Remarks by Chairman Alan Greenspan
New challenges for monetary policy
Before a symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming
August 27, 1999
"History tells us that sharp reversals in confidence happen abruptly, most often with little advance notice. These reversals can be self-reinforcing processes that can compress sizable adjustments into a very short time period. Panic market reactions are characterized by dramatic shifts in behavior to minimize short-term losses. Claims on far-distant future values are discounted to insignificance. What is so intriguing is that this type of behavior has characterized human interaction with little appreciable difference over the generations. Whether Dutch tulip bulbs or Russian equities, the market price patterns remain much the same.
We can readily describe this process, but, to date, economists have been unable to anticipate sharp reversals in confidence. Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect. To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes"
"But from time to time, this process has broken down as investors suffer an abrupt collapse of comprehension of, and confidence in, future economic events. It is almost as though, like a dam under mounting pressure, confidence appears normal until the moment it is breached."
bog.frb.fed.us
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Greenspan calls rise in
stock market inexplicable
Fed must reformulate monetary policy
DOW JONES NEWSWIRES
JACKSON HOLE, Wyo., Aug. 27 ? Federal Reserve Chairman Alan Greenspan said Friday the ?extraordinary? rise in U.S. stock prices in the last five years has been mostly inexplicable and said central bankers around the world must focus on changes in asset values in formulating monetary policy.
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