Putting Clinton's legacy to rest -- his boom was driven by an unsustainable stock bubble. Deal with it cepr.net/index.php/blog…
— Dean Baker (@DeanBaker13) January 30, 2013
Which leads to this pretty decent Baker analysis:
There is widely held view in Washington policy circles that the economy was golden in the Clinton years. We had strong growth, low unemployment, rising real wages, a soaring stock market and huge budget surpluses. According to this myth, George W. Bush ruined this Eden with his tax cuts for the rich and wars that he didn't pay for. While there are plenty of bad things that can be said about George W. Bush, his tax cuts for the rich and his wars (whether paid for or not), this story of paradise lost badly flunks the reality test.Baker is correct here as far as he goes. There was a stock market bubble. But, he fails to point out the bubble was caused by a massive acceleration in money supply (M2) growth, which was slowed for a bit by Greenspan in 1999-2000, which resulted in the 2000 market peak.
At the most basic level, the chain of causation is fundamentally wrong. The driving force in this story was the soaring stock market, which was in fact a bubble. Stock prices had grown hugely out of line with the fundamentals of the economy. The ratio of stock prices to trend earnings at the market peak in 2000 was over 30 to 1, more than twice the historic average. It was inevitable that this bubble would burst and in fact the unwinding actually begin when Clinton was still in the White House. The overall market was down more than 10 percent from its peak by January of 2001 and the Nasdaq was down close to 30 percent.
This collapse was the basis for 2001 recession which began less than 2 months after President Bush stepped into the White House.