Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve

by Frederick Sheehan and William A. Fleckenstein

Book Overview

No matter who you are-investor, trader, homeowner, 401(k) holder, or CEO-you are bound to feel the impact of Alan Greenspan's "Age of Ignorance" for years to come.

According to MSN Money columnist William A. Fleckenstein, Greenspan's nearly 19-year career as Federal Reserve Chairman is even worse than anyone imagined. Labeled "Mr. Bubble" by the New York Times, Greenspan was nothing less than a serial bubble blower with a long history of bad decision-making. His famous "Greenspan Put" fueled the perception of a Goldilocks economy-but, as this explosive expos reveals, the bear has finally caught up with Goldilocks.

Using transcripts of Greenspan's FOMC meetings as well as testimony before Congress, this eye-opening book delivers a timeline of his most devastating mistakes and weaves together the connection between every economic calamity of the past 19 years:

The stock market crash of 1987The Savings & Loan crisisThe collapse of Long Term Capital ManagementThe tech bubble of 2000The feared Y2K disasterThe credit bubble and real estate crisis of 2007

Fleckenstein explains just how far-reaching Greenspan's mess has been flung, and presents damning evidence that contradicts the former Fed chief's public naivet concerning shifts in the market and economy. He also points to a disturbing fact, that throughout his career, Greenspan not only made costly mistakes, but made the same ones-over and over again. And not only was he never able to recognize or admit to those mistakes, he constantly rewrote his own history to justify them.

Greenspan's Bubbles offers a lock-stock-and-barrel portrait of a flawed but fascinating man whose words and actions have led a whole generation astray, and whose legacy will continue to challenge us in the years ahead.

• Format: Hardcover
• Language: English
• ISBN: 0071591583
• ISBN13: 9780071591584
• Release Date: February 2008
• Publisher: McGraw-Hill Companies
• Length: 208 Pages
• Weight: 0.81 lbs.
• Dimensions: 0.8" x 5.7" x 8.3"

Customer Reviews

devastating

Here are some impressions I had: 1). My experience in reading the book exactly matched that of the reviewer who said it was slow going in the early chapters and then excellent and engaging in the middle and late chapters. The early part came across to me as muddling through the early part of Greenspan's reign in what I found to be a somewhat disjointed manner. Also, it seemed to me the author did not make a compelling case showing gross ineptitude on the part of Greenspan during that period. Probably there is not too strong a case for that. 2). As the story entered the mid to latter stage of the tech bubble and subsequent housing bubble, it became thoroughly engaging and I was unable to put the book down. And in this material the author built an unassailable case that Greenspan's performed his job with virtually total incompetence. And, as the author amply substantiates, Greenspan adds insult to injury by promiscuously redefining himself and his past in order to immunize himself from responsibilty for the wreckage he has caused to the economy. 3). Judging from the other reviews, there is unanimous agreement as to Greenspan's incompetence. The one main controversy is to what extent the Fed Chairman is responsible for the bubbles and to what extent are other players (e.g. other regulatory agencies, investors, analysts, speculators, whatever) responsible. I would say on this matter that the author to some degree took it as self-evident that the Fed Chairman's actions were the primary causes of the bubbles. That is not unreasonable since it is widely accepted that the powers wielded by the Federal Reserve have a dominant influence on the macroeconomy. (certainly, that is the INTENT of those who created the Fed) However, it does seem that it is a legitimate matter for debate as to whether, for example, certain interest rate shifts during the tech bubble were as significant as Fleckenstein appears to believe. 4). A couple of interesting issues that were raised in the book are: a). The adjustments made to Consumer Price Index formulas that are highly suspect. Fleckenstein indicates that three changes were made. One was to go from arithmetic to geometric compounding, which seems to me to be a correct change to have been made. The other two are questionable: - Substitution - Hedonics I don't fully understand how those two are implemented but both do appear highly suspect. b). Much of the basis for Greenspan's nonchalant attitude toward the tech bubble was his notion that it was justified by massive productivity growth created through the use of new technology. Fleckenstein provided persuasive evidence that that productivity growth was in fact bogus, based on faulty analysis. I knew essentially nothing about the Fed back then, and so most of the events discussed in the book are ones I was not particularly tuned into at the time, but I do remember all the brouhaha about the massive productivity gains we were experiencing, and I guess

My two cents

Most of the other reviewers got it right. Greenspan is either a completely incompetent central banker or a very despicable human being. He messed up everything; we are simply waiting to pay the very high price. Those of us who have been reading Bill's writing since the late 90's will readily attest to Bill's efforts to pull back the curtain on Greenspan. These long-time readers will find this a pleasant walk down memory lane; there is nothing new, but the collection of Greenspan quotes is still awe inspiring when viewed in total. For those who wonder why the reviewers all seem to hate Greenspan so much, read the book. The man was a menace to society, and history will write a very ugly chapter. I believe Bill's motivation was not money; he is probably very wealthy. His motivation was more likely to be, quite simply, to document Greenspan's Blunders for posterity.

