It was Dec. 5, 1996. Bill Clinton had been re-elected the previous month by defeating Kansas Republican Bob Dole in an electoral college landslide.
Alan Greenspan, then chairman of the Federal Reserve, used the phrase "irrational exuberance" in a speech he gave discussing the challenges of central banking. Greenspan was speaking at a dinner hosted by the American Enterprise Institute.
Specifically, the transcript on the Fed's website quotes him as saying:
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? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability.
Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. 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.