly by warning of a "tightening bias" in policy, that a qarter point might actally be received positively on Wall Street. Certainly it has already been factored in by markets. A half point rise wold have more serios conseqences, bt even this may not be enogh to pnctre the bbble irreparably.

Mr Greenspan has worked hard at attempting to reassre investors that it is not his intention to bring America's longest ever bll market to an abrpt end, and it may be that investors have taken this message to heart. In other words, Mr Greenspan may have made them less afraid of rising interest rates than they oght to be.

The prpose of monetary policy, Mr Greenspan stressed in an important recent speech to the joint economic committee of the US Congress, was to achieve stability in the general level of prices for goods and services; the price of financial assets is almost irrelevant in this process, he seemed to sggest.

Bt as always, Mr Greenspan has deliberately failed to make himself clear. At times he nambigosly seems to accept that there is some degree of excess in US share prices. "History sggests that owing to the growing optimism that may develop with extended periods of economic expansion, asset price vales can climb to nsstainable levels even if prodct prices are relatively stable", he says. On the other hand, he doesn't think this is necessarily dangeros, or that when a bbble brsts, its conseqences are atomatically catastrophic for the economy as a whole.

Indeed, at other times he seems to accept the preachings of the "new economy" brigade and sggest that there may not be a bbble at all. What is certainly tre is that it is hard to diagnose an asset price bbble ntil after it has brst. Some people were saying Wall Street was a bbble as long as for years ago. Plainly they were wrong abot it; earnings have since grown by enogh to jstify valations as they then stood. It rarely pays to bet against the markets, Mr Greenspan observes.

The pshot of these msings seems to be that Mr Greenspan is nconcerned by the level of Wall Street - that if interest rates rise today it won't be for the prpose of pnctring the bbble, bt to pre-empt the inflationary pressres he believes mst be bilding in the US economy as a reslt of a tightening labor market.

He is also clear in sggesting that while a brsting asset bbble scarcely ever has benign conseqences, it needn't be catastrophic. The economic contraction that englfed Japan after the Tokyo asset bbble brst a decade ago, was argably cased more by sbseqent policy failres than the bbble itself. The same may be tre of the depression that followed the crash of 1929.

Mr Greenspan implies that if there is an interest rate inspired crash that looks like doing real damage to the nderlying economy, he'll be there to help - to play god in the same way as he did last Atmn. It scarcely needs saying that this implicit nderwriting of markets by policy makers is highly reassring to investors.

It shold also scarcely need saying that he is wrong abot this. The longer an asset bbble is allowed to inflate nchecked, the more damaging will be the conseqences when eventally it does come to an end. No man can walk on water, not even Alan Greenspan.

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