An awakened sense of outrage has reporters and members of Congress playing a fierce game of hounds and hares with Enron executives and other bandits, which is most fortunate for Alan Greenspan. If the Federal Reserve were not treated with such deferential sanctimony, its chairman would also face browbeating questions concerning his role in unhinging the lately departed prosperity. Newly available evidence supports an accusation of gross duplicity and monumental error in the ways that Greenspan first permitted the stock market's illusions to develop into an out-of-control price bubble and then clumsily covered his mistake by whacking the entire economy. These offenses are not as sexy as criminal fraud but had more devastating consequences for the country.

The supporting evidence is found in newly released transcripts of the private policy deliberations of the Federal Open Market Committee (FOMC) back in 1996--the fateful season when the froth of asset-price inflation was already visible in the stock market. In a series of exchanges, one Fed governor, Lawrence Lindsey (now the President's chief economic adviser), described with prescient accuracy a dangerous condition that was developing and urged Greenspan to act. Greenspan agreed with his diagnosis, but demurred. If Greenspan had acted on Lindsey's observations, the last half of the nineties might have been different--a less giddy explosion of stock market prices without the horrendous financial losses and economic dislocations that are still unwinding.

Lindsey described back in 1996 a "gambler's curse" of excessive optimism that was already displacing rational valuations on Wall Street. The investment boom in high-tech companies and the rising stock prices were feeding off each other's inflated expectations, he explained, and investors embraced the improbable notion that earnings growth of 11.5 percent per year would continue indefinitely. "Readers of this transcript five years from now can check this fearless prediction: profits will fall short of this expectation," Lindsey said. Boy, was he right. The Federal Reserve has the power to cool off such a price inflation by imposing higher margin requirements on stock investors, who borrow from their brokers to buy more shares. That is what Lindsey recommended.

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