Alan Greenspan and the enduring ghost of irrational exuberance

Greenspan steered the Federal Reserve from 1987 through 2006, navigating the central bank through the volatile booms and busts that defined the era. His 1996 address, delivered at the height of the early internet frenzy, questioned how to identify when asset values had escalated beyond rational support. While the market initially dipped following his remarks, stocks continued their ascent for years before the eventual dot-com collapse. He later admitted the phrase was a calculated attempt to rattle investors, noting in a 2016 interview that while his timing earned him a modest grade for market prediction, his analytical focus on the underlying process remained sound.

Today, as multi-trillion-dollar valuations in artificial intelligence mirror the fervor of the nineties, the debate over market bubbles has returned. Greenspan’s perspective on intervention was pragmatic, if sobering: he believed that once a bubble takes hold, attempting to stop it often inflicts more damage on the broader economy than the correction itself. His counsel was to let the cycle run its course and manage the fallout only after the peak has passed.