Greenspan More Than Partly to Blame for the Technology Stock Bubble
by Andrew H. Dral

In the Sac Bee’s “Greenspan leaves biggest mark as inflation fighter” staff writer Dale Kasler on January 31, 2006 neglected to mention that Greenspan could have taken a fine scalpel to the stock market bubble, but instead took out a sledgehammer by raising interest rates. The sledgehammer approach brought down the entire economy. On September 24, 1996 Mr. Greenspan was quoted, “I recognize there is a stock-market bubble problem at this point.”

During the bubble days my job as a stock broker was to force high net worth clients to rein in their margin accounts to meet our collateral requirements. Brokerages will allow speculative clients to exceed the cash in their accounts based on the borrowing power available on the equity in their accounts through loans, called margin. Depending on a number of factors – volatility, listing longevity and capitalization -- the Federal Reserve and the brokerages set the amount of borrowing an individual equity can sustain.

All Greenspan had to do was to tighten margin requirements or eliminate them entirely, so speculative investors either couldn’t borrow as much or borrow at all. This would force investors to sell out their most volatile investments. The market would come down to reasonable levels by taking the speculation out of the market. Instead, Mr. Greenspan working at the behest of Wall Street executives didn’t have the ethical gumption to remove the punch bowl. You see Wall Street makes tremendous profit off of speculative margin borrowing.

Many respected economists have commented on Mr. Greenspan’s complete failure for not ratcheting down margin borrowing. Morgan Stanley’s Chief Economist Stephen Roach was quoted, the reluctance to make such a “surgical strike” reflects Greenspan’s concern about “what else [raising margin requirements] will do.” The “what else” is put a dent in Wall Street’s profits. I saw first hand how quickly we could get speculative investors to sell their most risky investments when they exceeded their borrowing capacity.




Andrew H. Dral “The Rabble”