(May 8) – “On the morning of Dec. 3, 1996, having watched the Dow surge a dizzying 27% that year, Federal Reserve Board Chairman Alan Greenspan hosted a private meeting that became his own genteel version of the debate show Crossfire,” writes Jacob Schlesinger in today’s Wall Street Journal.
“On one side was Abby Joseph Cohen, the belle of the bull market, who came from her post at Goldman, Sachs & Co. to defend investor sanity. She methodically gave Fed governors a list of reasons why underlying economic changes justified such lofty prices in the market.
“On the other side were two Ivy League economists, Yale’s Robert Shiller and Harvard’s John Campbell, who painted a much gloomier picture, though they didn’t address Ms. Cohen’s comments directly. They illustrated their message of portent in 10 pages of handouts showing trends going back to 1872. The markets were destined, at best, to tread water, and possibly to crash, they warned.
“As unusual as that meeting was, it didn’t compare to what would follow two days later. At a black-tie banquet at the Washington Hilton, Mr. Greenspan delivered a speech that would contain the most memorable utterances of his career: ‘How do we know when irrational exuberance has unduly escalated asset values? … And how do we factor that assessment into monetary policy?’
“Minutes after he spoke, stocks began tumbling in Tokyo, where the markets were open. That was followed by more carnage in Europe, then the U.S. Over the next few weeks, the Dow Jones Industrial Average slipped 4% from its then-record of 6400. Back at Yale, Prof. Shiller’s wife penned a Christmas letter to friends: “Recently, Bob has been troubled by the thought that he may have caused a worldwide stock market slide.”
“But Mr. Greenspan hadn’t picked sides. He had deliberately posed his thoughts as questions, not statements. And in subsequent years, America’s most influential economist continued to agonize over the causes and consequences of the unprecedented surge in stocks.
“Mr. Greenspan’s conclusions are evident in his recent words and actions. He has backed away from suggesting the market is overvalued, yet feels that monetary policy should reflect the market’s impact on the economy. The bull market’s surprising endurance has driven the Fed into its first sustained drive to raise interest rates in six years. Friday’s report that unemployment fell to a 30-year low of 3.9% means that campaign will continue, as the Fed is expected to raise rates again — possibly by half a point — at its May 16 meeting.”
http://interactive.wsj.com/articles/SB95774078783030219.htm