Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (35 page)

Bunning would not accept the general wisdom hypothesis:

Senator BUNNING: Well, I could argue all day about that because I don’t think there are an awful lot of sophisticated investors, as you might suspect.

Chairman GREENSPAN: There are enough, Senator.

Greenspan kept talking. He had said it all before. Bunning could not win, even with experience as an investment broker.
⁷

Ignoring the Stock Market

By the spring and summer of 2000, stock market woes were as much a topic of conversation as IPOs had been six months earlier. Chairman Greenspan avoided the subject. He seemed to speak of nothing except technology, although this perception is partly due to the media’s obsession with any utterance by Greenspan on the topic. A speech in June 2000 was typical: “Substantial increases in U.S. capital investment, and the accompanying faster growth of our capital stock relative to labor input … explain a large part of the pickup in underlying growth in output per hour over the past five years,
irrespective of how measured
”
⁸
[authors’ italics]. This was in a speech titled “Business Data Analysis,” before, of all groups, the New York Association for Business Economics.

He also told his audience: “That there has been some underlying improvement in the growth of aggregate productivity is now generally conceded by all but the most skeptical.”
⁹
By 2000, mathematical innovations attributable to the Boskin Commission Report had hedonically lowered the price of software sales, television sets, washing machines, microwave ovens, and textbooks (textbooks that included more color graphics increased the nation’s GDP). Those business economists who had read the May 2000
Survey of Current Business
published by the Bureau of Economic Analysis would have seen that businesses had spent $97.8 billion in 1999 on computers but that “real” spending, according to the BEA, had been $220 billion.
¹⁰
That is, computers bought in 1999 had cost businesses $97.8 billon. The $220 billion included the Bureau of Economic Analysis’s adjustment for how much the $98 billion of spending contributed to the economy. The $220 billion was used when the government calculated GDP growth and productivity. The $122 billon difference was fictional; those dollars never existed. The $122 billion of fiction was more than 1 percent of the gross domestic product in 1999.

⁶
FOMC meeting transcript, December 19, 1995, p. 38.
⁷
Michael Barone and Richard E. Cohen,
Almanac of American Politics
,
2008
(Washington, D.C.: National Journal Group, 2007), p. 682. Bunning had been an investment broker and agent from 1960 to 1986.
⁸
Alan Greenspan, “Business Data Analysis,” speech via videoconference, New York Association for Business Economics, New York, June 13, 2000.

It would seem that all but the most skeptical would question whether the recreational mathematics that the bureaucrats at the BEA applied accurately calculated GDP growth.
¹¹
“Irrespective of how measured” would also dismiss a study published by the Congressional Budget Office in June 1999. Robert J. Gordon, a professor at Northwestern University, was the author. Gordon wrote: “There has been
no productivity growth acceleration
in the 99% of the economy located outside the sector which manufactures computer software.… Indeed, far from exhibiting productivity acceleration, the
productivity slowdown
in manufacturing has gotten
worse
”
¹²
[authors’ italics].

¹⁰
Bureau of Economic Analysis,
Survey of Current Business,
May 2000. The comparison is between Table 5.4, Private Fixed Investment by Type, and Table 5.5, Real Private Fixed Investment by Type.

¹¹
Skepticism was at the top of the list when the National Research Counsel published a 2002 committee report. Under the direction of Charles Schultze (CEA director under President Carter), the “Schultze panel” noted the considerable literature on estimating hedonic functions; however, “researchers are much less experienced using them across a variety of goods.” The Schultze opinion was, depending on the source, either
the
reason or
a
reason that the BEA dropped its hedonic adjustments to computers in September 2003.

¹²
Robert J. Gordon, “Has the ‘New Economy’ Rendered the Productivity Slowdown Obsolete?” Northwestern University and National Bureau of Economic Research, revised
version, June 14, 1999; http://research.stlouisfed.org/conferences/workshop/gordon.pdf.

