Greenspan: Crisis an Accident Waiting to Happen

Sunday, 16 Sep 2007 04:14 PM

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Former Federal Reserve Chairman Alan

Greenspan responds to critics who charge that the Fed contributed to the

housing bubble and subprime mortgage mess by keeping interest rates low for

so long, "This particular problem was an accident waiting to happen. The

euphoria that existed in the expansion of the housing-market bubble induced

investors around the world who'd had a huge buildup in liquidity-largely

because of the lower real long-term interest rates that occurred as a

consequence of the end of the cold war-to invest in something with a higher

rate of return. And, lo and behold, the subprime mortgage market provided

it," he tells Newsweek in the September 24 cover "The World According to

Greenspan"

In a candid conversation, Newsweek Editor Jon Meacham and Columnist

Daniel Gross ask if a certain degree of instability is needed in order to

grow. Greenspan says, "It appears as though we need a certain degree of

turbulence in the financial system to create the stability in the private

system. A B-2 bomber is run almost wholly on computerized adjustments.

Hundreds of thousands, maybe millions of adjustments that are going on all

the time keeps the plane stable. That's not actually a bad analogy to the

turbulence in the economy. In one sense it's benevolent turbulence."

Greenspan tells Newsweek, on the question everyone wants to know, if he

thinks we are in a recession or headed for one by the end of the year,

"Well, we're not in one now. That we're not headed for one is a forecast

which has yet to unfold one way or another."

With the next presidential election imminent, Newsweek asks who he

would want to win: "Is one of the choices leaving the office open?"

Greenspan says. When asked about his view on Hillary Clinton for president

he says, "Very smart. She is probably everything that everybody says about

her. She wouldn't be a bad president, but she won't attack the issues which

really require coming to grips with during the campaign. The absolute

blindness of candidates to the obvious issue of Medicare's problems is just

truly discouraging to me," Greenspan says.

Greenspan considers himself the luckiest economist in the world. "I was

very fortunate," he tells Newsweek of his tenure, which lasted from August

1987 to January 2006. "I emerged on the scene at the beginning of this

extraordinary half-generation. And my tenure ended as events began to

change. At the Federal Reserve, we created policies that took full

advantage of the way the global economy was working, which enabled us to

gain what has really been a remarkable rise in American standards of

living."

On his legacy: "I'd like very much for people to say, 'Well, he caused

all of that.' But I don't think the evidence holds up very well for that

hypothesis. What I did was create essentially a risk-management-based

procedure to implement monetary policy."

Greenspan also says that if someone told him in 1987, when he became

Fed chairman, that it would be possible to have virtually uninterrupted

economic growth for nearly twenty years, it would have been a case of

"psychiatric inadequacy." He continued: "I do realize how extraordinary,

how unusual, this period has been. The very nature of its discontinuity

from history is what forced me to reach beyond the usual economic variables

to seek an explanation of what it's all about. And as you know, I concluded

that it was the result of a seminal geopolitical event, the end of the cold

war."

He continues, "On one side of the Iron Curtain were essentially

centrally planned collectivist societies based on the principal that

collective activity is what produces wealth and therefore there are no

individual rights to property. On the other side were capitalist societies

built around the market system, with free trade and individual-property

rights. The classic case was East Germany versus West Germany, which were

two economies coming from the same history, culture and language... The

conventional wisdom was that East Germany's economy was three fourths the

size of West Germany's, and that the Soviet Union, while having major

shortfalls, was a formidable economic power. Then the Berlin Wall came

down, and the economic ruin behind the Iron Curtain was utterly unexpected

and unimaginable."

Newsweek asked Greenspan about the concern many Americans have over

China's rise. "I am not, as many people are, concerned about China becoming

a threat militarily. In my book, I'm essentially forecasting that what

happened to the communist parties of Europe is likely what will happen to

the Chinese communist party... They are going to be a formidable economic

power, which I think is all to the good," says Greenspan.

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