Greenspan, Bubble-Head 
<BR/>for Our Age

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.

Back to the Drawing Board

The central charge against Greenspan is that he didn't act early enoughto prevent a maniacal increase in stock prices and a massively wastefulincrease in spending on tech goods and services by businesses. If moneysupply growth had been kept in check, the Fed's opponents argue, theninterest rates would've risen, and people would've been more careful withtheir investment choices, and the bubble would've been averted.

Not so, says Greenspan in his Friday speech: "The notion that awell-timed incremental timing could have been calibrated to prevent thelate 1990s bubble is almost surely an illusion."

To support his case, henotes that increases in interest rates did not stop the stock market fromrallying in 1988-89, in 1994, and in a period from mid-1999 to early 2000.

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.

Stay the Course

The speech also contradicts itself. Greenspan said there is basicallyno way that a central bank can be sure whether a stock market bubble isbrewing or not. But as Northern Trust chief economist Paul Kasriel notes: "If he knows so little, why has he been such an activist central banker?"¿

In fact, Greenspan did fret about whether speculative excess was in the making,¿but he just got overly relaxed in the late¿'90s. In Friday's speech,¿ he prides himself on warning in July 1997 congressional testimony that a bubble may be in formation.

Well, if he had the statistical data to raise that fear in 1997, whatstopped him from acting? What stopped him from believing it was a bubble?The answer is that in the late '90s, Greenspan appeared to buyinto the belief that the U.S. was undergoing a big step up in productivity.There was an improvement from '80s levels, but the '90s always were wellbelow the productivity rates achieved in the '50s and '60s, when stockswere much cheaper. And even as stocks began their slide, Greenspan, showing how¿far this¿great intellect had stooped, was pinning his hopes on Wall Street analysts' profit projections, as Detox 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.

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