Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (34 page)

A sign of mental instability was another Youth Movement. R. W. Huntington Jr., a veteran of several decades in the insurance industry, observed the scene from his investment post at Connecticut General Life Insurance Company in 1929: “We old fogies have been told time and again that we have entered a new era which we were incapable of understanding; that the past used to be the best guide for the future … but [is] no good now.” Huntington acknowledged the capacity for youth to make a fortune during a bull market, since it was not inhibited by knowledge: “[F]or the last six years the prudent and experienced have not made money on paper … as much as the rash and inexperienced who have never seen hard times or severe recessions.”
²⁸

In the Go-Go Years, 26-year-old conglomerateurs made fortunes. In April 2000, there was Tom Hadfield. The 17-year-old entrepreneur had floated his second Internet start-up (Schoolsnet.com). The
Financial Times
noted that Hadfield had founded his first Web site, Soccernet, when he was only 12. It was owned by Walt Disney at the time of this second flotation.
²⁹

²⁴
Gretchen Morgenson, “Something Borrowed May Leave Market Blue,” “Market Watch,”
New York Times
, January 30, 2000, p. B1.
²⁵
Ibid.
²⁶
Alex Berenson, “After the Fed, a Large Presence,”
New York Times
, January 23, 2000, p. B2.
²⁷
Ibid.
²⁸
R. W. Huntington, “The Company’s Investment Policy,” in Charles D. Ellis and James R. Vertin (eds.)
Classics: An Investor’s Anthology
(Homewood, Ill.: Dow Jones-Irwin, 1989), pp. 61–62.

The
Wall Street Journal
introduced its readership to Justin Hendrix, a “spike-haired, 19-year-old freshman at Seattle University with a messy bedroom and a summer job maintaining ice-making machines at local supermarkets.” Known as “Dr. Wall Street,” he offered up-to-the-minute advice: “This is the new economy, and you can learn as much about Wall Street on the Internet in two years as you could in the 10 or 15 years it used to take others.”
³⁰
Strictly speaking, Hendrix was correct, given the advice that Wall Street firms were offering their clients and the public.

Harvard Business School opened an office in Silicon Valley to develop Internet start-up case studies.
³¹
A March 2000 KPMG International poll of college seniors found that 74 percent of the students expected to become millionaires.
³²

Instead of sounding like “Dr. Wall Street” himself, Greenspan might have dampened the future carnage. Among his other storied accomplishments was that of an economic advisor who made stock market predictions for more than 50 years.

Basking in Adulation: “Let’s Hear It for a

Great Chairman”

Yet Greenspan continued to root for the Nasdaq. This was the mirror image of the world rooting for Greenspan. The praise was unremitting. He basked. He glowed.
Der Spiegel
chimed in with the continental view: “Greenspan is the new magic man of the Millennium.”
³³
On March 6, 2000, Greenspan attended a “New Economy” conference at Boston College. It was his birthday. He was presented with a cake and a cheery round of “Happy Birthday” from the packed house. Before his lecture, the local congressman, Ed Markey, primed the star-struck audience: “Let’s hear it for a great chairman, ladies and gentlemen.” They responded exactly as the warm-up crowd for a TV-game show should.
³⁴

²⁹
Andrew Ward, “Schoolboy to Float Second Startup,”
Financial Times
, April 17, 2000.
³⁰
Jeff D. Opdyke, “Paging ‘Dr. Wall Street’: Teen Prescribes Stock Winners,”
Wall Street Journal
, July 10, 2000.
³¹
Ross Kerber, “Internet Boom Reverberating in Business Schools,”
Boston Globe
, February 4, 1999.
³²
James P. Miller, “A Special News Report About Life on the Job—and Trends Taking Shape There,” “Work Week,”
Wall Street Journal
, March 28, 2000.
³³
Albert Wimmer, Professor, Notre Dame University, “‘Bullman Forever’: Teaching Stu
dents How to Be Wall Street Watchdogs,” www.krannert,purdue.edu/centers/cibers/
publications/gbl, p. 157.

