• 1994: Fearing inflation, he raised interest rates six times, but no inflation materialized.
• 1999: He ran scared about Y2K and flooded the U.S. with cash, but had to mop up liquidity in 2000 when the lights and computers stayed on. Greenspan’s own easy-money policies helped create the “irrational exuberance” on Wall Street, and the “slow crash” in the Nasdaq from 2000 to 2003.
• 2001-2003: After raising rates throughout 2000, he quickly reversed himself and pushed rates down to 1%, fearing a Japanese-style deflation. But the U.S. is no Japan; meanwhile, Wall Street had a field day making billions in closed-end funds and mortgage REITs.
• 2006: Now in his final days, Greenspan is threatening to create an inverted yield curve to fight inflation, even though inflation is on the decline.

I asked Paul Krugman what he thought of the new Fed chairman, Ben Bernanke. “He’s very good,” he said. “But we won’t really know for sure until he faces a real crisis, which could happen at any time.”

“Two years ago,” I said, “you predicted a ‘Great Unraveling’ under President Bush. Yet the economy is booming and the stock market is hitting new highs. Where did you go wrong?”

“What? No, no, my book is not about the economy, it’s about Bush’s politics. It’s spot on.”

Krugman apparently has a short memory. His book is mostly about the economy, and how Bush was destroying it in short order through tax cuts and deficit spending. Then I asked:

“Are you concerned that the price of gold is moving up sharply, and is now approaching $550?”

“Are you kidding?” Krugman said warmly. “Gold is a ‘barbarous relic,’ as Keynes said. It means nothing! I am, however, concerned about a collapse in real estate. It could be a disaster when it happens.”

“Are you selling your home?”

“Well, no.” And he walked away.

Earlier I met up with Gary Becker, a free-market economist from the University of Chicago. Yet he sounded an awful lot like Paul Krugman. “What do you think of Ben Bernanke as the new Fed chairman?” I asked.

“He’s very good.”

“With gold approaching $550 an ounce, is inflation a problem?”

“No, inflation is not a problem,” he said.

“What about the war in Iraq? Isn’t war inflationary?”

“This is a small war. It’s not inflationary.”

Then I talked with Joe Stiglitz, Nobel Prize winner from Columbia, where I taught for the past two years. Stiglitz spoke at a panel on ending global poverty. “Do you think inflation is a problem right now?” I asked.

“No, no problem.”

“Will Bernanke be a good Fed chairman?”

“Yes, he’s excellent.”

“Is there a solution to world poverty?” I asked.

“There’s no magic formula, no magic bullet, I’m afraid.”

The Extra Benefit of Halting the Rate Hikes

Other panelists at the meetings in Boston spent two full hours on their formulas for ending poverty and not once did any of them mention the most successful private-sector method for doing the micro-credit revolution! These panelists included Harvard professor Amartya Sen, also a Nobel laureate, and James Galbraith, son of famed John Kenneth Galbraith.

For those of you unfamiliar with micro-credit, it began several decades ago by Muhammad Yunus, a professor of economics in Bangladesh, who started loaning small amounts of money, from $100 to $300, to small groups of women.

It’s been so successful that the World Bank and several major international banks, such as Citibank and Deutsche Bank, have started their own micro-credit programs. I’ve met Muhammad Yunus, and found him to be a visionary genius. I highly recommend his book, Banker to the Poor.

Stay tuned as I carefully watch the actions of the new Fed chairman, Ben Bernanke. Hopefully, he will abandon Greenspan’s rate-increase policy. If the Fed stops raising rates, stocks will continue to rally. And so will gold. And world poverty will continue to decline. But if the Fed screws things up by raising rates too high, all bets are off.

Good trading,

Mark

Today’s Investment U Crib Sheet

• The Fed’s actions can be a huge source of profit for quick-minded investors. Ben Bernanke will offer plenty of opportunities for us to profit over the next few years. See Investment U # 481 for more on Greenspan’s record and Bernanke’s new role.
• Muhammad Yunus’ organization for micro-credit financing is actually owned by the community that it serves 90% of the Grameen Bank’ shares belong to its borrowers! For more information, visit http://www.grameen-info.org. Yunus’ book, Banker to the Poor, can be found on Amazon.