Sunday, July 14, 2013
the last book I ever read (dot.con: How America Lost Its Mind and Money in the Internet Era, excerpt fourteen)
from John Cassidy's dot.con: How America Lost Its Mind and Money in the Internet Era:
The Federal Reserve, which was created expressly to prevent speculative excesses, also failed in its duty. If anybody had the legal, moral, and intellectual authority to prick the bubble, it was Alan Greenspan, but he refused to exercise this power until it was too late. After his “irrational exuberance” speech in December 1996, Greenspan rarely mentioned the stock market, and when he did it was usually to say that prices reflected the actions of well-informed investors. Greenspan had some valid reasons for adopting a hands-off policy. The long economic expansion that accompanied the stock market boom reduced welfare rolls, raised wages for the poor, and drew many previously excluded members of society into the mainstream. Greenspan was also understandably reluctant to raise interest rates when there was no sign of inflation, but rising consumer prices are not the only sign of an unbalanced economy. During the late 1990s a soaring trade deficit, a plunging savings rate, and sharply rising indebtedness all indicated that the stock market was driving the economy into an increasingly precarious position. Still Greenspan stood aside—a fact that cannot be totally separated from his ideological beliefs.
As a fervent disciple of the free market, Greenspan believed that people’s investment decisions were largely their own concern, even if they didn’t make sense. When Nobel Prize-winning economists warned publicly about a dangerous speculative bubble developing, Greenspan refused to act. As a faithful apostle of Ayn Rand, he believed that American capitalism was renewing itself before his eyes. In speech after speech, he stressed the historic changes that were sweeping the economy thanks to the application of information technology. The New Economy thesis would never have become so widely accepted if Greenspan hadn’t seized upon it and made it his own. He liked to play the role of professor, hedging his public statements with qualifications, but Wall Street ignored these nuances, especially when it was repackaging his lectures for distribution to investors. The message passed to the public was unequivocal: the Fed chairman believed that the New Economy was a reality, therefore higher stock prices were justified. Greenspan knew this was happening, and he did little to stop it.