Irrational Exuberance, Reconsidered

The Wall Street Journal ^ | Wednesday, December 6, 2006 | JEREMY J. SIEGEL

[presidio9]

Ten years ago yesterday, Alan Greenspan made what was to become the most famous speech in his 18-year tenure as chairman of the Federal Reserve. Against a backdrop of a strong economy and soaring stock market, Mr. Greenspan said: "How do we know when irrational exuberance has unduly escalated asset values? . . . We should not underestimate . . . the interactions of asset markets and the economy. Asset prices, particularly, must be an integral part of the development of monetary policy."

Stocks indeed were surging when Mr. Greenspan spoke at the annual dinner of the American Enterprise Institute in Washington. The Dow Jones Industrial Average had crossed 5000 in November 1995 and 6000 in October 1996. On the day of Mr. Greenspan's speech, the Dow industrials stood at 6437, more than twice the level it reached only four years earlier. Many economists claimed that the market was already too high, and some maintained that if the central bank didn't step in and cool the market, a subsequent crash could cripple the economy.

The Fed chairman's speech seemed to agree with those fearful of the soaring market. His words sent shock waves through the world's financial markets. Stock prices slumped world-wide and the Dow industrials fell over 100 points when the market opened the next morning. But in the ensuing months, stocks continued to rise and the Fed did little to stop the bull market. Mr. Greenspan seemed to back away from his earlier statements, noting that the surprisingly strong growth in productivity and corporate profits may indeed justify higher stock prices.

After the market broke downward in 2001 and 2002, economists criticized Mr. Greenspan's inaction during the bull market, arguing that if he had stuck to his guns, the U.S. would have

[Uncle Miltie]

"The Fed chairman's speech seemed to agree with those fearful of the soaring market"

Don't fear net worth!

[Former MSM Viewer]

GreenSpam was too old to understand the dynamic economy unfolding around the world.

He stayed on too long.

[raybbr]

Here's one my Greenspan favorites.

I defy anyone to plan for the future using that quote.

[Moonman62]

One of the worst speeches ever given. I would like to not that the "irrational exuberance" in question was on the Dow, not the Nasdaq.

[Moonman62]

After the market broke downward in 2001 and 2002, economists criticized Mr. Greenspan's inaction during the bull market, arguing that if he had stuck to his guns, the U.S. would have

People who actually understand the economy, not economists, knew that Greenspan had raised rates too high at a time when it was uncalled for.

[presidio9]

That's just his bombastic way of saying a good imagination helps managers anticipate any changes that may be required.

[raybbr]

That's just his bombastic way of saying a good imagination helps managers anticipate any changes that may be required.

Okay. Plan your career around that. Or, plan a business strategy based on that.

Greenspan was the quintessential bureaucrat. I think he like to read the thesaurus (so do I) and use words just to show he could put half the country to sleep.

[presidio9]

In my career on Wall Street I can't tell you how many people I have come across who got rich doing exactly what Greenspan does: Use jargon to make simple concepts sound as complicated as possible so that the listener feels stupid and insecure.