14 FOMC meeting transcript, January 30–31, 2001, p. 181. 15 Ibid., pp. 174–181.
On February 13, 2001, in testimony before the Senate Banking Committee, Greenspan was upbeat about “strength in capital accumulation and sustained elevated growth of structural productivity over the longer term.”18 An article in the Financial Times reported Greenspan’s testimony under the title: “Greenspan Sees a Quick Rebound.”19 Andy Grove, chairman of Intel Corporation, disagreed. On a March 6 conference call, Grove, paterfamilias of the semiconductor industry, admittted: “I don’t expect the end demand to snap back.… We are in this state for some period of time.”20 He explained the recent cycle: “For a number of years, technology had huge momentum.… We built in an overcapacity of all physical things.” To eliminate this overcapacity, demand had to rise or investment had to fall until “the two levels cross, or the investments of the past several years have been obsoleted [sic]” by new technology. “Both of these require some time.”
Grove went on to discuss the specific problem that caused such mayhem: “The viciousness of the down cycle was made more so by all the [supply-chain management software]. It blew through the supply-chain in a much faster ripple than previous cycles. Nothing in supply-chain management can read minds. End demand is what end demand is.”21
Greenspan’s productivity gains, if they existed at all, including the “Internet and electronic interface systems” that had prompted the “viciousness of the down cycle,” since they are machines programmed by people, and the machines cannot read minds.
17 Ibid., p. 123.
18 Senate Committee on Banking, Housing, and Urban Affairs, “Federal Reserve Board’s Semiannual Monetary Policy Report to the Congress,” February 13, 2001.
19 Gerard Baker, “Greenspan Sees a Quick Rebound,” Financial Times, February, 14, 2001.
20“Intel CoFounder Sees No Quick Turnaround,” “Technology Briefing: Hardware,” New York Times, March 7, 2001.
21 William A. Fleckenstein, The Market Rap, grantsinvestor.com, March 8, 2001. Grove spoke on a conference call and Webcast hosted by Lehman Brothers and its semiconductor and PC-company analyst Dan Niles.
Believing in Greenspan; Betting on Grove
Schizophrenia reigned. Investment outflows paid heed to Grove, but sentiment bought shares in Greenspan: “Greenspan Is the Man Who Can Do No Wrong in the Eyes of a Prosperous Citizenry” was the headline in the March 8, 2001, Wall Street Journal. The drawing accompanying the article is of Alan Greenspan, a halo circling his head in the motif of a Byzantine icon. We learned in the essay that in a Wall Street Journal/NBC News poll, 9 in 10 Americans knew the Fed chairman’s name. In the late 1970s, that figure had been fewer than 1 in 10. Moreover, 55 percent of the American people thought (in 2001) that Greenspan was doing a fine job; only 8 percent were critical.22
Greenspan was not a lone wolf in sheep’s clothes. On March 20, 2001, James Glassman and Kevin Hassett were back on the Wall Street Journal editorial page. Under the less-than-compelling headline “Dow 36000? It’s Still a Good Bet,” the authors wrote: “[W]e checked the facts. Stocks are still a good buy. Our position hasn’t changed.”23 A few days later, Cisco announced it was writing off $2.5 billion of inventory. This was new equipment, hot off the assembly line, that could not be sold.24
“Shoot All the Analysts”
At the late June 2001 FOMC meeting Greenspan second-guesses analysts’ doubledigit, third-quarter rise in profit forecasts. Greenspan wondered if “the SEC’s financial disclosure requirement … may have had a major inhibiting effect on the ability of corporate executives to communicate to security analysts.”25
This was the least of the analysts’ limitations. The March 20, 2001, Financial Times had published an article with the title “Shoot All the Analysts.” In May 2001, Barron’s illustrated its cover with a drawing of Mary Meeker accompanied by the title: “How to Fix Wall Street’s Research Problem.”26 The March 8, 2001, Wall Street Journal reported that Morgan Stanley had received $479.6 million of investment banking fees for underwriting IPOs and follow-on offerings in 1998–2000. Meeker told the Journal that “she wasn’t seduced by the fat fees she and her firm stood to earn on the deals she helped push.”27 Salomon Smith Barney technology analyst Jack Grubman did not seem to tire of degrading his profession, or at least himself, with such commendably honest comments as: “Let’s call a spade a spade. Nobody on the sell side puts negative ratings on stocks.”28
22 Elizabeth Crowley, “Greenspan Is the Man Who Can Do No Wrong in the Eyes of a Prosperous Citizenry,” “American Opinion (A Special Report),” Wall Street Journal, March 8, 2001.
