Jude Wanniski
December 1, 2000


From: "Angell, Wayne (Exchange)" <wangell@* * * * *.com>
To: "'Jude Wanniski'" <>
Subject:  RE: graphs
Date: Fri, 1 Dec 2000 19:23:25 -0500 

I  certainly agree that there was no shortage of liquidity in 1987.  The price of gold and the index of 10 core commodity prices were pointing to excess liquidity.  My previous point concerning the 1987 stock crash was that the Fed and Treasury going in opposite directions in September brought confusion to the market.  On September 3, 1987, the Board of Governors approved a 50 basis point increase in the discount rate, at the suggestion of both Angell and Johnson.  However, both of us tried to convince Greenspan that his suggestion to move the funds rate target up an additional 25 basis points was likely to be confusing to the markets.  And it was confusing--the market thought that the extra 25 basis points meant that the Fed had made a second increase three weeks after the first.  As I recall Alan did not simply use his between FOMC meeting authority, but it was an explicit understanding when we voted on the discount rate.  Neither Manley nor I formally objected at the meeting--our objections had been stated with conversations previous to the meeting.  Both of us said that the market would assume that the funds rate increase would be the same as the discount rate increase.  I always assumed that Alan Greenspan knew that supplying a slower growth rate of reserves consistent with a funds rate increase of 75 basis points would not be consistent with Treasury wanting a lower dollar. As I recall the dollar weakened somewhat in September  and October, up to
October 19, after the funds rate increase.  I remember, for sure, that the dollar began strengthening in the midst of the market plunge--which I said at the time that there was a flight of funds to the U. S. dollar even though the origin of the uncertainty was over U. S. Treasury dollar policy.

-----Original Message-----
From: Jude Wanniski []
Sent: Thursday, November 30, 2000 3:16 AM
Subject: graphs

I'm sending two Bloomberg graphs, one on the gold price for '87, one for  the two years '86-'87. Keep them somewhere as I will refer to them in a later discussion, when I get my papers further assembled. I will actually write my supply-side weekend lesson about 1987 as a case study.

The graph should tell you there was no shortage of liquidity. The problem was an excess of liquidity, which was causing the dollar to inflate. Note how gold jumped at the time the liquidity was injected, although as I said it was not used because there was no demand for liquidity, which meant it fell in the weeks that followed.

Volcker was concerned in the spring about the effect the surplus reserves > were having on the bond market and gold, I'm sure, but when JBIII killed his nomination and brought it Greenspan, it had the effect of leading to the Crash, as Greenspan took several months to get his footing.

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