An Irrationally Exuberant Market


On this day in economic and financial history...

The phrase "irrational exuberance" first entered the economic lexicon on Dec. 5, 1996, in a speech by Alan Greenspan, then the chairman of the Federal Reserve, who said: "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? And how do we factor that assessment into monetary policy?"

Greenspan's evening speech to the American Enterprise Institute was followed by immediate market slumps around the world. Japan's leading index dropped by more than 3% when it next opened. Germany's market declined 4%. Hong Kong was down by nearly 3%, and London traders suffered a 2% market decline. The Dow Jones Industrial Average dropped by 2% within the first half-hour of trading but recovered to a loss of less than 1% by the end of the day.

The panic was fleeting. Exactly a year after Greenspan's comments, the Dow's value had increased by 28%. Two years later, the total gain stood at 41%. By the end of 2000, at the height of the dot-com bubble, "irrational exuberance" had become cartoonish, and the Dow had gained a staggering 71% in four short years. Its growth would later be undermined by an ill-fated decision to add highly inflated digital darlings Intel and Microsoft in 1999, just before they peaked and fell back to earth. Neither has since come close to those inflated market caps, despite generating far greater cash flow.

The market's subsequent meltdown was predicted by Yale economist Robert Shiller, who published a book with the title Irrational Exuberance in the spring of 2000. It was later updated in 2005 to discuss the inflating housing bubble, which would begin to blow apart two years after the revised book's publication.

Strength in numbers
Two of the largest labor unions in the United States agreed to merge in 1955, and on Dec. 5 they announced the merger to the world. The American Federation of Labor and the Congress of Industrial Organizations had become the AFL-CIO.

For the next 50 years, AFL-CIO was the dominant umbrella union organization in the U.S. Its member unions undertook many strikes during this period, with varying success. In 1970, federal postal workers went on strike in one of the largest labor protests in American history, which forced the reformation of the postal service into its current, more corporate form. In 1981, the air traffic controllers' union waged a major strike that was crushed by President Ronald Reagan. This was a major turning point in American labor history. In 1997, 185,000 unionized UPS employees waged the largest strike of the decade, costing the company more than $600 million in lost revenue and winning their demands of full-time employment and higher wages, among other concessions.

The AFL-CIO's power has been on the wane in recent years. The union's member roster was 8.5 million in 2011 -- a 34% decline from its peak in 1976.

To alcohol! The cause of, and the solution to, all of life's problems
Prohibition lasted for 14 long years, but for all its efforts, the flow of alcohol through America's illicit speakeasies could never be stopped. After recognizing the utter failure of the effort, the states ratified the Twenty-first Amendment on Dec. 5, 1933, repealing the Eighteenth and once again allowing the legal production and sale of alcohol across the country. Even ardent Prohibition supporters like Standard Oil magnate John D. Rockefeller saw the damage illegal alcohol was causing to the country, and many had changed their stances by the time Prohibition was repealed.

The brewing industry did not bounce back immediately, as many counties across the U.S. remained "dry" for years afterwards. Few breweries made it through the Prohibition era, with most survivors using brewing ingredients in alternative ways to stay solvent. By the end of World War II, beer production had increased markedly, although control of the industry remained primarily in the hands of the megabrewers that had outlasted Prohibition, notably Anheuser-Busch and the premerger forerunner of Molson Coors . Independent microbreweries did not offer the first hints of a challenge to industry leaders until decades after the end of the war.

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