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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