Fed Chief Treads Lightly on Stock Prices

Federal Reserve Chairman Alan Greenspan on Tuesday revisited his now infamous “irrational exuberance” comment regarding stock prices, but he gave nothing more to anyone hoping he would say the market is overpriced.

In December 1996, Greenspan triggered a brief market dive with a reference to the dangers of irrational exuberance on the part of investors--even though he did not say specifically that investors were guilty of such exuberance.

On Tuesday, he told the Senate Banking Committee that he has “concerns” about the level of stock prices. But even with the Dow Jones industrial average 3,200 points higher today than in late 1996, the Fed chief added, “Whether or not it [the market] is gripped by irrational exuberance is an issue that you won’t really know for sure, except after the fact.”

Greenspan said there is no question that some of the market’s heady gains of recent years were justified by improvements in business productivity that have enabled the economy to generate a higher rate of growth without spurring inflation.

“Clearly, nobody has questioned at all that the dramatic acceleration that we’ve seen in some technologies and the marked increase in productivity and profitability of American businesses has undoubtedly had a significant impact on underlying prices of all capital assets, including equities,” he said.

When a senator pressed the Fed chief to relate his 1996 comment to the current level of stock prices, Greenspan volleyed back with his characteristic self-deprecating humor.

He said the 1996 comment was made in “a very turgid speech, which put an awful lot of people to sleep through most of it.”

But now, as then, Greenspan said, he was only raising the question about whether a stock market bubble existed, not declaring that there was one.