On Monday, I talked about a hypothetical situation where President Bush knew the tech-bubble burst just before he started his first term, and how he met with Greenspan in order to discuss avoiding a severe recession in the post tech-bubble environment.
My conclusion, and this is just my belief, is that Greenspan convinced President Bush that the only way to avoid a severe recession, and to not repeat the Japanese economic catastrophe, was to lower interest rates to the lowest they have been in a half-century. Here’s the continuation of my make-believe Greenspan/Bush discussion, after rates hit a 46- year low:
Bush to Greenspan: “Alan, my friends in Texas and New York tell me they’re making big money selling their properties. Those low interest rates sure did get consumers spending like you said they would.”
Greenspan to Bush: “Mr. President, it’s about time we started moving interest rates higher, even if it’s before the election, so we can cool the housing market and show everyone the economy is doing so well that we can even raise rates.”
Bush to Greenspan: “Good idea. You better do it before you have a housing bubble.”
And that’s where we are today. The Fed has raised the Federal Funds rate to 2% from its 46-year low of 1%, and the majority of economists believe that another quarter-point hike will come in December. Most analysts are calling for a Federal Funds rate of 3% by the end of 2005.
Greenspan and the President are happy because the stock market keeps moving higher, real estate has not crashed, and the economy looks good for now. Tomorrow, I will share with you my opinion on how this cozy situation will end.