Harvard Business School opened an office in Silicon Valley to develop Internet start-up case studies.31 A March 2000 KPMG International poll of college seniors found that 74 percent of the students expected to become millionaires.32
Instead of sounding like “Dr. Wall Street” himself, Greenspan might have dampened the future carnage. Among his other storied accomplishments was that of an economic advisor who made stock market predictions for more than 50 years.
Basking in Adulation: “Let’s Hear It for a
Great Chairman”
Yet Greenspan continued to root for the Nasdaq. This was the mirror image of the world rooting for Greenspan. The praise was unremitting. He basked. He glowed. Der Spiegel chimed in with the continental view: “Greenspan is the new magic man of the Millennium.”33
On March 6, 2000, Greenspan attended a “New Economy” conference at Boston College. It was his birthday. He was presented with a cake and a cheery round of “Happy Birthday” from the packed house. Before his lecture, the local congressman, Ed Markey, primed the star-struck audience: “Let’s hear it for a great chairman, ladies and gentlemen.” They responded exactly as the warm-up crowd for a TV-game show should.34
29 Andrew Ward, “Schoolboy to Float Second Startup,” Financial Times, April 17, 2000.
30 Jeff D. Opdyke, “Paging ‘Dr. Wall Street’: Teen Prescribes Stock Winners,” Wall Street Journal, July 10, 2000.
31 Ross Kerber, “Internet Boom Reverberating in Business Schools,” Boston Globe, February 4, 1999.
32James P. Miller, “A Special News Report About Life on the Job—and Trends Taking Shape There,” “Work Week,” Wall Street Journal, March 28, 2000.
33 Albert Wimmer, Professor, Notre Dame University, “‘Bullman Forever’: Teaching Students How to Be Wall Street Watchdogs,” www.krannert,purdue.edu/centers/cibers/ publications/gbl, p. 157.
The New Economy conference received the standard pep talk: “At a fundamental level, the essential contribution of information technology is the expansion of knowledge and its obverse, the reduction in uncertainty.”35 On and on he went, the music man inevitably concluding: “Decisions were made from information that was hours, days…”36
Greenspan offered the Boston College audience a vision of the third millennium: “I see nothing to suggest that these [high-rate-of-return, productivity-enhancing investments] will peter out any time soon.”37 The great chairman did not disappoint the shareholders in attendance.
Arthur Levitt, chairman of the SEC, also gave a speech at the conference, in which he warned that retail investors did not fully understand markets and “may fall victim to their own wishful thinking.”38 These would be the investors whom Greenspan had told the senators would find it difficult to leverage their Internet stocks if the Fed raised margin requirements.
Julian Robertson, a hedge fund manager who produced at least 27 percent annual returns for close to two decades, threw in the towel. “The current craze in Internet stocks was creating a Ponzi scheme and that makes the process self-perpetuating until the pyramid eventually collapses under its own excess.” He closed his career by telling the New York Times: “I’m 67 years old, who needs this?”39
The Federal Reserve chairman did not seem to be influenced by the dissonance, which is not surprising. Greenspan had recast the job. A review of his speeches and testimony from this period is full of technology and productivity fluff. He did not speak much about money and credit. These had been the main concerns of previous Fed chairmen. The government had designed the Federal Reserve System to monitor money and credit. Greenspan rarely discussed either.
34 John Cassidy, “The Fountainhead,” New Yorker, April 24, 2000.
35Alan Greensan, “The Revolution in Information Technology,” before the Boston College Conference on the New Economy, Boston, MA, March 6, 2000.
36 Ibid.
37 Ibid.
38 Arthur Levitt, “The New Economy,” speech at The Finance Conference 2000, Boston College, Boston, March 6, 2000.
39 Gretchen Morgenson,“A Onetime Highflying Hedge Fund Appears Likely to Shut Down,” “Market Place,” New York Times, March 31, 2000.
