Quote from nitro:
Stock markets are future discounting mechanisms. If we can come out of this recession standing, watch out! The next time one of these "bubbles" happens, [and we won't be waiting 150 years for the next one,] the FED will have greater wisdom to draw upon...
nitro
The thing is nitro, the fed already had plenty of wisdom to draw upon. The 90's were a replay of the 20's.
There have been at least half a dozen periods of history where the public has taken an excellent new innovation and gone waaay overboard in terms of irrational valuations. Airplanes, cars, electricity, railroads, bowling stocks, on and on you name it.
The bubble developed in the 20's because a) it was an age of exciting progress, and b) it was a benign inflationary environment that allowed the seeds of excess to be planted.
I am not piling on to Greenspan because of the ugly outcome after the bubble popped. I was saying the same thing five years ago, and Fleckenstein was saying it before that!!!
It's BS to give Greenspan a pass because plenty of individuals did learn from past lessons of history, and Greenspan's OWN WORDS demonstrate that he had a personal knowledge of past history himself.
This is not about kicking an old man when he's down. This is about holding someone accountable for lessons that he learned but ignored. He knew all about the history of excess, he knew all about the history of bubbles developing in benign environments, and he was even speaking up about it in 1996- but then for some reason he decided to shut his mouth and play the game. He decided he would rather hold on to his popularity than stand by the conviction of history, the exact opposite of what a credible and accountable leader would do.
For those who say he didn't have any real power, give me a break. Even now the ability to manipulate the money supply is still gargantuan in terms of power. The entire world was hanging on his every word for years, literally- he had huge amounts of authority simply in the opinions he voiced. At the height of his influence, I wouldn't be surprised if his farts were being analyzed for their economic portents.
And back to the promise of technology: TECHNOLOGY AND VALUATION HAVE NO INTRINSIC CORRELATION.
Ever hear of "profitless prosperity"? This is also a concept that rational people understood long before the bubble, including Greenspan. If a company comes up with a great new innovation, but
so do a bunch of other companies at the same time, then the CONSUMER benefits in the form of a great new product, but the lack of pricing power due to competition means that the valuations of the companies do not deserve to rise out of proportion to their profits!!!
Let's say that the top ten pharmaceutical companies all came up with the same cure for cancer at the same time. This would be a great boon to society obviously. But whither the valuations of the pharma companies? Competition would ensure a low price- in fact, the margins on such a wonder drug might not be higher than that of any other drug given a fast enough distribution of the formula.
Now go back and look at the dot com sales sector. It was plain as the nose on anyone's face that a sector with supposed profit margins of a gazillion percent would be drowned in competition before you could shake a stick at it. This is exactly what happened. And it didn't take a genius to see that it was going to happen. It just takes common sense. And I was saying the same thing in 1999 and so were plenty of other people.
Innovation + competition = benefit to society but it does NOT equal a 250+ price to earnings ratio because competition arbs away profits back to normal levels. A company with a great product may well be a lousy investment. So "bubbles" and innovation do not have to go hand in hand. They only do because stupid folks forget the common sense lessons time and time again. But that's why "smart" folks like Greenspan are supposed to keep a rein on things instead of pouring gasoline on the fire.
Greenspan KNEW what he was doing, he KNEW that history counseled a different course of action, but for some reason post 1996 he decided to zip his lip and play puppet. He chose to fall down on the job for reasons of popularity or some other self centered interest. He can't hide behind smoke screens of how hard his job was or how "complex" it was, give me a break, he had demonstrated prior knowledge and understanding that he failed to act on and thusly he shirked his duty to the detriment of the country. This is not kicking a guy when he's down, it's calling someone to task for failing in their responsibilities for a deplorable reason- a desire to preserve their own glory.
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