WALL STREET seems to be exhibiting just the kind of "irrational exuberance" Federal Reserve chairman Alan Greenspan has cautioned against. It is one thing to be bullish. It is another to be bull-headed. As the Dow Jones average soared 82 points yesterday, obliterating the 55-point drop that followed Mr. Greenspan's comments, the Financial Times of London said "a sign of a seriously overheated [market] is a willingness to brush such warnings aside." It called Wall Street's "insouciance" perhaps "the biggest reason to worry."
Mr. Greenspan sent overseas markets reeling Friday with a nuance-laden hypothetical question: "How do we know," he asked, "when irrational exuberance has unduly escalated asset values which then become subject to unexpected and prolonged contractions, as they have in Japan over the past decade?"
Tokyo's Nikkei promptly fell 3.2 percent. The German and French bTC stock markets dropped almost 5 percent. But Wall Street, calmed by sluggish economics statistics, lost a mere 0.86 percent. Then, after a weekend of contemplation, came yesterday's upsurge.
What it all projects for the future we will leave to astrologers and analysts. For the moment it is better to subject Mr. Greenspan's comments to word-by-word exegesis. His reference to "unduly escalated asset values" reflects a surge in stock prices fed by infectious speculation and massive inflows of 401-K and IRA investments. His warning about "unexpected and prolonged contractions" was a direct reference to the bursting of the Japanese bubble and that country's painful recession.
What Mr. Greenspan did not mention is whether the Fed will raise interest rates to offset any inflationary pulsation in the economy because of the 25 percent run-up in the Dow Jones average this year. But it was on the mind of everyone who was paying attention, including Senate majority leader Trent Lott, who said he wanted lower interest rates and worried about the Fed's "independence."
On both points, Senator Lott may be in error. Lower interest rates when stock prices are at record highs would encourage even more speculation. And a crackdown on the "independence" of the Fed would put politicians into play in an arena where they don't belong. It is curious how supply-side Republicans like Mr. Lott find themselves in the same corner as liberal Democrats on these issues.
The long-term aim should be to keep the U.S. economy on its present course of moderate growth, low inflation and healthy job creation.
Pub Date: 12/10/96