In short, the dot-com bust was the last chance for the Fed to pivot and liberate the American economy from the corrosive financialization it had fostered. A determined policy of higher interest rates and renunciation of the Greenspan Put would have paved the way for a return to current account balance, sharply increased domestic savings, the elevation of investment over consumption, and a restoration of financial discipline in both public and private life. Needless to say, the Fed never even considered this historic opportunity. Instead, it chose to double-down on the colossal failure it had already produced, driving interest rates into the sub-basement of historic experience. This inexorably triggered the next and most destructive bubble ever. – David Stockman, The Great Deformation
Over the course of the roughly twelve and a half years from Black Monday to the beginning of the end for the dot-com bubble, the Fed effectively engineered a mania by facilitating the explosion of bank loans, GSE debt, and the shadow banking complex, which together grew from under $5 trillion in 1987 to $17 trillion by the beginning of 2000.
For evidence that this expansion was indeed the work of monetary authorities and was not funded by an increase in America’s savings, look no further than the following chart which shows an accommodative Fed and an increasingly savings averse American public:
When the Nasdaq collapsed, the Fed was given an opportunity to restore some semblance of order and discipline to a market that had learned to rely on the Greenspan put. Instead, it chose to inflate a still larger bubble and now, courtesy of Janet Yellen’s friends at the San Francisco Fed, we know precisely why.
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