One
The Stock Market Level
in Historical Perspective

When Alan Greenspan, chairman of the Federal Reserve Board in Washington, used the term irrational exuberance to describe the behavior of stock market investors in an otherwise staid speech on December 5, 1996, the world fixated on those words. Stock markets dropped precipitously. In Japan, the Nikkei index dropped 3.2%; in Hong Kong, the Hang Seng dropped 2.9%; and in Germany, the DAX dropped 4%. In London, the FT-SE 100 index was down 4% at one point during the day, and in the United States, the Dow Jones Industrial Average was down 2.3% near the beginning of trading. The words irrational exuberance quickly became Greenspan's most famous quote—a catch phrase for everyone who follows the market.

Why did the world react so strongly to these words? One view is that they were considered simply as evidence that the Federal Reserve would soon tighten monetary policy, and the world was merely reacting to revised forecasts of the Board's likely actions. But that cannot explain why the public still remembers irrational exuberance so well years later. I believe that the reaction to these words reflects the public's concern that the markets may indeed

-3-

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