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Without doubt, Greenspan did everything possible to help the U.S. economy eek out every available and borrowed ounce of expansion…did he not recognize that his actions were helping to create one of the largest stock market bubbles in history? Laugh. He may play coy but the man is not blind.
Yesterday Greenspan said that the Fed had no way of knowing for sure that the stock markets were in a bubble in the late 1990s. Further, Greenspan argued that even if the Fed had known that stocks were in a bubble they would not of had the means to stop the bubble from growing larger.
To begin with, Greenspan’s story does not make a lot of sense. To be sure, it does not take a genius to figure out that when companies with no earnings are trading with multibillion dollar market caps that something is amiss. Moreover, its does not take mystic analytical skills to deduce that when profitless multibillion dollar companies like AMZN and YHOO are turning over all of their outstanding shares every 15 trading sessions that the markets have become little more than a demand driven ponzi-pyramid waiting to collapse.
As such, and whether Sir Alan will admit it or not, Greenspan probably knew that the stock markets were in a bubble. However, rather than pop or attempt to slow this enlarging bubble (which he tried to do a couple of times with ominous statements) Greenspan opted to forget about rising stock prices altogether and focus on the economy. ‘Productivity gains are fabulous and inflation doesn’t exist’ or so Greenspan would proclaim as investors cheered…
Accordingly, Greenspan’s big mistake was not that he didn’t try to stop the bubble. Rather, that he acted just like the naïve investor absorbing pro forma EPS data as the gospel. For certain, no Central Banker should ever proclaim that manipulated productivity gains are beneficial to the economy when they ‘suspect’ that stocks are in a bubble. Furthermore, no Central Banker should ever argue that low inflation is an absolute economic positive when asset prices are thought to be in a bubble. Why? Because by attempting to legitimize economic strength this serves only to add fuel to the bubble – then the bubble serves to temporarily fuel the economy (this is a little confusing - but after a certain point Greenspan was no longer praising the economy but the stock market bubble itself and the impact the bubble was having on the U.S. dollar, consumer confidence, capital spending, etc). In short, bubbles cannot be ignored because productivity gains are high and inflation low. Rather, during extreme market manias all that matters is the mania! A lesson Greenspan is learning today.
With this in mind, that Greenspan failed to adopt any anti-bubble policies during the late 1990s is forgivable (after all, part of Greenspan’s job it to live by the belief that credit and money expansion are infinite). However, that Greenspan helped promote the bubble with optimistic rhetoric is deplorable.
Greenspan will go down in history as one of the most popular and influential Fed bosses ever. However, with yesterday’s speech he threatens to go down in history as being bungling icon of the ‘new economy’.
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