Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars (Hardcover)

~ (Author) "The US demonstrated the triumph of capitalism over communism in the climactic decade of the twentieth century..." (more)
Key Phrases: traditional inflation, stockmarket investors, official interest rates, Alan Greenspan, Wall Street, Federal Reserve (more...)

Editorial Reviews

From Publishers Weekly

Former Federal Reserve chairman Alan Greenspan's famous 1996 pronouncement that an "irrational exuberance" had gripped the American stock market was premature; the markets continued to climb, reaching an exceptional peak in March 2000 before sliding into a $7.8 trillion collapse. Hartcher (author of The Ministry and an editor at the Sydney Morning Herald) turns his attention to the culprits behind "the madness that was the Great American Bubble"—what was in purely monetary terms, the single costliest event in American history. The author blames corporations, Wall Street, the government and the media, but chief among his targets is Greenspan himself, whom Hartcher indicts for keeping interest rates low and investors' attitudes cheery. In this account, Greenspan's retreat from the critical position he staked in 1996, in the face of political opposition and public mania, earns him a decisive share of responsibility for the bubble and its consequences. Equal parts revisionist history, economics lesson and admonitory polemic, the book briskly moves through complex concepts with illustrative examples and straightforward analysis. While the text is occasionally repetitive (e.g., frequent mention of the crash of 1929), Hartcher's brisk, lively approach transforms a potentially dry dissection of monetary policy into an engaging cautionary tale. (May)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

From The Washington Post

The subtitle of Bubble Man symbolizes the many flaws in Peter Hartcher's jeremiad against Alan Greenspan and the dot-com hysteria that the former Federal Reserve chairman allegedly abetted. The "Missing 7 Trillion Dollars" refers to the losses that stockholders incurred in the three years after the late-1990s stock market bubble collapsed. Throughout the book, Hartcher argues that Greenspan is to blame for those losses -- until the epilogue, in which Hartcher acknowledges that in the three years after those three years, a market upswing recovered "nine dollars out of every ten lost." As Gilda Radner's Emily Litella famously put it, "Never mind."

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.

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Product Details

• Hardcover: 208 pages
• Publisher: W. W. Norton; 1 edition (May 22, 2006)
• Language: English
• ISBN-10: 0393062252
• ISBN-13: 978-0641961304
• Product Dimensions: 8.2 x 5.4 x 0.8 inches
• Shipping Weight: 12.8 ounces (View shipping rates and policies)
• Average Customer Review: 3.6 out of 5 stars  See all reviews (7 customer reviews)
• Amazon.com Sales Rank: #612,044 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

24 of 27 people found the following review helpful:

4.0 out of 5 stars Whatever financial and political elites want, July 13, 2006

By	J. Grattan "book reviewer" (Lawrenceville, GA USA) - See all my reviews (TOP 500 REVIEWER)    (REAL NAME)

The capitalism described by Adam Smith in 1776 has almost nothing to do with the workings of 21st century corporate, and largely financial, capitalism driven and controlled by huge players and institutions, like the New York Stock Exchange. The little guy instead of being the essential player and equal of his fellows postulated by Smith is virtually helpless against these monoliths. But of course, these actual workings are not really talked about, even denied by capitalist propagandists. The Federal Reserve System is supposed to contain some of the excesses of corporate capitalism, not the least of which is maintaining appearances of integrity. This book is a statement on how well Alan Greenspan, the chairman of the Federal Reserve System from 1987-2006 dealt with economic issues under his purview, especially the stock market bubble from 1996-2001.

Alan Greenspan and other members of the FOMC knew that the valuation of the stock market was out of control as early as 1996, Greenspan even making a speech where the "irrational exuberance" of the market was alluded to. But he was unwilling to follow up on his observations. Instead, Greenspan actually lowered interest rates and did not increase margin lending requirements for buying securities, which fueled the bubble. The author makes it perfectly clear that Greenspan was a political player in Washington, even to the extent of compromising his duties as chairman of the Fed. Squeezed by the Clinton administration and by Congress, Greenspan continually lent credibility to the incredible run-up of the market, engaging in a lot esoteric discussion about a new economic era, etc.

There is a distinction made between the impact of inflation in essential goods and services versus that in financial instruments with some validity, especially in so far as the financial instruments do not have broad impacts. But that is now hardly the case with the stock market. The American public has actually been forced into the stock market with the evisceration of pension plans and the establishment of 401K plans that are heavily weighted toward stock purchase. Actually few Americans have the wherewithal to be individual stock purchasers operating through brokers; they are dependent upon mutual fund managers navigating market forces. The author chides Americans for flooding the markets with expectations of vast profits without acknowledging how few options are actually available for those having 401K funds deducted from paychecks.

