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Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars |  |
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Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars | |
Bubble Man's thesis is simple and direct: From 1996 on, Greenspan knew that equity markets were overheated and should have taken concerted action to cool them. In fact, he gave one speech in December of that year questioning the "irrational exuberance" of investors but never followed up to pop the bubble. Indeed, by 1999, Greenspan had become an out-and-out cheerleader of the so-called New Economy, in which labor productivity was rising so quickly that inflationary pressures were of minimal concern. As the steward of America's financial markets, he should have known better, Hartcher argues, but in the face of jawboning from both Congress and the White House, Greenspan buckled under and took the easy way out.
Hartcher's evidence for most of these assertions is a pretty thin gruel. In the transcript of a September 1996 meeting of the Federal Open Market Committee, Greenspan says that he thought stocks were experiencing a bubble market. Hartcher -- the former Washington bureau chief of the Australian Financial Review, now political editor of the Sydney Morning Herald -- takes this as ironclad evidence that Greenspan knew that something was rotten in the state of Wall Street but chose to do nothing.
The problem is that Bubble Man assumes that, at the moment Greenspan uttered that sentence, his opinion was both fixed and true. Neither assertion holds up. Hartcher fails to demonstrate that Greenspan ever repeated his comment at any later Fed meeting. The record suggests that Greenspan was worried about asset-price inflation -- that is, skyrocketing stock and housing prices. Furthermore, he was not entirely sure he should be worried about it. As the 1990s progressed, he continually sought out diverse views on this point. The fact that his infamous caution against "irrational exuberance" was framed as a question symbolizes the extent of his uncertainty.
As it turns out, Greenspan was right to be unsure. For all the talk about stock market bubbles, the returns on tech stocks in the decade since 1996 have proven way higher than the historical average. Price-to-earnings ratios are now higher than the historical average, albeit significantly lower than they were at the peak of the dot-com era. When one takes a step back, Hartcher's case falls apart completely. To assert that Greenspan's Fed was the primary regulatory authority responsible for the dot-com bubble requires the reader to swallow an awful lot. For one thing, you need to accept that other government agencies -- say, the Securities and Exchange Commission or the Treasury Department -- should be completely exonerated for their roles in the mishap; for another, you need to accept that the Fed would somehow be able to deflate stock prices without harming the real economy.
Greenspan's response in 2005 to skyrocketing housing values demonstrates another difficulty with Hartcher's broadside. Despite Greenspan's speeches about the "frothiness" of the housing market and the Fed's repeated increases of short-term interest rates, the Fed has had a minimal impact on both housing prices and long-term interest rates. Even if Greenspan had wanted to lower stock prices, it is not clear, in retrospect, that he would have succeeded.
Bubble Man does contain some interesting questions. How can a central bank simultaneously manage inflation in both the goods market and the asset market? How can asset-price inflation be distinguished from a genuine shift in the real value of assets? Unfortunately, Hartcher never digs into these questions. Instead, he seems determined to write a literary retort to Maestro, Bob Woodward's 2000 paean to Greenspan's financial acumen. Every trait that Woodward praises, Hartcher scorns. For example, Woodward paints Greenspan's political network as essential for doing his job; to Hartcher, the chairman's contacts are merely evidence that Greenspan was like every other politician, subject to pressure and eager to be liked.
By the end of the book, Hartcher seems determined to throw as much mud at Greenspan as possible. Some of this is amusing (Greenspan was a recipient of the Enron Award for Public Service), but most of the time he overreaches. After all, blaming Greenspan for all day traders is like blaming Bill Clinton for all adulterers.
A central irony of Bubble Man is that it is Greenspan's aura as the master of markets that gives Hartcher's accusations any resonance at all. Greenspan was so adroit at handling so many aspects of his job that it seems plausible that he should have handled the dot-com hysteria as well. Greenspan is not perfect, but he's no bubble man.
Reviewed by Daniel W. Drezner
Copyright 2006, The Washington Post. All Rights Reserved.
From Booklist
In January 2006, Alan Greenspan stepped down as chairman of the Federal Reserve Board after an unprecedented 19-year term. Remarkably, although Greenspan was often cited as the most powerful man in the world, only 0.2 percent of the U.S. population know what he did. Hartcher, former Washington Bureau chief and associate editor of the Australian Financial Review, explains the man and his function in a way that even the financially uninitiated will comprehend. The angle here is that Greenspan knowingly presided over and even encouraged the greatest stock-market bubble in history, which consumed $7 trillion of investor funds, yet he emerged with his reputation unscathed. Greenspan, who rocked world markets in 1996 with his seemingly innocuous but now famous phrase "irrational exuberance," failed to follow through on any real controls over the market, bowing to political pressure and even cheering the market on as it rose into nosebleed territory at the end of the millennium. Although Hartcher lays much blame at Greenspan's doorstep, he's never too hard on the man. David Siegfried
Copyright © American Library Association. All rights reserved
