“Irrational exuberance” continues to loom large over financial markets nearly three decades after Alan Greenspan coined the phrase.
We learned Monday that Greenspan, former Fed Chair, died at 100 years old from complications of Parkinson’s disease. He led the Fed from 1987 through 2006, running the central bank during booms and busts that spanned four different presidencies.
I spoke to Greenspan a decade ago and got him to reflect on his famous December 1996 speech, in which he used the words “irrational exuberance” to suggest that stock prices might have reached extreme levels. At the time, tech stocks were beginning to explode higher as investors grew very excited about the internet’s early potential. Of course, just a few years later, the dot-com bubble crashed, bringing those high-flying stocks back to earth.
There may be echoes of that happening today. Big Tech companies are pouring hundreds of billions of dollars into data centers, fueling an AI boom that’s pushed their stock prices to valuations in the trillions.
When I asked him about the phrase and how it continued to resonate years later, he stood by it.
“If you rate me on my irrational exuberance forecast, I get a C,” Mr. Greenspan told me in 2016 in an hour-long interview. “But analytically, it was describing a process that I thought we had to be very concerned about.”
Here was Greenspan’s specific quote in his 1996 speech:
“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
His call came in the middle of the 1990s tech bubble. And while stocks immediately fell after his speech, they quickly came roaring back and would continue to soar for several years before the bubble burst in 2000.
In his book “The Age of Turbulence,” he wrote that he thought of the “irrational exuberance” phrase when he was in the bathtub writing his speech. And he said in my interview that he chose that exact wording for its shock value.
“I was acutely aware of the fact that that particular phrase was put in that speech to spook the market,” he said.
The phrase took on a life of its own for years. It has its own Wikipedia page. Robert Shiller, the Yale economist and Nobel Prize winner, wrote a book by that title.
And now, “irrational exuberance” is relevant yet again as the debate rages over whether we’re in the midst of an AI bubble.
I said last year that we could be in the midst of a new tech bubble, one that could get bigger and eventually pop more spectacularly than the dot-com boom and bust.
But the truth of the matter is, no one really knows whether we’re in a bubble or not. And if we are, it’s hard to act without knowing what will transpire in the future, which was one of Greenspan’s biggest takeaways to me.
“Once a bubble emerges, it is difficult to do anything to stop it that won’t have a major negative impact on the economy,” he said. “The best thing to do is to let it run its course and address the consequences when they occur.”
