Greenspan and Destructive Creation

by Sean Corrigan

Greenspan’s speech gave few clues, perhaps because Big Al doesn’t possess any himself these days.

Short of new ideas, he had the gall to warm over the hot enchillada that was his Boca Raton speech from last October, the High-Tech encomium that served to light the blue touchpaper on the sky – rocket of Y2k liquidity, which gave the market its final weeks of glory. He even went back to his mid-90s musings on job insecurity – in the tightest labour market on record! And we thought the only doubt the American working man had these days was whether to turn up and drive his truck for FedEx, or sit at home and trade its stock instead!

It is worrying that Nestor, despite much self-contradiction, still clings to the same old productivity myths with which we have dealt before, but it is perhaps more damaging that a universe of financial analysts still confuses output-per-hour with added-value-per-hour and so thinks that simply making more units guarantees higher profits and thus justifies higher stock prices.

In more upbeat times, this latest offering would have sparked another surge in the Nasdaq since, though laced with just enough warnings of higher short-term interest rates ahead (we nearly said more restraint, but the Chairman and the market still confuse dearer credit with less abundant credit), it was also replete with soothing noises.

There was, for example, ‘little doubt’ that productivity had risen , nay, had accelerated and there was ‘scant evidence’ that this was about to ‘crest’. Moreover, the Chairman saw ‘no reason’ that this growth could not ‘remain elevated, or even increase further’, bringing Milk and Honey to all.

Disingenuously, but also counter-productively, he went on to espouse both the equity market’s inviolability and also its invulnerability. Even if targeting assets were appropriate (and why exactly are the prices of financial claims on goods less suitable for interference than those of the goods themselves, by the way?), he doubted whether he could affect them even by raising rates in bigger increments. (He could always try, it worked for Paul Volcker after all!) . Such uncharacteristic modesty from our Chairman. Patently, he still feels the chagrin of being ignored by the Bulls through all his earlier years of doubt.

Finally, with his usual incantation about ‘significant unbundling of risk’ (recurrent financial crises, derivatives disasters, surging default rates), he moved on to the wonders of the modern economy in pouring endless credit into Dot.Com malinvestments on a monumental scale. Or, rather as he termed it, the process of ‘creative destruction’ in shifting ‘capital’ from ‘failing technologies’ into those at the ‘cutting edge’.

The day Jeff Bezos makes as much clear, indisputable profit in his whole cyber empire as Sam Walton makes in just one of his stores, we might begin to give this one some credence. Until then this is mindless bally-hoo, more suited to a press release from an IPO lead manager than a text from the guardian of monetary stability.

A decidely Old Airing of the New Era, the speech showed that Greenspan remains as clearly wedded to the glamour of Tech as any Nethead daytrader and this, in turn, means he has no clear policy prescription to offer.

Forget Schumpeter and ‘creative destruction’, harken instead to the Trumpeter of Destructive Creation.

April 12, 2000

Sean Corrigan writes from London on the financial markets, and edits the daily Capital Letter and the Website Capital Insight.