Greenspan Defends Himself on'90s Bubble

New Haven Register ^ | 01/03/04 | Jeannine Aversa (A.P.)

[Holly_P]

WASHINGTON (AP) -- Federal Reserve Chairman Alan Greenspan defended himself Saturday against a criticism of his tenure, saying policy-makers would have damaged the economy in the late 1990s had they tried to burst that era's speculative stock market bubble.

"The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble while preserving economic stability is almost surely an illusion," Greenspan said in a speech to the American Economic Association's annual meeting in San Diego. A copy of his remarks was distributed in Washington.

Greenspan previously has defended the Fed's handling of the high-flying stock market late in the Clinton administration. In Saturday's speech, he said the Fed correctly focused policies on trying to mitigate probable damage from the eventual bursting of the bubble of stock market speculation.

"There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble's consequences, rather than the bubble itself, has been successful," Greenspan said. "Despite the stock market plunge, terrorist attacks, corporate scandals and wars in Afghanistan and Iraq, we experienced an exceptionally mild recession" in 2001.

Some critics have argued that the central bank made a major policy mistake by failing to curb stock prices as they soared. The bubble finally collapsed in the spring of 2000, wiping out trillions of dollars in paper wealth.

For the Fed to have influenced the level of stock prices significantly during the boom, Greenspan said, short-term interest rates would have had to have been ratcheted up high enough to risk severe damage to the economy.

Greenspan did not address in his speech the future course of short-term interest rate policy or the direction of the U.S. economy.

Amid signs the economy is gaining traction, economists believe Fed policy-makers will hold a key short-term rate at a 45-year low of 1 percent at their first meeting of this year on Jan. 27-28. Some analysts believe the Fed could begin to nudge rates upward as early as June. Others believe, however, that rates will stay where they are into 2005.

Many economists also believe the Fed's credit-easing campaign that started in January 2001 and saw the last cut in June 2003 probably has ended.

Greenspan said the Fed had been able to cut short-term rates so aggressively because inflation posed no threat to the economy. In fact, as the economy struggled to recover in the first half of last year, Fed policy-makers worried more about prices moving down, into deflation, rather than up, into inflation.

"We thought we needed to be, and could be, forceful in 2002 and 2003 as well because, with demand weak, inflation risks had become two-sided for the first time in 40 years," Greenspan said.

As he has in the past, Greenspan rejected the use of a device called "inflation rate targeting," which is used by some central banks. Using the tactic, a central bank sets an optimal target for inflation for the year, then manages interest rate policy to achieve that goal.

Greenspan said he preferred a more flexible approach to policy-making.

"Simple rules will be inadequate as either descriptions or prescriptions for policy," he said.

[mabelkitty]

I'm curious.
Why is he "defending" himself now.
Last I heard, he was immune from having to do his job.

[Support Free Republic]

Rank	Location	Receipts	Donors/Avg		Freepers/Avg		Monthlies
40	Utah	20.00	1	20.00	86	0.23	60.00	3

Thanks for donating to Free Republic!

Move your locale up the leaderboard!

[Bogey78O]

Well I can understand what he's saying. It's hard to talk reason into invesotrs without scaring them. But politics played a big part in it.

[Holly_P]

It's about his "legacy".

[rushfreedom]

bull hockey !!! He should take the blame. His "irrational exuberance" was correct, but he did nothing to curb it.

[Our man in washington]

Why is it Greenspan's business what the stock market is doing? If people are buying stocks in dot coms that have never made a cent and end up losing their shirts, that's not the government's problem. The government isn't there to be our nanny.

If the Federal reserve must exist at all, it should follow simple rules designed to insure enough liquidity to meet the needs of the economy.

[OldFriend]

Greenspan began raising interest rates as the cost of energy sky rocketed. This did nothing but HURT business.