23 James K. Glassman and Kevin A. Hassett, “Dow 36,000? It’s Still a Good Bet,” Wall Street Journal, March 20, 2001.
24 Fred Hickey, HighTech Strategist, May 4, 2001, p. 6.
25 FOMC meeting transcript, June 26–27, 2001, p. 140.
Also at the June 26–27 FOMC meeting, Greenspan enlightened the committee with an observation that only he could think was original: “These are not security analysts in the old sense of the term who really looked at the company and made their own judgments.”29
One week before the FOMC met, Congress, usually the last institution to grasp a trend, had interrogated several analysts about their “buy” recommendations. They were accused of being “pawns” who produced “biased and unreliable advice.” The politicians had their own axe to grind: “According to congressional financial disclosure forms issued [on June 14, 2001], several senators engaged in hectic trading of hightech stocks as the market began its precipitous slide.”30 Yet Greenspan still did not seem to know there had been a stock market bubble.
The Federal Reserve chairman appeared before the politicians in July. The subterfuges, such as coffee breaks, that Greenspan employed during FOMC meetings were unavailable during these sessions. Texas Senator Phil Gramm asked the chairman: “[I]f this is the bust, the boom was sure as hell worth it. You agree with that, right?”“Yes, Senator,” responded the under caffeinated Federal Reserve chairman.31 It appeared this was the popular opinion, as an August 2 Wall Street Journal headline queried: “What Happens When King Allen Goes?”
26 Barron’s, May 28, 2001.
27Randall Smith and Mylene Mangalindan, “A Year After the Peak: For E-Business Booster Meeker, Fame Is E-Phemeral,” Wall Street Journal, March 8, 2001.
28Randall Smith, Deborah Solomon, and Suzanne McGee, “Grubman’s Missed Call on AT&T Could Affect Influential Analyst’s Stature,” Wall Street Journal, October 4, 2000, p. C1.
29 FOMC meeting transcript, June 26–27, 2001, p. 140.
30 Richard Wolffe and Julia Levy, “Senators Quick to Buy and Sell in Market Turmoil,” Financial Times, June 15, 2001.
The Fed’s rate cuts were gunning a credit expansion, but the lending was not directed toward business, nor toward the stock market. Paul McCulley, a bond manager at PIMCO, the largest bond mutual fund institution, was ahead of his contemporaries when he wrote to his clients in July 2001: “There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan would deny any such thing.”32
Real estate looked more attractive all the time. The Fed aroused housing speculation by cutting the funds rate halfway to zero by the middle of 2001. Longer-term treasury yields, to which fixed-rate mortgage rates are tied, were also falling. The comparative virtues of the housing market were obvious to the speculating, debt-bound head of the house: at midyear, national housing market prices were rising at an 8 percent rate.
A Crisis Solved: “Alan Greenspan Has Been Everywhere”
In the aftermath of the September 11 attacks on the World Trade Center and the Pentagon, the Federal Reserve chairman received heaps of praise. According to the New York Times: “Alan Greenspan has been everywhere in guiding economic policy in the wake of the terrorist attacks, slashing interest rates, he
lping to get Wall Street running again, shaping the tax cuts being developed by Congress and evaluating which airlines should receive government loan guarantees.”33 The description was apt but possibly embellished. Evidence of Greenspan’s airline intervention is lacking, but that was emblematic of the man’s grip on America’s pulse.
31 Senate Committee on Banking, Housing, and Urban Affairs, “First Session on Oversight of the Monetary Policy Report to Congress Pursuant to the Full Employment and Balanced Growth Act of 1978,” July 24, 2001, p. 16. This was not the only memorable tête-à-tête with Senator Gramm. Gramm called Alan Greenspan a “national phenomenon” and an oracle (Richard W. Stevenson, “Suddenly, Critics Are Taking Aim at Greenspan,” New York Times, April 2, 2001). Gramm would call Greenspan “the greatest central banker of the century,” presumably the twentieth century (Ian A. Gordon, The Long Wave Analyst, vol. 5, no. 1, January 2003, p. 5, www.thelongwaveanalyst.ca).