He may have enjoyed his superstar status to such a degree that he preferred to speak about a hot topic. Or, he may have avoided discussions of money if he came to realize he was illequipped to mention it. One confirmation of the latter flows from a congressional hearing in February 2000:
Mr. GREENSPAN. Our problem is not that we do not believe in sound money; we do.… The difficulty is in defining what part of our liquidity structure is truly money. …[A]s a consequence of that we … have downgraded the use of the monetary aggregates for monetary policy purposes. …
Dr. [Ron] PAUL. So it is hard to manage something you can’t define?
Mr. GREENSPAN. It is not possible to manage something you cannot define.40
Since Greenspan’s responsibility was to peg the price of money at the correct interest rate, this was an important admission. It passed without notice.
What to Do after a “Speculative Bubble of
Extraordinary Proportions”? Tighten Money
In the end, Greenspan’s words were of no intrinsic value. At the close of trading on April 14, the Nasdaq Composite closed at 3,321, a fall of 35 percent from March 10. Massive buying interests did what they could to restore the market, but it was exhausted, particularly the technology companies.
40 House Committee on Banking and Financial Services, Conduct of Monetary Policy: Report of the Federal Reserve Board Pursuant to the Full Employment and Balanced Growth Act of 1978 P.L. 95–523 and The State of the Economy, February 17, 2000, p. 30.
There was no doubt that, after inflating for the past decade, the stock market was now deflating. Since the stock market ran the economy, there was a good chance that the GDP would follow. This was an odd time for the Federal Reserve to raise the funds rate. Two years earlier, at the May 19, 1998, FOMC meeting, Greenspan claimed: “If the market were to fall 40 or 50 percent, I would be willing to stipulate that there had been a bubble!”41 The Nasdaq fell 35 percent in a month. Greenspan never said in 1998 what action the Fed would take when the market wobbled on the windowsill. Now we found out: he tightened money. The Fed raised the funds rate from 6.0 percent to 6.5 percent in May 2000.
At the FOMC meeting on May 16, Michael Prell commented, “[W]e’ve experienced a speculative bubble of extraordinary proportions.”42 Greenspan was not interested in stocks. Instead, he spent considerable time on the relationship between productivity and oil: the “lighter distillates” being used in Germany had caught his attention.43
Greenspan had obviously decided before the meeting to raise the fed funds rate by 0.50 percent: “I think the evidence indicates that productivity, indeed perhaps underlying GDP, is still accelerating.”44
He mentioned that “the network externalities effect of our hightech system is creating a major underlying acceleration of our economy.”45 Whatever this meant, it was part of Greenspan’s pitch to tighten money. The FOMC voted unanimously to target a 6.50 percent fed funds rate. The Fed had raised the funds rate by 0.25 percent in February and 0.25 percent in March. It was now 1.00 percent higher than at the beginning of 2000.
41 FOMC meeting transcript, May 19, 1998, p. 84.
42 FOMC meeting transcript, May 16, 2000, p. 23.
43 Ibid., p. 87.
44 Ibid., p. 82.
45 Ibid.
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19
The Maestro’s Open-Mouth Policy
June–December 2000
If something can’t go on forever, it will stop.1—Alan Greenspan, September 13, 2000
The Senate Banking Committee held a series of hearings in early 2000, “The Emerging Structure of U.S. Securities Markets and the Appropriate Role for Regulation.” The Federal Reserve chairman spoke on April 13, 2000, about one month after the Nasdaq had peaked. Greenspan tried to steer clear of a stock market discussion. What the Feder
al Reserve chairman wanted to ignore, Republican Senator Jim Bunning from Kentucky wished to pursue.
Bunning asked if Greenspan’s jawboning had contributed to the recent 25 percent fall in the Nasdaq index. The Federal Reserve’s role was a long-running feud between the two. This was really a long-standing grievance about the role of Alan Greenspan. Bunning’s frustration may have been with Alan Greenspan, the showman, rather than with Alan
1 Alan Greenspan, quoting Herbert Stein, chairman of the Counsel of Economic Advisers under President Nixon. Of Stein’s statement, Greenspan said that he “got it just right.” At the Herbert Stein Memorial Luncheon, sponsored by National Association for Business Economics, in conjunction with the Federal Reserve Bank of Dallas, Annual Meeting, National Association for Business Economics, Drake Hotel, Chicago, September 13, 2000. www.nabe.com.com/am2000/grnspnvid.
