GREENSPAN'S BUBBLES: THE AGE OF IGNORANCE AT THE FEDERAL RESERVE Hardcover – Feb 6 2008
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From the Back Cover
PRAISE FORGREENSPAN'S BUBBLES
“After reading Greenspan's Bubbles you will have no respect for the Fed! It's a must-read…in it, the authors demystify the belief that the Fed 'solves' problems when, in fact, it is directly responsible for a colossal destruction of wealth of the median household and of the U.S. currency through its irresponsible monetary policies.”
-Marc Faber, editor of the Gloom, Boom & Doom Report
“Greenspan for Mt. Rushmore? Not if Bill Fleckenstein has anything to say about it.”
-James Grant, editor of Grant's Interest Rate Observer
“In his typically engaging style, Bill Fleckenstein pops the Greenspan bubble…presenting compelling and convincing evidence that the former Fed chief got us into this mess...”
-Herb Greenberg, Senior Columnist, MarketWatch.com
“Before Ben Bernake shovels more cash into the U.S.'s money trap, he should read Greenspan's Bubbles, a damning account of how his predecessor inflated two asset bubbles that mutated into $11 trillion in home mortgage debt.”
“Alan Greenspan was dubbed history's greatest Federal Reserve chairman upon his retirement in 2006, but the housing bust is prompting renewed criticism of his laissez-faire brand of monetary policy. Hedge fund manager William Fleckenstein is among the loudest critics. Fleckenstein is the author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. He views Greenspan's legacy as a litany of too-low-for-too-long interest rates that created the dot-com and housing bubbles.”
--US News & World Report
“I suggest that you read Greenspan's Bubbles, a recent book by William Fleckenstein. It'll knock your socks off.”
--Copley News Service
About the Author
William A. Fleckenstein is president of Fleckenstein Capital, a money management firm based in Seattle. He writes a daily Market Rap column for his Web site, Fleckensteincapital.com, as well as the popular column Contrarian Chronicles for MSN Money.
Frederick Sheehan is a former Director of Asset Allocation Services at John Hancock Financial Services. He has written for Marc Faber's Gloom, Boom & Doom Report, Whiskey & Gunpowder, and the Prudent Bear Web sites.
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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.
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.
"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.
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:
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 it was Greenspan who was the one most vocally peddling that (apparently erroneous- as just about everything else he has ever said) message.
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