"Irrational exuberance" is a phrase used by former Federal Reserve Board
Chairman Alan Greenspan in a speech given at the American Enterprise Institute during the stock
market boom of the 1990s. The phrase was
interpreted by financial pundits as a typically cryptic warning that the market might be overvalued.
Although it is sometimes believed that Greenspan's comment was made near the height of the dot-com boom (and contributed to
its downfall), it was actually said much earlier, in December 1996 (emphasis added in excerpt):
“ […] Clearly, sustained low inflation implies less uncertainty about
the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse
relationship exhibited by price/earnings ratios and the rate of inflation in the past. But 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? […] ”
- "The Challenge of Central Banking in a Democratic Society", 1996-12-05
The presence of the short comment—not repeated by Greenspan since—within a rather dry and complex speech would not normally
have been so memorable; however, it was followed by immediate slumps in stock markets
worldwide, provoking a strong reaction in financial circles and making its way into common parlance. Greenspan's comment was well
remembered, although few heeded the "warning."
The losses were quickly recouped and eclipsed by the accelerating stock market boom; as of mid-2007, stock prices have never
again fallen to the levels seen following the warning. The phrase was notably used by Yale professor Robert Shiller, who titled his book with it in 2000. When the market slumped in the same year, in
response to increasing interest rates, the phrase got another popularity boost and was much used in hindsight, to characterize the excesses of the bygone era. In 2005, upon Greenspan's retirement from the
Treasury Board, The Daily Show with Jon Stewart held a full-length farewell show
in his honor, named "An Irrationally Exuberant Tribute to Alan Greenspan."
It had become a catch phrase of the boom to such an extent that, during the economic
recession that followed the stock market collapse of 2000, bumper stickers reading "I want to be irrationally exuberant again" were sighted in Silicon Valley and elsewhere.
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