Good question too!
Here is an article from Buisness week online that just came out a couple of hours ago.
Strategy Shift for the Fed?
Greenspan is still chary about making it policy to deflate perceived bubbles, but he now admits that inflated asset prices can't be ignored
Federal Reserve Chairman Alan Greenspan has always stoutly defended the central bank's handling of the late 1990s stock market bubble and its aftermath. He has argued that it's difficult, if not virtually impossible, to identify a bubble before it bursts.
And even if one could be recognized early, he has contended that the Fed lacks the tools to delicately deflate it without severely harming the economy in the process through sharply higher interest rates.
Better for the central bank to step aside and wait for the bubble to pop, and then act to shelter the economy from the fallout. And, at least to hear Greenspan tell it, that strategy has succeeded, as the economy suffered only a mild recession in the wake of the 2000 collapse of stock prices.
INVESTORS BEWARE. But now, though, Greenspan has begun to publicly admit that the Fed needs to pay more attention to stock market and other asset prices in setting monetary policy than it has in the past.
"The structure of our economy will doubtless change in the years ahead," he told the annual elite gathering of central bankers from 30 countries gathered in picturesque Jackson Hole, Wyo., to celebrate his 18 years as chairman of the Federal Reserve Board. "Our forecasts and hence policy are becoming increasingly driven by asset price changes."
And, in a throwback to his warning of about a decade ago of "irrational exuberance" in the stock market, Greenspan cautioned investors of today that they may be becoming too complacent about the financial and economic risks that lie ahead.
LITTLE CHOICE. He suggested that might be the case in rising prices for stocks, bond, and lately, homes. "History has not dealt kindly with the aftermath of protracted periods of low-risk premiums," he said.
In some sense, Greenspan has little choice but to recognize the growing importance of asset prices to the economy and monetary policy. Look at what has happened over the last 10 years. The stock market boom of the late 1990s sharply boosted household net worth, especially of upper-income families.
That helped fuel a consumer spending spree and powered the economy forward. After the bubble burst and the economy dipped into a recession, it was a surge in home prices -- fueled in no small part by the Fed's low interest rate policy -- that buttressed household net worth and allowed consumers to keep on spending.
Increasingly, it seems, wealth, rather than income from wages and other sources, is driving consumer spending decisions, especially on big-ticket items.
NO GUARANTEE. But the growing importance of asset prices in fueling the economy poses tricky problems for the Fed. Asset prices can suddenly shift direction. Witness the 1987 stock market crash that took place just months after Greenspan started at the Fed and which lopped an incredible 20% off share values in a single day.
Although Greenspan was able to protect the economy from the fallout of that crash, there's no guarantee the Fed would be able to do the same again -- especially given the increased importance of stocks in Americans' portfolios.
Greenspan isn't turning his back on the strategy the Fed followed in coping with the late 1990s stock market bubble. He still believes that was the best approach to take. But in acknowledging the growing importance of asset prices to the economy, he's recognizing that the Fed's strategies may need to shift after he steps down as chairman in the new year.
Gee, if Greenspan can't see where the economy is going than god help us.
Or better still send a delegation to Oz and check the RBA.
They identified (in my opinion) a overheated housing market and with 2, 1/4 percent rises stopped it in it's tracks, and without a ensuing reccession.
They also had there hands on the levers again for a inflationary wages breakout.Not required so far.
Even I could see stocks breaking out at around the same time, April 03 (Baghdad bounce) with the smart money going to the stock market (ASX)
C'mon Greenspan, get real.