I would not only reappoint Mr. Greenspan—if Mr. Greenspan should happen to die, God forbid ... I'd prop him up and put a pair of dark glasses on him and keep him as long as we could.
|--John McCain, GOP debate, 2000|
Up until now, Alan Greenspan had merely been dabbling. Yes, his frequent interventions in markets were worrisome, unprecedented by historical Federal Reserve standards. But as we shall see, they were merely a warm-up for what was to yet come.
In July 1998, the NASDAQ Composite had just cleared the 2,000 mark for the first time. At the time, the tech-heavy index was dominated by active traders, ranging from big momentum funds to small day traders. The prior few years had been good to those NASDAQ traders, with strong gains in 1995 (39.9 percent), 1996 (22.7 percent), and 1997 (21.6 percent). And 1998 was looking like a good year also, until the unpleasantness with Long-Term Capital Management began. At the first inkling of trouble, the so-called momo traders dumped their shares. As the depth of the LTCM hedge fund's problems became clear, the NASDAQ got pounded. From its July peak of 2,000, the NASDAQ lost nearly one-third of its value, trading down to near 1,350 in less than three months.
To a Fed chair obsessed with asset prices, this was of grave concern.
Hence, the LTCM bailout. If Greenspan hoped the rescue plan would act as a salve to traders, he sure got his wish. Confidence levels recovered just as quickly as they had faltered. ...