It's really all about Greenspan, isn't it?
It strikes me that a lot of this discussion is coming down to one question: Should Alan Greenspan have tried to strangle the tech bubble in the late 1990s or not? There are still a few people on the West Coast who argue that Greenspan did strangle a real tech boom by raising interest rates slightly in 1999 and 2000, but let's leave those nutters aside. (Unless of course Paul and Andy are among them, in which case, let's have it out!)
Greenspan's argument all along has been that it's hard to tell a bubble until after it has popped, and that the job of the Fed should be to get out of the way and then clean up the mess afterwards. He's taken a lot of crap for this from hard-nosed investor types like Jeremy Grantham, whom Jesse cites, and his (Greenspan's) new employer Bill Gross. It was obvious by 1999 that the market had reached bubble conditions, their argument goes, and Greenspan's post-crash cleanup simply created lots of new bubbles.
The problem with the first part of this argument is that it also seemed obvious to a lot of people in 1996 (like, say, Robert Shiller) that the market had reached bubble conditions. Yet, in retrospect, it hadn't--it looks now like it was sometime late in 1998 that stock prices and reality began to follow separate paths.
As for Greenspan's post-crash cleanup effort, it was messy, and it created a housing bubble. But it was preferable to what happened in the 1930s, no? So I guess I'm with Dan on this: Hooray for Alan Greenspan and his bubble-friendly ways!
How should bubbles be avoided except by denying a lot of ordinary people a chance to participate? Since it is hard to know for sure when a bubble exists and even harder to know when one will end it seems that preventing bubbles is really about allowing only the "smart money" to participate. Yes ordinary people might be hurt by arriving too late but many will participate and make more money than they ordinarily will.
This on top of all of the excess capacity that might result in jobs that would never have existed without the bubble.
Daniel A. Greenbaum
May 17, 2007 2:51 PM | Reply | Permalink
Also, Shiller's reasoning was pretty sound. The Q-ratio did start to grow out of proportion in 1996. Was he wrong? Or did the market just not crash as much as he thought. One thing's for sure: only the Dow has reached new highs, 7 years after 2000 and the Dow represents only 30 mostly industrial companies. Most of the market has still not recovered. So, maybe it wasn't as bad as Shiller thought, but it was bad enough that 7 years after the crash that he predicted 4 years too soon, we have still not regained our losses.
thosethingswesay.blogspot.com
May 17, 2007 7:51 PM | Reply | Permalink
Personally, I think bubbles are always harmful. But I do not hold Greenspan responsible. I hold the SEC responsible. Take a close look at the preamble to the Securities Act of 1934 and you will find that the SEC (notwithstanding what they like to preach about protecting investors)was created SPECIFICALLY to prevent bubbles.
http://www.sec.gov/about/laws/sea34.pdf
Looks specifically at paragraphs 3 and 4. There it is in black and white. "National mergencies, which produce widespread unemployment and the dislocation of trade, transportation, and industry, and which burden interstate commerce and adversely affect the general welfare, are precipitated, intensified, and prolonged by
manipulation and sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and markets, and to meet such emergencies the Federal Government is put to such great expense as to burden the national credit."
The wisdom of 1934 was that bubbles were bad, innocent people get hurt and they can be prevented by responsible government action. I'm with the New Deal on all three.
How did the SEC trip over itself and permit a bubble? It permitted the same old crap that is as old as the Missisippi story: this time its different. Don't look at the financial statements, count clicks or EBITDA or some other made up metric. But MOST OF ALL, don't pay any attention to executive stock options. Those are free money, worth tens or hundreds of millions and miraculously off the books. The SEC could have shut that circus down and did not. Legally, they had an obligation to do so and did not.
May 18, 2007 7:55 PM | Reply | Permalink