The FOMC met two weeks after this speech, on June 27 and 28, 2000. Greenspan admitted that “the economy is slowing to a certain extent.”
¹³
He claimed “the evidence of an actual recession at this point is belied by the fact that there is no evidence of which I am aware that suggests any significant deterioration in productivity growth.”
¹⁴
Hedonics at the Bureau of Economic Analysis and Gordon’s study at the Congressional Budget Office had placed the burden of proof on Greenspan to validate
any
productivity improvement over the past decade.
¹⁵

Aside from that, this contention that rising productivity prevents recession was new. No doubt, the calligraphy of deltas and epsilons on assorted campus blackboards has tested the hypothesis, but now the New York University Ph.D. was running the ship of state on such conjecture.

Greenspan leaned on analysts again to support his contentions, despite contrary evidence in the press.
¹⁶
The May 2000 issue of
Red Herring
, a widely read technology magazine, quoted from a speech by Keith Benjamin (a former Robertson Stephens analyst who had moved to venture-capital firm Highland Capital Partners): “Let’s get real. I mean I used to actually have to … justify these valuations. Now, I think I did a pretty good job of fooling at least some of you in the audience, but OK, today I can step back and say there’s no way I could have ever really justified any of the valuations.… What can I say? God bless America and the capitalist system.”
¹⁷

At the August 22, 2000, FOMC meeting, Greenspan cited security analysts’ higher longterm earnings projections with a qualification: “As I have mentioned before, the latter may not be very knowledgeable about what is going on in the business world, but they are reasonably good reporters of what the companies that they follow are saying about their longer-term outlooks.”
¹⁸

¹³
FOMC meeting transcript, June 27–28, 2000, p. 104.
¹⁴
Ibid., p. 106. William A. Fleckenstein with Frederick Sheehan,
Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve
(New York: McGraw-Hill, 2008), p. 102, discusses the CBO paper in more detail.
¹⁵
In 2000, business computer sales of $101 billion were inflated to hedonically adjusted “real sales” of $290 billion—the difference being about 2 percent of GDP growth. Data from
Survey of Current Business
, Bureau of Economic Analysis, December 2001.
¹⁶
“Longterm expectations of the security analysts, which we presume reflect the views of corporate management, have not diminished. Indeed, they continue to move up for both the hightech and the old economy firms.” FOMC meeting transcript, June 27–28, 2000, p. 106.
¹⁷
Duff McDonald, “Investor The First Annual Price Target Awards,”
Red Hessing
, May 2000.

The wonder is why they would be “reasonably good reporters,” since Greenspan had previously acknowledged (in the October 1999 FOMC meeting, discussed in Chapter 17) that “[earnings projections] are biased on the upside, as they are made by people who are getting paid largely to project rising earnings to sell stocks, which is the business of the people who employ them.”
¹⁹
In fact, just three months before the August 2000 meeting, on June 3, 2000, Merrill Lynch had published a “buy” recommendation on Excite@Home (ATHM). Yet the firm’s superstar Internet analyst, Henry Blodget, wrote to a Merrill comrade: “ATHM is such a piece of crap!”
²⁰

Wall Street and Greenspan spared no effort to prop up prices. Critics called this Greenspan’s open-mouth policy. Wall Street voices pumped up the buying opportunity. The most revered, Abby Joseph Cohen from Goldman Sachs, wrote a note to clients (and thus the nation) on October 13, 2000, that the stock market was 15 percent undervalued. The Nasdaq rose almost 8 percent that day, its second-largest one-day percentage gain ever.
²¹
It then fell 25 percent by the end of the year.

At the October 3, 2000, FOMC meeting, Greenspan was perplexed by “some really bizarre stock price movements among some of the larger and fairly well established hightech firms,” but consoled himself with “longterm forecasts of earnings by securities analysts.”
²²

¹⁸
FOMC meeting transcript, August 22, 2000, p. 73.
¹⁹
FOMC meeting transcript, October 5, 1999, p. 48.
²⁰
“Vested Interest,”
Now with Bill Moyers,
PBS, May 31, 2002. From John Cassidy,
Dot.con: The Greatest Story Ever Sold
(New York: HarperCollins, 2002), table on pp. 348–349: Excite@home went public on July 11, 1997. The IPO raised $2 billion. On March 10, 2000, its market cap was $10.8 billion. On August 31, 2001, its market cap was $172 million. Cassidy, p. 308: “Of all the money-eating Internet companies, the Excite/At Home combine was probably the most ravenous. Since 1995, it had gone through almost $10 billion.” This was in January 2001.
²¹
Jonathan Fuerbringer, “Nasdaq in Comeback, Surging Almost 8%,”
New York Times
, October 14, 2000, p. C1.
²²
FOMC meeting transcript, October 3, 2000, p. 76.

