The time is June 2004: An alien U.F.O. lands smack dab in the center of Wall Street. A green little man descends onto the sidewalk and asks to see the "LEADER" of the U.S. financial system. Out of the mist, Federal Reserve chairman Alan Greenspan appears. Over the next few hours, Greenspan explains to the Martian how the Fed -- via interest rate policy -- is the puppet master of the overall economy and direction of stocks.
The Martian decides to stick around for the next five years and see this "Fed-Led" system first-hand. In the end, he will report back to his planet how "intelligent" these human life forms really are.
Here's what our extraterrestrial witnessed: After slashing interest rates 13 times from 2001-2003 to a 46-year low of 1%, the Fed finally decided to put an end to its "accommodative" policy. After all, the U.S. stock market had seemingly put the nightmare of the dot-com bust behind it by surpassing the 10,000 level. And the housing market was starting to fire on all cylinders, rising to the forefront as the bedrock of recovery.
The Fed's subsequent mission was clear: Keep the economy from overheating and deliver it to the much-coveted "soft landing." The way to achieve that goal: begin increasing rates. On this, the following news item from the time says plenty:
"Recovery On Track; Interest Rates To Rise... Growth remains strong. The Fed can and must concentrate on keeping inflation in check. Extraordinary low rates had once been needed to rescue the economy from the 2001 recession. Not now." (MSN Money)
And so it begins: From June 2004 to June 2006, the Fed jacks up rates 17 times to 5.25%.One year before its rate-hiking campaign ends, the U.S. housing bubble bursts with the peaking of the S&P 500 Housing Index. In the year after, the massive subprime implosion occurs, sending the U.S. economy into the worst recession since the Great Depression and stocks into a gut-wrenching bear market.
Not even the Fed's attempt to stave off crisis by slashing rates again -- TEN times to a record low of .25% between 2007 and 2009 -- could prevent the economy's "soft landing" from becoming an all out financial asteroid strike.
With his time on earth up, our little green man got on his spacecraft and never looked back.
In his groundbreaking 2002 book Conquer the Crash, EWI President Robert Prechter Jr. offered this insight into the mythology surrounding the Fed's assumed power:
"It's nearly impossible to find a treatise on macroeconomics that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses immense power to manipulate the stock market. The very idea that it can do these things is false. It is what I call the 'Potent Directors' Fallacy."
In reality -- the Fed has no such power. This is the revelation of Elliott Wave International's newest complimentary resource from Club EWI: the 35-page eBook titled "Understanding the Fed." Including excerpts from the selected works of EWI President Robert Prechter -- including his 2002 book "Conquer the Crash" and several past "Elliott Wave Theorist" publications -- this riveting report exposes once and for all the most dangerous myths about the Federal Reserve.
In Bob Prechter's own words: Once you can assimilate the truths contained in this eBook, "you will have knowledge of the banking system that one person in 10,000 has."