Thursday February 21, 6:44 pm Eastern Time Greenspan's 1996 stocks anxiety shared by Lindsey By Glenn Somerville
WASHINGTON, Feb 21 (Reuters) - Federal Reserve Chairman Alan Greenspan's anxiety in 1996 about over-valued stock markets was amply shared by his colleagues, including Lawrence Lindsey, now President George W. Bush's top economic adviser.
Minutes from the 1996 meetings of the Federal Reserve's Federal Open Market Committee, made public on Thursday, show that then-Fed Governor Lindsey was warning by late summer about ``excessive optimism'' in U.S. financial markets.
In September, Lindsey said ``a gambler's curse'' hung over the markets that led investors to apparently believe earnings growth of 11-1/2 percent a year would continue into the indefinite future.
``Readers of this transcript five years from now can check this fearless prediction: profits will fall short of this expectation,'' Lindsey declared to his FOMC colleagues as they mulled the economy's state in one of their eight-times-a-year meetings.
The full transcripts of FOMC meetings are released with a five-year delay, although heavily edited minutes are released with about a six-week interval after each meeting.
Months later in a now-famous Dec. 5, 1996, address to the American Enterprise Institute, Greenspan sent stock prices tumbling when he cautioned that ``irrational exuberance'' might lie behind the stock market's strong performance.
WHAT TO DO ABOUT IT
``How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected contractions as they have in Japan over past decades,'' Greenspan asked. ``And how do we factor that assessment into monetary policy.''
Greenspan's comments, buried deep in a lengthy speech, drove Japanese and U.S. stock prices down. He was criticized for making the remarks afterward by U.S. lawmakers and others and now rarely comments so directly on potential imbalances in financial markets.
Lindsey's warning in September was a blunt one in which he said the ``gambler's curse'' amounted to a feeling that ``we have won this long, let's keep our money on the table.'' He said a ``bubble'' was developing that could be costly for the economy.
``As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes overwhelming,'' Lindsey said.
Greenspan accepted Lindsey's analysis.
``I recognize that there is a stock market bubble problem at this point, and I agree with Governor Lindsey that this is a problem that we should keep an eye on,'' Greenspan said, but he expressed worry about how the bubble might be pricked.
One way was to increase margin requirements, making investors put up a larger percentage of the money when buying stocks with margin loans.
``I guarantee that if you want to get rid of the bubble, whatever it is, that will do it,'' Greenspan said. ``My concern is that I am not sure what else it will do.''
Greenspan's December warning took some steam out of stock prices at the time, but didn't permanently impede the run of stock price gains that lasted throughout the 1990s during a record economic expansion that lasted a decade before recession set in last March.