ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Saturday, December 7, 1996 TAG: 9612090026
SECTION: NATL/INTL PAGE: A-1 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: MARTIN CRUTSINGER THE ASSOCIATED PRESS
In a scholarly after-dinner lecture that strolled through America's economic history back to Colonial times, Federal Reserve Chairman Alan Greenspan proved once again why he's considered the second most powerful man in the country.
With a single question, Greenspan sent financial markets reeling around the world.
``How do we know when irrational exuberance has unduly inflated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?'' Greenspan asked his audience at a black-tie dinner Thursday night at the American Enterprise Institute, a conservative think tank.
Greenspan never answered his own question, but to financial markets that didn't matter.
As soon as reports of his comments flashed across their screens, traders seized on the fact that the chairman of the most powerful central bank in the world was wondering out loud about ``irrational exuberance'' in stock and bond markets.
The Tokyo stock exchange, which was open at the time of the speech, suffered its biggest one-day loss this year, and stock markets from Sydney to London began falling as well.
When Wall Street opened Friday, the Dow Jones industrial average promptly plunged by more than 140 points, raising real concerns that Greenspan's remarks might bring on some type of Black Friday. As the day wore on, those anxieties eased, and the Dow finished the day down 55 points.
All the turmoil came because investors read Greenspan's comment as a coded message that the Fed was getting ready to prick a speculative bubble on Wall Street by raising interest rates.
Some private economists insisted that Greenspan's comments were blown out of proportion by nervous traders who jump at every news flash.
But others disagreed.
``This was a well-thought-out speech in which every word was chosen with great care,'' said Lyle Gramley, who was a Fed board member during Paul Volcker's tenure. ``Greenspan wanted to send a precautionary message that if the Fed has to start raising interest rates four months from now, the markets could be very vulnerable if they continue rising as they have been.''
Some saw the timing of Greenspan's comments as significant. The Fed chairman sees the unemployment figures the night before they are released to the public. It is possible, some analysts suggested, that Greenspan was concerned that the signs of a slowdown might drive stock prices and bond prices even higher and he wanted to dampen some of that enthusiasm.
``This was an excellent use of the Fed's open-mouth policy,'' said Robert Dederick, chief economic consultant at Northern Trust Co. in Chicago. ``This was an attempt to ward off the need to raise interest rates by doing a bit of jawboning.''
For the record, the Clinton administration, which had worried about a stock market plunge before the election, professed surprise at the market's reaction to Greenspan's comments.
``His talk was about a broad philosophy of monetary policy,'' said Joseph Stiglitz, the president's chief economic adviser. ``I think people are over-reading into his words meaning that wasn't really there.''
If that occurred, it certainly wouldn't be the first time for Greenspan.
In February, delivering his semiannual report on monetary policy to House and Senate committees, he prompted a 44-point sell-off the first day; and using almost the same phrases to answer questions, prompted a 57-point gain the following day.
Then there was the famous speech he gave in June 1995 that led two major newspapers to headline stories the next day: ``Greenspan Hints Fed May Cut Interest Rates'' and ``Doubts Voiced by Greenspan on a Rate Cut.''
Even on the best of days, everyone agrees, Greenspan's convoluted answers can leave listeners puzzled.
While two previous Fed chairmen - Arthur Burns and Volcker - were viewed as masters of obfuscation, many believe Greenspan, now in his third term, has far surpassed them.
Greenspan seems proud of this fact. He once told a congressional committee, ``Since I have become a central banker, I have learned to mumble with great incoherence.''
LENGTH: Medium: 83 lines ILLUSTRATION: PHOTO: AP file/1995. Federal Reserve Chairman Alan Greenspanby CNBcaused quite a stir with a speech Thursday night. color.