But markets also felt empowered to ignore the powerful Fed head. If Greenspan intended, as he later admitted, to knock some wind out of stocks, his impact was not long-lasting. Did Greenspan know the potential power of those words, which he has said he came up with while working on the speech in the bathtub?
The bond market. Read: Bond investors go from predator to prey. The internet bubble, also known as the dot-com bubble, is a textbook example of a speculative bubble. Who Is Alan Greenspan? Alan Greenspan was the 13th chair of the Federal Reserve, appointed to an unprecedented five consecutive terms between mid and early Herd Instinct Herd instinct in finance is the phenomenon where investors follow what they perceive other investors are doing rather than their own analysis. What Is the Bubble Theory?
Bubble theory is a theory that markets occasionally push prices above their true values, leading to large or persistent overvaluations in asset prices.
Positive Feedback Definition Positive feedback—also called a positive feedback loop—is a self-perpetuating pattern of investment behavior where the end result reinforces the initial act. The Great Moderation The Great Moderation was a period of decreased macroeconomic volatility in the United States from the mids to the financial crisis in Partner Links.
Related Articles. Markets What Causes Bubbles? Markets 5 Stages of A Bubble. Investopedia is part of the Dotdash publishing family. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. It usually occurs in stocks but has also happened in housing, gold, or even Bitcoin.
It may even look like prices are rising for valid reasons. But anything can burst the bubble. As a result, the frenzy of greed turns to panic when asset prices return to their real-world values. Investors sell at any cost, sending prices below their real value. The collapse then spreads to other asset classes. An economic contraction follows, usually leading to a recession. Irrational exuberance is usually how a stock market crash causes a recession.
In " The Challenge of Central Banking in a Democratic Society ," Greenspan asked how central bankers could tell whether asset values were overpriced.
Greenspan noted that low-interest rates had created steady earnings. It led to complacency on the part of investors. They ignored risks as they sought ever-higher returns. He then asked whether central banks should address irrational exuberance with monetary policy.
At the time, the Fed didn't concern itself with the stock market or even real estate prices. He did note though, that central bankers must get involved when they sense that speculative frenzy is driving a dangerous bubble. He concluded that when the stock market or any asset class affects the economy, then central bankers must get involved.
Greenspan's use of the phrase "irrational exuberance" sent stock markets plummeting the next day. Investors were afraid that the Fed would raise interest rates to slow down the economy. In , Yale professor and behavioral economist Robert J. Shiller wrote a book titled "Irrational Exuberance.
He also predicted the subsequent stock market crash that led to the recession. Is this irrational exuberance? It seems to me that this is directionally correct. Image by Rob Crandall [3]. Aug 16, , RealClearMarkets. Were stock prices too high in December ? Graph 2 brings the story up to the present. Nov 9,
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