Leave it to some polititian to screw everything up:
NEW YORK, Feb 26 (Reuter) - The following are excerpts from the question and answer session
following the first leg of Federal Reserve Chairman Alan Greenspan's semi-annual
Humphrey-Hawkins address before Congress.
Greenspan addressed the Senate Banking Committee at 1000 EST/1500 GMT.
SEN. FAIRCLOTH (R-NC): "Since your ('irrational exuberance') statement, the (stock market)
continues to go up. Is there something in the economy other than maybe an irrational exuberance or
a temporary excitement to create a bull market? Or, is there simply so much money in savings and
retirement accounts that there isn't anywhere to put it -- that is forcing the market up ... which is
causing it?"
GREENSPAN: "The issue that I put on the table back in December was a question for monetary
policy considerations. And when I emphasize that it is a very difficult judgment for us to make when
we believe there is irrational exuberance out there. It's not markets that are irrational ... it's people
who become irrationally exuberant on occasion ...
"The more important question which you raise is what's driving the market. The market is being
driven not, as best as I can judge, by the large expansion of funds. In other words, we've seen this
really quite extraordinary growth in the mutual fund industry, for example.
"I think you can explain the current market levels by what economists call the risk factors (or) the
discount factors involved in discounting forward expected earnings in corporations, and that is low.
It has declined quite significantly because long-term interest rates are part of that. There are two
components: one is the riskless rate of return, which is best proxied by long-term U.S. Treasury
rates, and what we call an equity premium, which is the rate of return on equities which the market
requires for equities over-and-above the riskless rate.
And the analytical breakdown of the market change in the last several years is explainable in terms
of the dramatic increase in expected earnings growth over the long run and the decline in the ...
discount factor.
"It's not required that we look at the flows of funds to explain what is happening. Indeed, history
tells us that flows of funds very rarely impact the level of stock prices ... which are the present value
of expected future returns for individual companies. Who owns the stock, how much is moved
around, obviously does affect the price in the short run. But in the long run, the price is determined
by how good a company it is."
(( -- N.A. Treasury Desk, 212-859-1660 )) |
