Tags: Greenspan | Fed | crisis | Yellen

Greenspan Presents New Book at Press Club

By    |   Wednesday, 04 December 2013 01:18 PM

Former Federal Reserve Chairman Alan Greenspan was interviewed recently at the National Press Club by Angela Greiling Keane, who noted that Greenspan's wife, Andrea Mitchell, had recently been honored by the Club with its lifetime achievement award.

Greenspan and Mitchell have been a power couple in Washington for decades, and Greenspan lamented the passing of the bipartisan parties that used to be held at the homes of the Alsops and Grahams.

Greenspan clearly plans to continue to be an active participant in debates over economic policy as this is Greenspan's second book since leaving the Fed, and he said he retains the curiosity of a 6 year old.

Greenspan's main point is that in failing to identify the timing of the 2008 crisis episode, he was operating on the assumption that people are mostly rational, and to the extent that they aren't, the irrational behavior tends to cancel out before it can adversely affect markets.

He cites the 1987 crash and the bursting of the tech bubble in 2000 as examples of market downturns that did not have an adverse impact on the larger economy.

What was different about the most recent crisis was that the markets lost confidence in the value of long-term assets, including construction projects and long-dated securities, to the extent that they were unwilling to trade in them.

In 2008 the standard models failed, and Greenspan proclaims that he has discovered behavioral economics. He says what made the 2008 episode so dangerous was the leverage on the balance sheets on the institutions that held and traded long-term assets and the underlying uncertainty as to the valuation of these assets is a condition that has not been cured. That is why, he notes, housing starts have only partially recovered from their high for the cycle and stand at the lowest level since 1938.

Greenspan has warm words for Janet Yellen as she prepares to take over the Fed chairmanship. He recalls that when he was chairman and he had questions regarding theoretical issues being debated in academe, Yellen was the one he would go to for a clear explanation.

What is remarkable about Greenspan's message is that he points his finger directly at the FDIC and the other financial regulators for giving assurances in 2006 that the 99 percent of banks were "well-capitalized."

Now he says that banks need to implement a "major increase" in their capital levels. This places Greenspan in the hawkish camp as regulators are being challenged by a few loudly critical senators to demonstrate that they will take concrete actions to convince the markets that they are ending the policy of too big to fail.

I would point out that at the time of the savings and loan (S&L) crisis in the late 1980s, regulators gave assurances that the broader economy was safe, because banks were better managed, better capitalized and better regulated than the S&Ls were, but this turned out to be false.

Fed Chairman Ben Bernanke gave assurances that the 2008 episode could be contained within the housing sector, but this, too, proved to be false. The question is when and where the next episode will occur.

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Former Federal Reserve Chairman Alan Greenspan was interviewed recently at the National Press Club by Angela Greiling Keane.
Wednesday, 04 December 2013 01:18 PM
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