Booms, Bubbles and Busts in US Stock Markets

by Western; David L.

• ISBN13: 9780415369688
• ISBN10: 0415369681
• Format: Hardcover
• Copyright: 2004-10-28
• Publisher: Routledge

Summary

Why did US stock markets experience such a huge bubble in the 1990s? Why did Greenspan 'allow' the bubble to occur? Why did investors appear to act irrationally and indulge in such vehement speculations? Why the euphoria? This book examines the American stock market during one of its most intriguing periods. By turning his critical eye upon the rise of the stock market bubble during the 1990s boom years and its inevitable crash some years later, David L. Western has written a scholarly yet readable book. Providing historical background as well as solid statistical research, the book helps to explain the mysteries of the stock market in an authoritative manner. Advanced undergraduate and postgraduate and postgraduate students will find this to be an enlightening read, whilst readers with an interest in how the biggest economy in the world got things badly wrong will find this to be a book that remains useful as a reference for many years to come.

Author Biography

David L. Western is Senior Lecturer at Curtin Business School, Australia.

Table of Contents

List of Figures	p. xi
List of Tables	p. xiii
Foreword	p. xiv
Acknowledgements	p. xvi
Introduction	p. 1
Why the stock bubble?	p. 1
From one bubble to another?	p. 1
A unique set of circumstances?	p. 2
How absurd were valuations?	p. 2
Why did investors ignore warning signals?	p. 3
Why did the stock bubble burst?	p. 4
Why did Greenspan ignore 'irrational exuberance'?	p. 4
Greenspan and the markets	p. 5
How costly was corporate governance failure?	p. 6
The Fed's enemy: inflation or deflation?	p. 7
What are the lessons from the 1929 bubble?	p. 8
Japan's mess and deflation: what can the United States learn?	p. 8
The massive policy push: powerful enough to create sustainable growth?	p. 9
How fragile is the US recovery?	p. 11
Where from here?	p. 11
A bull or bear market rally?	p. 12
The bubble era in US stocks	p. 13
Introduction	p. 13
Origins of the bubble	p. 14
Why the stock bubble?	p. 16
Stocks versus bonds	p. 16
Absurd valuations	p. 19
The bubble: geopolitical forces at work?	p. 20
The bubble: underwritten by a stable bond market?	p. 22
Debt, savings and switching	p. 23
Warning signals: why not switch?	p. 24
What of corporate earnings?	p. 25
Similarities with 1929	p. 28
Where from here?	p. 29
Conclusion	p. 29
The great bull run of the 1990s	p. 31
Introduction	p. 31
Macroeconomic background	p. 32
The policy paradigm	p. 37
Dip and recovery: 1990-1	p. 38
The roaring Dow: 1992-3	p. 39
The policy-induced correction: 1994-5	p. 41
Up, up and away: 1996-7	p. 43
Correction and a major recovery: 1998-2000	p. 47
Conclusion	p. 51
Valuation methods and investment strategies	p. 52
Introduction	p. 52
Portfolio choice	p. 53
Diversification and risk	p. 55
News: economic or financial?	p. 57
Market efficiency	p. 57
Investing over the life cycle	p. 58
The fundamentals approach	p. 59
The contrarian strategy	p. 60
Serial correlation and mean reversion	p. 63
Investment strategies	p. 64
Financial fragility	p. 66
Expectations, trading and timing	p. 67
Conclusion	p. 68
The bubble era: how rational?	p. 70
Introduction	p. 70
Biases in the one-way street	p. 70
Where were the arbitragers?	p. 76
Old benchmarks and turning points	p. 77
Was it a speculative bubble?	p. 78
The 'New' new economy	p. 79
The 1990s: a deviation from fundamentals	p. 80
Wealth storage and far-sightedness	p. 82
Greenspan's defense of the NASDAQ bubble	p. 83
Domestic origins of the boom	p. 85
Conclusion	p. 86
The new economy: has it arrived?	p. 88
Introduction	p. 88
Productivity growth and the stock market	p. 89
A rational bubble?	p. 90
Old questions and old answers	p. 91
The productivity slow down debate	p. 91
Sources of productivity growth	p. 93
The IT and communications revolution	p. 94
