Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (36 page)

²⁸
Alan Greenspan, “Structural Changes in the Economy and Financial Markets,” speech at America’s Community Banker’s Conference, Business Strategies for Bottom Line Results, New York, December 5, 2000.

²⁹
FOMC meeting transcript, December 19, 2000, p. 69.
³⁰
Ibid., pp. 69–70.
³¹
Ibid., p. 70.

Greenspan also washed his hands (temporarily) of the productivity– stock market–analyst–corporate management hoax at the December meeting. He acknowledged: “I have gotten calls from a number of hightech executives who are telling me that the market is dissolving rapidly before their eyes. But I suspect that a not inconceivable possibility is that what is dissolving in front of their eyes is their own personal net worth! [Laughter.] That does bias one’s view of what is happening in the world. So, we have to be a little careful about being seduced by those types of evaluations.”
³²

Greenspan had good reason to laugh off CEOs. They were modernday court jesters. On November 19, 2000, Intel Corporation’s chairman, Craig Barrett, pronounced, “We’re very bullish on our core business and expect it to continue to grow.… [N]ext year is going to be very exciting and continue to give us positive growth.”
³³
On December 4, 2000, Cisco Systems Chairman John Chambers delivered his annual speech to Wall Street analysts. “I have never been more optimistic about the future of our industry as a whole, or of Cisco.”
³⁴

Intel and Cisco were two of the most revered technology companies. They were both entering freefalls. In April 2001, John Chambers admitted, “[T]his may be the fastest any industry our size has decelerated.”
³⁵
Chambers was paid $279 million in 1999 and 2000 for his foresighted leadership.
³⁶

By the end of 2000, the Nasdaq Composite had fallen 51 percent and the Philadelphia Internet Index had lost 77 percent from its peak. All told, investors in U.S. stocks had lost trillions of dollars and were constantly reminded of this by the wonder of technology’s multicolored screens that flashed instant calculations of their attenuated portfolio holdings.

³²
Ibid., pp. 71–72.
³³
“Is the Chip Slowdown Overblown?”
Investor’s Business Daily
, November 21, 2000, p. A6.
³⁴
The Center for Future Studies,
Developing and Using Scenarios
, p. 15;
http://www.futurestudies.co.uk//images/scenarios_presentation.pdf.
³⁵
Fred Hickey,
HighTech Strategist
, May 4, 2001, p. 6.
³⁶
Ibid., November 6, 2003, p. 1.

One index was rising: a biography of Alan Greenspan,
Maestro
, written by Bob Woodward. It was number three in the December 24
New York Times Book Re vie w
nonfiction bestseller list. On its tail was
The Darwin Awards
, a chronicle of characters whose behavior was spectacularly inept. It trailed at number four.
³⁷

³⁷
Best Sellers,
New York Times Book Review
, December 24, 2000.

2001

Alas, technology has not allowed us to see into the future any more clearly than we could previously.
¹

—Alan Greenspan, January 11, 2002

January 2001 was a banner month for stocks. The Nasdaq Composite gained 21 percent. Yet, business and financial news was uniformly awful. Technology-production capacity grew at a 49 percent annual rate in December, but sales were scarce. In Janaury, Cisco Systems announced the value of its inventory rose from $1.2 billion to $2.0 billion in the previous quarter.
²
Companies announced plans (or hopes) to reduce inventories by the end of 2002. This unwinding across the whole economy would take years to complete—unless some artificial paper printing inflated prices

¹
Alan Greenspan, “The Economy,” speech at the Bay Area Council Conference, San Francisco, January 11, 2002.
²
Fred Hickey, The High Tech Strategist, February 2, 2001, pp. 3–5. Production capacity growth had compounded at a 35 percent to 45 percent annual rate since 1995. The profit collapse among technology companies should not have been a surprise.

237

even more and tricked Americans into another (and worse) imaginary sense of prosperity.

The only good news was not news at all, but a premise: the Fed will always bail us out. And it did. January 2, the first trading day of the year extended the spirit of the old. The Nasdaq Composite lost 7.2 percent. The FOMC cut the funds rate cut from 6.5 percent to 6.0 percent on January 3.

