Alan Greenspan might have blown it. Evidence is accumulating that the Federal Reserve should have taken modest steps last year to slow the market advance, and the economy, soon after his "irrational exuberance" speech.
Since that speech, stock prices have advanced more than 40%.
While Mr. Greenspan has held off because of an absence of evidence of inflation as measured either by the consumer price index or the gross domestic product deflator, he has ignored the raging inflation in the prices of financial assets -- especially stocks.
The culprit seems to be excessive money growth. M3, for example, has grown at a 9.8% annual rate through the first quarter of this year. As economists Ed Hyman and Nancy Lazar of the ISI Group noted in the firm's May 4 newsletter, 10% money growth didn't lead to a "bubble" economy in the 1970s because economic conditions directed the excess liquidity into consumer spending.
Now, the rapid money growth is occurring in an environment of price disinflation, allowing the excess liquidity to flow into stocks and other investment vehicles. The real estate market is showing signs of becoming overheated, and so, too, are the private debt and equity markets.
The longer a bubble is allowed to grow, the more dangerous it is to prick it. Mr. Hyman and Ms. Lazar believe the United States is early in the bubble-building process. Others are not so sure.
It might already be too late for Mr. Greenspan and his colleagues to prick the bubble without causing a major correction in the stock market, and hence a significant slowing in the economy, perhaps even a recession.
But the longer they wait, the worse any implosion is likely to be when the bubble does burst. Mr. Greenspan and his colleagues may be in a no-win situation. Their choices appear to be a relatively mild correction now, or a worse one later. A smooth landing appears to be unlikely.
Pension executives and money managers ought to favor the mild correction now to mop up the excess liquidity and set the economy and the markets on course for another decade of healthy growth.