Federal Reserve Chairman Alan Greenspan said Friday that the U.S. central bank couldn't have deflated the stock market bubble during the late 1990s because a sharp rise in interest rates would have pushed the economy into recession. "The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion," Greenspan said in remarks before the Kansas City Fed's annual economic conference in Jackson Hole, Wyo. As evidence of this, Greenspan said the Fed raised interest rates by more than 3 percentage points in the late 1980's and mid-1990's, but that the markets continued to rise after a brief pause. Greenspan's speech came in response to critics who have argued that the Fed didn't take strong enough action to control stock market euphoria in the late 1990s. The Nasdaq surged a whopping 85% in 1999 and an additional 25% between January and March 2000. The S&P 500 jumped 24% from the start of 1999 to March 2000. Since the market peaked, of course, trillions of dollars in wealth have been wiped out and a string of former highflying companies have gone bankrupt or been sold off in parts. Greenspan said Fed policymakers struggled to understand developments in the mid '90s, and that "only history books and musty archives gave us clues to the appropriate stance for policy." Nonetheless, he said there was nothing the Fed could have done to prevent the bubble short of a sharp increase in interest rates "that engenders a significant economic retrenchment."
Greenspan with the economy down has become fashionable of late, and I can't blame those for delivering at least a little harsh treatment to a man who has been so closely identified with the economic success of the '90's," he wrote on RealMoneyPro. "But the criticism has reached almost extreme levels, particularly today, since his Jackson Hole speech has the tenor of someone who is backpedaling furiously." Gilmartin also said that "what people seem to forget is that Greenspan has only somewhat direct control over the banking system. ... What people also seem to forget is that with the banking system relatively healthy, and no credit or liquidity problems within the system, there isn't much else Greenspan can do. "This 'economy' isn't his fault," Gilmartin continued, "and I would even argue by moving when he did in 2001 he prevented worse decay."