The Morning After

"The reason I wrote this book was so that the average person could understand the scope of the housing bubble, and what its bursting was going to mean and...where blame should be placed...at Greenspan's Fed, specifically," posits William Fleckenstein, who has keenly observed Mr. Greenspan's comments and actions in lucid daily commentary on the economic environment and investing practice for over a decade. By the end of Fleckenstein's crisp account, I craved that "The Maestro" had succeeded a fraction as well in HIS calling: Fleckenstein makes the story accessible to the average American, and his clarity stands in bold contrast with Greenspan's oft-obfuscating "Greenspeak." Given the current state of the housing market, readers of 'Greenspan's Bubbles' might be prompted to ask whether Greenspan feels any culpability for luring unsuspecting homeowners into adjustable mortgage rates. Fleckenstein observes, "Greenspan was extolling the virtues of floating rate mortgages when interest rates were at the lowest they had been in over 50 years," suggesting that Greenspan ought to, even if he does not. Certainly, today Greenspan expects Americans to believe he really didn't mean what he said when he endorsed ARMS. However, this book asserts that Greenspan blew serial bubbles in the stock market and real estate by keeping rates too low too long, thereby inviting reckless speculation. Fleckenstein likens normal cycles of economic ups and downs to going to a party, imbibing in a few drinks, and feeling kind of shaky the next day. However, Greenspan's take on the economy was to entice Americans to throw down fifty metaphorical shots of tequila to keep the party going. There's got to be a morning after, and 'Greenspan's Bubbles' helped me connect the dots between Greenspan's career at the Fed and the pain of duped Americans losing their homes, well-qualified hopeful homebuyers being shut out from credit, and the lowering status of the U.S. dollar- which has been the world's reserve currency for almost one-hundred years. "Lucky" for him he squeaked through his tenure right before the tequila hit the fan.

No One Says It Quite Like Fleck (or nails it so succinctly) . . .

Bill Fleckenstein makes it painfully clear that former Federal Reserve Chairman Alan Greenspan bumbled our economy as badly as he mumbled his own words. This book is an eye-opener in that it systematically exposes Greenspan's own hubris and successive wrong turns in managing the U.S. economy. Oops! Too late to take it back. The dollar is on its way to parity with the peso and the Fed is caught with little wiggle-room to keep the economy propped up in the face of two bubble busts. Managing a $13 trillion economy is an awesome responsibility. Surely we need a Fed Chairman who has exhaustively studied fiscal history and who can recognize important inflection points so that he can maintain economic moderation and stability. Sadly for us, Greenspan wasn't that guy. It was Greenspan's loose monetary policies - the Greenspan Put! - that spawned the right conditions for bubble development. And we didn't have just one bubble -- the stock market bubble that burst in 2000 was the first we'd had in over fifty years -- we had two, a stock market bubble AND a real estate bubble . . . and they were both enormous! We'll be feeling the effects of Greenspan's irresponsibility for a long time to come. As Fleckenstein explains so well, the current subprime debacle is yet another example of bubble fallout. This is why this book is invaluable. If you truly want to process how we arrived at this juncture, then here's your guide. Fleckenstein is a colorful writer. For what could have been a boring, complex, and even technical dissertation, Fleckenstein manages to make it understandable in a wit + candor style. The first two chapters are somewhat tedious and might I even suggest, "numbing," but don't let that dissuade you. The content rich middle and concluding chapters absolutely sing. The book is informative, thought-provoking, and just the right amount of information to digest. To me, that's five-star worthy.

Finally, the Truth!

Many laud Alan Greenspan as a master of the modern economy. Fleckenstein, however, sees Greenspan as nothing less than a serial bubble-blower - the market crash of '87, the Savings and Loan crisis, the crash of the Russian ruble and Long Term Capital Management, the 2000 tech bubble, the supposed Y2K disaster, and the credit bubble and real estate crisis of 2007. Prior to Greenspan's arrival, excluding the brief mania for commodities and precious metals in late '79 and early '80, the U.S. had been bubble-free for over 50 years. "Greenspan's Bubbles" points out that he supported S & L deregulation as a paid consultant for Lincoln S & L (costing over $100 billion for taxpayers to bail out). During his '87 confirmation, Senator Proximire pointed out that Greenspan's forecasts at the Council of Economic Advisors were way off, and in some years, the worst of all. Greenspan helped cause the mid-90's stock market bubble by lowering interest rates when it was not required; instead of admitting this as a mistake, Greenspan declared the market's level as indicative of Wall Street's wisdom on new ways to value stocks. Further acerbating the situation, Greenspan participated in and led efforts to change inflation measures (lower), thus appearing to call for less money tightening. Contrary to Greenspan, former Fed Chairman Paul Volcker observed in 1999 that the stock market's growth was dependent on 50 stocks - half of which had never reported any earnings. (Definitely a "bubble-seer.") In 2005 Volcker also pointed out that the housing market had become a vehicle for borrowing as much as a source of financial security. Greenspan, however, saw rising subprime loans as the "benefit" of increased lender productivity through the use of new technology. Fleckenstein concludes that Greenspan created a 24% drop in the dollar's value vs. a basket of other currencies, and a greater increase in the price of oil than most other nations had experienced (eg. 3X increase in European nations, vs. 5X in the U.S. over a 5 year period). Another unhappy income (for most) was the transfer of wealth from the middle-income segment to the highest income group. A lasting legacy of Greenspan is that investors have learned to "invest" without fear - the Federal Reserve will bail them out if enough money is involved. And monetary policy has become more set by populist demand (eg. the rants of Jim Cramer, Lawrence Kudlow, Steve Forbes, and the greedy Wall Street brokers) than rationality.