The author performs a service in taking the luster off of the Greenspan shine; he became more of a political operative than a central banker. But even had Greenspan moved to contain the stock market bubble, larger issues remain regarding the stock market and its impact on even average-income Americans. Legislation is absolutely required to limit the speculative nature of the stock market and to emphasize dividends based on corporate earnings. The idea that someone should be able to cash in on a grossly inflated financial instrument that has little connection to a viable business entity is absurd and is harmful to the economy and society. Furthermore, 401K plans are much too limited. If corporate America wants to abandon its employees in terms of retirement income, employees should have far more options and devices for saving money. For example, why is it that the ordinary individual cannot tap directly into tax-free municipal and corporate bonds? Of course, the answer is that 401K money is the plaything of securities experts and their elaborate computer systems. A solid retirement system is the last concern of financial elites, who, of course, have vast sway in the election of politicians who, in turn, are more than willing to maintain the status quo.

Basically, the problems with American, corporate capitalism are far greater than a Fed chairman pandering to politicians and other elites. It would be wrong to maintain that only had Greenspan performed his required duties as a central banker that all would have gone well for the average American in his or her contact with the playground of the rich, the various stock exchanges. The author also discusses the current housing bubble, fueled ironically by the low interest rates instituted after the stock market bubble collapse, and the massive trade imbalance. The book is definitely informative as far as it goes.

10 of 10 people found the following review helpful:

4.0 out of 5 stars The Human Element, June 29, 2006

By	Justice Litle (Nevada) - See all my reviews (REAL NAME)

If you want the full picture of the great dotcom debacle, you can get pretty close with four books: 'Origins of the Crash," by Roger Lowenstein; "The New Reality of Wall Street," by Don Coxe; "Extraordinary Popular Delusions & The Madness of Crowds," by Charles Mackay; and now "Bubble Man," by Peter Hartcher, to round out the bunch.

Lowenstein looks at the crash through the lens of corporate excess, tracing a rampant culture of greed and deceit to its "origins" of many years earlier. Coxe gives insight into "triple waterfalls"-the sweeping market transitions, typically measured in decades, that define capital migration. Mackay examines the lunacy that ensues when the average investor gets swept up by hysteria, drawing timeless lessons from the adventures of John Law.

And now Hartcher offers up the final puzzle piece, laying blame at the feet of the man who saw the great bubble develop, privately acknowledged its presence, decided to do nothing, pumped it further, cheered it on, and then refused to take responsibility when it burst: Alan Greenspan.

The opening chapters of Bubble Man are mainly a historical account of the big crash and the causal events leading up to it. You may find it a bit late for yet another postmortem, as I did, but fortunately the details go quickly and the telling was nicely done. Just as I was about to write the book off as another mildly interesting but forgettable read, Hartcher took up the subject of Greenspan the man, the operator, the human being... and from then on I couldn't put it down.

Before reading this book, I had a minor inkling but no real grasp of how brilliant a politician and truly connected a player Greenspan actually was. In terms of subtle calculation, ego manipulation and natural alignment to power, he really was a "Maestro" of the highest order. Greenspan's subordinates were in awe of his mind-boggling command of policy minutia, inexhaustible reserves of patience, and superhuman networking skills. In Greenspan's defense, nor did I previously grasp how much political pressure a Fed Chairman is actually under. The notion of Fed independence is laughable, an idealistic notion crushed by the realpolitik of the real world.

Detective-like, what Hartcher does best is skillfully reconstruct the scene of the crime... the play by play of the Chairman's moral downfall. We retrace the painful missteps that Greenspan learned from early in his career, and from there observe how he shaped and crafted his political life into an exquisite work of art. The emotional pinnacle of the book is the "irrational exuberance" moment: the point at which Greenspan must decide whether to fulfill his duty as leader and protector, and risk sacrificing all he holds dear, or preserve popularity at the cost of his soul. We know which path he chose. If Hartcher's account were made into a movie it could be an Oliver Stone docu-drama, with all the elements of a Greek tragedy and the conflicted Chairman at center stage.

As Bubble Man demonstrates with great attention to detail, the brilliant Maestro turned out to be a coward. In a job that required backbone above all, Greenspan failed us. (Though we the people, by way of our elected politicians, first failed him.) To make things worse, once the decision to sell out was made, all sense of propriety went out the window. Greenspan expressed bubble concerns as early as 1996, but later denied those concerns completely. Instead of providing sober adult supervision, he cheered Wall Street's madness from 1996 on. Instead of encouraging thoughtful discussion at policy meetings, he neutered debate as much as possible. Instead of trying to maintain political objectivity, he cut implicit deals and grew closer to the White House with each passing year. By electing to go with the flow when he should have been fighting it, this banker's banker wound up a rock star, an economic hero "so square he was cool," and to those Wall Streeters who made millions from his easy money policies, a god.

Greenspan's eventual bitter defense--that bubbles cannot be spotted in advance--was self-serving, self-contradicting, and something he probably did not believe himself. His successor, Ben Bernanke, has inherited an unbelievable mess--one that is probably too big to be cleaned up. Hartcher's clear-eyed account, and others to follow, will hopefully inform history and help set the record straight on the Bubble Man's true legacy.

12 of 14 people found the following review helpful:

4.0 out of 5 stars Greenspan's Legacy!, July 15, 2006

By	Loyd E. Eskildson "Pragmatist" (Phoenix, AZ.) - See all my reviews (TOP 100 REVIEWER)    (REAL NAME)

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