Book Review: Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve by William A. Fleckenstein with Frederick Sheehan. McGraw Hill ● 2008 ● 194 pages ● $21.95
Have you lost your job, house, or retirement nest egg? Does your Social Security check buy less than you thought it would? Do the economic stresses currently pervading the atmosphere give you insomnia, impotence, and alopecia? According to money manager and investment columnist William Fleckenstein (“with,” whatever that means, Frederick Sheehan), the nation’s financial woes are due to the bumblings of Alan Greenspan, the slow-witted former chairman of the Federal Reserve. Greenspan, they claim, single-handedly caused the tech bubble of the late 1990s and the current subprime mortgage debacle. The dimwit did so by forcing interest rates too low for too long because he believed too fervently in the productivity advances of the so-called “new economy,” particularly the revolution in cheap networked computing. “Easy Al” also signaled Wall Street firms that they should go hog wild because the infamous “Greenspan put” would save them if they stumbled. Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Merrill Lynch, and others were happy to oblige, running up huge profits before going quietly into that dark night, sticking the American taxpayer with their “final expenses.”
There is an element of truth to all this. The real world in real time is a confusing and complex place and the data and models available to central bankers are limited, lagged, and often deeply flawed, so nobody should expect perfection. Stabilizing financial markets to prevent decreases in output and employment comes at the dear cost of increasing moral hazard and risk-taking. Greenspan exaggerated the risks of a Y2K meltdown and failed to detect, much less stop, the irrationality at the heart of the dotcom and housing bubbles. As one would expect, his recently published memoirs are skewed in his favor.
Fleckenstein and Sheehan’s book is perhaps even more skewed, however, though of course in the opposite direction. Much exaggeration and sensationalism pervade the book, which contains nothing that anyone familiar with Fleckenstein’s columns, which are quoted as some length in the book, will be surprised by. The tone throughout is such that neutral observers will suspect that personal animus was a major motivation for the book’s creation. The authors claim that “the evidence speaks for itself” (p. 187), yet they felt compelled to interject editorially, often several times, in every Greenspan passage they quote. In addition to being distracting, the intrusions sometimes display the authors’ rush to judgment. For example, when Greenspan says “we are getting increasing evidence that we are probably expensing items that really should be capitalized,” they interject “That is, they should be treated as an asset, not as an expense [p. 34, their emphasis].” In fact, Greenspan was arguing for a change in accounting standards (depreciating software like a capital expenditure) rather than restructuring balance sheets. In another embarrassing editorial insertion, the authors reveal their ignorance of the nature and importance of network externalities (p. 97). Elsewhere, they quote Greenspan out of context to make it appear that “he was flying by the seat of his pants” (p. 109), as if their book were a segment on some late night fake news program. Greenspan was certainly imperfect but he was far from the feckless moron they portray.
Greenspan’s Bubbles is simply too thin to adequately address twenty years of U.S. monetary history. (I read it cover to cover on the Acela between New Haven and Philadelphia.) The endnotes are few (only 21) and of little help to readers interested in substantiating the book’s most important claims, which is ironic given that the authors chastise Greenspan on the same grounds (p. 136). Bold assertions appear to be based on nothing more than FOMC transcripts, not interviews, beige books, or any number of other potentially illuminating source materials. The authors rightly point out that financial history is too often neglected but then ignore it themselves, save for short and hackneyed allusions to the Tulip Mania and the South Sea Bubble. They know that interest rates are important to their story but fail to make the critical distinction between nominal and real (inflation-adjusted) rates. To make the most recent housing bubble appear of unprecedented proportions, they display a graph of nominal median U.S. house prices since 1972 (p. 172) instead of showing the percentage increases (or graphing the data on a log scale).
The book’s biggest flaw, though, is its failure to come to grips with the Fed’s power, or rather lack of it. Throughout, Fleckenstein and Sheehan argue that Greenspan could have controlled the financial system and indeed the entire economy if only he had possessed the prescience to, a claim that Greenspan himself repeatedly rejected. Fed chairmen, I submit, are more akin to a cowboy trying to stay atop a raging bull than a rider on a steeplechase horse. Markets, especially modern financial markets, are powerful forces. Central bankers can certainly influence them but they cannot control them in any significant way for long. Instead of blaming Greenspan for the nation’s economic ills, we might instead view him as yet another failed central planner. Despite the book’s subtitle, the Fed’s pre-Greenspan record is far from admirable. It performed poorly, especially in the 1930s and the 1970s, though not as badly as Soviet and Chinese planners sometimes did. What America needs is to reevaluate its fiscal, monetary, and regulatory systems and more generally to reexamine the ways in which government interacts with the economy. What it does not need are more diatribes.*
Robert E. Wright is Clinical Associate Professor of Economics at New York University’s Stern School of Business and the author of 10 books on financial and economic history, including most recently One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (2008).
*For an excellent study of U.S. monetary history and policy, see Robert L. Hetzel, The Monetary Policy of the Federal Reserve: A History (New York: Cambridge, 2008). It's a tough slog, but this is serious stuff that demands serious treatment.