YES, WE'VE just passed the fifth anniversary of the stock bubble's bloated maximum.
Yes, we were nuts to buy stock in Pets.com. Yes, we were delusional to think "eyeball share" on Web pages had anything to do with stock value. But the most important lessons from the rise and fall of the stock market aren't the ones that apply to investors.
Those remain unchanged since Benjamin Graham and David Dodd published Security Analysis in 1934, five years after the implosion of a previous bubble. We just forgot about them.
("While emphasis was still seemingly placed on facts and figures" during the 1920s bubble, they wrote, "these were manipulated by a sort of pseudo-analysis to support the delusions of the period. The market collapse of 1929 came as no surprise to such analysts as kept their heads.")
The most interesting lessons from the 1990s bubble are the ones drawn by policy-makers. What should future governments do when bubbles - or what officials think are bubbles - appear?
Those conclusions are far less obvious and, because they potentially involve market manhandling by the government, fraught with danger.
Federal Reserve Chairman Alan Greenspan still doesn't think you can tell a bubble until it's too late. As long as there's no consumer price inflation, he believes, the proper approach to soaring home, stock and bond prices is to let 'em ride and cushion the fall when it's over.
"It was very difficult to definitively identify a bubble until after the fact - that is, when its bursting confirmed its existence," he said in August 2002, two months before the stock market hit bottom.
But hubris and Monday-morning quarterbacking being what they are, numerous economists, money pros and elected officials have ridiculed this defense and set the stage for a very different approach after Greenspan steps down, probably in less than a year.
Many on the left, such as the Center for Economic and Policy Research's Mark Weisbrot, suggest that the Fed could have saved a lot of grief by nipping the bubble early with oral warnings or tighter borrowing requirements for investors.
(These critics come from the same crowd that habitually blasts Greenspan - Maryland Sen. Paul S. Sarbanes is the most persistent - for allegedly stifling job creation by keeping interest rates too high. It's hard to see how tightening investor borrowing limits enough to pop a stock bubble would hurt job growth any less than higher interest rates, but the theory lets liberals fault Greenspan for the bubble without appearing to flip-flop.)
Others, including Stephen Roach, a Morgan Stanley economist, and Stephen Cecchetti, formerly head of research for the Federal Reserve Bank of New York and now with Brandeis University, think Greenspan should have attacked ascending stock prices with higher interest rates.
"The policy-maker's job is to look out for the long-term welfare of society as a whole," Cecchetti wrote a couple of years ago, "and if that means raising interest rates in the face of high and rising equity or housing prices, so be it."
Even Greenspan keeps supplying ammo to the interventionists in the form of long-ago comments that cast doubt on his contention that you can't identify a bubble until afterward.
Transcripts from the 1999 Fed meetings, which came out a week ago, show him saying in December 1999, close to the height of the madness, "I see no overheating except in the stock market." And he did, after all, warn about "irrational exuberance" in 1996 while ultimately doing little about it.
Free marketeers should be unnerved by all this. Along with $7 trillion in wealth, the collapsing 1990s bubble demolished the idea that markets are always efficient, that autonomous investors can value securities properly and allocate capital in the most productive ways. Pets.com at $11 per share was not productive.
The resulting vacuum might be filled by a future, overweening Fed chairman, scanning the sky for bubbles and possibly causing more harm by quashing stocks than Greenspan did by pumping them up. Markets have nothing on bureaucrats for causing economic chaos. Some economists - led by Fed Governor Ben S. Bernanke, mentioned as Greenspan's replacement - want the Fed to aim for specific inflation targets, not interest rates.
It's unclear how such a change would play out, but it doesn't seem as though it would keep the Fed from popping putative bubbles. The most important legacy of the great 1990s bull market might be a future maestro who swings his baton a little too fast, a little too hard.
