New York: McGraw-Hill, 2008. 208 pp. $21.95 (cloth).

In 1954, the Board of Governors of the Federal Reserve System issued the third edition of “The Federal Reserve System, Purposes and Functions,” in which they stated:

The basic function of the Federal Reserve System is to make possible a flow of credit and money that will foster orderly economic growth and a stable dollar. An efficient monetary mechanism is indispensable to the steady development of the nation’s resources and a rising standard of living (p. 1).

In Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, William Fleckenstein, the president of a Seattle-based money management firm, sets out to show that under Alan Greenspan’s supervision the Federal Reserve System has been anything but a stabilizing influence on America’s economy—especially in recent years. In the book’s first chapter, “How Wrong Can One Man Be?” Fleckenstein quotes a prediction by Greenspan in the January 7, 1973, New York Times: “[I]t is very rare that you can be as unqualifiedly bullish as you can be now.” Then, he points out that four days later “the Dow Jones Industrial Average peaked at 1051 and then declined by 46 percent over the next two years as the country endured the worst recession since the Great Depression” (p. 10). By tracing the Fed’s actions in detail from the 1970s through late 2007—discussing along the way the 1973–74 recession, the market crash of 1987, the savings and loan crisis of the 1980s and 1990s, the Y2K fear, and the demise of Long Term Capital Management (a large hedge fund)—Fleckenstein demonstrates that the Fed chairman’s analytical and predictive capabilities improved little over the years, and that his poor decision-making greatly contributed to both the 2000 stock bubble and the 2007 housing/credit bubble.

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. The result was that, during his reign, the United States experienced a bubble in stocks and then in real estate. These two massive bubbles emerged within 10 years of each other. Prior to Greenspan’s arrival at the Fed, excluding the brief mania for commodities and precious metals from late 1979 to early 1980, the country had been bubble-free for over 50 years (p. 3).

To demonstrate that Greenspan’s faulty decision-making wreaked havoc on the American economy, Fleckenstein presents a trail of documentation that includes excerpts from the Federal Reserve Open Market Committee (FOMC) meetings, Greenspan’s testimony before Congress, Greenspan’s press statements, Fleckenstein’s own contemporaneous columns, and comments from other market and financial experts. Combining this documentation with several charts showing interest rate fluctuations and stock market action, Fleckenstein contrasts Greenspan’s words with corresponding actions and reactions in the economy and the markets in order to arrive at the truth. . . .

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