Putting Greenspan's remarks on the market into perspective


FEDERAL RESERVE Chairman Alan Greenspan rattled stock markets around the world when at a black-tie dinner in Washington on Dec. 5, he asked whether an "irrational exuberance" has sent stock and bond prices beyond reasonable levels.

Even though they've been jittery, U.S. stock markets have held up in the aftermath of the Greenspan speech, and remain at dizzying levels. What was Greenspan trying to do through his comments? Was he trying to cool down the markets? Did the strategy work?

Patrick C. Ryan

President, Ryan, Lee & Co., McLean, Va.

He was sending a strong message about speculation. There's clearly been too much speculation. Chairman Greenspan may not have been talking about IBM, AT&T; or General Motors, but we have seen incredible, incredible speculative fever.

It is not normal when you find [the market] repeating year after year, and you say, "Gee, I can make 15 percent a year in the market."

I think there is a feeling now of overconfidence that the market is almost a no-lose, no-risk proposition. It is like winning three races in a row at Pimlico and Laurel. You think you are on a streak and you bet a little more than you should.

If we have some downturn in earnings, if we have pressure on the Fed and interest rates finally move up, then analysts will say it is over, and some folks are going to hit the panic button.

David R. Clogg

President, Chapin, Davis, Baltimore

I don't think too many people paid too much attention to it. I don't think it will have much effect on the market.

The market is going to probably continue to grow until you have a major change in interest rates, inflation or corporate profits. Right now, we are not seeing a major change. I think we are still in a bull trend.

What he [Greenspan] was trying to do was to calm the market down verbally without having to increase interest rates. The danger side to that is that a lot of wealth has been created in the market as it has risen. A lot of times people sell stocks to buy goods. But when he comes out with a statement like that, he is also knocking wealth down, which in turn knocks down purchasing power.

When he first made the statement, I thought to myself that it is not for him to say what the market's value is. No one really knows. Nobody really knows when the market is over or undervalued. I don't think you should try to control the market as much as you should control the underlying fundamentals of the market, and that is really his job.

John C. Sweeney

Chief investment officer, USF&G; Corp., Baltimore

It looks like most of the economists read his comments as a warning. I did see it as a signal. He is a very thoughtful and prudent speaker and he usually has a message. If he didn't mean it, he is out of form with his general public comments.

To use that phrase 'irrational exuberance,' I think is understandable.

Greenspan is perfectly free to comment on all of the economic variables in the economy as he sees them. But he made an implicit valuation comment and it is the valuation comment I don't think he should have talked about.

He is questioning whether there is irrational exuberance. He doesn't know any more than I do about what the proper valuation of the stock market is.

It could be fairly valued at 10,000. He could make it go to 4,000, that is what scares people.

I don't know that you can say the market is dangerous. A standing correction is 10 percent. If you take this market down 10 percent you are barely below 6,000. I don't think you'd see people bailing out of the market at 5,800. I don't see anything in the economy or interest rates that would indicate that type of correction.

Mark Sargent

Securities professor, University of Maryland Law School, Baltimore.

Was he intending to send a message to cool things off? I don't know. I'd be surprised if he would say something like that in an unguarded way. This is a savvy person who is aware that any utterance of his will be read to mean something.

What everybody is afraid of is that the markets today are nothing more than hot air, a balloon that has floated away from investment fundamental a long time ago. It is essentially a confidence game, and that somehow, some way, sometime the air is going to come out of the balloon and it is going to deflate instantly. Even the slightest hint that that could or should happen from someone like Greenspan can have dramatic affects.

What is keeping the American market equities up are Baby Boomers who are now of an age in their prime earning years and are investing enormous amounts of money in equities with a view to retirement and paying college tuition. So the demand for equities is enormous in helping keeping things afloat. You've got tens of millions of people linking their hands and together pushing everything up.

Pub Date: 12/15/96

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