32 Paul McCulley, “Show a Little Passion, Baby,” PIMCO Fed Focus, July 2001, www.pimco. com/LeftNav/Featured+Market+Commentary/FF/1999-2001/FF_07_2001.htm.
In a less flamboyant summary, the Federal Reserve printed a lot of money. The Fed had already chosen this path in August, when the monetary base rose 12.5 percent (on an annualized basis). The Fed cut the funds rate from 3.75 percent to 3.50 percent on August 21. In September the monetary base rose 55 percent (annualized). The Fed cut the funds rate from 3.50 percent to 1.75 percent between September 17 and December 11, 2001.
The Fed’s expansion in August may have been prodded by ominous warnings, signals that accumulated into the week before the terrorist attack. On September 5, auto sales for August were announced: GM’s sales fell 7 percent; Ford’s were off 7.5 percent; and Chrysler’s had fallen 24 percent from August 2000.34 Financial markets from around the globe indicated a synchronized, worldwide slump. On September 10, Japan’s Nikkei 225 average dropped 3%, to the lowest level since 1984.35 Also on September 10, the FTSE 100 (a broad-based index of Britain’s stocks) fell to its lowest level since 1998.36 The Nasdaq Composite had fallen from 1,843 on August 29 to 1,695 at the close on September 10, an 8 percent drop.
On September 20, Greenspan spoke to the Senate. He reported an economy that had been improving: “[C]onsumer spending moved higher in August and appeared to be reasonably well maintained in the first part of September. Industry analysts suggest that motor vehicle sales were running close to August levels. …”37
If motor vehicle sales were running close to August levels, the stock markets around the world were correct—we were entering a severe recession. But a legend grew that a strengthening economy had entered a death spiral after the terrorist attacks and it was Greenspan’s policies that prevented an economic catastrophe.
33 Richard W. Stevenson, “Expansive Role for Greenspan Brings Out Critics of Fed’s Chief,” New York Times, October 11, 2001.
34Danny Hakim, “Detroit’s Big Three May Shuffle as Chrysler Struggles,” New York Times, September 5, 2001, p. C4
35 “What’s News,” Wall Street Journal, September 11, 2001, Front page.
36 Alan Cowell, “California Energy Crisis Hits Scottish Power,” New York Times, September 11, 2001, p. W1.
37Senate Committee on Banking, Housing, and Urban Affairs, “The Condition of the Financial Markets,” September 20, 2001.
Meanwhile, patriotism was taking a bizarre form. William McDonough, president of the New York Federal Reserve, made a most unbankerly proposal: “What we dearly want is for Americans to behave like Americans—to do the patriotic thing and go out and spend.”38 President Bush told Americans to “get down to Disneyworld.”39 Alan Greenspan explained the faltering economy to the Senate: “During the past week, of course, the level of activity has declined. The shock is most evident in consumer markets where many potential purchasers stayed riveted to their televisions and away from shopping malls. Both motor vehicle sales and sales at major chain stores … have fallen off noticeably.”40 Earlier in the year, Dallas Federal Reserve Governor Bob McTeer urged all Americans to “join hands and go buy a new SUV… preferably a Navigator.”41
In the history of the human race, no society had ever before urged its members to spend when anticipating war (and in this case, it was being called the “forever” war). The government did not even take advantage of the average citizen’s desire to pitch in—the Treasury could have issued zero-coupon war bonds from the Broadway TKTS tickets booth in New York. To those who still doubted that the American economy would collapse if the pace of around-the-clock shopping ever slowed, here was the government’s plea for perpetual, accelerating consumption.
On November 8, Enron Corporation, a power-generation company in Texas that generated little power but a wealth of off-balance-sheet derivative gimmicks, announced that it had overstated profits by about $600 million over the past five years. This was not a particularly conspicuous event in the scheme of things. Cisco Systems’s third-quarter sales fell 32 percent from the year before, and Intel’s dropped 25 percent.42 Cisco’s stock price had recently fallen to $11.24 a share (down 86 percent from its 2000 high) and Intel’s to $18.96 (a 75 percent loss). Shareholders in the two companies had lost over $800 billion.43 And these were among the best in show: they would survive.
