Greenspan fiddled while the economy burned

Greenspan also kept his poor predictive record intact, for on March 6, 2000, at a conference in Boston in a speech entitled, "The Revolution in Information Technology," Greenspan described with wonder a new age of productivity and growth. He indicated that the strong capital-spending boom showed that business continued to find and make a wide array of productivity enhancing investments in technology. " And I see nothing ... to suggest that these opportunities will peter out anytime soon." Ninety-six hours later, the NASDAQ began the descent from which it has yet to recover.

At first, it was thought that the only people who were losers were the Internet kids with the propellers on their beanies, but as the collapse spread, it became apparent that it would affect nearly every American. Over the two and a half years following Greenspan's Boston speech, U.S. stocks would lose fully half of their value--more than 8.5 trillion dollars--roughly equal to seven times the GDP of China and 50% more than the GDP of Japan. Two and a half million people would lose their jobs. Retirement plans were shattered; businesses were shuttered; and college plans were destroyed. Even the Shriners would have to close several hospitals for crippled children because of their portfolio losses. Businesses with new products under development were shut--with projects and services in their development pipelines that probably never will see the light of day. The market declined for 32 consecutive months, nearly equaling the 34 months of the Great Depression. For the period of the decline, the Dow was down 37.8%; S&P, 49.1%; and Nasdaq, a crashing 77.9%. Notable blue chips such as AT&T dropped 76.6%; Ford, 76.7%; and Intel, a staggering 82.4%. The consequences were felt throughout Europe, Asia, and a number of emerging economies around the globe.

According to the minutes of its January, 2001, meeting, the Federal Reserve itself was shocked by the result of its actions. Greenspan, convinced of inflation and trapped in his data, drove the economy off a cliff while looking in his rear-view mirror. Then, like a general committing his reserves piecemeal to battle, he doled out small interest rate cuts as the economy gasped for help. The Fed, with its 500 economists, studied the aftereffects of the Japanese bubble and concluded that the Japanese central bank had reacted with interest rate cuts that were too little and too late. Yet, the Fed, under Greenspan, adopted that policy as its own.

Piecemeal solutions

The Fed continued its pattern of piecemeal interest rate cuts and slow monetary growth until Sept. 11, 2001, when it began a period of aggressive interest rate cuts. Even then, as if to show who was in charge, the Fed delayed until just before the opening bell of the Stock Exchange, five days after the terrorist attacks, to cut rates. The Dow was down 500 points that day. The economy fell into recession and the markets continued to decline for another year.