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Rational Cautiousness

The press gasped when Bush and Greenspan failed to bolster the Wall Street, but the market is behaving rationally.

12:00 AM, Jul 18, 2002 • By CHRISTOPHER CALDWELL
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TUESDAY NIGHT on the "CBS Evening News," Dan Rather described Fed chief Alan Greenspan's testimony before the Senate Banking Committee in these terms: "President Bush couldn't do it; today the chairman of the Federal Reserve tried to calm nervous investors and stop the slide on Wall Street. Alan Greenspan, who once warned against 'irrational exuberance,' today was cheerleading 'cautious optimism.' For a while, it appeared to work."

This is a phony narrative arbitrarily superimposed on Greenspan's testimony. Why does Rather assume that "stopping the slide on Wall Street" is what Bush and Greenspan have been aiming to do? Greenspan, it is true, doesn't want the collapse in share values to become irrational. But who does? If there was any evidence in Greenspan's testimony that he believes the slide is irrational thus far, I didn't see it. The president has explicitly disavowed speculation that his remarks were meant to prop up market values. ("He would say that," I hear you grumble, "wouldn't he?")

Why should either Bush or Greenspan try to trick the market into heading upward? At the core of the recent stock-collapse is an accounting scandal. The misconduct involves companies manipulating the books to show profits that didn't exist. Ipso facto, once that misconduct is made public, all rational stock buyers will assume that stocks are worth less, on average, than we thought they were before. How nuts would an investor have to be to continue to pay the old, pre-scandal share price?

So the collapse in values has a silver lining. It means there is a link--imperfect, but nonetheless real--between earnings (or lack thereof) and share prices. It assures us that the stock market retains a certain resistance to bubbling. If investors could be induced by political sweet-talk into paying the same price for a product known to be debased, we would have no such assurance.

"Stopping the slide" is not what Bush and Greenspan are trying to do. It's not even what they should do. It's merely what Rather and a lot of other nervous investors selfishly wish they could do.

Christopher Caldwell is a senior editor at The Weekly Standard.