Myths of the Greenspan Era

As of Big Al's last day as chairman, the Nasdaq was still down well over 50% from its all-time peak. If there's a "Greenspan put," it's doing a lousy job. Indeed, if that's the kind of capital destruction that exists with the "put," I'd hate to imagine what we'd have seen without it. (Yes, that's sarcasm.)

The brutal post-2000 crash makes it hard to argue that the put is -- or ever was -- anything more than wishful thinking by a speculative public.

Myth 5: Greenspan as Economic Sage

At the risk of repeating myself, Greenspan's track record belies the consensus view of his economic prowess. Consider this sample of the Maestro's greatest misses:

July 20, 2004: Greenspan testified before Congress saying that rising energy prices "should prove short-lived." Crude prices have risen appreciably since then.

Summer 2004: Greenspan's advice to would-be homeowners: Consider adjustable-rate mortgages. Surprising advice, considering that fixed-rate loans were near half-century lows. Rates have subsequently increased.

May 2003: Greenspan made an amazingly bad call on natural gas when he warned of potential shortages; natural gas prices tumbled shortly thereafter.

Summer 2003: Fed concern about deflation led Greenspan to suggest the Fed stood ready to make open-market purchases of Treasuries to ensure rates stayed low. He even convinced the Treasury market into believing that rates would stay low for a long, long time. Bond buyers discovered (to the detriment of their holdings) that this statement was false.

October 1999: The Fed erroneously anticipates a Y2K-induced run on the banks, and it infuses liquidity. That surge in money supply effectively doubled the Nasdaq Composite from October 1999 to March 2000; I presume you recall how that ended.

1996: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?" Markets proceeded to rally strongly for another four years.

Free Lunch = Indigestion

One has to wonder why so many acolytes believe you can get something for nothing. Yet much of Greenspan's aura and the myth-making surrounding it is based on the theory of the free lunch: easy money, and lots of it, via low rates, lots of money supply.

Yet I recall the very first lesson in economics: "There is no free lunch." That simple truism seems to have escaped much of the Greenspan fan club. There are costs associated with such accommodations, ones that have yet to be paid for. That's why some time and distance may be necessary before we know the true measure of Greenspan's legacy.

In my opinion, the "Greenspan mystique" myth is as much a result of fortuitous timing as anything else: He started his gig as the Fed head honcho five years into the biggest bull market in history; 13 years later -- well before the tech wreck and dotcom crash -- his reputation had been cemented.

It's a Wall Street cliche, but it's still the truth, certainly in Greenspan's case: People still confuse a bull market with genius.