Here's a decent analysis of your "new economy". It remains to be seen if you can debate or make a coherent argument that doesn't involve personal insults. When you grow up, people might start actually paying attention to your posts:
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Money & Investing
Blame Greenspan
James Grant
09/03/2001
Forbes Magazine
Page 116
Copyright 2001 Forbes Inc.
The chairman's ill-timed optimism seduced investors and helped inflate the bubble.
Recent sensational congressional testimony has revealed what Wall Street security analysis usually is not. It usually is not analysis. It is marketing, and if by mistake an analyst should produce a piece of analysis instead of a marketing brochure, the miscreant is summarily fined one seven-figure bonus.
However, it wasn't only the bought-and-paid-for analytical community that led the investing public down the garden path. There were greater seducers, not least the chairman of the Federal Reserve Board.
Wall Street, though not always corrupt, is almost always bullish. The fundamental source of distortion of investment values over the past several years was the speculative bubble. A bubble is a boom so outsized it leads even level-headed people to lose their judgment. Alan Greenspan, whose 1996 suggestion that investors are susceptible to bouts of "irrational exuberance" temporarily made him the public's least favorite central banker, fell in with the new age. He seemed not to notice that the boom he seeded (and accommodated and celebrated) was becoming a monstrosity. On Mar. 6, 2000, just 96 hours before the Nasdaq market top, the chairman gave, at a conference in Boston, a speech entitled "The Revolution in Information Technology."
Through its monetary policy the Fed was then leaning against the wind. The 5.75% funds rate was on its way to 6.5%, where it would remain until the cutting began in earnest on Jan. 3. In his rhetoric, though, Greenspan leaned the other way. The Boston speech described a world embarked on a new age of technological wonder, productivity growth and transparency.
Previously, said Greenspan, "most business decisions were hampered by a fog of uncertainty. Businesses had limited and lagging knowledge of customers' needs and of the location of inventories and materials flowing through complex production systems. In that environment, doubling up on materials and people was essential as a backup to the inevitable misjudgments of the real-time state of play in a company. Decisions were made from information that was hours, days or even weeks old."
Within nine months Silicon Valley would wake up to discover that its customers had disappeared. Far from lifting, the fog of uncertainty blanketed the executive suites of even the companies that made the computers that supposedly had removed the uncertainty.
Of course, the chairman told the Boston conference, technological benefits can be realized only through capital investment, and on the prospects for investment he became, for him, lyrical.
"Technological synergies have enlarged the set of productive capital investments," said Greenspan, "while lofty equity values and declining prices of high-tech equipment have reduced the cost of capital.... The fact that the capital-spending boom is still going strong indicates that businesses continue to find a wide array of potential high-rate-of-return, productivity-enhancing investments. And I see nothing to suggest that these opportunities will peter out anytime soon."
Another central banker might have realized that the availability of essentially free speculative capital distorts decision making, coaxing out more capital investment than can profitably be put to use. Not Greenspan, who went on to lend his imprimatur to the preposterous valuations then prevailing in the business-to-business branch of the Internet trade. The Bloomberg B2B stock index peaked three days later--and has now fallen 95%.
The cyclical cards lay face up on the table in February 2001, when Greenspan delivered his semiannual report to Congress. He sounded wise after the fact, declaring that a "temporary glut" in high-tech manufacturing was "inevitable at some point." But he missed the point that the glut was the product of the bubble--and of the systematic undervaluing of capital and credit, and therefore of risk.
Greenspan ventured an ill-timed expression of optimism for corporate profitability, then in the process of collapsing. Corporate managers, "rightly or wrongly," remain sanguine about the prospects for technological innovation continuing to drive productivity growth and profitability, he said. "At least," he went on, citing a source that sounds even more dubious today than it did then, "this is what is gleaned from the projections of equity analysts, who, one must presume, obtain most of their insights from corporate managers."
No one demands that central bankers be clairvoyant. But they can and should be prudent.
James Grant
is editor of Grant's Interst Rate Observer. Find past columns at www.forbes.com/grant. |
