A half-truth

There is an interesting interview of Alan Greenspan in CBS MarketWatch. Here is the link. This is what he says about the dotcom bubble:

The Fed tried in 1994 to defuse a bubble with monetary policy alone. We called it a boom back then. The terminology has changed, but the phenomenon is the same. We increased the federal funds rate by 300 basis points, and we did indeed stop the nascent stock-market bubble expansion in its tracks. But after we stopped patting ourselves on the back for creating a successful soft landing, it became clear that we hadn’t snuffed the bubble out at all. I have always assumed that the ability of the economy to withstand the 300-basis-point tightening revised the market’s view of the sustainability of the boom and increased the equilibrium level of the Dow Jones Industrial Average. The dot-com boom resumed.

It is an interesting observation. He might be partially right. But, he is also omitting to tell us that the bubble resumed not because the market’s view of the sustainability of the boom changed after withstanding 300 basis points but that he fanned it by becoming a cheerleader for the boom. He hastily made amends after wondering about irrational exuberance in 1996. He cut rates thrice in 1995 and raised them only once in 1997.  Market sentiment and his sentiment (waxing eloquent on once-in-a-lifetime productivity boost) reinforced each other. The boom became a bubble and then a bust. The veteran central banker is somewhat economical with truth.

 

 

 

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