Bearish on Greenspan
Alan Greenspan and the Missing 7 Trillion Dollars
By Peter Hartcher
Norton. 231 pp. $24.95
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. ·
Daniel W. Drezner is an associate professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.