16 years ago Alan Greenspan bitch slapped the equity market with his now infamous “irrational exuberance” speech. As History now clearly shows, people were acting quite rationally and it was the TIME cover boy who was far too exuberant.
In the weeks, months and years that followed Greenspan’s utterance, the Chairman proceeded to: Back off from a doubling of the Funds rate. Lower the rate 3 times in 1998. Raise the rate 5 times into 2000. Drop the rate 13 times to get to 2003. Then, in the most damaging and idiotic (thus publicly hailed) central bank gambit of ALL time, he raised the rate 16 times in a row at 2:15 et on predetermined dates. Of course, he advertised the future intent in memos, speeches and a small blimp with a banner that floated over the Eurodollar pit. (OK, maybe that last one didn’t happen…maybe)
Investors acted as rationally as could be expected given the schizophrenic actions of the man on the tiller. The apex was to lever the bejeezus out of themselves with stocks, homes and stuff while the Chairman played his cards face up. To some extent, the present Fed is making a similar mistake. Mopping up the mess is demanding unsavory medicine so a huge PR campaign (transparency) is attached to the work. That transparency reduces efficacy and promotes the now famous label behavior.
Happy 16th Birthday Rational Exuberance ! Here’s the keys, try not to hit anything, the insurance is running out.