Greenspan: Not Much Fed Can Do on Bubbles Fri Aug 30,11:06 AM ET
By Glenn Somerville
JACKSON HOLE, Wyo. (Reuters) - Federal Reserve ( news - web sites) Chairman Alan Greenspan ( news - web sites) on Friday defended the Fed's lack of action during the ill-fated 1990s stock market boom, saying there was little the central bank could do to identify and fight emerging asset bubbles.
Greenspan said there was not a reliable enough guide to allow a central bank to safely and slowly deflate a speculative surge in prices. The bursting of the 1990s stock bubble erased trillions of dollars in wealth, prompting criticism that the powerful Fed chief should have done more to prevent it.
"It is by no means evident to us that we currently have -- or will be able to find -- a measure of equity premiums or related indicators that convincingly presage an emerging bubble," the Fed chief said in prepared remarks for delivery to a symposium sponsored by the Kansas City Federal Reserve.
"Short of such a measure, I find it difficult to conceive of an adequate degree of central bank certainty to justify the scale of preemptive tightening that would likely be necessary to neutralize a bubble," he said.
The Fed chief in December 1996 famously wondered aloud if the stock market had a case of "irrational exuberance" but he later abandoned efforts to talk down the markets and they bounded almost unstoppably higher until spring 2000.
Greenspan has indicated in the past that he did not believe it was the Fed's job to second-guess the judgements of private investors about the appropriate value of stocks.
Some critics have said he should have used his always powerful rhetoric, interest rate hikes or even tighter margin requirements for buying stocks to help let air out of the bubble sooner and less painfully.
Greenspan, however, contended in his speech that those methods would not have worked and the magnitude of rate increases needed for a less-damaging deflation of the bubble would have risked a Fed-triggered recession.
"It was far from obvious that bubbles, even if identified early, could be preempted short of the central bank inducing a substantial contraction in economic activity -- the very outcome we would be seeking to avoid," he said.
The speech, which offered no clues to the Fed's near-term outlook for policy, was overshadowed in markets by a stronger-than-expected reading on a Chicago-area gauge of manufacturing activity.