Bubble Man: Greenspan and the Missing 7 Trillion Dollars

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	• Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars Peter Hartcher W. W. Norton, 2006 - 208 pages average customer review:based on 7 reviews view larger image
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3.5 Stars-It wasn't just Greenspan alone

Hartcher(H) makes the case that the primary responsibility for the crash of the stock markets, in the wake of the collapse of the dot com companies in 2000-2001,rests with Alan Greenspan.Hartcher correctly notes that Greenspan's December 5, 1996 comment about the " irrational exuberance " of the American stock markets means that Greenspan was clearly aware that a bubble had formed .Of course,the bubble had been forming since early 1993.Greenspan's statement, then, is a statement of fact.However,it doesn't follow that Greenspan ,acting alone as FED chairman,could have prevented the collapse that was sure to follow.Hartcher's conclusion ,therefore,that Grenspan's " do nothing " approach is primarily responsible for the bubbble's collapse,doesn't follow.This is because H ignores the other important regulatory agencies that would all have had to be taking a proactive approach simultaneously ,in concert with Greenspan,to deflate the bubble before it crashed .These other agencies are the Securities and Exchange Commission(SEC),the Comptroller of the Currency,and the Federal Deposit Insurance Corporation(FDIC).None of these other agencies attempted to use the powers available to them to try to stop banks from pumping up the bubble by making loans available for highly speculative, leveraged buyout deals or dot com investments to firms that had never made a profit in their lives,only losses.Greenspan can be criticized for not using his " jawboning" capabilities to constantly put the spotlight on the problem.Instead,he toned down his criticisms.However,he bears,at worst,only a small part of the blame for this collapse.This collapse is primarily due to the financial deregulation that started back in the last 2 years of the Carter administration.

Greenspan himself, and/or the Federal Reserve System itself,acting through the Federal Open Market Committee,a quasi public,quasi private agency that usually puts the private interests of the commercial banks above the public interest of American citizens,can't be singled out as ,for instance,R Batra does in another book that is heavily critical of Greenspan,being primarily responsible for not dealing with the Dot com bubble.The problem is much more fundamental.It is the prevention of bubbles in the first place that should be the goal of public policy.This requires that the Securities and Exchange Commission(SEC) have a strong regulator,such as Bill Casey,on the watch to prevent the Wall Street crowd of speculators from packaging/selling their junk bonds or subprime mortgage loans or dot com stocks based on faked and phony accounting data .Of course,this has not been the case for over 25 years.It requires a knowledgeable Comptroller of the Currency on watch to try and backup the SEC.It also requires a Fed that enforces basic creditworthiness standards that must be adhered to by the private commercial banking industry.

Adam Smith got it all right back in 1776-First,no loans are to be made to projectors(the speculators and rentiers of J M Keynes's General Theory),prodigals,and imprudent risk takers.Such loans will result in the aggregate savings of a nation being wasted and destoyed.Loans are to be made only to the sober people who will use it for productive,job creating purposes.The loans can't be made to support greenmail(T Boone Pickins and La Mesa Oil)or leveraged buyouts or margin account loans .The central bank must have the power to prevent such loans from being made ,no matter how profitable they are for the private commercial banks.Second,discretionary monetary policy must be eliminated.In its place you substitute Smith's rule- the long run rate of interest must be permanently fixed at a low level a little bit above the prime rate.[See pp.280-340,especially the conclusions on pp.339-340, of the Wealth of Nations,1776,Modern Library(Cannan)edition.Interestingly,these are the same conclusions reached by Keynes in the GT in Part V of that book.]

It is evident that the same type of Wall Street inspired and led speculator approach again threatens Main Street ,in the form of the subprime mortgage loan mess,that created the crash of 2000-2002.Unfortunately,nothing has changed since then.The same type of loan approach(35 % of bank loans in certain state housing markets were made to individuals whom the banks knew were well know speculator flippers)has been followed.The result will be the same.The failure to follow the wisdom of Adam Smith and learn the lessons of history means that another crash is in the works.

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Greenspan's Legacy!

Since 1925 the average value of all America's shares has run 55% of GDP. Just before the 1929 crash it reached 81% - the highest level until 9/95's 82%. Then, in March of 2000 it broke through 183%. Meanwhile, from '97 to 2000, as stock prices rose 67%, total corporate profits fell 6%. (As for the myth that most Americans own lots of stock, in '98 the Fed found that the richest 20% owned 96% of all stocks.) Part of the problem was analysts - especially those tied to investment banks; corporations also contributed by smoothing earnings, stretching GAAP, ridiculous growth assumptions (eg. Internet volume would continue to double every 100 days), and even illegal accounting. But Greenspan was the biggest single problem (other than investors themselves who ignored the fact that there was a steady worsening in every financial ratio).

