Greenspan, our teacher, says no bubble

Doug Henwood dhenwood at
Fri Apr 14 08:55:43 PDT 2000

Wall Street Journal - April 14, 2000

Greenspan Warns Against Changing To Centralized Stock-Trading System


WASHINGTON -- Federal Reserve Chairman Alan Greenspan suggested at a congressional hearing that the recent plunge in high-technology stocks would do little to deter the central bank from its current campaign to raise interest rates.

"Let's remember that the overall market is still significantly above where it was a year ago," Mr. Greenspan said when pressed by legislators about whether recent financial-market gyrations had eased his sense of the urgency about cooling the red-hot U.S. economy. "There has been retrenchment recently," he acknowledged under questioning by Republican Sen. Jim Bunning of Kentucky. "But it's still very substantially higher than it was."

Mr. Greenspan, testifying before the Senate Banking Committee on the future of financial markets, repeated his belief that stock-market-driven wealth is helping push consumer demand beyond the economy's ability to supply goods and services, and that is creating "imbalances." He alluded to the fact that his favorite measure of stock-market value, the Wilshire 5000, is still about 10% higher than it was last April, even though it has fallen 10% from its peak earlier this year.

No Nasdaq Bubble

Indeed, while assiduously steering clear of any market forecasts -- and denying that the Fed was targeting stock prices per se -- the Fed chairman indicated that he was fairly bullish about financial markets. He rejected, for example, Sen. Bunning's assertion that the Nasdaq Composite Index was a bubble inflated by unsophisticated speculators.

"I grant you that there are an awful lot of people in the market who cannot distinguish between what they are doing and what they would do in a casino," Mr. Greenspan said. But their impact was largely offset by "millions of intelligent investors who know the companies that they've invested in," he added. "It's the best judgment you can get."

The recent volatility in markets, Mr. Greenspan asserted, had less to do with speculation -- or even the Fed's interest-rate increases -- than the very nature of the unpredictable high-tech industry.

"These types of stocks, these types of companies are at the cutting edge of technology, where there is a great deal of turbulence," Mr. Greenspan said. As a result, "earnings expectations ... would be expected to be quite volatile" and "that in itself is a reason why you would expect a high degree of stock-price volatility," he added.

Single System Opposed

The main purpose of the hearing wasn't to discuss recent stock activity; it was to discuss the long-term structure of financial markets and regulation. Mr. Greenspan devoted his prepared testimony to that topic, and with his remarks, he joined a growing number of lawmakers and industry participants in opposing a concept recently floated by the Securities and Exchange Commission to impose on U.S. markets a single, computerized system for displaying all securities prices.

"Given the pace of change in our markets, it is difficult to contemplate how a government mandate could be implemented," he said. "Systems might well be obsolete before we were half-way through the planning process."

SEC Chairman Arthur Levitt has advocated the general idea of electronically linking the growing number of markets, which include securities exchanges, the Nasdaq Stock Market and new electronic stock-order matching systems such as Island ECN and Archipelago LLC. The SEC has asked the industry to voluntarily come up with strategies for linkages and is seeking comment to guide the agency in proposing formal changes to the markets.

Threat to NYSE

Mr. Greenspan also warned that imposition of a single new electronic market could threaten the existence of the New York Stock Exchange, which has long been an important and stable cornerstone of the U.S. marketplace. Challenging the NYSE to adapt technologically to the changing markets, Mr. Greenspan said, "The NYSE and regional exchanges, too, recognize that investors may increasingly choose to execute their trades elsewhere."

The Fed chairman's views on the subject are consistent with those of GOP Sen. Phil Gramm of Texas, chairman of the Senate Banking Committee who has warned Mr. Levitt to tread softly in prescribing any fundamental changes in the way the markets should be upgraded.

Scheduling Mr. Greenspan as the only witness in a hearing on securities markets was unusual, given that the Fed has no direct regulatory authority over the securities markets. Mr. Gramm explained that Congress often calls on the Fed chairman as "the nation's teacher and adviser on these kinds of issues."

To convey that the Fed isn't trying to assert any jurisdiction in the market-structure process, Mr. Greenspan said that the SEC, "along with Congress, should lead the way in formulating and implementing appropriate public policies."

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