The Maestro’s crystal ball is the gift that keeps giving. With an uncanny knack for completely missing most of the major inflections points in financial markets over the past five decades, Greenspan added this gem to his resume in a FOX Business News interview yesterday:
“There are a lot of things that can go wrong, but to say that the market is bubbly and in a position where it could conceivably create a serious problem, I think is overstating it.”
Let’s put this prediction in perspective by filling in some of his resume…
“It’s very rare that you can be as unqualifiedly bullish as you can now.” ~ Alan Greenspan, The New York Times “Economic Survey”, January 7, 1973
1973 and 1974 turned out to be the worst years for economic growth and the stock market since the Great Depression. (as noted in Jason Zweig’s commentary in The Intelligent Investor)
On October 2, 1990, then Federal Reserve chairman Greenspan made this prediction:
“At the moment it isn’t raining. The economy has not yet slipped into a recession.”
It was later revealed that a recession had actually begun three months earlier, in July.
In April 2000 (one month after the NASDAQ peak), Greenspan was asked if rising rates would prick the stock market bubble. His response:
“That presupposes I know that there is a bubble… I don’t think we can know there’s a bubble until after the fact.”
From The Age of Turbulence (2007), Greenspan recounted his thoughts on the 2003-2006 housing bubble:
“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.”
The December 26, 2005 issue of BusinessWeek confirmed his complacency:
“The view of most economists, including Fed Chairman Alan Greenspan, is that a national home-price bust is highly unlikely.”
Greenspan also whistled past the subprime lending grave:
“With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. . . . This fact underscores the importance of our roles as policymakers, researchers, bankers and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers.” ~ Alan Greenspan, from a speech given April 8, 2005
Housing prices peaked in Q1 2006 and by Q4 were in full retreat, yet Greenspan was unconcerned:
“Most of the negatives in housing are probably behind us. The fourth quarter should be reasonably good, certainly better than the third quarter.” ~ Alan Greenspan, October 26, 2006
Even as late as Q2 2008 he thought the worst was over:
U.S. financial markets, roiled by the collapse of the subprime-mortgage market, have shown a pronounced turnaround since March. The worst is over for the credit crisis, or will be soon, and there’s now a reduced possibility of a deep recession. ~ Alan Greenspan, June 13, 2008
The S&P 500 plunged nearly 45% over the ensuing five months.
Alan Greenspan is a stark reminder that central bankers have only one productive use: as contrary indicators.