Greenspan Offers Defense of Net Mania

Federal Reserve Chairman Alan Greenspan, testifying on Social Security issues before a Senate committee on Thursday, was asked about the rush to invest in Internet stocks. “Is that called investment?” he quipped.

But the central bank chief went on to pay a tribute, of sorts, to the Internet mania.

“You wouldn’t get hype working if there weren’t something fundamentally, potentially sound under it,” Greenspan said. “The size of that potential market is so huge that you have these pie-in-the-sky type of potentials for a lot of different vehicles. And undoubtedly some of these small companies . . . will succeed,” he said, even if “the vast majority are almost sure to fail.”

“There is something else going on here though, which is a fascinating thing to watch,” Greenspan said. “It is, for want of a better term, a ‘lottery’ principle. What lottery managers have known for centuries is that you could get somebody to pay for a one-in-a-million shot, more than the value of that chance.

“In other words, people pay more for a claim on a very big payoff, and that’s where the lotteries’ profits have always come from.”

And so Internet stocks, he said, have a “lottery premium” in them.

Still, the Net mania “does reflect something good about the way our securities markets work: mainly that they do endeavor to ferret out the better opportunities. . . . That is something that at the end of the day probably is more plus than minus” for the economy, he said.