Friday, May 22, 2009

Book Notes: Greenspan's Bubbles

I read Bill Fleckenstein's GREENSPAN'S BUBBLES: THE AGE OF IGNORANCE AT THE FEDERAL RESERVE. I started reading Fleck about 10 years ago, back then he had a pretty good column that just ripped the dot-com stocks and bubble. Greenspan was a constant villain, always acting to save the bubble from itself. This book is Fleck's revenge.

As analysis it's lacking, most of the book is diatribe and assertion. To it's credit the book contains numerous quotes from the FOMC meetings back in the day, they give some insight into why Greenspan was so ineffectual.

First he subscribed to a species of market fundamentalism, a belief that the masses could never be wrong (or at least not second guessed) even in the face of overwhelming evidence to the contrary. A bubble then could never be diagnosed in the present, it could only be seen in the past after the market turned and it deflated. This belief by itself wouldn't have hurt Greenspan that much, in effect it says the Fed should ignore the stock market. Unfortunately Greenspan extended this logic by assuming that if the market is always right, and people want to be happy, then the market should always be happy. If it's not, ie if there are significant declines across indices it implies an externality and Greenspan saw it as his duty to counteract it. In short, he completely misunderstood or ignored the necessity of creative destruction, that creating losers is as critical a market function as creating winners.

I'd recommend the book for those nostalgic for the dot-com days.

No comments: