BOOKS: Boom and bust that need never have happened

BOOKS: Boom and bust that need never have happened - Joseph Stiglitz's account of Clinton-era market madness is insightful, but he has his own axe to grind, suggests Frank Kane.

by Frank Kane, business editor of the Observer
Last Updated: 31 Aug 2010

Joseph Stiglitz's account of Clinton-era market madness is insightful, but he has his own axe to grind, suggests Frank Kane.

His credentials are impeccable: Nobel prizewinner, top economic adviser to former President Bill Clinton, chief economist at the World Bank. Between these duties, Joseph Stiglitz found the time to become a darling of the global left, with his book Globalization and its Discontents, which allowed those throwing rocks at the police in Genoa and Seattle to claim a fig-leaf of intellectual legitimacy.

Now, in The Roaring Nineties, Stiglitz gives his account of the tumultuous decade in which stock markets grew at unprecedented rates, spawning a new generation of multi-millionaires and billionaires, and which ended when the bubble burst in 1999.

The stock market crash and the savage bear market that followed - and which we are all grappling with even now - are analysed, more controversially, under the book's subtitle 'Seeds of Destruction'.

Stiglitz is in a long line of American leftish economic commentators who believe in the power of Big Government to temper and restrain the greed and selfishness of Big Business, and he sees the Roaring Nineties principally as a failure of the Clinton administration and its advisers to do just that.

From his viewpoint, the central failure of the decade was that the US government - and its main agency of financial control, the Federal Reserve - failed to spot the bubble inflating and did little to prevent it. When it did try, its actions were ineffectual because it failed to understand the nature of the financial markets.

The pivotal moment in this way of thinking was the 'irrational exuberance' speech delivered by Alan Greenspan, the Fed chairman, in December 1996. Greenspan, in the Delphic argot that became known as 'Fedspeak', posed the question: 'How do we know when irrational exuberance has unduly inflated asset values?'

Nobody remembers now that he was speaking broadly in relation to Japanese real estate, but there was little doubt that the real target was closer to home: when Stiglitz had a chat with him afterwards, 'it was clear that he was fixated on the 'irrational exuberance' remark. He knew the pundits would know that it was the US rather than Japan that he had in mind.'

Greenspan's comments had an immediate effect. Markets round the world reeled in anticipation of an interest rate rise. 'And then ... nothing happened,' comments Stiglitz. Markets recovered, and went on to undreamed-of heights.

When the Fed chairman spoke, the Dow was in the 6,000 range; a little more than three years later it was 12,000. 'When the speech failed ... to lead to long-term deflation of the bubble, there was no next step, no other action.'

What should have happened, according to Stiglitz, was that Clinton and Greenspan should have paid more heed to the Council of Economic Advisers, of which Stiglitz himself was chairman. This body - a mixture of think-tank and economic kitchen cabinet - clearly saw its role as reigning in the wilder excesses of unbridled Big Business and free-market forces.

It is the nub of the book's argument that Clinton listened too much to Greenspan and too little to Stiglitz.

You might be tempted to conclude that the book is a long exercise in sour grapes by the author, who had lost the battle for Clinton's ear.

But that is too simplistic. Indeed, Stiglitz pays generous tribute to Greenspan for helping save the Council when George W Bush later sought to scrap it. Instead, the main target of his personal chagrin appears to be the Treasury, and especially Larry Summers and Robert Rubin.

But the implication is that, with solid cautionary advice from Stiglitz and his colleagues put on the back-burner by Clinton, the way was clear for the insanity of the bubble. The stock markets took on a life of their own and by the time Greenspan and others realised what was happening it was too late: the Dow was at vertiginous heights, the average American share trader had hocked his house to buy into the internet dream, and the shoe-shine boys at Grand Central Station were giving out share tips.

When the bubble burst, as they all do, America was left in recession, with a new president more concerned with tax-cuts for the rich and spending billions on foreign military adventures. The 'seeds of destruction' had been sown and reaped.

Stiglitz is sound on the economics of the '90s boom, and offers fascinating insights into the economic decision-making of the Clinton presidency. Likewise, he is right to blame the years for the corporate abuses rocking America, from Enron to Grasso.

But he has his own axe to grind, and it shows. However they end-ed, the years, when the markets were a sure-fire cash-generating machine, made many people in America and the rest of the world extremely wealthy. And it is surely hyperbole to argue that the relatively gentle recession Bush is trying to manage amounts to 'destruction'.

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