Greenspan fiddled while the economy burned

During the 1990s, old-economy companies General Electric, General Motors, Dupont, and Procter & Gamble shed over 400,000 jobs while businesses such as Microsoft, Dell, Cisco, and Oracle added nearly 140,000. The decade saw gross domestic product grow at an average annual rate of 3.5%. The Dow increased from 3,000 to over 10,000 and the Nasdaq from 500 to over 5,000. Consumer confidence reached an all-time high. The tide of tax dollars moved the U.S. budget into surplus. Unemployment fell below four percent and inflation remained low at 2-2.5% thanks largely to increased productivity. It was not until much later that the Fed began to understand the effect of technology and productivity, and later still until it admitted to errors. Because of these miscues, American workers paid a large price.

Though Greenspan was concerned about "irrational exuberance," he feared Y2K even more. In 1999, leading up to the year 2000 and the chaos Greenspan thought might ensue, the Fed poured large amounts of cash into the money supply. This fueled the hot market and the "Interact bubble." The bubble already was on the mind of the Federal Open Market Committee, according to the minutes of its June, 1999, meeting in Jackson Hole, Wyo. Raising margin rates on stock purchases was discussed, but discarded. Instead, the money supply was increased, adding fuel to the flames. That action has gone unexplained to this day.

If the economy was overheating, or inflation was prevalent, the Fed had several tools at its disposal. Greenspan mentioned inflation often as justification for raising rates, but since there were no signs of inflation, he was compelled to cite the "wealth effect" as his justification. The wealth effect, the result of so many people working and making money from the increased value of their assets, would cause inflation, he postulated. Therefore, interest rates had to be raised. And raised they were as the Fed went on an aggressive rate increase schedule in 2000.

Moreover, the Fed began to drain the money supply at a particularly crucial time. The price of oil was increasing from $10 to $37 per barrel. Since oil contracts are priced in dollars, an increasing supply of oil was necessary just to service these contracts. The Fed, though, foolishly drained $37,000,000,000 from the money supply just as more dollars were needed. By the fall of 2000, capital markets were in disarray; capital spending stopped; and the economy and the stock market fell off a cliff.

Carly Fiorina, CEO of Hewlett-Packard, commented afterwards: "In December; it was just like someone turned off the lights." Sun Microsystems CEO Scott McNealy added, "We were going 110 miles an hour and then we weren't." John Chambers, CEO of Cisco, likened the debacle to a 500-year flood. Business and investor confidence, a precious commodity, was destroyed. Thus ended the Goldilocks Economy, the longest economic expansion in our nation's history. More jobs, more prosperity, more wealth: it had to be stopped.