Greenspan’s bubble

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Greenspan’s bubble

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“When he says something, everybody listens to him.” “The power of his words move the world’s markets.”
These quotes refer to the influence of Alan Greenspan, who served as the chairman of the Board of Governors of the U.S. Federal Reserve.
In 1999, David Sicilia and Jeffrey Cruikshank examined the effects Greenspan’s words have on markets and concluded that his remarks usually moved markets the way he intended them to.
That is called the Greenspan Effect.
A good example is what happened in the markets right after he started working as the chairman.
In August 1987, stocks nosedived in the New York market, showing signs of a financial crisis. Greenspan then said the Federal Reserve Bank, America’s central bank, was ready to provide all necessary liquidity.
With this, he stabilized the market at once.
In 1996, when the markets were overheated due to bubbles in IT stocks, the chairman warned of “irrational exuberance,” and slowed down irrational investments.
Greenspan never said anything definitive or direct. He intentionally used sages to the market. One newspaper even ran an article that said there is nobody who can confuse Wall Street like Greenspan.
He himself said that if his words sound clear, probably they were misunderstood.
On Wall Street, there are experts who analyze Greenspan’s remarks and thus the term “Greenspanology” was coined.
Since retiring, he has held lectures and worked as an advisor.
Recently, he sent a definitive and direct warning to China’s overheated stock market saying that it is not sustainable and may fall abruptly. That’s some of the same rhetoric he used to borrow.
At first, the Greenspan Effect seemed to appear.
China’s stock market fell right after he made the remark, even though it never did when the Chinese financial authorities warned of irrational exuberance a couple of times.
But that didn’t last long. China’s market recovered in one day. Even Greenspan’s warning was not strong enough to calm the Chinese craze for investment.
Even Greenspan, who used to direct the world’s financial markets at his will, seems to have lost influence after retirement.
This being so, was not the Greenspan Effect also a bubble that the position of the chairman of the Federal Reserve Board created?

The writer is an editorial writer
of the JoongAng Ilbo.


By Kim Jong-soo [Jongskim@joongang.co.kr]

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