The New Economy conference received the standard pep talk: “At a fundamental level, the essential contribution of information technology is the expansion of knowledge and its obverse, the reduction in uncertainty.”
³⁵
On and on he went, the music man inevitably concluding: “Decisions were made from information that was hours, days…”
³⁶

Greenspan offered the Boston College audience a vision of the third millennium: “I see nothing to suggest that these [high-rate-of-return, productivity-enhancing investments] will peter out any time soon.”
³⁷
The great chairman did not disappoint the shareholders in attendance.

Arthur Levitt, chairman of the SEC, also gave a speech at the conference, in which he warned that retail investors did not fully understand markets and “may fall victim to their own wishful thinking.”
³⁸
These would be the investors whom Greenspan had told the senators would find it difficult to leverage their Internet stocks if the Fed raised margin requirements.

Julian Robertson, a hedge fund manager who produced at least 27 percent annual returns for close to two decades, threw in the towel. “The current craze in Internet stocks was creating a Ponzi scheme and that makes the process self-perpetuating until the pyramid eventually collapses under its own excess.” He closed his career by telling the
New York Times
: “I’m 67 years old, who needs this?”
³⁹
The Federal Reserve chairman did not seem to be influenced by the dissonance, which is not surprising. Greenspan had recast the job. A review of his speeches and testimony from this period is full of technology and productivity fluff. He did not speak much about money and credit. These had been the main concerns of previous Fed chairmen. The government had designed the Federal Reserve System to monitor money and credit. Greenspan rarely discussed either.

³⁴
John Cassidy, “The Fountainhead,”
New Yorker
, April 24, 2000.
³⁵
Alan Greensan, “The Revolution in Information Technology,” before the Boston College Conference on the New Economy, Boston, MA, March 6, 2000.
³⁶
Ibid.
³⁷
Ibid.
³⁸
Arthur Levitt, “The New Economy,” speech at The Finance Conference 2000, Boston College, Boston, March 6, 2000.
³⁹
Gretchen Morgenson,“A Onetime Highflying Hedge Fund Appears Likely to Shut Down,” “Market Place,”
New York Times
, March 31, 2000.

He may have enjoyed his superstar status to such a degree that he preferred to speak about a hot topic. Or, he may have avoided discussions of money if he came to realize he was illequipped to mention it. One confirmation of the latter flows from a congressional hearing in February 2000:

Mr. GREENSPAN. Our problem is not that we do not believe in sound money; we do.… The difficulty is in defining what part of our liquidity structure is truly money. …[A]s a consequence of that we … have downgraded the use of the monetary aggregates for monetary policy purposes. …

Dr. [Ron] PAUL. So it is hard to manage something you can’t define?
Mr. GREENSPAN. It is not possible to manage something you cannot define.
⁴⁰

Since Greenspan’s responsibility was to peg the price of money at the correct interest rate, this was an important admission. It passed without notice.

What to Do after a “Speculative Bubble of

Extraordinary Proportions”? Tighten Money

In the end, Greenspan’s words were of no intrinsic value. At the close of trading on April 14, the Nasdaq Composite closed at 3,321, a fall of 35 percent from March 10. Massive buying interests did what they could to restore the market, but it was exhausted, particularly the technology companies.

⁴⁰
House Committee on Banking and Financial Services,
Conduct of Monetary Policy: Report of the Federal Reserve Board Pursuant to the Full Employment and Balanced Growth Act of 1978 P.L. 95–523 and The State of the
Economy, February 17, 2000, p. 30.

There was no doubt that, after inflating for the past decade, the stock market was now deflating. Since the stock market ran the economy, there was a good chance that the GDP would follow. This was an odd time for the Federal Reserve to raise the funds rate. Two years earlier, at the May 19, 1998, FOMC meeting, Greenspan claimed: “If the market were to fall 40 or 50 percent, I would be willing to stipulate that there had been a bubble!”
⁴¹
The Nasdaq fell 35 percent in a month. Greenspan never said in 1998 what action the Fed would take when the market wobbled on the windowsill. Now we found out: he tightened money. The Fed raised the funds rate from 6.0 percent to 6.5 percent in May 2000.