IT and communications: drivers of productivity growth?	p. 97
US government and productivity growth	p. 98
Productivity growth: how permanent?	p. 99
Productivity and the stock bubble	p. 100
Conclusion	p. 101
Governance issues: old and new	p. 102
Introduction	p. 102
Market versus government failure	p. 102
Incentives and trade-offs	p. 105
What are the challenging issues?	p. 106
Wall Street in the 1960s: fresh challenges	p. 108
Past pressure for regulation	p. 109
The case of Enron	p. 110
A dangerous incentive structure?	p. 111
Regulatory reform and the Sarbanes-Oxley Act	p. 112
Conclusion	p. 114
The Federal Reserve: in unchartered waters?	p. 115
Introduction	p. 115
Ultimate objectives and trade-offs	p. 116
The yield curve	p. 116
The government environment	p. 117
America's economic cruise speed: what guideposts?	p. 118
Diagnosis of imbalances	p. 120
Hitting targets: what policy mix?	p. 123
What economic indicators?	p. 124
Critics of the 'Wrong Paradigm'	p. 126
Canterbery's Vatican paradigm	p. 127
Reputation and credibility of the Federal Reserve	p. 128
The caterpillar market and fear of the Fed	p. 129
Confessions of a central banker	p. 130
Is the Fed secretive?	p. 130
Conclusion	p. 131
Shifting ground beneath the Federal Reserve	p. 132
Introduction	p. 132
Deregulation of the financial sector	p. 132
Financial product innovation	p. 133
Technology and innovation	p. 136
The effectiveness of monetary policy	p. 138
Target interest rates or monetary aggregates?	p. 140
Does money affect output?	p. 141
Channels of the monetary transmission mechanism	p. 142
Does money affect stock prices?	p. 144
Interest rates: how effective on output?	p. 145
Interest rates: what affect on stocks?	p. 146
Conclusion	p. 148
Evaluating the Greenspan years: 1987-2004?	p. 149
Introduction	p. 149
Greenspan's background	p. 150
Greenspan's economic philosophy	p. 150
Greenspan and the markets	p. 152
Sifting wheat from the chaff	p. 156
Power to move the economy?	p. 157
Mistakes in the Greenspan era?	p. 157
Greenspan's two flagships	p. 160
Flexibility: Greenspan's hallmark	p. 161
Conclusion	p. 163
The great asset price bubble of 1929	p. 165
Introduction	p. 165
Seeds of the bust in the 1920s	p. 165
Damage to the real economy	p. 167
Causes of the 1929 crash and depression	p. 168
What were the triggers?	p. 175
What lessons have we learnt?	p. 175
Could history repeat itself?	p. 176
Conclusion	p. 177
Lessons from Japan's financial crisis	p. 178
Introduction	p. 178
Japan's old growth strategy	p. 178
Weaknesses and seeds of destruction	p. 180
Macroeconomic challenges	p. 180
Policy levers	p. 181
Why the asset price bubble?	p. 182
Financial not economic constraints	p. 183
Japan's asset price bubble: liquidity roots?	p. 184
What of the export growth strategy?	p. 185
Monetary policy failure	p. 186
Monetary transmission mechanism: clogged pipes?	p. 187
Fiscal policy failure	p. 188
Krugman's insight	p. 190
Japan's policy response: why so ineffective?	p. 191
Lessons from Japan's financial crisis	p. 192
A multi-pronged approach to recovery	p. 192
Flow on effects from Krugman's solution	p. 193
Lessons from Japan's stagnation	p. 194
Conclusion	p. 194
The Asian bubble and crisis	p. 196
Introduction	p. 196
Some commonalities	p. 196
Financial origins of the bubble	p. 197
Excess liquidity revisited	p. 203
Why did the bubble burst?	p. 203
The Asian crisis: why so sudden?	p. 206
Stock market performances: post bubble	p. 207
Conclusion	p. 210
US stock markets: where from here?	p. 212
Introduction	p. 212
From one bubble to another?	p. 213
What of currency instability?	p. 213
The liberation of Iraq	p. 214
Geopolitical forces	p. 215
Synchronization and integrated markets	p. 217
Why the US stock rally?	p. 218
The powerful policy stimulus	p. 219
The US economic recovery: where from here?	p. 222
Lessons from the movie: Wall Street	p. 223
Conclusion	p. 223
Bibliography	p. 226
Index	p. 232
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