"It's important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity. And if stock prices start continuing down, I would get very concerned." - Former Federal Reserve Chairman Alan Greenspan, Meet the Press, February 7, 2010
Alan Greenspan is as confused in retirement as when he ran the Fed. Most mortals, quoted as often as Greenspan, would justifiably worry such contradictions of past contentions would ricochet around the media. Vice President Dan Quayle made front page news when he misspelled "potato." This is the sort of trivial mistake the media can grasp, or, all it thinks its audience can understand.
Alan Greenspan's about-face on the Fed's capacity to battle stock market bubbles cost investors several trillion dollars, yet he remains a fixture on the Washington party circuit (Fortune, February 5, 2010). He can say whatever comes into his head since he is still feted by those who matter. He talks on Meet the Press (where he was deferentially addressed as "Dr. Greenspan") and collects large fees as a dinner speaker.
Like Ted Williams' head, Alan Greenspan's reputation is frozen. The skull of the baseball great (Williams) was set in ice when he died. It is to come alive a century from now (or, something equally peculiar is promised). Likewise, Alan Greenspan's foibles have been frozen into a series of clichés designed to leave the party circuit undisturbed.
The former chairman's battered legacy actually flatters the man: his errors were "idealistic." So, have another drink, Alan. We're all idealistic in Washington. (Ayn Rand asked a half-century back: "Do you think Alan might basically be a social climber?")
The banks take the blame. They deserve it, but financial firms are more a symptom than a source. The bank cliché is convenient for both politicians and the most malignant contributor to our national woes, the Federal Reserve.
Worse though, than the money lost in the stock market debacle, is the lost decade (and counting). After the stock market burst, Chairman Greenspan attempted to reflate the economy with his one-percent, adjustable-rate mortgage bubble. The consequences need no comment.
The most scandalous aspect of Greenspan's declaration on Meet the Press last weekend is not that he denied the link between the stock market and the economy when he was Fed chairman (in 1999). Far worse is that long before 1999, he had consistently emphasized the link. His contortions can be seen in a three-act sequence:
Act #1: When Greenspan knew a plunging stock market could sink an economy.
December 28, 1959, in the New York Times, Alan Greenspan explained "that a break in stock market trends was not just a harbinger of boom or recession, as is commonly held, but a crucial factor in causing a boom or a recession."
March 1959, in Fortune magazine: "[O]ver-confidence finds exuberant expression in a bull stock market.... Once stock prices reach the point at which it is hard to value them by any logical methodology, [Greenspan] warns, stocks will be bought, as they were in the late-1920's - not for investment but to be unloaded at a still higher price. The ensuing break could be disastrous."
March 28, 1995, at a Federal Reserve Open Market Committee (FOMC) meeting - GREENSPAN: "I think the downside risks [to the economy] are basically coming from the possibility of significant increases in stock and bond prices.....Ironically, the real danger is that things may get too good. When things get too good, human beings behave awfully."
STAGE NOTE: By 1996, fears were rising of a stock market bubble. The Wall Street Journal wrote on November 25, 1996: "Federal Reserve Board Chairman Greenspan isn't talking about the stock market these days. In fact, the word among Fed officials is: don't use the word 'stock' and 'market' in the same sentence. No one wants the blame for the crash."
Greenspan gave his famous "irrational exuberance" speech (regarding the stock market) on December 5, 1996. He testified before Congress and the Senate in early 1997, warning both bodies (in his way) of the stock market bubble. The congressmen and the senators told him to mind his own business. He never discussed the bubble again in public, and even forbid the FOMC from talking about it in 1998.
Greenspan then hid in his own bubble.
Act #2: Greenspan couldn't see bubbles and they might not matter anyway.
It was on June 17, 1999, that the Federal Reserve chairman unveiled his thesis: that the Federal Reserve could not identify a bubble ahead of time and it would therefore make no attempt to do so. This was entirely new and near the peak of the greatest stock market bubble of all time.
(FLASHBACK - FOMC meeting on September 24, 1996 - GREENSPAN: "I recognize that there is a stock market bubble problem at this point....We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.")
In his June 1999 testimony before Congress, he told Congress don't worry, be happy:
"While bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy.... while the stock market crash of 1929 was destabilizing, most analysts attribute the Great Depression to ensuing failures of policy." (Note: Greenspan had never before attributed the Depression to ensuing policy failures. For instance, see his interview with Fortune above).
The chairman's contention became known as The Greenspan Doctrine in the media and among so-called economists. With little rebuttal, he contributed addenda to his Doctrine, such as in 2002, when he added a footnote to a speech in Jackson Hole, Wyoming. Discussing the aftermath of the 1987 stock-market crash: "[I]n line with later episodes, the failure of the collapse to have an economic impact seems to have contributed to subsequent higher stock prices." According to this wrinkle, stock market crashes are good for stock prices. (The footnotes to Federal Reserve governor speeches contain amazing contentions.)
Act #3: Greenspan warns stock market bubbles can cripple an economy.
SETTING: Alan Greenspan retired from the Federal Reserve in early 2006. Among other post-retirement warnings that the stock market and the economy are Siamese twins:
Interview with Reuters, September 30, 2007: "[U]nless stock prices resume their pace of increase of earlier this year, U.S. consumer spending and GDP will be under pressure from declining household wealth."
Again, Meet the Press, February 7, 2010: "It's important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity. And if stock prices start continuing down, I would get very concerned."
Why is he still on TV?
Whether it is appropriate to invite Greenspan on television is for the media to decide. More of a muddle is why he still attracts an audience. He is as consistently wrong as during his Fed chairmanship.
In October 2006, Greenspan claimed: "Most of the negatives in housing are probably behind us. It's taking less out of the economy."
On February 7, 2010, he told Meet the Press: "I don't think [home prices will] decline from here. In other words, they seem to be bottoming out."
On the same day, he also told Meet the Press: "The recession is over."
Look out below.
Frederick Sheehan writes a blog at www.aucontrarian.com.
