Books | Greenspan: a habit of self-delusion?

Books | Greenspan: a habit of self-delusion?
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First Published: Sun, Sep 28 2008. 11 14 PM IST

Updated: Sun, Sep 28 2008. 11 14 PM IST
This book states the argument of those who oppose Alan Greenspan, the former chair of the US Federal Reserve. William A. Fleckenstein and Frederick Sheehan, who sometimes seem to go a bit over the top in the intensity of their attacks, write that Greenspan, despite his reputation, was no “maestro”. In fact, they say, his career before he became Fed chair was full of blunders and even ethically questionable conduct. Greenspan’s forecasts as chair of the council of economic advisers were not simply wrong: In retrospect, they seem coloured by his tendency to say what was politically expedient.
Bubbles are uncommon and relatively easy to recognize. During tulip mania in the Netherlands in the 17th century, everyone seemed to be making a killing in tulip bulbs. Then quite suddenly, the bubble popped. No one wanted tulip bulbs anymore and many people faced financial ruin. Similarly, the stock market bubble of the Roaring 20s was exhilarating while it lasted, until it crashed and sent the world into the Great Depression. Demographics, technology, round-the-clock market coverage on cable television and artful accounting by US corporations all played their part in the speculative mania of the 1990s. However, the stock market bubble couldn’t have happened without Greenspan. He kept the money flowing with low interest rates.
Greenspan’s tenure at the helm of the Fed was consistent with his earlier actions. He presided over a regime of easy money that had dire consequences for the financial system in the US and, indeed, the entire world. Low interest rates on bank certificates of deposit and on bonds led people to the stock market in search of higher returns. One consequence of this was the equity market bubble of the 1990s. After the bubble burst, Greenspan continued to open the money spigots and the flood of liquidity went into the housing market, creating the biggest real estate bubble in American history.
Meanwhile, Greenspan ignored the fact that banks were getting more and more deeply involved in exotic, difficult to understand securities markets such as mortgage-backed securities.
The Fed first began loosening money in 1989 and continued the trend until 1992, overstimulating the financial markets. Greenspan claimed before a meeting of the Federal Open Market Committee (FOMC) that the rate increase had taken the air out of what might have become an equity market bubble. Then in Senate testimony in 1994, Greenspan explained that even though the economy had been doing well, he was worried about how the rate increase would affect the financial markets. In 1995, Greenspan’s Fed began to cut interest rates again.
Greenspan was aware that the housing market was approaching what some considered bubble proportions by 2002. However, he said that a real estate bubble was unlikely, denying it just as he had denied the stock market bubble. Instead of taking action to counter it, Greenspan worried about deflation—a concern raised publicly by Ben Bernanke, who eventually succeeded Greenspan as Fed chair. Although Americans were experiencing higher prices for a wide range of goods and services, the Fed chair was worried about falling prices and was providing easy money to help keep them from falling too far.
The authors describe Greenspan as a poor manager with a habit of either deception or self-delusion and draw heavily on extensive quotations from Greenspan’s testimony before the Congress and on minutes of the Federal Reserve Open Market Committee meetings to support their argument. Although getAbstract might wish for less fervour in this presentation, it forwards this book to policy- makers, financial services executives and others who wish to understand the downside of Greenspan’s policies and how he may have contributed to the US economy’s current dilemma.
Rolf Dobelli is the chairman of getAbstract.
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First Published: Sun, Sep 28 2008. 11 14 PM IST