Tags: Greenspan | GDP | Summers | economy

Greenspan Sharp, Candid in Interview About Economy

By    |   Wednesday, 05 March 2014 11:15 AM

During the recent meetings of the National Association for Business Economics in Washington, former Federal Reserve Chairman Alan Greenspan sat for an interview with Michael McDonough, chief economist of Bloomberg, and expressed his highly analytical, sometimes provocative, views on a variety of timely subjects.

The first question was about Greenspan's current outlook for the economy, and he responded, without hesitation, "Essentially, more of the same," noting that the outlook would be even more difficult if it weren't for the fact that asset prices are still undervalued. Over years, stock prices have risen consistently by an annual average of 6 percent to 7 percent, half real, half due to inflation.

Asked whether the economy has slowed due to weather, Greenspan pointed to a significant downward revision of the GDP for the fourth quarter of 2013 due to some slippage in industrial production, which he attributed to excess inventory accumulation and "a mistaken buoyancy" in the second half of 2013. His outlook is for 2 percent GDP growth in the first quarter, and it remains to be seen whether the economy can improve on that during the rest of the year.

In a key admission, Greenspan referred sarcastically to the poor performance of complex econometric models in 2008: "We missed it, JPMorgan missed it, the IMF missed it, the OECD missed it; in fact, I'm hard pressed to find anybody with a hard structure that got it right."

McDonough asked whether there might be a bubble in equity markets (Greenspan has been notoriously slow and reluctant to recognize bubbles in the economy). Greenspan responded that the fact that there isn't a bubble doesn't mean the markets can continue higher. He doesn't see the degree of euphoria in the market that would create a bubble.

Greenspan differed with a statement by former Treasury Secretary Larry Summers in saying that interest rates will move higher, "and that's going to be difficult to deal with," but he see "a deeper problem that is essentially a product of our response to the crisis that has emerged."

He made a very unusual observation that the average maturity of the components of the GDP has been declining, so that software is three to five years; residential building, 75 years; haircuts, one month. Therefore, the weighted duration average, which after going down gradually, has turned sharply lower, because the weight of structures has declined very dramatically, from more than 10 percent to slightly below 6 percent, and he ties this directly to slack in employment.

Greenspan finds investment in illiquid assets at the lowest point in peacetime since 1938. (At this point, the camera picked up Summers in the audience nodding in agreement.) He attributed this behavior to a view by decision makers of nonfinancial corporations that while rates of return on investment in the 20 percent might be attractive, the variance in the return is unacceptably high.

Greenspan explains that through regression analyses dating back to 1970, he has found that large government investments crowd out private investments contemporaneously, so the gross domestic savings rate necessarily declines to the point where the net domestic savings rate is zero, partially offset by a decline in borrowing from abroad, with the result that productivity has declined dramatically and GDP growth is stagnant.

It would appear to this lay observer that Greenspan's remarkable analysis should pose a challenge to policymakers who assume that GDP can be produced by timely interventions as though one were fiddling with the dials of a well-engineered machine.

Viewers might also be astonished to witness the performance of a legendary economist who remains engaged and whose analytical acuity may be defying the laws of nature and improving with age, perhaps because he is less involved with the staff of economists and lawyers at the Federal Reserve.

(Archived video can be found here.)

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During the recent meetings of the National Association for Business Economics in Washington, former Federal Reserve Chairman Alan Greenspan sat for an interview with Michael McDonough, chief economist of Bloomberg.
Wednesday, 05 March 2014 11:15 AM
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