Bob Riha, Jr./ Getty Images
The Pets. com puppet mascot during the filming of a television commercial, January 11, 2000. The company became famous for its mascot and infamous for proving that a memorable advertisement is not a business model.
becoming a depression, but it can also encourage the belief that risk will always be rescued.
The problem is not confined to central banks. Investors face the same uncertainty without the privilege of creating money. Valuation measures can show that an asset is expensive relative to earnings, sales, rents or historical experience, but they cannot reveal the date on which enthusiasm will end. A bubble can grow larger after it has become recognizable, as the years following Greenspan’ s speech demonstrated. The last buyer may be foolish, but the skeptical investor who leaves three years early may not feel especially wise.
The anniversary arrives during another period of technological excitement. Artificial intelligence may prove as transformative as its strongest advocates claim. It may raise productivity, change the organization of work and produce vast profits for some companies. None of that guarantees that every AI-related investment is sound, that current leaders will remain dominant or that investors can disregard the price they pay. The internet fulfilled its promise while destroying the capital of many people who had correctly anticipated its importance.
That is perhaps the most useful lesson of December 1996. Being right about the future is not enough. An investor must also be right about competition, profitability, financing, timing and valuation. New technology can change the world without making every associated security a good investment. A company can become indispensable while its stock, purchased at an absurd price, produces disappointing returns. Reality may eventually validate the story while never validating the price.
Greenspan’ s famous question also reminds us that markets are social institutions rather than calculating machines. Prices incorporate enormous amounts of dispersed information, but they are produced by human beings who imitate, fear, hope, extrapolate and respond to incentives. A rising market may reflect genuine discoveries about the future. It may also reflect the belief that someone else will pay more tomorrow or that the Federal Reserve will limit the damage if everyone is wrong.
Thirty years later,“ irrational exuberance” endures because it names a permanent temptation. Every generation wants to believe it has discovered the asset, technology, policy or economic arrangement that repeals ordinary limits. Sometimes the innovation is real. Sometimes the profits are real. The irrationality begins when those truths are used to justify any valuation, any amount of leverage and any degree of confidence.
Greenspan never told us how to identify that moment with certainty because no one can. His greater error may have been suggesting that the consequences could always be managed after the fact. Bubbles redistribute wealth, misdirect real resources, reshape institutions and create political demands for rescue, which— if realized— fosters moral hazard. By the time the damage threatens the real economy, the choice is no longer between intervention and non-intervention. It typically becomes a choice between several costly forms of intervention, each rewarding some mistakes and punishing others.
The speech is therefore worth remembering for more than two elegant words. It captured the deepest difficulty of modern central banking and speculative markets: policymakers cannot know when optimism becomes irrational, but they cannot behave as if the distinction does not matter. Investors cannot reliably time the end of a mania, but they cannot assume that transformative technology makes valuation irrelevant. Irrational exuberance is easy to identify in retrospect and almost impossible to oppose while it is making everyone rich. That was true in 1996, and it remains true 30 years later.
Dr. Peter C. Earle is the senior director of research at the American Institute for Economic Research( AIER). His research focuses on financial markets, financial market history, monetary policy, cryptocurrencies, the economics of games and problems in economic measurement. He has been a member of the Financial History editorial board since 2022.
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