BOOK REVIEW

Mr. Market Miscalculates: The Bubble Years and Beyond

APRIL 24, 2009 by GEORGE C. LEEF

Veteran financial writer James Grant describes himself as a “Grover Cleveland Democrat”—that is, someone who believes strongly in sound money, free trade, and very limited government. Mr. Market Miscalculates is a collection of his essays published in “Grant’s Interest Rate Observer” over the last decade. While most financial writers credulously accept the notion that central banks must regulate economic activity and are mesmerized by the oracular mutterings of Federal Reserve chairmen, Grant treats it all with disdain. He sees the Fed not as a brilliant modern innovation, but as a dangerous political contraption that interferes with the free market’s smooth order. And as for Fed chairmen, Grant regards them as deluded as the emperor who thought he was wearing the most exquisite of clothes when in fact he was wearing nothing.

Most readers will be interested primarily in knowing what Grant thinks about our current financial crisis. Prominent politicians have declared that it’s due to that nasty old villain, the free market. Not even close, says our author. Instead he points to the belief held by former Fed chairman Alan Greenspan that the U.S. economy needs steady inflation. Following the dot-com recession of 2000, Greenspan feared that the economy would suffer from deflation if the Fed didn’t shovel in loads of money. That’s just what he did, driving interest rates down to almost nothing.

Grant, who obviously learned his economics and history well, looks askance at Greenspan’s beliefs. For one thing, there is nothing to fear from deflation. The American economy had long periods of deflation in the nineteenth century while at the same time enjoying rapid economic growth. That was in the primitive days prior to wizards in Washington expertly running macroeconomic policy, but, amazingly, things worked out quite well.

Furthermore, Grant understands that the government can