227
Greenspan, the Federal Reserve chairman. The chairman responded as if he were the Fed’s legal counsel: “Senator, I continue to deny and insist upon continuing to deny that our goal is to jawbone the stock market. It is not.”2
Greenspan’s reply veered away from the transgression that really irked Bunning, which was Greenspan’s outsized reputation and influence on American life. The senator had not asked Greenspan to define the Fed’s job. There was no miscommunication between the two: Bunning wanted Greenspan to receive no more publicity than an undersecretary of transportation.
Greenspan understood how his own words had become a major influence on the markets. In a January 2001 FOMC conference call, Greenspan would note that “years ago presumptions about what the Fed would or would not do didn’t have much effect on the marketplace. Now we just whisper or open our mouths or smile or something and the markets go berserk.”3 As Bunning knew, it wasn’t “we.” It was Greenspan’s theatrics that had remodeled the American mind.
Bunning went on to ask if the losses in the Nasdaq had eliminated the socalled bubble in the economy.4 The chairman’s response dodged self-incrimination:
Chairman GREENSPAN: Senator, … I don’t believe we can know that there has been a bubble.… When you think of the fact that there are millions of very intelligent investors out there … to basically presume that you know a great deal more than that general wisdom, I think is, first, presumptuous, and second, invariably wrong.5
The chairman’s hypothesis somehow equates “intelligent investors” to “general wisdom,” but intelligent investors such as Julian Robertson sent money back to their clients in the same month. “General wisdom” was dumb enough to buy Nasdaq stocks, as it had been “dumb enough to buy 100-year bonds” in 1995.6
2 Senate Committee on Banking, Housing, and Urban Affairs, “The Emerging Structure of U.S. Securities Markets and the Appropriate Role for Regulation,” February 29, 2000; April 13, 2000; and May 8, 2000. Greenspan spoke at the April 13, 2000, hearing. Quote is on p. 154.
3 FOMC conference call transcript, January 3, 2001, p. 25.
4 Senate Banking Committee, “Emerging Structure of U.S. Securities Markets,” p. 159.
Bunning would not accept the general wisdom hypothesis:
Senator BUNNING: Well, I could argue all day about that because I don’t think there are an awful lot of sophisticated investors, as you might suspect.
Chairman GREENSPAN: There are enough, Senator.
Greenspan kept talking. He had said it all before. Bunning could not win, even with experience as an investment broker.7
Ignoring the Stock Market
By the spring and summer of 2000, stock market woes were as much a topic of conversation as IPOs had been six months earlier. Chairman Greenspan avoided the subject. He seemed to speak of nothing except technology, although this perception is partly due to the media’s obsession with any utterance by Greenspan on the topic. A speech in June 2000 was typical: “Substantial increases in U.S. capital investment, and the accompanying faster growth of our capital stock relative to labor input … explain a large part of the pickup in underlying growth in output per hour over the past five years, irrespective of how measured”8 [authors’ italics]. This was in a speech titled “Business Data Analysis,” before, of all groups, the New York Association for Business Economics.
He also told his audience: “That there has been some underlying improvement in the growth of aggregate productivity is now generally conceded by all but the most skeptical.”9 By 2000, mathematical innovations attributable to the Boskin Commission Report had hedonically lowered the price of software sales, television sets, washing machines, microwave ovens, and textbooks (textbooks that included more color graphics increased the nation’s GDP). Those business economists who had read the May 2000 Survey of Current Business published by the Bureau of Economic Analysis would have seen that businesses had spent $97.8 billion in 1999 on computers but that “real” spending, according to the BEA, had been $220 billion.10 That is, computers bought in 1999 had cost businesses $97.8 billon. The $220 billion included the Bureau of Economic Analysis’s adjustment for how much the $98 billion of spending contributed to the economy. The $220 billion was used when the government calculated GDP growth and productivity. The $122 billon difference was fictional; those dollars never existed. The $122 billion of fiction was more than 1 percent of the gross domestic product in 1999.
