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Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars

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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.

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.

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

There's that old saying about debt: If you owe the bank a thousand dollars it will hound you into the courts to get recompense, but if you owe it $1 million it will treat you as one of its most valued customers.

And if you owe $7 trillion? Providing you are Alan Greenspan, chairman of the United States Federal Reserve, presidents and potentates will dance attendance, the world will hang on your every word and in January you will retire with your reputation intact, hailed as one of the great makes of the last quarter of a century.

Even a supposedly critical biographer will let you off lightly, because Peter Hartcher's book does not live up to its aggressive title. It is almost as if having prepared the ground, he lost his nerve about 100 pages in, overwhelmed by the sheer refulgence of his over-mighty subject.

Instead there are other villains to blame on the road to the stock market crash and the `tech wreck' that marked the first years of this century - credulous investors, plundering CEOs, cheer-leading media pundits - over which Greenspan presided too benignly and failed to control. The mark this book give his performance is `could do better' when it should have been `deserves expulsion'.

The most damaging allegation against Greenspan, a lifelong Republican, that his decisions became ever more political the longer he remained in the post, serving the interests of the Clinton, then the Bush administrations rather than the economic wellbeing of the nation as a whole, is made but not rammed home with sufficient vigour.

Much is made of a speech to the American Enterprise Institute in late 1996 shortly after he had satisfied himself that the stock market was over inflating - in the parlance of the industry a bubble was forming and unless it could be deflated gently it would burst, with potentially catastrophic results.

In his address he used the term "irrational exuberance" to describe the mood of the day. The immediate effect was dramatic. The Dow Jones fell, but the reaction from the market, investors and politicians was furious. Greenspan went into his shell, did nothing to follow up, and after a few weeks the party resumed.

Hartcher writes: "Greenspan had been persuaded that the politics of the situation were too difficult. He appeared to have lost all interest in addressing the bubble. Instead of acting to mitigate it, the Fed started to brace for the crash that it knew was to come when the bubble collapsed."

These are astonishing words. The chairman of the US Federal Reserve was adrift on a storm-tossed sea, doing nothing to avert a course that would lead to the biggest loss of wealth in history. The very nature of the free market, indeed of capitalism itself as a viable framework for the constitutional right to the pursuit of happiness, was being called into question.

Hartcher, who reported on the American economic scene for three years as Washington Bureau chief and associate editor of the Australian Financial Review, has nevertheless produced a good read, packed with anecdotes, gossip and humour, often revolving around Greenspan's circumambient way of answering questions and including this description by President Clinton's first Treasury Secretary, Robert Rubin:

"Alan would doff his cap in the direction of a question, even if, on occasion, it was somewhat off the mark. `That's an interesting observation that you make, Senator, about the earth being flat,' he'd say. `If I may, let me rephrase the question.'"

The author sums up Greenspan's dilemma in the final pages when he notes the market system has been susceptible to `irrational exuberance' throughout its history (the South Sea Bubble and the 1929 Wall Street crash are just two examples). "This is the challenge of the times, and it is the challenge that Alan Greenspan prepared to meet in 1996 before retreating timidly in the face of political difficulty. Instead of fulfilling his mandate even in the face of opposition, he sought to hide himself in the orthodoxy of the day and the madness of the crowd."

Yet he goes into retirement honoured as a brilliant, powerful and successful central banker. There will no doubt be other books that will eventually define his proper place in history, but this is not one of them.

This is one of two sources that helped me to understand where the value got lost in the tech crash. The value existed in our minds and we believed what we were told. The other source I'd recommend is actually an old movie, The Wizard of Oz.

