The Beginning of Irrational Exuberance
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:
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 led to immediate market slumps around the world. Japan's leading index dropped by more than 3% when it next opened, Germany's market declined by 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 30 minutes of trading, but finished essentially flat by the end of the day.
This minor panic was fleeting. The Dow rose 28% within a year of Greenspan's comments, and two years later its total gain stood at 41%. By the end of 2000, at the height of the dot-com bubble, "irrational exuberance" had been all but forgotten, and the Dow had risen an astounding 71% in four short years. However, just four years after the first mention of irrational exuberance, Greenspan was very belatedly proven correct, and the Dow began a decline that would cut its value from nearly 12,000 points to a low of 7,286 points -- which was still 13% higher than its Dec. 5, 1996, closing value of 6,437 points. The dot-com meltdown was accurately predicted by Yale economist and eventual Nobel winner Robert Shiller in a book titled Irrational Exuberance, which was published in spring 2000 just as the decline began. It was later updated in 2005 to discuss the inflating housing bubble, which blew apart about two years after the revised book's publication.
Don't wait until the market becomes irrationally exuberant again to start investing
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.
The article The Beginning of Irrational Exuberance originally appeared on Fool.com.Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.