6 FOMC meeting transcript, December 19, 1995, p. 38.
7Michael Barone and Richard E. Cohen, Almanac of American Politics, 2008 (Washington, D.C.: National Journal Group, 2007), p. 682. Bunning had been an investment broker and agent from 1960 to 1986.
8Alan Greenspan, “Business Data Analysis,” speech via videoconference, New York Association for Business Economics, New York, June 13, 2000.
It would seem that all but the most skeptical would question whether the recreational mathematics that the bureaucrats at the BEA applied accurately calculated GDP growth.11 “Irrespective of how measured” would also dismiss a study published by the Congressional Budget Office in June 1999. Robert J. Gordon, a professor at Northwestern University, was the author. Gordon wrote: “There has been no productivity growth acceleration in the 99% of the economy located outside the sector which manufactures computer software.… Indeed, far from exhibiting productivity acceleration, the productivity slowdown in manufacturing has gotten worse”12 [authors’ italics].
10 Bureau of Economic Analysis, Survey of Current Business, May 2000. The comparison is between Table 5.4, Private Fixed Investment by Type, and Table 5.5, Real Private Fixed Investment by Type.
11 Skepticism was at the top of the list when the National Research Counsel published a 2002 committee report. Under the direction of Charles Schultze (CEA director under President Carter), the “Schultze panel” noted the considerable literature on estimating hedonic functions; however, “researchers are much less experienced using them across a variety of goods.” The Schultze opinion was, depending on the source, either the reason or a reason that the BEA dropped its hedonic adjustments to computers in September 2003.
12 Robert J. Gordon, “Has the ‘New Economy’ Rendered the Productivity Slowdown Obsolete?” Northwestern University and National Bureau of Economic Research, revised version, June 14, 1999; http://research.stlouisfed.org/conferences/workshop/gordon.pdf.
The FOMC met two weeks after this speech, on June 27 and 28, 2000. Greenspan admitted that “the economy is slowing to a certain extent.”13 He claimed “the evidence of an actual recession at this point is belied by the fact that there is no evidence of which I am aware that suggests any significant deterioration in productivity growth.”14 Hedonics at the Bureau of Economic Analysis and Gordon’s study at the Congressional Budget Office had placed the burden of proof on Greenspan to validate any productivity improvement over the past decade.15
Aside from that, this contention that rising productivity prevents recession was new. No doubt, the calligraphy of deltas and epsilons on assorted campus blackboards has tested the hypothesis, but now the New York University Ph.D. was running the ship of
state on such conjecture.
Greenspan leaned on analysts again to support his contentions, despite contrary evidence in the press.16The May 2000 issue of Red Herring, a widely read technology magazine, quoted from a speech by Keith Benjamin (a former Robertson Stephens analyst who had moved to venture-capital firm Highland Capital Partners): “Let’s get real. I mean I used to actually have to … justify these valuations. Now, I think I did a pretty good job of fooling at least some of you in the audience, but OK, today I can step back and say there’s no way I could have ever really justified any of the valuations.… What can I say? God bless America and the capitalist system.”17
At the August 22, 2000, FOMC meeting, Greenspan cited security analysts’ higher longterm earnings projections with a qualification: “As I have mentioned before, the latter may not be very knowledgeable about what is going on in the business world, but they are reasonably good reporters of what the companies that they follow are saying about their longer-term outlooks.”18
13 FOMC meeting transcript, June 27–28, 2000, p. 104.
14Ibid., p. 106. William A. Fleckenstein with Frederick Sheehan, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve (New York: McGraw-Hill, 2008), p. 102, discusses the CBO paper in more detail.
15 In 2000, business computer sales of $101 billion were inflated to hedonically adjusted “real sales” of $290 billion—the difference being about 2 percent of GDP growth. Data from Survey of Current Business, Bureau of Economic Analysis, December 2001.
16 “Longterm expectations of the security analysts, which we presume reflect the views of corporate management, have not diminished. Indeed, they continue to move up for both the hightech and the old economy firms.” FOMC meeting transcript, June 27–28, 2000, p. 106.
17Duff McDonald, “Investor The First Annual Price Target Awards,” Red Hessing, May 2000.
Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession Page 25