The Dukes of Hazzard

Bo and Luke usually tried to do the right thing. They would challenge Boss Hogg who was always trying a new get rich quick scheme or trying to rip off others with some shady activity. Sometimes they succeeded but other times they would inadvertently help Boss Hogg get his way. The local sherriff, Rosco, was an ineffectual police officer and did little to stop Boss Hogg. Bo and Luke didn't always understand the consequences of their actions. Let's face it - they liked making moonshine and racing around in the General Lee - their car. (If you didn't watch TV in the early 80's then I'm sure this is all lost on you.)

Anyway, take a look at the above chart of the Dow from the early 80's until now. I circled three market crisis'. In the 1970's Paul Volker made the Fed an active participant in curing our inflation woes. In the late 80's Greenspan took over. He was a true free-market capitalists and devotee of Ayn Rand. That is, the free market was great as long as everyone (read Wall St.) was making money. Greenspan encouraged speculation and assumed that the market would self-correct but in three crashes, two caused by market speculation and the third (9/11) caused by outside forces, he did not let the market self-correct. He pumped liquidity, through lower interest rates, into the market to get it moving back up as quickly as possible.

Here's the problem: for those who started investing for themselves or working on Wall St. sometime within the past thirty years, we have never seen a market crash that the Fed could not correct. If we think that the Fed will always save us then we are encouraged to take on more risk - we have nothing to lose because the market always quickly recovers (this is called a moral hazzard).

The Fed has done a good job of smoothing out the economic cycles and insulating the market from extreme risk. However, like Bo and Luke, the Fed didn't understand that sometimes they were not helping the right people and unfortunately, our other regulatory agencies acted more like Sherriff Rosco than Elliot Ness.