Alan Greenspan talked about ‘Irrational Exuberance’


Alan Greenspan is an American economist who worked as the Chairman of the Federal Reserve until 2006.

He now runs his own company Greenspan Associates LLC.

Greenspan worked under Reagan and Bill Clinton.  His opinions on how the markets and economics work are very well documented.

In 1996, Greenspan said something that many remember to this day.

<<Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets.

We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past.

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?

And how do we factor that assessment into monetary policy?

We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability.

Indeed, the sharp stock market break of 1987 had few negative consequences for the economy.

But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy.

Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.>>

I took more than three years for the Nasdaq to top out from the time Greenspan made the speech.

The Nasdaq now follows the S&P, Dow, TSX, DAX, CAC, FTSE, SSEC, HKDow and Nikkei.

For monetary policy and economic historians, this is essential information.   We must not be irrational.

This my friend is what is facing Uganda.  Irrational Excuberance.  Counting your chicks before the eggs hatch.

How is that oil looking by the way?

Martha Leah Nangalama

Moncton, Canada

The writer is an IT analyst for an oil company, holds a bachelor in Business Administration and a Masters degree in Information Science.  All my opinions are mine and mine alone.  They do not reflect on my employer or any organisation I am affiliated with.  Far too many families were evicted from their lands in the Uganda oil patch it is heart breaking to even try to understand why we let this happen.

Information and Education is Power.

Story Credit: Business Insider

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