Dismantling Greenspan

James Grant, Editor of "Grant's Interest Rate Observer", has a collection of essays published in a book "Mr. Market Miscalculates: The Bubble Years and Beyond". This I am reading in an attempt to understand our Wall Street-driven world.

An essay, "Nasdaq's Peak was Greenspan's", from August 3, 2001, had a take down of the fabled Federal Reserve Chairman, excerpts below.

...Insofar as Greenspan leads the market, it is a case of a one-eyed man leading people with two. Perhaps after they refresh themselves on the chairman's errant judgment — especially off the beam on the eve of the 2000 stock-market peak — the sighted will have more confidence in their own judgment.
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The fundamental cause of the bubble was the mispricing of capital and credit, therefore of risk. In the hottest, most bubble-like sectors of the economy, investment projects were undertaken purely because money or credit was available to finance them.
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Money was easy late in the decade, and when the capital markets chose to make it tight, as in the wake of the 1998 Long-Term Capital Management affair, the Fed insisted on making it easy again.

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{Greenspan made a speech on March 6, 2000, before the Boston College Conference on the New Economy, on "The revolution in information technology".} As he spoke, orders for high-tech durable goods in the second quarter were on their way to registering a year-over-year gain of 25%. Four quarters later, in April-June 2001, following a sharp rise in the cost of speculative capital, they would register a 31% decline, the steepest on record. John Lonski, Moody's chief economist, aptly described the surge and plunge as "the picture of a bubble".

It was no bubble to the chairman when he rhapsodized on information technology and productivity growth. Thanks to computer technology, Greenspan declared, business managers were increasingly able to formulate decisions using "real-time" information.......

At a fundamental level the essential contribution of information technology is the expansion of knowledge and its observse, the reduction of uncertainty. Before this quantum jump in information availability, most business decisions were hampered by a fog of uncertainty. Businesses had limited and lagging knowledge of customers' needs and of the location of inventories and materials flowing through complex production systems. In that environment, doubling up on materials and people was essential as a backup to the inevitable misjudgments of the real-time state of play in a company. Decisions were made from information that was hours, days or even weeks old.

Thanks to the clarity afforded by instantaneous communications, Cisco Systems have to write off only $2.25 billion in excess inventories during its third fiscal quarter, in addition to just $1.17 billion in restructuing and other special charges. Using the older technologies — telephone, fax, the mails, citizens' band radio, etc., — the loss would undoubtedly have been greater. Throughout Silicon Valley, makers of PCs, chips, servers, printers, and other digital products have admitted to monstrous miscalculations of final demand. Lucent, Corning, Nortel and JDS Uniphase have been devastated by one of the greatest misallocations of capital outside the chronicles of the Soviet Gosplan. Who can conceive of the size of this waste had there been no email?
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The fact that the capital spending boom is still going strong indicates that businesses continue to find a wide array of potential high-rate-of-return, productivity-enhancing investments. And I see nothing to suggest that these opportunities will peter out any time soon.

At least, not for the next 96 hours (the Nasdaq peaked on March 10).

Here was a remarkable set of ideas. What drives a capital spending boom, said the central banker is not — even in part — an excess of bank credit or an artificially low money-market interest rate. Rather, it is the cold and detached analysis of cost and benefit.....