It was almost 18 years ago that Alan Greenspan, then chairman of the Federal Reserve, uttered his famous warning. Here’s his quote, with two words standing out: “Clearly, low inflation implies less uncertainty about the future . . . but how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”
The phrase “irrational exuberance,” although not quite as dramatic as “a date which will live in infamy” – no other expression was – not only shook up the market, but has become permanently associated with Greenspan’s term at the Fed. Looking back at Dec. 5, 1996, the Fed chairman was so highly respected and feared – that it, at least briefly – that it became a self-fulfilling prophecy. The words became mandatory for anyone seeking to comment on the market’s future.
It should be no surprise that it was just a short leap from the market’s nervous reaction to Greenspan’s warning to a rehash of the Crash of 1929. It was hard to avoid media arguments as to whether December 1996 was the beginning of an ominous trend or just a “much-needed” correction. Of course, just the possibility that we were on the verge of a disaster triggered a great deal of selling. Those with cooler heads, so to speak, saw the “Greenspan sell-off” as a buying opportunity.
The fact is, there is very little the two eras – then and now – have in common, with one exception: that it was and is an Alfred E. Newman market. You remember Alfred from Mad magazine, don’t you? The question, “What, me worry?” seems to be rampant on Wall Street, along with the assurance that “things are different now.”
Well, they are different. For one thing, very few of the companies whose stocks had climbed off the charts paid dividends, so there was nothing to fall back on when the panic began. The “hottest” stocks were in three industries – radio, aluminum and aircraft. None of those stocks paid any dividends, so the feeding frenzy was solely based on hope (prayer) for continued price increases.
As the panic on Wall Street began, the Fed decided that the best medicine for an “overheated” economy was higher interest rates. Did the rate increase do the trick? If you think that the failure of 2,000 banks in one week was what the economy needed, then the Fed made a wise move.
Now, of course, Federal Reserve officials are much wiser and are immune from making serious economic mistakes. Yeah, sure. The steady hand on the tiller means that there will never again be a financial collapse. If only.
The lesson that should be learned from financial history is that there are no lessons to be learned, except that we should beware of those who say, “it’s different this time.” Didn’t they say that about the real estate market a few years ago? Or gold? Or the Japanese stock market? The list goes on.
Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at [email protected]