Alan Greenspan's much-anticipated speech Friday sounded like the firstbars of his swan song -- sung to the tune of Je ne regrette rien. At a regular Fed shindig in Jackson Hole, Wyo., the 76-year-oldcentral banker absolved himself of any blame for the stock market bubble andattempted to discredit many of the criticisms of his tenure. The stock market's dramatic bust and the economy's stagnation have ledan increasing number of people to question his policies and his intellect.Some now believe that when the markets and economy stabilize, he will be edged out as Fed chairman. Perhaps knowing that his days are numbered,Greenspan on Friday delivered one of his most antagonistic and feistyspeeches. In the '90s, breaking with the tradition of the stern central banker who rarely comments on subjects other than monetary policy, Alan Greenspan spoke out on many economic and financial issues. He even became a powerfulcheerleader for the U.S. economy, which he believed was experiencing aproductivity miracle. And his all-round bullishness -- punctuated only by one or two speechesexpressing caution, including the famous one that warned of "irrationalexuberance" in stock prices -- was a key driving factor behind the meteoricrise in stock indices in the second half of the decade. With the Nasdaq back at 1997 levels, Greenspan and all those whobelieved in him are looking pretty silly. But the intellectual dishonestyand inner contradictions of his Jackson Hole speech will do little torebuild his reputation. The barely repressed contempt for his critics thatoozes out from the address suggests that he knows that.
All three examples are flawed, however. The first period followed astock market correction that brought the market's price-to-earningsvaluation to well below its long-term average, so a rally was to beexpected. If you read carefully, Greenspan half admits that the 1994 periodis not perfect for illustrating his point. He says: "Stock prices initiallyflattened, but as soon as that round of tightening was completed, theyresumed their marked upward advance." In other words, a tougher central bank did have an impact on stocks, and when it slackened, stock prices carried on going up. What's more,¿despite the rate hikes, money supply growth started increasing quickly in early 1995, and that surely helped stocks rise. As for the last period, that tightening did of course contributemassively to the stock market crash and profits recession, so it's fatuousto claim otherwise. noted at thetime. The most incredible intellectual trick that Greenspan tries to pull offin his speech is to argue that booms need not lead to busts. He says: "The key policy question is: If low-cost, incremental policytightening appears incapable of deflating bubbles, do other options existthat can at least effectively limit the size of bubbles without doingsubstantial damage in the process? To date, we have not been able toidentify such policies, though perhaps we or others may do so in thefuture." The translation of this is that we need to find a pill we can take so we can drink from the punch bowl all night and never go through a hangover. That'll never exist. All busts are created by the very booms they follow. Greenspan can't admit that he created the boom, so he can't admit thatthere has to be a bust. His failure to let that bust run its course is whatis stopping the restructuring that U.S. corporations need so badly. It willhappen, but probably when Greenspan has completed his run and leftsome poor sap with the job of really cleaning up the economy.