In late 1998, a cheery Mary Meeker, star technology analyst at Morgan Stanley, graced the front cover of
Barron’s
with the title: “Queen of the ’Net.” In December 1999, a
Wall Street Journal
editorial chastised her: “When Web companies openly admit they gave their IPO business to Morgan Stanley hoping to get a favorable tout from Mary Meeker, you have to wonder whom the analysts are really working for.”
²³
The
Journal
was not thrilled with how other analysts composed their “Buy” lists: “The news last week, moreover, wasn’t that Jack Grubman, Salomon [Smith Barney]’s top-rated telecom analyst, had become a believer in AT&T’s cable strategy.
²⁴
The news was that his change of heart came just as Salomon was pitching for work as an underwriter of AT&T’s wireless tracking stock.”
²⁵
In May 2000, Grubman told
BusinessWeek
the conflict of interest that so disturbed the
Journal
had been resolved: “What used to be a conflict is now a synergy.”
²⁶

At the November 15, 2000, meeting, Greenspan cited analysts, with reservations: “If we take the I/B/E/S data, which is really the best we have on profit expectations, real or crazy, those numbers have not changed.” The next day (November 16, 2000), Kirsten Campbell, assistant vice president, Merrill Lynch Internet Research, sent an e-mail to Henry Blodget: “I don’t want to be a whore for f-king mgmt. If 2-2 means that we are putting half of Merrill retail into this stock because [Merrill is] out accumulating it then I don’t think that’s the right thing to do. We are losing people and money and I don’t like it. John and Mary Smith are losing their retirement because we don’t want [a colleague] to be mad at us the whole idea that we are independent from banking is a big lie.”
²⁷
Campbell lacked Greenspan’s refinement, but a guest appearance at an FOMC meeting might have added the spark it lacked.

²³
Editorial, “Analyze This,”
Wall Street Journal
, December 17, 1999.
²⁴
Salomon Brothers had been bought and merged with Smith Barney.
²⁵
Editorial, “Analyze This.”
²⁶
Peter Elstrom, “The Power Broker,”
BusinessWeek
, May 15, 2000, p. 74.
²⁷
“Vested Interest,”
Now with Bill Moyers
, PBS, May 31, 2002.

Greenspan Clears His Throat

On December 5, 2000, Alan Greenspan spoke at the America’s Community Bankers Conference. After a few paragraphs, the chairman cleared his throat and queried the audience: “Why, then, one might ask, is this process of reassessment taking place now?” He noted: “The orders and output surge this past year in a number of high-technology industries, amounting in some cases to 50 percent and more, was not sustainable.”
²⁸

Greenspan told FOMC members the bad news at their December 19, 2000, meeting. The economic expansion had “very clearly and unambiguously moved down dramatically from its pace of earlier this year, which was unsustainable.”
²⁹
The chairman continued: “The key question, and one we really cannot answer, is whether the growth rate has stabilized. At this point we cannot know.… The problem, as I’ve indicated on numerous occasions and as a number of you have commented, is that we do not have the capability of reliably forecasting a recession.”
³⁰

Oh, those models! Greenspan couldn’t see a bubble and now sat on his hands waiting for a recession. When a problem confronted the chairman, he walked away from it. The Federal Reserve, like a ship’s captain, is expected to act
in extremis
; once again, Greenspan deserted the bridge. Greenspan pinned the model problem on oil: “[W]e have never been able to use our model structures to forecast a recession out of an oil shock. We’ve had three oil shocks in recent decades that were followed by recessions.”
³¹
Given this observation, why did he need a model at all to prepare for a recession? The definition of a recession is debated and redefined by committees. The simplest (though not official) measurement of recession is whether the GDP has contracted for two consecutive quarters. Real GDP fell 0.1 percent in the second quarter of 2000, rose +0.5 percent in the third quarter, and fell 0.1 percent in the fourth quarter. Recession or not, the economy lacked get-up-and go-from the time the stock market started falling.