"Buy, Lie and Sell High"

Alan Greenspan famously frowned on the run-up in stock prices as "irrational exuberance," a term that is likely to go down in history. What are the history books going to say about what he actually did to prevent any of this?

I think they're going to say that he did very little to prevent it and a lot to encourage it.

[Greenspan] spoke about "irrational exuberance" I think in 1996, and then really did not return to that theme -- the Fed did really not tighten money as it should have to slow down this asset bubble. The Fed debated this continually; the regional Fed banks debated it. The national Fed debated it -- whether or not the Fed should intervene to stop this bubble from inflating, and they chose not to do it. In fact, Greenspan was continually heaping praise on the new economy and talking about a "new plateau of low inflation and high productivity in the American economy" -- all of which he knew perfectly well was being interpreted as an endorsement of the [Internet] bubble.

You group Enron with the rest of the dot-com companies, not because it was a technology company per se, but because it used the enthusiasm of the bubble to its own ends. Could you explain that?

Enron was the old-economy company -- a kind of slow-moving energy company -- which was most effective in the capital markets at turning itself into a new-economy company. It became an Internet-based trader in energy, futures and that sort of thing. It reinvented itself as an Internet company. And that's the reason [it is included in the book]. It's the bridge between the old economy and the new economy in the period of the Internet bubble. It did most successfully what a whole lot of other companies wanted to do.

What they didn't know then -- and I didn't fully understand because we're learning more about it day by day -- was the degree to which that wasn't real but was based on fraud.

You look at and profile a number of German dot-coms in your book in addition to American companies. Where did the idea to mirror the bubble in Germany and the U.S. come from?

It had been remarked on a number of times that the same kind of bubble was going on in Europe and particularly in Germany. Dot-com companies, Internet companies, et cetera. And so I got interested in -- since that had happened -- in what had been the consequences. Had they been the same as the United States'?

The answer is that they had largely been the same in terms of the volatility of the market. They had been largely the same in terms of their impact on the companies -- the dot-com entrepreneurs. They had been largely the same in terms of the causes, the way that the banks and the venture firms had changed what they were doing.

Where they had been different was in their consequences for investors, because Germany does not permit anywhere near the amount of pension money and life savings of people to go into the stock market as we do here. And we only started that a few years ago, where we started to allow people to seriously manage tax-protected pension funds on their own. So what we did was essentially to draw all these people in. A much larger percentage of the American population is in the stock market than in Germany: almost 50 percent [of Americans], which is enormous. In Germany it's much lower than that -- back where we used to be -- and they have much stronger controls and regulations.

You note early on in your book that the Internet bubble amounted to a huge redistribution of wealth from the many [retail investors] to the few [VCs, investment banks and other insiders]. What do you think the long-term consequences of that redistribution will be?

Very hard question. Two or three things. I think [the Internet bubble] was something that the financial markets or institutions liked. In my book, I quoted one industry insider as saying that the problem wasn't the bubble -- it was its aftermath. So there will be tremendous incentives to try to do the same thing again. No matter how much people are now wringing their hands and saying, "Oh, we have a hangover. We shouldn't have done that." The reality is that there are tremendous incentives to try to repeat it because it was so successful for them.

The second thing is that it has created a huge crisis of confidence in the capital markets. That's the reason that the president and the Fed can't get this thing under control and why these bills that are being reconciled in Washington are not stopping the slide of the market. It's taken people a while to understand that the money they lost in the markets is not coming back. That many of those companies are gone for good -- and so is their money. They're only really beginning to understand that now, as you see people [who were retired] going back to work, et cetera. And I think [ordinary investors] now feel like the markets are a deck that's stacked against them.

What do you think the 1990s would have looked like had investment banks and stock analysts and venture capitalists stuck to their "principles" and to conservative business practices, rather than throwing all those things out the window?

Same level of economic growth. Same or a little less inflation. There would have been a better economy and you wouldn't have had the economic recession we're in now with the risk of a substantial decline behind it. So you would have simply have had better economic growth. [The Internet bubble] did not contribute to the success of the American economy during [the 1990s]. In fact, if anything, it constrained it. And when it bust, it risked it entirely.

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