Greenspan: Net stocks not just hype
Fed chief sees investors operating on 'lottery principle'
By Rex Nutting, CBS MarketWatch
Last Update: 12:11 PM ET Jan 28, 1999 Net Stocks
WASHINGTON (CBS.MW) -- Internet stocks aren't just hype, Federal Reserve Chairman Alan Greenspan said Thursday.
Appearing before the Senate Budget Committee, Greenspan gave his most extended comments yet on the Internet stock craze that has sent the value of many virtual companies soaring far above those of their brick-and-mortar counterparts. See related story.
The Fed chairman, who has warned in the past about "irrational exuberance" in the markets, seemed to take an evenhanded approach to the question of whether Internet stocks are overvalued.
Greenspan said some Internet companies are bound to become major players as "a significant part of the distribution of goods and services in this country" moves to an Internet-based system. "They very well may justify even higher prices," he said. But "the vast majority are almost sure to fail."
"Of course there's some hype, there's hype in lots of things," Greenspan said in response to questioning by Sen. Ron Wyden, D-Ore. But the central banker pointed to Internet stocks as an example of how the securities markets "endeavor to ferret out the better opportunities" and fund them before they're able to turn a profit.
"That's good for our system," Greenspan said. "With all of this hype and craziness ... it's probably more a plus than minus."
Something that Greenspan described as "the lottery principle" is at work in the world of Internet stocks. Just as in a lottery, he said, investors are willing to pay a premium when the potential payoff gets high enough.
"What that means is when you're dealing with stocks, the possibilities of which are, either it's going to be valued at zero or some huge number," he said. "You get a premium in that stock price, which is exactly the same sort of price evaluation process that goes on in a lottery."
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