Greenspan Rattles The Bulls

NEW YORK: When Alan Greenspan speaks, people listen. Especially on Wall Street, where his latest pronouncement at a Senate Banking Committee meeting this morning sent the Dow plunging by more than 100 points before it settled to a loss for 61 1/2 for the day. Greenspan, who rocked markets in December with a comment about the irrational exhuberance among investors that was driving stock prices high, told the Senate Wednesday that the recent upward run of the stock market poses an inflationary threat. When he added that the Fed would not rule out raising short-term interest rates in an effort to ease those inflationary pressures, the markets went temporarily insane. Within moments, the Dow Jones industrial average fell more than 101 points, while in the bond markets, interest rates on 30-year Treasury bonds soared from 6.66 percent to 6.80 percent. Investors fear that a tightening of credit will draw money out of stocks and into the bond market, a move that could end the six-year bull market run and in the process devastate the assets of the waves of newcomers who have flooded the market with money over the past few years. But today's testimony doesn't necessarily mean a rate hike is coming after the Fed's May meeting. In December, rates remained rock steady after Greenspan cleared his throat and sent investors scurrying for cover. Still, Greenspan made it clear that he didn't think that this unprecedented expansion means we have entered a new, recession-proof age: "History is strewn with visions of new eras that in the end have proven to be a mirage. Excessive optimism sows the seeds of its own reversal in the form of imbalances that tend to grow over time." Now that he has repeated his concern about soaring stock prices, the financial community will wait anxiously to see if he will take action to back up these words.