Letter Written to Mr. Alan Greenspan, FED Chairman

June 21, 2001

Dear Mr. Greenspan,

Your actions seem to indicate that you are too obsessed with the stock prices.  In 1999-2000, the stock market was behaving like a bubble and you were correct by pointing out the "irrational exuberance."  But you committed serious errors by increasing interest rates when there was no hint of inflation in 1999, apparently to punish the stock market.  These actions of yours were highly irrational because altering stock market behavior is not in your domain.  If you think rationally, then you notice that investors and stock market speculators are searching for the next Oracle or Microsoft or Intel or Yahoo!, which were pooh-poohed when they first came into being because no one believed then that any novice technology company could ever dominate IBM!  As a result of their search for the next potential leader, investors and speculators often bid up the stock price of a company with a new technology.  But, such technology upstarts and their stock prices get slashed when more information about the company becomes available.  The point I am making is that investors are smarter than you or the economists at the Federal Reserve System to self-correct stock prices.  The BOG must not show the investors a dagger by artificially raising interest rates, ostensibly to preempt any non-existing inflation, but tacitly to cow down stock investors.  Do you or your blind trust own stocks?  Could you make that information publicly available?  Your irrational monetary policy seems to have lost credibility.

By raising interest rate, you seem to have preemptively killed an economy growing without inflation.  Now, you seem to be nervously cutting interest rates and approving of tax cuts.  Incidentally, these cuts are also redundant because banks and money lenders have been begging potential borrowers to borrow funds at much lower rates than those "set" by the FED.  Tax cuts are predicated on huge forecast budget surplus.  I see the surplus as virtual because government tax revenues climbed to their unprecedented levels when corporations made huge profits and investors cashed-in their massive capital gains.  Now, you will see losses everywhere and the tax collection will be totally stifled.  Thus, in effect, a part of the stock bubble has gone to the government, while ordinary investors are holding massive debts and shrinking values of their retirement portfolios.

You and President Bush are dreaming of getting any more froth of a bubble that has been burst.

I see the US economy in a very disastrous shape.  The massive amount of capital that was siphoned to the USA from the rest of the world has been shrunk in value.  This is good for the world at large because these were capitals of the rich in those countries; like the Russian oligarchs or other dictators in various developing countries that had pocketed their IMF/WB assistance, drug lords, and exporters from the rest of the world investing in stocks and bonds in USA.  That era of virtual prosperity of the USA is gone because there is no more capital to come from the rest of the world to this kingdom on earth.  The US government has in effect collected massive amounts from taxpayers to lend through IMF to countries like Russia, Pakistan and Indonesia.  You have to dream of collecting those sums, for the USA cannot nuke a nuclear Russia or Pakistan!  How can Pakistan repay $38 billion when its exports are hardly $5 billion per year?

True, the money lent to Pakistan was used for arms purchases that came back to the USA.  But, in effect, the taxpayers' money went from the poor Americans (99% percent of them) to the rich!  Eventually, taxpayers will discover this game of transfer of wealth from the poor to the rich Americans and will stop paying increased taxes that the government hopes to be able to collect.  The virtual American growth is at huge risk.

If you respond, I may suggest what I think should be done at this stage.


Professor Sankar Acharya, Department of Finance

University of Illinois at Chicago


sacharya@uic.edu <mailto:sacharya@uic.edu>