In December of 1996 he spoke of "irrational exuberance" in the stock market, creating stock drops around the world, including 144 in the DJIA. The subsequent outcry within Congress, and the recognition that President Clinton didn't trust him, led Greenspan to lose interest. (Experience convinced him that the Federal Reserve's independence was safe when either the President or Congress was upset - danger lurked when they both were.) Thus, instead of raising interest rates or margin limits, he basically did nothing, though staff forecasts began to incorporate expectations of 20% drops in the stock market. Making matters worse, Greenspan also endorsed the euphoria, attesting that we were in a "great historical transformation" with the Internet.

A second, similar bubble (housing) began prior to the market crash in 2000. In early post-WWII years the national housing stock was worth 60-70% of GDP; in '81 it hit 100%, and 140% in '04. It still is raging.

Subsequent to the 2000 crash, Greenspan has made a number of public exculpatory remarks - however, reviewing his private remarks within Federal Reserve Board meetings reveals obvious contradictions.

Greenspan has now left the Federal Reserve, but we are left with the new housing bubble, a stock market that still greatly exceeds historical ratios vs. GDP, a belief by many investors that stock and housing prices will continue to inflate (creating new bubbles), and the generally unrecognized problem of long-running deficits in the Federal government and our foreign trade. While "Bubble Man" is generally sympathetic to Greenspan's political plight during his tenure, it also makes clear that his lack of courage makes him primarily responsible

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Bubble Man: Greenspan and the Missing 7 Trillion Dollars

Great Book! It show how the American people were totally naive on allowing this so called hero of the American Tech Boom and Housing Bubble to be allowed to destroy the American dollar and thus the entire economy. Not only did he create those bubbles he had the audacity in his book to fail to admit that he is the one responsible for what is happening to the dollar today. The man can't address the truth and refuses to take responsibility for what he did during his nineteen years as the head of the Fed. This book should (hopefully) open the eyes of his adoring followers to see what this man is really like. He is totally delusional and ignorant of economics. To think he was a follower of Ayn Rand and a gold advocate in the 1960s is beyond understanding. If you look at his picture I think anyone can see the hooks left in his lips from politicians leading him to do their bidding. History will not look favorably upon this man. GREAT BOOK! I HIGHLY RECOMMEND IT! It was very eye opening to me

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readable but lacks key insights

The listed Washington Post review is a good one, especially the thoughtful questions at the end. How does one determine the difference between real and speculative changes in asset values (after all market price is market price)? How much impact do statements of the Fed have on markets? Should the Fed (in essence) speculate on when the market is "wrong" (isn't that substituting government judgement for the invisible hand of the market)? How exactly do interest rate changes propogate in the economy, the term structure, etc.?

A lot of the positive mystique about Greenspan was misplaced of course. But another popular book that just goes in the opposite direction of negativism, but is still plagued by "story-telling" versus economic issue analysis is not helpful.

Personally, I think a lot of the bubble was the result of naive business thinking about the Internet and the New Economy. I think that penetrated much further than people realize (including among the banks that were calling stuff "peices of crap"). Otherwise, the shorts would have killed the bubble earlier. The thing to think about is how much of a lesson have the MBA schools, McKinsey's and the like learned? Was this a one-time miscalculation or is there a deeper problem of a lack of true intellectual curiosity into business analysis? I think it's a deeper problem. And I think that it limits best capital allocation and company operation. Of course, this gets us into agency effects...

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reviews: page 1, 2

The destructive legacy of the most powerful man in the world: Alan Greenspan, chairman of the Federal Reserve.

In this eye-opening account, Peter Hartcher reexamines the achievements of Alan Greenspan, the man who presided over the 1990s stock-market bubble?perhaps the biggest speculative frenzy in history?and walked away when it came crashing down, with his reputation apparently unscathed. The U.S. economy is still struggling with the fallout from Greenspan's tenure, which includes a bubble in housing prices, a rocky recovery, and a vast federal deficit. His mistakes live on, as does the question of what to do about bubbles.

Hartcher's careful investigation of the most financially expensive event in American history results in a gripping tale of failed leadership, excess, and the bizarre politics behind the world's most powerful economy.

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