To blame Greenspan
for the bubble is asinine at best.
Oh, really?!
" December 5, 1996 marks the start of the modern bubble,
for on that date, Alan Greenspan gave his famous speech
warning of the "irrational exuberance" of the stock
market. But a clear sign that a bubble was coming
occurred the year before. On August 9, 1995, a year-old
company with no profits and little revenue made its IPO.
Netscape went public at $28 per share and shot upward
all day to close at $58, worth over $2 billion. Netscape
CEO Jim Clark's secretary, who knew nothing about stock
options before joining the company, ended the day worth
over $1 million. She retired two years later.
By late 1996, the S&P 500 index, the broadest and most
representative measure of big company stock values had
topped 750. It was selling for 20 times earnings, a very
high ratio in a strong economy. Stock prices had almost
doubled in the five preceding years.
It was time for the Fed to take away the punchbowl.
Instead, as Morgan Stanley chief economist Stephen Roach
said, "the Fed squandered the opportunity to pop the
equity bubble in late 1996 and early 1997." Worse, "an
`irrationally exuberant' equity bubble was suddenly
rationalized by a Fed that embraced the New Economy with
open arms."
By early summer 1998, the S&P 500 had risen by 60% to
1,200, and the bubble spread to Asian stock markets. In
August, however, financial markets in Asia (excluding
Japan) began to crack-falling 50% or more in a matter of
months. The Asia crisis put a number of U.S.-based
financial speculators at risk, most infamously Long Term
Capital Management. U.S. markets retreated 15%, but the
S&P 500 still hovered around 1000, one-third higher than
the irrationally exuberant levels of two years before.
The Federal Reserve faced a choice: it could let the
markets do what the Fed itself should have done in early
1997-deflate the U.S. bubble-or it could bail out global
interests in Asia and Wall Street. It chose the latter.
In an unprecedented move, the Fed summoned major Wall
Street investment banks to its New York offices to
arrange a bailout of Long Term Capital Management, and
on September 27, 1998 announced a bailout plan. The next
day, it began the first of three rapid rates cuts. The
markets got the message: "Don't fight the Fed." The
early bubble was over, and the mania began." |
