Greenspan’s Folly – 1973 To The 1990s

While many might hail Alan Greenspan as The Maestro, he is in fact actually someone who has made a lot of mistakes throughout his life. In the period from 1973 to the 1990s, he made wrong predictions and implemented many economic policies that weakened the US economy. To know more and delve deeper into “The Maestro”, I strongly recommend that you read this article.

In 7 January 1973, Alan Greenspan made a bold prediction where he urged people to be bullish on the stock market. However, 4 days later, the Dow Jones Industrial Average (DJIA) fell by 46%, putting into action an extremely big transfer of wealth in history. During this stock market crash, people who followed his bullish advice lost big and saw their wealth shrink. To me, this was one of the earliest gaffes he made in public.

In addition, being one who strongly believes in the economic power of interest rates, he has always reduced interest rates excessively and such low rates were maintained for too long from the period of 1973 to 1994. Because of this, this empowered people to move their capital from certificates of deposits (CDs) and bonds into stocks, feeding a stock bubble (which is defined as an event where prices action is 2 standard deviations from the long-term trend).

To make things worse, in times of stock market declines, he was always willing to increase liquidity in any way to prevent markets from crashing. This was notoriously known as the Greenspan Put and due to this fervent support he provided for stock markets, many people became overly optimistic about stocks. Coupled with persistently low interest rates, each decline precipitated growth of the stock bubble that eventually burst in 2001.

Moreover, when formation of the stock bubble was obvious in the 1990s, he did not increase margin requirements. In financial terms, margin refers to the minimum amount of money to deposit for trading financial instruments. Given low margin requirements and overly optimistic sentiments, many investors had big leverage and bought huge amounts of stocks during this period of madness.

Furthermore, instead of recognizing this obvious bubble, he worsened it in 1999 by increasing credit provision in response to Y2K fears. This added fuel to the burning fire of the craze about stocks, attracting more people to the market and eventually burning their capital.

Here, Greenspan’s folly mostly lied in the fact that he reduced interest rates to form bubbles and slashed them further to solve its aftermath. This increased inflation while bringing down economic growth. At the same time, the sensitivity of interest rates as an economic tool became diminished.

To worsen things, he has always tried to absolve blame for his bad decisions by saying that he couldn’t see the formation of bubbles and claiming that bubbles can only be seen after they burst. To many, I believe that such unrepentant behavior ought to be denounced.

However, while he was one who indeed made many mistakes, there were also times when he made right decisions. For example, he increased interest rates in February 1995 in an attempt to inhibit the growth of bubbles. Nevertheless, he still went back to slashing interest rates in July 1995, once again worsening the bubble and setting the stage for the 2001 stock market crash.

In conclusion, after covering the many aspects where The Maestro blundered in, I believe readers have now gained a better understanding about how imperfect he was. Upon going through all these, I certainly hope that readers can learn and benefit from his mistakes as history always repeats.

Related posts