Great Book! It show how the American people were totally naive on allowing this so called hero of the American Tech Boom and Housing Bubble to be allowed to destroy the American dollar and thus the entire economy. Not only did he create those bubbles he had the audacity in his book to fail to admit that he is the one responsible for what is happening to the dollar today. The man can't address the truth and refuses to take responsibility for what he did during his nineteen years as the head of the Fed. This book should (hopefully) open the eyes of his adoring followers to see what this man is really like. He is totally delusional and ignorant of economics. To think he was a follower of Ayn Rand and a gold advocate in the 1960s is beyond understanding. If you look at his picture I think anyone can see the hooks left in his lips from politicians leading him to do their bidding. History will not look favorably upon this man. GREAT BOOK! I HIGHLY RECOMMEND IT! It was very eye opening to me

Hartcher(H) makes the case that the primary responsibility for the crash of the stock markets, in the wake of the collapse of the dot com companies in 2000-2001,rests with Alan Greenspan.Hartcher correctly notes that Greenspan's December 5, 1996 comment about the " irrational exuberance " of the American stock markets means that Greenspan was clearly aware that a bubble had formed .Of course,the bubble had been forming since early 1993.Greenspan's statement, then, is a statement of fact.However,it doesn't follow that Greenspan ,acting alone as FED chairman,could have prevented the collapse that was sure to follow.Hartcher's conclusion ,therefore,that Grenspan's " do nothing " approach is primarily responsible for the bubbble's collapse,doesn't follow.This is because H ignores the other important regulatory agencies that would all have had to be taking a proactive approach simultaneously ,in concert with Greenspan,to deflate the bubble before it crashed .These other agencies are the Securities and Exchange Commission(SEC),the Comptroller of the Currency,and the Federal Deposit Insurance Corporation(FDIC).None of these other agencies attempted to use the powers available to them to try to stop banks from pumping up the bubble by making loans available for highly speculative, leveraged buyout deals or dot com investments to firms that had never made a profit in their lives,only losses.Greenspan can be criticized for not using his " jawboning" capabilities to constantly put the spotlight on the problem.Instead,he toned down his criticisms.However,he bears,at worst,only a small part of the blame for this collapse.This collapse is primarily due to the financial deregulation that started back in the last 2 years of the Carter administration.


Greenspan himself, and/or the Federal Reserve System itself,acting through the Federal Open Market Committee,a quasi public,quasi private agency that usually puts the private interests of the commercial banks above the public interest of American citizens,can't be singled out as ,for instance,R Batra does in another book that is heavily critical of Greenspan,being primarily responsible for not dealing with the Dot com bubble.The problem is much more fundamental.It is the prevention of bubbles in the first place that should be the goal of public policy.This requires that the Securities and Exchange Commission(SEC) have a strong regulator,such as Bill Casey,on the watch to prevent the Wall Street crowd of speculators from packaging/selling their junk bonds or subprime mortgage loans or dot com stocks based on faked and phony accounting data .Of course,this has not been the case for over 25 years.It requires a knowledgeable Comptroller of the Currency on watch to try and backup the SEC.It also requires a Fed that enforces basic creditworthiness standards that must be adhered to by the private commercial banking industry.

Adam Smith got it all right back in 1776-First,no loans are to be made to projectors(the speculators and rentiers of J M Keynes's General Theory),prodigals,and imprudent risk takers.Such loans will result in the aggregate savings of a nation being wasted and destoyed.Loans are to be made only to the sober people who will use it for productive,job creating purposes.The loans can't be made to support greenmail(T Boone Pickins and La Mesa Oil)or leveraged buyouts or margin account loans .The central bank must have the power to prevent such loans from being made ,no matter how profitable they are for the private commercial banks.Second,discretionary monetary policy must be eliminated.In its place you substitute Smith's rule- the long run rate of interest must be permanently fixed at a low level a little bit above the prime rate.[See pp.280-340,especially the conclusions on pp.339-340, of the Wealth of Nations,1776,Modern Library(Cannan)edition.Interestingly,these are the same conclusions reached by Keynes in the GT in Part V of that book.]


It is evident that the same type of Wall Street inspired and led speculator approach again threatens Main Street ,in the form of the subprime mortgage loan mess,that created the crash of 2000-2002.Unfortunately,nothing has changed since then.The same type of loan approach(35 % of bank loans in certain state housing markets were made to individuals whom the banks knew were well know speculator flippers)has been followed.The result will be the same.The failure to follow the wisdom of Adam Smith and learn the lessons of history means that another crash is in the works.