Alan Greenspan's much-anticipated speech Friday sounded like the first bars 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-old central banker absolved himself of any blame for the stock market bubble and attempted to discredit many of the criticisms of his tenure. The stock market's dramatic bust and the economy's stagnation have led an 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 feisty speeches. 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 powerful cheerleader for the U.S. economy, which he believed was experiencing a productivity miracle. And his all-round bullishness -- punctuated only by one or two speeches expressing caution, including the famous one that warned of "irrational exuberance" in stock prices -- was a key driving factor behind the meteoric rise in stock indices in the second half of the decade. With the Nasdaq back at 1997 levels, Greenspan and all those who believed in him are looking pretty silly. But the intellectual dishonesty and inner contradictions of his Jackson Hole speech will do little to rebuild his reputation. The barely repressed contempt for his critics that oozes 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 enough to prevent a maniacal increase in stock prices and a massively wasteful increase in spending on tech goods and services by businesses. If money supply growth had been kept in check, the Fed's opponents argue, then interest rates would've risen, and people would've been more careful with their investment choices, and the bubble would've been averted. Not so, says Greenspan in his Friday speech: "The notion that a well-timed incremental timing could have been calibrated to prevent the late 1990s bubble is almost surely an illusion." To support his case, he notes that increases in interest rates did not stop the stock market from rallying 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 a stock market correction that brought the market's price-to-earnings valuation to well below its long-term average, so a rally was to be expected. If you read carefully, Greenspan half admits that the 1994 period is not perfect for illustrating his point. He says: "Stock prices initially flattened, but as soon as that round of tightening was completed, they resumed 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 contribute massively to the stock market crash and profits recession, so it's fatuous to claim otherwise.
Stay the Course
The speech also contradicts itself. Greenspan said there is basically no way that a central bank can be sure whether a stock market bubble is brewing 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, what stopped him from acting? What stopped him from believing it was a bubble? The answer is that in the late '90s, Greenspan appeared to buy into 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 well below the productivity rates achieved in the '50s and '60s, when stocks were 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 the time . The most incredible intellectual trick that Greenspan tries to pull off in his speech is to argue that booms need not lead to busts. He says: "The key policy question is: If low-cost, incremental policy tightening appears incapable of deflating bubbles, do other options exist that can at least effectively limit the size of bubbles without doing substantial damage in the process? To date, we have not been able to identify such policies, though perhaps we or others may do so in the future." 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 that there has to be a bust. His failure to let that bust run its course is what is stopping the restructuring that U.S. corporations need so badly. It will happen, but probably when Greenspan has completed his run and left some poor sap with the job of really cleaning up the economy.