Greenspan’s rescue effort pumped the index by 14 percent by the closing bell. This was the greatest one-day gain in the Nasdaq’s history.
³
The Greenspan legend preyed on poor memories. Toward the end of Greenspan’s chairmanship, celebrated figures sang his praises. Lawrence Lindsey wrote a
Wall Street Journal
guest editorial in December, 2004. In “Life After Greenspan,” Lindsey reviewed the January 3, 2001, fed funds rate cut: “Mr. Greenspan combined his access to, and understanding of, anecdotal information with his accumulated knowledge of market signals to make what, in Washington at least, was a very contrarian decision. The country was fortunate that Mr. Greenspan’s experience as a trader and business consultant trained him to combine instinct, experience, reason and facts to operate in the real-time manner required for making successful judgments.”
⁴

The Panic–Rate-Cut Conference Call

The Nasdaq Composite had lost more than half its value from its 2000 high. Greenspan’s “accumulated knowledge of market signals” had proved no more a guide in this situation than to the day traders selling the fractional remnants of Cisco Systems, which had fallen from $82 to $43 a share.

Greenspan had not expressed much concern at the December 19, 2000, FOMC meeting. “Recession” was mentioned 25 times at that meeting before Greenspan decanted what would be the official opinion: the FOMC could not know if the current growth rate was sustainable.
⁵
The chairman changed tactics during a January 3, 2001, FOMC conference call. Greenspan had a new twist on stock analysts. He noted: “[A]nalysts’ estimates for both the fourth quarter and the current first quarter are negative versus a year ago.”
⁶
When analysts had been in vogue, he quoted their five-year forecasts, but on this day, their next-quarter forecasts came in handy. Maybe Greenspan decided he needed a rationale for cutting the funds rate, given his ostrich act at the December FOMC meeting only two weeks before. Nothing much had changed in the economy over the previous two weeks: prospects had looked as bleak on December 20, 2000, as they did on January 3, 2001. Not many economic reports are released between Christmas and the New Year. It was the stock market that shattered the chairman’s
sangfroid
.

³
William A. Fleckenstein with Frederick Sheehan,
Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve
(New York: McGraw-Hill, 2008), p. 114.
⁴
Lawrence B. Lindsey, Editorial, “Life After Greenspan,”
Wall Street Journal
, December 6, 2004.
⁵
FOMC meeting transcript, December 19, 2000, p. 69.

Lawrence Lindsey should have been praising his own aptitude. On January 4, 2001, the day after the conference call, Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, was quoted in the
New York Times
: “Larry [Lindsey], to his credit, has been saying for some time that there are some real weaknesses in this economy. It sure looks that way now.”
⁷

It is a safe bet that, if Lindsey had still been at the Fed in 2000 or 2001, his opinion would have made no difference. Greenspan’s hold on the FOMC was tighter than ever. The FOMC met on January 30–31, 2001. The decision was made to cut the funds rate again, from 6.0 percent to 5.5 percent. Toward the end of the meeting Greenspan mentioned “the preliminary draft of our press statement that I’ll read to you.”
⁸
It appears the chairman had brought this to the meeting. There was some talk; then Greenspan moved to adjourn. The transcript next shows:

MR. KOHN. Do you want to vote first? You haven’t taken the vote yet.
CHAIRMAN GREENSPAN. We didn’t? [Laughter]
⁹
After a temporary recess, the vote was unanimous.

⁶
FOMC conference call transcript, January 3, 2001, p. 3.
⁷
Joseph Kahn, “Contrarian of Boom Decade Put in Bush Inner Circle,”
New York Times
, January 4, 2001, p. C8.
⁸
FOMC meeting transcript, January 30–31, 2001, p. 182.