His main concern seemed to be to protect the large firms that were ripping off the little guys.....such as Goldman Sach's, Morgan Stanley, and assorsted other firms whose brokers were in bed with the companies they were supposed to be monitoring.

They made sure their high flying clients got rich at the expense of the little investor.

Right up until the collapse WorldCom was being touted as a great stock. Dittos Enron, Global Crossing, Tyco,and assorted other corrupt companies.

[cake_crumb]

Waitaminnit...the 1990s? Why, that was the Clinton economy, and it was robust, strong, muscular, great, grand, swell, peachy, hunky-dory, yada, yada, etcetera, etcetera...

I with they'd keep the propaganda straight.

[RightWhale]

Control of the economy is based on models just as complex as the models used by Global Warming politicians.

If one has not looked at the model and found a flaw, is one required to accept the model?

[proxy_user]

The right thing to do would have been to increase margin requirements, without raising interest rates.

I know guys who were trading on margin during the boom. Their brokers were not even following the existing rules. If you were a big trader, they let your account go below the 30% limit without a call.

If they had clamped down on this, the market never would have got so out of control.

[Consort]

Rubin and Reich and Rivlin.

[Williams]

The criticism of the Fed ultimately may be correct, BUT does this article even mention the phrase "irrational exuberance"?? Greenspan tried to warn about the bubble and EVERYONE was so dependent upon it that he was viciously attacked by politicians, investors, industry. As with every bubble, people were running around convincing themselves that for some inexplicable reason it would be OK for stocks to trade at 200 times earnings, or for investors to belive that companies that had never made money should have astronomical valuations. If he had tried to put the brakes on, I think he might have been fired.

[The PeteMan]

I have always thought that Greenspan was WAY overrated!

Figures he would be trying to spin the collapse under HIS leadership of the Fed.

[NonValueAdded]

Indeed, legacy repair at work.

[wardaddy]

wiping out trillions of dollars in paper wealth.

"paper wealth" my ass....somebody bought that stock at those prices before the fall (your's truly amongst them). that said....blaming Greenspan is ludicrous....it's not the Fed's job to micromanage equities....some of us thought he did more than enough. what happened was inevitable and the 9-11 "lightning strike" amplified and extended the major correction. It was not however a mild recession insofar as equities corrections nor negative growth rates...I believe it was the longest consecutive quarters downturn since the Depression was it not?

[auboy]

Greenspan: Andrea made me do it.

[Mel Gibson]

"His "irrational exuberance" was correct, but he did nothing to curb it"

I totally disagree. Greenspan's irrational exuberance was misplaced and misguided, he had absolutely no business interfering in the marketplace with seven consecutive increases in interest rates. He did "something" i.e. increased interest rates which brought the economy to a halt and into a recession, killing the golden goose which laid the golden eggs.

[SpaceBar]

Something is clearly wrong when the world's richest and most vibrant economy can significantly fluctuate in value and activity when one man passes gas. Alan Greenspan IS overrated. Those who say he "brilliant", "gifted", "the guy for the job", etc have no proof other than anecdotal evidence to back up their claims since there is no control group from which to compare. He has no more "insight" into things financial than a good Wall Street futures broker. If our economy in fact does need some wise old guy to see it through tough times, we are in serious trouble folks. In his defense, I hear he was a damn good Cobol programmer years ago. The US economy needs to be left alone and allowed to function as the autonomous, self-regulating system that it is, without all the "help" by a few self appointed financial "experts".

[T. Jefferson]

Greenspan screamed inflation and raised rates 6 times, when we were in a deflationary cycle...ie, he was 100 percent wrong. He single handedly caused the crash. However, it always takes a catalyst to trigger it. Clinton filed anti-trust suits against the 3 biggest creators of the wealth...MSFT, CSCO, and INTC in an effort to take over the tech industry in socialist fashion. This was as stupid as Greenspan's rate hikes. The crash began the day MSFT lost it's initial suit in march. Both of them are equally to blame.