To: d. alexander who wrote (23206 ) 8/29/1999 1:45:00 PM From: d. alexander Respond to
speech redux: was interested to see Barrons' A. Abelson interpret (possibly) in favor of his own cherished received ideas.Abelson , the he being Mr. G.he indicated less savory factors also were at work... the use of stock options instead of cash to pay employees may be distorting (read: understating) wage inflation. Mr. Greenspan also commented on the role of leverage in kiting asset values, citing the ballooning of home equity loans Any speech that makes mention of Dutch tulip bulbs can't be considered entirely favorably disposed toward the stock market. And when that phrase trips off the lips of the chairman of the Federal Reserve, it's a tad unnerving. All the more so when it's coupled with the expletive "bubble." Greenspan There has always been a fuzzy dividing line between what is expensed and what is capitalized. This has historically bedeviled the accounting for research and development, for example. But the major technological advances of recent years have exposed a wide swath of rapidly growing outlays that, arguably, should be capitalized so that the returns they produce would be more accurately reflected as earnings over time. Indeed, there is even an argument for capitalizing new ideas, such as different ways of organizing production, that enhance the value of a firm without any associated outlays. Some analysts judge the size of undercapitalized outlays as quite large. But the newer technologies, and the productivity and bull stock market they have fostered, are also accentuating some accounting difficulties that tend to bias up reported earnings. One is the apparent overestimate of earnings that occurs as a result of the distortion in the accounting for stock options. The combination of not charging their fair value against income, and the practice of periodically repricing those options that fall significantly out of the money2 We live in what is, for the most part, a stable economic system, where market imbalances that produce unusual outcomes almost always give rise to continuous and inevitable moves back toward longer-run equilibrium. However, the violence of the responses to what seemed to be relatively mild imbalances in Southeast Asia in 1997 and throughout the global economy in August and September of 1998 has illustrated yet again that the adjustments in asset markets can be discontinuous, especially when investors hold highly leveraged positions and when views about long-term equilibria are not firmly held...
