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Investors in financial assets should worry about 'excessive exuberance'

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Saturday, June 15, 2013, 9:00 p.m.

In the early 2000s, then-Federal Reserve Chairman Alan Greenspan coined the term “excessive exuberance.” Today, some important central bankers appear to support the Federal Advisory Council in warning that sustained injections by the Fed of synthetic cash should be tapered off. This could make conditions difficult and worrisome for investors.

In mid-May, Fed Chairman Ben Bernanke merely hinted that a tapering-off of this infusion of cash should be considered to hold down bond interest rates, or quantitative easing. It was enough to shock financial markets and cause Bernanke to dilute his original remarks.

Paul Volcker, perhaps the most venerated post-war, former Fed chairman, recently told the Economic Club of New York that a central bank's prime responsibility is to maintain a “stable currency.” He added that the Fed likely will “fall short” by being asked to achieve the dual mandate of a sound currency and full employment.

Richard Fisher, president of the Dallas Federal Reserve Bank, told an audience in Toronto earlier this month that central banks are becoming concerned about how any action they take to curb their QE programs will result in an adverse reaction by financial markets. “We cannot live in fear that, ‘Gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine,' ” he said afterwards.

Former Fed Chairman Alan Greenspan gave a most illuminating interview on this issue to CNBC on June 6. As the author of the greatest asset boom in history — which resulted in deep recession and a threatened crash in 2007 — Greenspan's remarks were of particular interest. Remarkably, he urged the Fed to “get moving” in beginning to taper off QE.

“I think we've got to do it, even if we don't think (the economy) is strong enough,” he said.

What could have inspired four of the most important central bankers in the world to make such seemingly “unhelpful” remarks?

Could it have been that financial markets are giving increasing signs of “excessive exuberance,” and raising the danger of speculative collapse? Or could it be a growing awareness that sustained QE could produce both financial risk and economic harm?

In 1913, when President Woodrow Wilson agreed to legislation forming the Federal Reserve Board, he insisted that the Fed's governors report every quarter to a supervisory board, the Federal Advisory Council. As these reports were kept secret, little has been known of this “supervision” by twelve bankers representing the Fed districts and, presumably, in touch with Main Street.

Thanks to courageous past pressures by people such as Rep. Ron Paul, R-Texas, and a Freedom of Information Act request by Michael Bloomberg, the Fed's reports to the FAC were ordered to be made public. When the first minutes of those meetings were released last month, they showed a growing realization that sustained QE is proving ineffective and has created serious financial risks and potential structural problems for banks.

QE could be ending far faster than markets have calculated. Investors in financial assets should be concerned by that possibility.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Total Trib Media. Email him at

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