The verdict: Did Greenspan cause market
plunge?
November 24, 2000 12:00 AM PT
by Ali Asadullah
The defendant: Alan Greenspan
The charge:
Letting stocks plunge
Judge's commentary: Even Einstein made
mistakes. But it took a long time for his critics
to come anywhere near proving even the
slightest computational indiscretion on his part.
Mr. Greenspan may not be the equivalent of
an economic Einstein, but he does have his
own uncontestable genius when it comes to
making the U.S. economy work. When it
comes time for a retrospective of his life and
service to the country, I have no doubt that he
will stand with the most impeccable record,
marred by few, if any, blemishes.
Unfortunately, this trial was not about homage, retrospective analysis or
reverence for a life lived well. This trial was about the moment -- a
snapshot of a performance at a very particular point in time. And the
question before the jury was whether Mr. Greenspan has been derelict
in his duties by standing idly by while the stock markets take a turn for
the worse, and tech bellwethers such as AOL (AOL), Cisco (CSCO),
Yahoo (YHOO), Intel (INTC) and Microsoft (MSFT) took a
beating.
The conventional argument in favor of Mr. Greenspan's recent
performance is that his responsibility is the broader economy, not the
indicators of that economy's strength. And amongst the jurors, plenty of
sentiment fell in favor of this view. Said Juror #121: "Greenspan is not
responsible to watch every moron investing in poor stocks. He is
controlling inflation (this is very important) and makes sure the economy
is good." (See juror's full statement)
Further clarifying this position, Juror #141 said: "Look all around and
you could see signs of trouble -- energy prices pushing up, real estate
prices pushing up, labor shortages pressuring wages up." Looking back
over time, the juror continued to say, "Remember the Carter years
when inflation was in the 'teens? Inflation wipes out wealth forever;
inflation is the real enemy. This Nasdaq correction was a minor blip in
the grand scheme of things. If you're having a hard time with that
concept, look at a 10-year graph: perfectly up and to the right, trending
right through the present level." (See juror's full statement)
There is no doubt that there are a host of factors weighing on the
economy at this very moment that need tending to. But again I must
reiterate that this case was about the need of the markets in specific.
And the vast majority of the jury recognized this. There is an alternative
perspective that many jurors latched on to: That the markets in the past
four years have moved so far beyond being mere indicators of
economic conditions that it is almost imperative to see to their
well-being in the same manner that one tackles inflation or
unemployment.
Said Juror #182: "When you are trying to prepare that last final nest egg
and do so in a manner that should be stable ... then someone as
powerful as [Alan] Greenspan should have answered the challenge to
help and stabilize the catastrophic condition of this market." (See juror's
full statement)
This juror brings up a very important point; namely, that with the
proliferation of individual investors over the past four years, the markets
have a very real impact throughout a larger portion of the population.
And if George W. Bush enters the White House and continues to
encourage personal management of retirement via investment, then the
movement of the markets truly can't be ignored.
But in establishing a collective voice against Greenspan, jurors chose
most frequently to fault Greenspan for simply going too far. "Greenspan
and the Fed have been raising interest rates over the past year to head
off inflation that does not exist," said Juror #180. (See juror's full
statement)
Said Juror #196: "Greenspan was completely wrong to raise interest
rates six consecutive times to a high 6.5 percent. Take a time lag of six
months into account and you can see that his wrongful actions have
caused many companies to lower their earning estimates just six months
after the second or third raise. His actions and higher energy prices have
put the breaks on the economy and made the market correction far
worse than it could have been."
The juror continued his indictment arguing: "The market would have
corrected by itself, as it always does, without the help of the Fed. They
have made things a lot worse and sucked the confidence out of
investors, businesses and individuals." (See juror's full statement)
Of course this plan assumes "responsibly investing," a term that has
become somewhat of an oxymoron as of late, it seems.
The verdict: Based on the sheer volume of negative sentiment
expressed toward Alan Greenspan, I have no choice but to rule against
him. Additionally I will offer the following reasoning:
There are some very real perceptions about the stock market that have
infiltrated popular discourse on the markets and business in general. In
general, the UpsideToday jury perceived that Mr. Greenspan has been
flawed in his attention to the markets in the midst of ratcheting down the
economy. It also perceived that a certain sense of urgency is necessary
on the part of the Fed when the markets begin to falter. Such
perceptions lead to real impacts on the economy as investor confidence
wanes and this is something that perhaps Mr. Greenspan should give
greater weight to moving forward.
However, the markets have corrected, not crashed. The economy has
slowed, not receded or depressed. And given Mr. Greenspan's prior
record as Fed chief, I am inclined toward leniency in sentencing. I
therefore order four years of court-supervised probation.
Court is adjourned. |
