Alan Greenspan’s ‘Irrational Exuberance’: Then and Now

The comments above & below is an edited and abridged synopsis of an article by Alex Pollock

When Greenspan gave the ‘irrational exuberance’ speech, the inflation-adjusted index was 1,392, or almost 3 times as high as it was at year-end 1987. That is an average compound annual growth rate of more than 12% over 9 years—a remarkable run, and not sustainable for the long term. After the speech, the market climbed for 3 more years.

The collapse came a few months later. By September 2001, real prices were back to December 1996 levels. In other words, the inflation-adjusted price gain over nearly 5 years was zero.

The speech was too early. Perfect timing would have been about 2 years after (November 1998), when the warning would have caught the final blow-off and the collapse. When Greenspan retired in 2006, the total real price return from a November 1998 warning to his retirement date would have been zero.

In February 2009, 3 years after Greenspan had left the Fed, more than 12 years after his irrational exuberance speech, and in the midst of financial crisis, the real Nasdaq index was 21% below its level at the time of the speech. Since then, a remarkable new boom has taken off, and the index has just about regained its bubble peak.

From February 2009 to now, the real Nasdaq index has increased about four times. The average compound price increase is more than 17% per year. Is this irrational exuberance? Or is it the effect of artificially low interest rates manufactured by Greenspan’s central banking successors?

In July, Greenspan issued a new bubble warning: “By any measure, real long-term interest rates are much too low and therefore unsustainable,” he said. “Long-term interest rates will rise,” and “That is not good for asset prices.”

Will Greenspan’s timing prove to be better this time than last?