Here is somethiong about Greenie:
THE FABULOUS DESTINY OF ALAN GREENSPAN
by Bill Bonner
"How do we know when irrational exuberance has unduly
escalated asset values, which then become subject to
unexpected and prolonged contractions, as they have in
Japan over the past decade?" asked the Fed chairman,
when he was still mortal. The occasion was a black-tie
dinner at the American Enterprise Institute in December
- five years ago.
"We as central bankers," Greenspan continued, "need not
be concerned if a collapsing financial asset bubble does
not threaten to impair the real economy, its production,
jobs, and price stability. But we should not
underestimate or become complacent about the complexity
of the interactions of the asset markets and the
economy. Thus, evaluating shifts in balance sheets
generally, and in asset prices particularly, must be an
integral part of the development of monetary policy."
Mortals make mistakes. But Greenspan was right on target
in '96. It was later, after he became a demi-god, the
"Maestro," that the Fed chief erred.
In 1996, the bear market of '73-74 and the crash of '87
were still functioning as caution signs. Greenspan spoke
on the evening of the 5th. On the morning of the 6th,
markets reacted. Investors in Tokyo panicked...giving
the Nikkei Dow a 3% loss for the day, its biggest drop
of the year. Hong Kong fell almost 3%. Frankfurt 4%.
London 2%. But by the time the sun rose in New York,
where the Fed chairman was better known, investors had
decided not to care. After a steep drop in the first
half-hour, as overnight sell orders were executed, the
market began a rebound and never looked back. By the
spring of the year 2,000, the Dow had almost doubled
from the level that had so concerned the Fed chairman.
But while the maestro was alarmed at Dow 6,437 he was
serene at Dow 11,722. Fatal to Greenspan's judgment was
a combination of bad information, bad theory and a human
nature that - though unchanged for many millennia -
seems to have avoided the notice of central bankers.
Greenspan's theory was that by carefully controlling the
cost of credit and the money supply he could avoid
serious economic downturns. You have suffered enough
discussion of this issue here in the Daily Reckoning,
dear reader. For today's purpose, we will just point out
that Mr. Greenspan has everything he needs to get the
economy back on track, except the essentials. He cannot
make telecom debt worth what people paid for it. He
can't restock consumers' savings accounts. He can't make
Enron a good business. He can't erase excess capacity,
nor make investment losses disappear.
In addition to the bad theory, Mr. Greenspan had bad
information. The "information age" brought more
information to more people - including to central
bankers...but the more information people had, the more
opportunity they had to choose the misinformation that
suited their purposes.
Since the late '90s, however, many of the figures used
to justify the New Economy have been revised, downward.
"The government previously decided that neither
corporate profits nor productivity improvements were
nearly as good as they appeared to be in 1999 and 2000,"
reports Floyd Norris in the New York Times. "And now the
industrial production numbers have been sharply revised
downward."
"The new numbers show industrial production was
dramatically overestimated, particularly in the high-
technology area," Norris quotes John Vail, the chief
strategist of Fuji Futures, a financial futures firm in
Chicago.
What was true for the nation's financial performance was
also true for that of individual companies. Companies
engineered their financial reports to give investors the
information they wanted to hear - that they earned one
penny more per share than anticipated. But what they
were often doing was exactly what Alan Greenspan worried
about - impairing balance sheets in order to produce
growth and earnings numbers that delighted Wall Street.
Curiously, during what was supposed to be the greatest
economic boom in history, the financial condition of
many major companies - such as Enron and IBM - actually
deteriorated.
But by 1998, Alan Greenspan no longer noticed; he had
become irrationally exuberant himself. Markets make
opinions, as they say on Wall Street. The Fed chairman's
opinion soon caught up with the bull market in equities.
As Benjamin Graham wrote of the '49-'66 bull market: "It
created a natural satisfaction on Wall Street with such
fine achievements and a quite illogical and dangerous
conviction that equally marvelous results could be
expected for common stocks in the future."
Stocks rise, as Buffett put it, first for the right
reasons and then for the wrong ones. Stocks were cheap
in '82...the Dow rose 550% over the next 14 years. Then,
by the time Greenspan warned of "irrational exuberance",
stocks were no longer cheap. But by then no one cared.
Benjamin Graham's giant "voting machine" of Wall Street
cast its ballots for slick stocks with go-go technology
and can-do management. Stocks rose further; and people
became more and more sure that they would continue to
rise.
"Greenspan will never allow the economy to fall into
recession," said analysts. "The Fed will always step in
to avoid a really bad bear market," said investors. Over
the long term, there was no longer any risk from owning
shares, they said. And even Alan Greenspan seemed to
believe it. If the Fed chairman believed it, who could
doubt it was true? And the more true it seemed, the more
exuberant people became.
"What happened in the 1990s," says Robert Shiller,
author of the book "Irrational Exuberance," is that
people really believed that we were going into a new era
and were willing to take risks rational people would not
take...people did not feel they had to save. They spent
heavily because they thought the future was riskless."
But risk - like value - has a way of mounting up, even
while it seems to disappear. The more infallible Alan
Greenspan appeared...the more "unduly escalated" asset
values became. Having warned of a modest "irrational
exuberance," the maestro created a greater one. |
