When the man who couldn’t recognize a stock market bubble says this, watch out.
Alan Greenspan’s monetary policies inflated not one but two massive bubbles, one in dot-com/technology stocks and then another in housing. Both times he missed the bubble. Both times he said afterward that his policies had nothing to do with it, something that almost no one else accepts. Just the other day, Greenspan asserted again that his actions in creating so much new money had absolutely nothing to do with the housing bubble. As we have pointed out before, it is true that, in George W. Bush’s memorable words, “Wall St. got drunk” during the housing bubble. But what do you think they were getting drunk on? It was of course the new money gushing out of Greenspan’s Fed.
Now Greenspan says that the stock market is cheap. This might be true but for one small fact. Corporate earnings have been inflated by a combination of the Fed financed government deficit spending and by the Fed’s cheap money policies. These earnings are about 70% above trend line and are completely unsustainable. Even leading Keynesian economist Robert Shiller agrees that current earnings are unsustainable and that as a result stocks are very expensive.
The truth is that both bonds and stocks today are in yet another bubble. And we all remember what happened when the last two bubbles burst. There was a little temporary pain on Wall St, before the massive bail outs, but it was really the middle class and especially the poor who paid the price.