At the FOMC meeting on May 16, Michael Prell commented, “[W]e’ve experienced a speculative bubble of extraordinary proportions.”
⁴²
Greenspan was not interested in stocks. Instead, he spent considerable time on the relationship between productivity and oil: the “lighter distillates” being used in Germany had caught his attention.
⁴³

Greenspan had obviously decided before the meeting to raise the fed funds rate by 0.50 percent: “I think the evidence indicates that productivity, indeed perhaps underlying GDP, is still accelerating.”
⁴⁴

He mentioned that “the network externalities effect of our hightech system is creating a major underlying acceleration of our economy.”
⁴⁵
Whatever this meant, it was part of Greenspan’s pitch to tighten money. The FOMC voted unanimously to target a 6.50 percent fed funds rate. The Fed had raised the funds rate by 0.25 percent in February and 0.25 percent in March. It was now 1.00 percent higher than at the beginning of 2000.

⁴¹
FOMC meeting transcript, May 19, 1998, p. 84.
⁴²
FOMC meeting transcript, May 16, 2000, p. 23.
⁴³
Ibid., p. 87.
⁴⁴
Ibid., p. 82.
⁴⁵
Ibid.

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June–December 2000

If something can’t go on forever, it will stop.
¹
—Alan Greenspan, September 13, 2000

The Senate Banking Committee held a series of hearings in early 2000, “The Emerging Structure of U.S. Securities Markets and the Appropriate Role for Regulation.” The Federal Reserve chairman spoke on April 13, 2000, about one month after the Nasdaq had peaked. Greenspan tried to steer clear of a stock market discussion. What the Federal Reserve chairman wanted to ignore, Republican Senator Jim Bunning from Kentucky wished to pursue.

Bunning asked if Greenspan’s jawboning had contributed to the recent 25 percent fall in the Nasdaq index. The Federal Reserve’s role was a long-running feud between the two. This was really a long-standing grievance about the role of Alan Greenspan. Bunning’s frustration may have been with Alan Greenspan, the showman, rather than with Alan

¹
Alan Greenspan, quoting Herbert Stein, chairman of the Counsel of Economic Advisers under President Nixon. Of Stein’s statement, Greenspan said that he “got it just right.” At the Herbert Stein Memorial Luncheon, sponsored by National Association for Business Economics, in conjunction with the Federal Reserve Bank of Dallas, Annual Meeting, National Association for Business Economics, Drake Hotel,
Chicago, September 13, 2000. www.nabe.com.com/am2000/grnspnvid.

227

Greenspan, the Federal Reserve chairman. The chairman responded as if he were the Fed’s legal counsel: “Senator, I continue to deny and insist upon continuing to deny that our goal is to jawbone the stock market. It is not.”
²

Greenspan’s reply veered away from the transgression that really irked Bunning, which was Greenspan’s outsized reputation and influence on American life. The senator had not asked Greenspan to define the Fed’s job. There was no miscommunication between the two: Bunning wanted Greenspan to receive no more publicity than an undersecretary of transportation.

Greenspan understood how his own words had become a major influence on the markets. In a January 2001 FOMC conference call, Greenspan would note that “years ago presumptions about what the Fed would or would not do didn’t have much effect on the marketplace. Now we just whisper or open our mouths or smile or something and the markets go berserk.”
³
As Bunning knew, it wasn’t “we.” It was Greenspan’s theatrics that had remodeled the American mind.

Bunning went on to ask if the losses in the Nasdaq had eliminated the socalled bubble in the economy.
⁴
The chairman’s response dodged self-incrimination:

Chairman GREENSPAN: Senator, … I don’t believe we can know that there has been a bubble.… When you think of the fact that there are millions of very intelligent investors out there … to basically presume that you know a great deal more than that general wisdom, I think is, first, presumptuous, and second, invariably wrong.
⁵

The chairman’s hypothesis somehow equates “intelligent investors” to “general wisdom,” but intelligent investors such as Julian Robertson sent money back to their clients in the same month. “General wisdom” was dumb enough to buy Nasdaq stocks, as it had been “dumb enough to buy 100-year bonds” in 1995.
⁶

²
Senate Committee on Banking, Housing, and Urban Affairs, “The Emerging Structure of U.S. Securities Markets and the Appropriate Role for Regulation,” February 29, 2000; April 13, 2000; and May 8, 2000. Greenspan spoke at the April 13, 2000, hearing. Quote is on p. 154.

³
FOMC conference call transcript, January 3, 2001, p. 25.
⁴
Senate Banking Committee, “Emerging Structure of U.S. Securities Markets,” p. 159.