Alan Greenspan's easy-money policies caused two bubbles, resulting in stock market and real estate crashes. Now Americans face years of economic pain.

That's the thesis of author William Fleckenstein, a hedge fund manager. Fleckenstein asserts that Greenspan as Federal Reserve Board chairman was responsible for both the stock market bubble that exploded in 2000 and the recent subprime housing crisis.

He uses this book to attack Greenspan's reputation as a master of the money universe. It was an image burnished by books such as Greenspan's The Age of Turbulence and Maestro, a glowing profile by Bob Woodward. But Greenspan was no maestro, Fleckenstein, like a growing chorus of skeptics, declares. He was wrongly eulogized as a brilliant central banker who created a booming stock market and higher standards of living.

"In reality, the overwhelming majority of people in the United States will find that they are worse off in the years ahead because of his stewardship," Fleckenstein writes on page 3. "Greenspan erred by continually picking an interest rate that was too low, then he solved the turmoil that resulted from that decision with another period of interest rates that were again too low." By staving off short-term economic problems with cheap money, Greenspan made a much bigger mess, he adds.

The key to understanding this Fed chairman is what the author calls "the Greenspan put." It is defined as "the belief by market participants that in times of stock market distress Greenspan was willing to increase liquidity by whatever level was necessary to keep the stock market from declining in any meaningful way" [page 191].

Greenspan ignored or misread economic warning signals, saying that no one can see a bubble coming. The latter is a claim the author believes is ridiculous. "You can see a bubble coming," Fleckenstein said in an interview with Financial Advisor.

In setting interest rates artificially low, Greenspan succumbed to the temptation to be popular in the short-term unlike his predecessor, Paul Volcker. The book commends Volcker's leadership of the Fed. He courageously broke the back of inflation, avoiding a bubble. But Volcker also became one of the most hated men in America when he pushed the nation into a recession, the author says. However, raising interest rates was exactly the monetary medicine needed to beat double-digit inflation, Fleckenstein says.

By contrast, few hated Greenspan. He continually cut interest rates and became a national hero who some even beatified as Saint Alan. He seemed to have produced strong stock and real estate markets, but they were Potemkin Village economies. They were sustained by monetary policies that papered over festering economic problems, the author says.

The truth, Fleckenstein claims, is that Greenspan has a long history of egregious economic forecasting in both the private and public sectors. The failure dates back to his inability to call the market disaster of 1973-74. Interestingly, that bear market and recession were also the result of the failed easy money policies of another Fed chairman, Arthur Burns, who was one of Greenspan's professors.

Could it be that the problem is more than Greenspan or Burns but the Fed system of correctly and apolitically picking the right money supply? Milton Friedman, who advocated a computer set interest rates, was also doubtful that the Fed could do its job effectively. If there's a disappointment in this interesting book, it is that Fleckenstein doesn't pursue this strand in detail, although he does tease the subject early in the book, suggesting that central bankers are often wrong.

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