38 Ian A. Gordon, The Long Wave Analyst, vol. 4, no. 1, January 2002, p. 15, www.thelongwaveanalyst.ca.
39 http://www.time.com/time/specials/packages/article/0,28804,1872229_1872230_ 1872236,00.html.
40Senate Committee on Banking, Housing, and Urban Affairs, “The Condition of the Financial Markets,” September 20, 2001.
41Bob McTeer, Remarks Before the Richardson Chamber of Commerce, Richardson, Texas, February 2, 2001; http://www.dallasfed.org/htm/dallas/speeches/2001/020201. html.
Within a few days of its announcement, it was clear that Enron’s activities were either juvenile or diabolical. As it turned out, they were both. Foresight was lacking, as is true in every boom. While expansion endures, there is no end to the accounting and financial tricks that companies employ. The list of transgressors was soon better known than the top Nasdaq performers: Global Crossing, Tyco International, WorldCom, Adelphi Communications, Arthur Andersen.
The Enron Prize
On November 13, 2001, Alan Greenspan accepted the Enron Prize for Distinguished Public Service in Dallas. This was a few days after Enron announced that it had filed five years of fictional financial reports.44 Ta c t and political acumen being Greenspan’s specialties, he talked about oil, not integrity.
The day after Greenspan’s oil forecast, Henry Blodget resigned from his distinguished seat in Internet hokum. Greg Smith had resigned from Prudential Securities a week before, where he had been equity strategist for nearly two decades. Smith, interviewed by Barron’s, captured the essence of success in the new era—both Greenspan’s and Blodget’s: “ ‘During the 1990s, the stock market became a media phenomenon.’ Television … all too predictably, decided to ‘personalize what was happening in the market.… [T]elevison created the idea that people moved markets, and it covered Abby Joseph Cohen as though her outlook was a news event.’ ” Smith lamented the securities firms that unleashed their “marketing dogs, who turned strategists’ projections into promotional fare.… ‘This was always meant to be a cottage industry, not part of a multi-billion-dollar enterprise.’ ”45 The analyst TV stars and Greenspan (also a TV star) owed their reputations to the fascination with celebrities. They were failures, but few noticed.
42 Chris Gaither, “Market Place,” New York Times, November 6, 2001, p. C6; Fred Hickey, HighTech Strategist, November 2, 2001.
43 Losses are not adjusted for share repurchases, share dilution, and so on.
44 Richard A. Oppel Jr. and Andrew Ross Sorkin, “Enron Admits to Overstating Profits by About $600 Million,” New York Times, November 9, 2001, p. C1.
Greenspan came to the December 11, 2001, FOMC meeting full of news: “It may be … not an overvaluation but possibly a new way of looking at the market.�
�� [I]t may be that the markets stay overvalued or undervalued for protracted periods of time.”46 It might also be a superabundance of cheap credit that continued to speculate in the stock market. Whatever the answer, the chairman did not propose that the stock market was accurately assessing the economy.
The FOMC cut the funds rate another 0.50 percent in December 2001. The Fed had now cut rates 11 times in 2001 to 1.75 percent by the end of the year. This was a 76 percent cut from 6.5 percent at the beginning of 2001.47 Short-term rates were lower than the inflation rate. The Federal Reserve Chairman was doing his best to restore the vitality of the “Greenspan put.”
The FOMC was taking more interest in houses than in productivity. Mortgage was mentioned 40 times at the December meeting.48 This was anticipated by the chairman on a September 13 conference call. Prior to September 11, “[t]he general level of consumer expenditures seemed to be holding up, I suspect in large part because of capital gains in homes.”49
Technology and productivity were yesterday’s obsessions. In January 2002, the Federal Reserve chairman squashed the new era when he spoke in San Francisco: “[A]las, technology has not allowed us to see into the future any more clearly than we could previously.”50
45 Alan Abelson, “Fun and Games,” Barron’s, November 12, 2001.
46 FOMC meeting transcript, December 11, 2001, p. 83.
47 Fleckenstein and Sheehan, Greenspan’s Bubbles, p. 120.
48 FOMC meeting transcript, December 11, 2001.
49 FOMC conference call transcript, September 13, 2001, p. 1.
50Alan Greenspan, “The Economy,” speech at the Bay Area Council Conference, San Francisco, January 11, 2002.
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