Book review - Maestro, my ass! How we got into this mess: Breaking the Maestro’s baton


Alex Chambers
Published on:

Greenspan’s direction belatedly questioned; The flaws of too big to fail

Maestro, my ass! How we got into this mess
When you are the subject of a book entitled Maestro, my ass! How we got into this mess you know that its tone is unlikely to be positive. The fact that the author, Michael Ashton, has only just published this unforgiving rebuttal – nine years after Bob Woodward’s Maestro: Alan Greenspan and the American boom – might strike the subject of this short and sharp paperback as a little unfair.

But Ashton insists that he wrote much of his book long ago, finishing the manuscript in 2003 only for his then employer, Barclays Capital, to refuse him permission to publish it. This was an understandable position; Alan Greenspan was then still lauded as an omnipotent central banker responsible for getting the US economy, and therefore the global economy, through the 1987 stock market crash, Mexico/Asian/Russian/LTCM crises, the dotcom crash and 9/11.

As the principal of Ashton Analytics, the author no longer faces any such restrictions and, given a broad volte-face on the merits of Greenspan’s tenure as Federal Reserve chairman between 1987 and 2006, his decision to publish now is certainly justified. Towards the end of the book his prescient analysis of the US housing market, where he exposes the madness of its financing practices and structure, shows that a primary cause of this crisis is lax regulation of the most basic kind.

Ashton spends the early few and mercifully short chapters explaining what the Fed’s mandate is, how it has changed, and the limitations this body has in executing it. He offers a neat comparison between the Fed’s policy objectives and that of an options trader. In effect the Fed should not have tried to maximize its policy objectives – sustaining growth and minimizing inflation – because this also entailed selling policy options that could entail disastrous downside. His thesis is that Greenspan’s refusal to allow the economy ever to suffer a downturn was his most serious policy error. Ashton says relatively little about the Fed’s accommodative monetary stance during the early part of the decade. Instead he focuses on the numerous bailouts that the then Fed chairman oversaw. These helped contribute to the widespread belief in the so-called ‘Greenspan put’ – a term increasingly used in financial circles during the second half of his tenure. Ashton argues forcibly that the Fed chairman encouraged moral hazard. Under his stewardship, financial actors increasingly believed that he would support the economy and the markets, no matter what. Ashton writes: "The overall effect of the Fed’s Superman routine has been to convince investors that Alan was ‘on watch’ and prepared to intervene if necessary to avert disaster."

A backdrop such as this encourages traders and others to suspend rationality and go for broke. The US central bank’s adoption of the new paradigm theory that supported the idea that the US could have faster economic growth without triggering inflation gave further sustenance to the market bulls at the time.

Ashton saves his greatest condemnation for Chapter 12 – entitled ‘When genius bailed’ – which analyses the bailout of LTCM. The rescue of the hedge fund, under the auspices of the Fed, reinforced the view of senior financial markets players that the Fed would not allow a big counterparty to fail.

Too big to fail

This brings us to the book Too big to fail – The hazards of bank bailouts. The original version of this work was also written several years ago – in 2004 – when the authors, Gary Stern and Ron Feldman, decided that the too-big-to-fail (TBTF) problem was serious and getting worse. Stern and Feldman are respectively president and chief executive, and senior vice-president of the Federal Reserve Bank of Minneapolis. So their words should have carried some weight first time around. But they did not.

Unlike many other books on the financial crisis published recently it reads like an academic textbook. Much of the early part is spent spelling out the fact that there is a widespread belief in the market that a number of banks are TBTF and will be rescued if they get into trouble.

The TBTF problem, now self-evident, was mostly theoretical when this book was first written. While correctly identifying why TBTF protection is costly, Stern and Feldman fail to come up with an answer to the problem. The authors argue that one of the ways to manage TBTF is to put creditors at risk of real loss. They also suggest policymakers should attempt to institute reforms that prevent the failure of one bank spilling over to another and that provide regulators with greater certainty of how to deal with a bank defaulting.

One problem with their thesis is Lehman Brothers. Its failure is widely seen as having intensified the financial crisis last year and the subsequent requirement for the widespread use of government guarantees in the banking system. There have been examples of institutional creditors being wiped out during the credit crunch but generally investors have been made whole.

Understandably, the debate on banking regulation has grown louder of late. Mervyn King, the governor of the Bank of England, made a speech in June in which he said that the concept of there being private-sector entities that cannot fail does not sit comfortably in a market economy. Quite.

Stern and Feldman argue for introducing greater market discipline to limit bank risk-taking; a laudable goal. But their proposals, unlike King’s, do not really get to the heart of the problem. If there are banks that really are too big to fail, surely the best way to address that problem is to stop them becoming too big.

Both books make interesting reading – especially as they were both mostly written before the crisis. As with other books written since the crunch, there is no happy ending. Indeed, it all ends rather badly.