Jeremy Siegel has two Ivy League degrees in economics, teaches at an Ivy League college - the University of Pennsylvania - and is a frequent guest on CNBC. In the same way that “three strikes and you’re out” is the fundamental rule of baseball, these three attributes of Siegel amount to proverbial three strikes against his competence in anything even tangentially related to the real economy. Fortunately, because Jeremy Siegel is so eager to offer his opinion on all sorts of topics he clearly knows nothing about, it is not necessary to simply rely on the three attributes above to prove his colossal ignorance.
In December 1996, Alan Greenspan (#29) gave one of the most memorable and remarkable speeches in the history of central banking – “The Irrational Exuberance” speech of December 05, 1996. The speech was officially titled “The Challenge of Central Banking in a Democratic Society,” but most people simply dubbed it the “irrational exuberance speech.” In this speech – which was given to the American Enterprise Institute (AEI) - Greenspan said,
“How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions, as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not to be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability…But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.” (Emphasis added)
The speech – which was long even by Greenspan standards – and doubtless came at the end of an evening full of drinking. Most likely the by now slightly sauced policy wonks of the AEI didn’t even notice the financial world shifting under their feet as the speech was being made. However, the financial markets certainly did. The reaction by the markets to the speech was immediate and explosive. Asian markets fell by several percent just hours after the speech. When markets opened in the US they tumbled as well. After having been long conditioned by the “Greenspan put” and his loose monetary policies, markets were shocked their prime benefactor, Chairman Greenspan, might be worried about “unduly escalated asset values” or that the impact of stock prices on the economy “must be an integral part of the development of monetary policy.”
Faced with the prospect of losing their sugar daddy and having to work for their money like every other business, the largest Wall Street banks and wealthiest investors everywhere threw a temper tantrum. Like a spoiled child screaming at the top of their lungs at a supermarket checkout in the hopes of getting yet another candy bar from their parents, market participants hoped to force Greenspan to reconsider the less expansionary policy he appeared to endorse in his speech. It was a test of wills between the market and Greenspan – and Greenspan folded, like origami.
Instead of leaning against the emerging stock market bubble and having the Fed adopt a more passive role in the economy, Alan Greenspan became the most ardent disciple of what came to be called – incorrectly, it hardly needs to be said - the “new economy.” He constantly praised how the emergence of computer technologies would fundamentally alter business and virtually prevent mistakes of the past such as poor inventory management or bad strategic decisions. Most fatally, he was firmly convinced – like nearly all PhDs in economics – that computers allowed central planners/central bankers to precisely control and fine-tune the economy. These same computer technologies would also allowing investment bankers to model prices of all sorts of financial assets to seven significant digits of accuracy. This level of mathematical precision would allow an enormously beneficial, market-smoothing industry of incredibly complex, “derivative” securities to be created.
Of course in all this, Greenspan was completely wrong. The stock market soared throughout the late 1990s, culminating in the madness of the “dot com” mania. Before the dust from the tech bubble crash had even settled, Greenspan was being criticized for his awful judgement and people cited the “irrational exuberance” speech as strong evidence that Greenspan did indeed know better and failed to put his correct judgement into action.
However, a variety of people – mostly academics wedded to the belief that central planning in the form of central banking provides a tremendous benefit to the economy – defended Greenspan after he failed to take any action after threatening the market to do so in his “irrational exuberance” speech. In the front ranks of these Greenspan defenders, was Jeremy Siegel. Here is Siegel writing in the Wall Street Journal as a Wharton finance professor, stock market cheerleader and CNBC favorite ten years after the irrational exuberance speech,
“Now that we have 10 years of economic and financial data, we can now accurately determine whether the market was indeed “irrationally exuberant” in December 1996. The answer is decidedly no. Had the market been overvalued, it would have shown poor returns in the following decade. But it did not…”
The stupidity in this comment is basically biblical in scope. Prof. Siegel cites stock valuations in 2006 - which were exclusively fueled by the housing bubble, only the largest financial bubble in history - to refute the notion that stocks weren’t overvalued when Greenspan gave his irrational exuberance speech. This wasn’t a flat earth society crackpot questioning the validity of a lunar landing. This was the economic analysis of a finance professor at what is reputed to be the best college in the world to study finance, the University of Pennsylvania. Time has revealed Siegel’s judgement to be wrong on all counts and yet he is still a widely respected commentator on financial markets. What additional proof is needed to conclude that most of what passes for finance in the U.S. today is nothing but a fraud and its leading proponents, many of whom come from our elite universities, nothing but hucksters?
To further prove just how often Jeremy Siegel gets everything wrong, here he is in December 2007 predicting what the economic future holds for 2008, the year when all the financial chickens associated with Bill Clinton’s central plan for housing, the Fed’s monetary madness and Wall Street avarice finally came home to roost;
“I think the actual number of (mortgage) delinquencies next year will be below what the market predicts as investors have overreacted to the mortgage crisis. When this happens it could lead to a nice recovery in financial stocks…And I believe financial stocks, which have plummeted 18% so far this year, will outperform the S&P500 index next year as the crisis fades.”
Of course, far from overreacting to the mortgage crisis, most investors didn’t have an inkling of just how bad the crisis would become. In the stock market, financial stocks, far from leading the market higher, would be annihilated, with two of the five Wall Street investment banks – Lehman Brothers and Bear Stearns - vanishing from the financial universe. Jeremy Siegel didn’t limit his incorrect predictions to his supposed area of expertise – finance. He also predicted that Hilary Clinton and Rudolph Giuliani would win their party’s nomination for president.
To be sure, the financial crisis relied on several key individuals to flourish and grow. Chief among the individuals most responsible for the emergence of an enormous financial crisis in 2008 are of course Ben Bernanke (#3), Bill Clinton (#12), Andrew Cuomo (#16), Barney Frank (#21), Alan Greenspan (#29) and Lawrence Summers (#45). However, along with these key individuals it was also necessary for an entire infrastructure of lousy economic theory to not only exist, but to flourish and become accepted as gospel. Jeremy Siegel – and all the other less well-known, largely anonymous dolts teaching economics at Ivy League colleges – played an enormous role in creating an intellectual environment in which the fallacies latent in Bill Clinton’s central plan for housing, and the Federal Reserve’s active control of the economy would be accepted as unchallenged, universally accepted truths.
See Austan Goolsbee (#25) and Art Laffer (#32) for two other PhDs in economics regularly featured as experts on CNBC who regularly demonstrate enormous gaps in their knowledge of economics.