Greenspan: No Fan of The Entity


Greenspan is not a fan of The Entity. It’s not trying to bail out some troubled

firm, he says: rather, it’s trying to artificially support an entire asset class.

Which might not be a bright idea:

Greenspan argued that that a delicate market psychology could be speared

by the move. “It could conceivably make [conditions affecting investor

psychology] somewhat adverse because if you believe some form of artificial

non-market force is propping up the market you don’t believe the market

price has exhausted itself.

“What creates strong markets is a belief in the investment community

that everybody has been scared out of the market, pressed prices too low and

they’re wildly attractive bargaining prices there,” he said.

“If you intervene in the system, the vultures stay away,” he said.

“The vultures sometimes are very useful.”

I agree with Greenspan on the

usefulness of vultures, although I’m not convinced about the usefulness

of pop psychology in these kind of situations. Talk of "capitulation"

and prices "exhausting" themselves and the like is a kind of market

anthropomorphism which rarely sheds much light on market movements; in fact,

it comes very close to technical analysis. If there’s some undeniable improvement

to liquidity as a part of this plan, then I don’t think psychological considerations

should be enough to derail it.

(A short summary of Greenspan’s comments is here,

if you hit a firewall.)

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