Articles

Greenspan Bubbles

Book Review:

Greenspan's Bubbles - The Age of Ignorance at the Federal Reserve (Hardcover)
by William A. Fleckenstein with Frederick Sheeham (Authors)
Publisher: McGraw-Hill
ISBN: 978-0-07-159158-4

Napoleon once said that "History is the version of past events that people have decided to agree upon." Author William A. Fleckenstein is intent on having people agree that history should judge Alan Greenspan critically for the problems that he foisted upon the American public. In his book, Greenspan Bubbles - The Age of Ignorance at the Federal Reserve, Fleckenstein chooses his ammunition wisely in his attacks upon Greenspan; the publicly released notes from the Federal Reserve meetings and various public speeches given by Greenspan.

Fleckenstein's ire with Greenspan spans many years and his outspoken criticism of the disasters that were bound to come as a result of the punch bowl policies pursued at the Federal Reserve were well documented long before they came to pass. The book begins with an accounting of just how wrong Greenspan was long before he became Federal Reserve chairman. Those disasters were nothing compared to what resulted from the creation of the Greenspan put - the notion that you couldn't lose in the stock market because the Federal Reserve would necessarily ride to the rescue if the equity markets stumbled. The creation of this backstop by the Fed resulted in undue moral hazard and the creation of a stock market mania. Fleckenstein doesn't stop there though, he again shows how Greenspan even refused to acknowledge his incorrect assumptions about the productivity miracle and that in fact, productivity, like the gains in the equity markets, were a mirage and a laughable one at that.

The final portion of the book deals with the housing ATM and Greenspan's decision to address the equity bubble and collapse of the 1990's with a housing bubble in the early 2001-2003 period. His actions to push interest rates to the lowest levels in decades fueled yet another credit bubble on top of an already problem laden framework and eventually led to the debacle we have witnessed over the past two years in the equity markets.

Fleckenstein's argument that Greenspan "bailed out the world's largest equity bubble with the world's largest real estate bubble" is, in my opinion, irrefutable and the consequences are dire. We are living through the first part of that bubble burst currently and personally, I'm afraid there is more to come.

Fleckenstein has given the historians a solid rebuttal to Greenspan's version of history laid out in The Age of Turbulence: Adventures in a New World. If history is indeed a reflection of what people decide to agree upon they will most likely agree that Alan Greenspan and the Federal Reserve were a nightmare for our financial well being given Fleckenstein's succinct analysis and for that, we can only hope that future generations benefit from history rather than repeat the mistakes once more. I would recommend this book to anyone who cares to understand how we got into this financial mess we are witnessing in 2008-2009 and beyond.

 

Reviewed by L.A. Little on 5/03/2009