Flashback—1997: The FOMC Warned Greenspan of “Irrational Exuberance”

Lindsey had resigned from his post as Federal Reserve Governor on February 5, 1997. The FOMC had met on December 17, 1996. This was shortly after Greenspan’s “irrational exuberance” speech. Lindsey opened his comments by thanking Mr. Greenspan for his best efforts, then predicted, “1997 is going to be a very good year for irrational exuberance.”
¹⁰
Lindsey discussed good news forming on the fiscal, credit, and international fronts. “But,” Lindsey continued, “in each case it is going to be creating bigger problems for us to solve down the road. So, 1998 looks like the year in which irrational exuberance will meet its match.”
¹¹
The chairman responded:

CHAIRMAN GREENSPAN. I will make another speech [Laughter]
MR. LINDSEY. Don’t wait a whole year.
CHAIRMAN GREENSPAN. Governor Yellen.
¹²

Governor Janet Yellen followed. (Immediately—the chairman made no reply to Lindsey.) Her assessment of the economy and markets paralleled Lindsey’s:

GOVERNOR YELLEN. Like Governor Lindsey and some of the rest of you, I consider the stock market a significant continuing risk.… Maybe your speech also served to heighten just a little the appreciation by the market that there do remain real risks around what is admittedly a very rosy scenario.

CHAIRMAN GREENSPAN. Thank you all. We can go to coffee now.
[Coffee break]
¹³

Coffee breaks were as much an ally as faulty models, another means to ignore problems.

¹⁰
FOMC meeting transcript, December 17, 1996, p. 28.
¹¹
Ibid., p. 30.
¹²
Ibid.
¹³
Ibid., pp. 31–32.

Flash Forward: January 30–31, 2001

At the January 30 and 31 FOMC meeting, Greenspan made a surprising claim: “[A]fter experiencing this huge bubble of speculative activity and looking at price-earnings ratios, which are not by any means depressed, we can’t be sure that this expansion will just slow down, then pop up, and continue the way it was.”
¹⁴

It’s a shame he did not gather the fortitude to address a recession at the time he finally discussed a bubble, maybe the stock market bubble, possibly the inventory bubble, but, the admission of a bubble looks like a momentary whim. He did not use the word
bubble
in the other 2001 FOMC meetings or in public.

Greenspan believed “there is little evidence of which I’m aware that longterm profit expectations have deteriorated to any significant extent.” He lectured on the wonders of “Internet and electronic interface systems,” on the demand for “a broad range of products in the hightech area,” on “the continuing leap in structural productivity,” on the “emergence of extraordinary improvements in the cost structure on business-to-business applications,”
¹⁵
and on and on. This being true (in Greenspan’s mind), he missed how this compression of time was putting many of the high-flyers in liquidation faster than before. His point seemed to be that technology was so great that the future could not be compromised by stock market losses or by bankruptcies. His pleadings are either face-saving or evangelical. The man who was not sure if he existed in his late twenties may have discovered a spiritual home with technology in his late seventies. This would complement large segments of the public that found a spiritual home with Alan Greenspan.

Yet—and this is the mark of a zealot—the Federal Reserve could not forecast a recession because of the limited technology of models—all models: “There is no way to forecast when [a recession will] happen except by luck.… There are those who look back and say ‘I forecasted the recession,’ and I’m saying it was good luck because that’s what it was.”
¹⁶
The late January 2001 meeting was chock-full of confessions. He finally admitted that he believed in the new era: a description he had deliberately avoided: “I think part of the answer is the new economy. We can’t explain it all [recessions] in terms of the new economy because the model reflects the history of all previous periods.”
¹⁷
“All previous periods” is all a model can reflect.

¹⁴
FOMC meeting transcript, January 30–31, 2001, p. 181.
¹⁵
Ibid., pp. 174–181.

On February 13, 2001, in testimony before the Senate Banking Committee, Greenspan was upbeat about “strength in capital accumulation and sustained elevated growth of structural productivity over the longer term.”
¹⁸
An article in the
Financial Times
reported Greenspan’s testimony under the title: “Greenspan Sees a Quick Rebound.”
¹⁹
Andy Grove, chairman of Intel Corporation, disagreed. On a March 6 conference call, Grove, paterfamilias of the semiconductor industry, admittted: “I don’t expect the end demand to snap back.… We are in this state for some period of time.”
²⁰
He explained the recent cycle: “For a number of years, technology had huge momentum.… We built in an overcapacity of all physical things.” To eliminate this overcapacity, demand had to rise or investment had to fall until “the two levels cross, or the investments of the past several years have been obsoleted [
sic
]” by new technology. “Both of these require some time.”