Excerpt published in Barron’s Mailbag July 29, 2013 under the title Back to the Future
Irrational Exuberance Redux
Over the last two months we have seen equity and fixed income markets show what Alan Greenspan referred to back in 1996 as “irrational exuberance” during his speech “The Challenge of Central Banking in a Democratic Society.” The difference this time though is that it is the very same office held by Mr. Greenspan which has fueled the exuberance and irrationality this time around. Back in 1996, the underlying theme of Mr. Greenspan’s remarks was for the central bank to be very conscious of current economic situations and to have the willingness to act accordingly as can be understood from the following excerpt:
“Because monetary policy works with a lag, we need to be forward looking, taking actions to forestall imbalances that may not be visible for many months. There is no alternative to basing actions on forecasts, at least implicitly. It means that often we need to tighten or ease before the need for action is evident to the public at large, and that policy may have to reverse course from time to time as the underlying forces acting on the economy shift.”
I would encourage readers to go and take a look at the speech in its entirety as its points are very relevant to today’s situation that the Fed finds itself in. Clearly the challenges facing Mr. Greenspan during his tenure and the ones facing Mr. Bernanke are very different. Mr. Greenspan was faced with an accelerating economy and tightening labor markets which came along with the dawn of the tech boom which drove equity markets and the economy to new highs into the change of the millennium only to see markets crash in early 2000. Now, Mr. Bernanke has been dealing with the opposite situation and one which I think we can all agree has been significantly more intense and dynamic than what existed in 1996. To Mr. Bernanke’s credit, he took the hand he was dealt and made the best of it. So the question now is where do we go from here? It seems the current policy of the Fed is to keep the pedal to the metal and ignore any caution signs. I guess Mr. Bernanke wants to go out of office without any doubt as to the credibility of his nickname “Helicopter Ben.” I really wish Mr. Bernanke would take a look back at his predecessor’s words, actions and inaction to perhaps see what we may be heading for. Is a 6.5% unemployment rate the magic number which will make everything ok? I think we need to ask, how bad is our situation today compared to what it was 5 years ago? At the same time, we also need to accept the fact that there have been structural shifts to our economy which will prevent certain areas of the country from returning to what used to be. The good news is that where one area falls down, another one picks up. One has to look no further than the renaissance taking place in the natural gas and shale oil businesses to see new and great opportunities. Unfortunately, change takes time, but as this country has proven time and time again, we will succeed. I just hope that the powers that be will focus on what we have and not what we had.