Being chairman of the US Federal Reserve, Alan Greenspan once wielded great power and was in fact lord of the US economy. However, during his reign, he planted the root for 2001's dot-com bubble which caused many to lose their hard-earned money. Without further delay, let us now explore how Greenspan contributed to the bubble's growth during the period of 1998 to 1999.
In the period of 1998 to 1999, Alan Greenspan contributed to the bubble by slashing interest rates 3 times to 4.75% despite the fact that the stock market was already recovering from Long Term Capital Management's collapse and Russian debt default. This underlying fear of deflation overstimulated the economy and increased irresponsible speculation.
While he might not have meant this, Greenspan's actions sent out the message that he would support the economy by increasing liquidity should any decline come. This emboldened speculators as they became under the mirage that the economy will never fall.
In addition, the slashing of interest rates was done on a Friday where many options contracts were expiring, increasing price movements as options make use of leverage. This further adds on to the message that Greenspan is with the speculators and will further reduce interest rates more than increasing them.
To make things worse, he insisted that there was no bubble going on when many others thought otherwise and provided evidence about its existence. Despite the fact that even Paul Volcker (his predecessor) showed him that the stock market was at 180% of US GDP, he nevertheless still believed in the miracle of technology and refused to heed advice. Such obstinate behavior contributed to the bubble's growth.
However, when interviewed after the bubble burst, he attempted to blame others and shirk responsibility by involving people like Bob Rubin by saying that market forces cannot be controlled or fought when others before him and he himself did so (by overheating the economy).
To add on, he even made many ridiculous claims that bubbles can only be seen after they burst when so many people already provided him tangible proof that a bubble was going on. In retrospect, I do not think that such acts of denial should be condoned and we ought to learn from all these as history always repeats.
In conclusion, having covered how Alan Greenspan fueled the fire of speculation during the period of 1998 to 1999, I believe readers have learnt much about economic history. Now, with this knowledge in mind, seek to exploit such situations to your advantage should they happen again.
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