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Thread: Alan Greenspan's book: The Age of Turbulence

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    Alan Greenspan's book: The Age of Turbulence

    Sept. 24, 2007 issue - Having retired, former Federal Reserve chairman Alan Greenspan is no longer required to testify at length before Congress about the state of the global economy, the future direction of interest rates and the health of the stock market. But he was willing to sit down in his low-key Washington office for a two-hour tutorial with NEWSWEEK's Jon Meacham and Daniel Gross.

    NEWSWEEK: How should Americans judge your legacy as Fed chairman?
    GREENSPAN: I was very fortunate. 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. 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.

    When you became Fed chairman in 1987, if someone had said that in the next 20 years we're going to have virtually uninterrupted economic growth, would you have said, "That is a banker's fantasy"?
    I would have said it was psychiatric inadequacy. 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.

    That was clearly an important political event, by why was it the most important economic event of our lifetimes?
    On one side of the Iron Curtain were essentially centrally planned collectivist societies based on the principle 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. Central planning did not work in the Soviet Union. And the standard of living in East Germany was not 75 percent of West Germany, but somewhere between a third and 40 percent. The impact of that on the rest of the world was dramatic.

    How, specifically?
    The evidence of the power of the marketplace versus central planning, as exposed so demonstrably in Europe, led to an extraordinary rise in foreign direct investment in these countries. In China, for instance, foreign direct investment, which had been $4 billion in 1991, by 2006 was over $70 billion a year. Deng Xiaoping called the transformation "socialism with Chinese characteristics." What it was was creeping capitalism.

    It's common to hear complaints from many quarters about China's rapid rise. Does it worry you?
    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.

    Looking back, was there anything you could have done to stop the technology bubble of the 1990s?
    I concluded that we could not prevent the bubbles that emerged while I was at the Fed ... What we had happen to us in the 1990s in the stock market wasn't on purpose. We did tighten the economy quite significantly at various times during the 1990s. And what we found was that instead of defusing or incrementally declining the bubble, we enhanced it ... You can only break a bubble if you break the underlying basis of the economy. Basically, it's not possible to defuse a bubble before its time has come.

    Which gets us to where we are today: the housing bubble has burst, the subprime-mortgage market has melted down and we're in a credit crunch. Critics have charged that the Fed contributed to the trouble 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.

    The mortgage brokers were just meeting demand from investors?
    Precisely. And so you had Wall Street's securitizers basically then talking to the mortgage brokers saying, "We'll buy what you've got." ... The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn't afford. We created something which was unsustainable. And it eventually broke. If it weren't for securitization, the subprime-loan market would have been very significantly less than it is in size.

    People want the Fed to cut interest rates to alleviate tight credit conditions. Do you think the financial marketplace has come to view interest-rate cuts as a crutch? And is that an appropriate role for the central bank?
    To the extent that [the Fed] interferes with the economy, we do help some of the people who are involved in rather questionable financial activities. The problem basically is that if you do effective monetary policy and stabilize the economy, you will raise all asset prices—those that are assets owned by prudent investors, but also the prices of assets of those who have taken very silly risks and should be punished as a consequence. There is no simple solution. If we do something which works for the society as a whole, we will inadvertently and undesirably bail out, if you want to put it in those terms, the people who have taken silly risks.

    And how does the housing market look now?
    On top of all this, we've got a housing outlook which is very unfavorable. There are estimates of about 200,000 new mainly completed units that are atrophying and have to be sold quickly. But the sales of homes are falling even though housing starts are falling sharply ... That's putting downward pressure on prices. There's an Act II to this: as prices go down, the net worth of individuals goes down. And their propensity to spend goes down.

    The question everyone wants to know is, are we 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.

    You were for years a figure of reassurance, whether during the stock-market crash of 1987 or September 11. People are going to look at the title of your book, "The Age of Turbulence," and say, "My God, if Greenspan thinks this is turbulent, what are we going to do?"
    Well, the way I put it in economic terms, provided we can create a sufficiently flexible financial economic system, we can essentially absorb the turbulence and its extremes without significant job loss or economic disruption. Turbulence is, as we get into the 21st century, probably a necessary condition to maintain an economy worldwide as high-powered as the one that now exists.

    So we need a certain degree of instability in order to grow?
    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 keep the plane stable. That's not actually a bad analogy to the turbulence in the economy. In one sense it's benevolent turbulence.

    Reading your opinions of the various presidents you've worked with, it was surprising that you ranked Clinton near the top, given your personal political views, as well as Nixon, given his reputation.
    Both were tops in IQ, not in character. Nixon, as I point out, I really misjudged. He was a Jekyll and Hyde. With Clinton, there's a moral looseness about him. When I heard the rumors about Monica Lewinsky I thought, it's not possible. I don't care how corrupt the president of the United States is, they just don't do that to themselves. The person who had true character was Gerald R. Ford. I felt more comfortable with him, and I trusted him more than anybody.

    How about the next president? Hillary Clinton seems to be the frontrunner on the Democratic side. What's your view on the junior senator from New York?
    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 withduring the campaign. The absolute blindness of candidates to the obvious issue of Medicare's problems is just truly discouraging to me.

    Who would you like to win next year?
    Is one of the choices leaving the office open?
    A Candid Conversation with the Oracle - Newsweek Business - MSNBC.com

    A interview of Greenspan, anyone here thinking of buying his book, I know I am.
    Those who can't change become extinct.

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    It comes out tommorrow, or Sept. 17.
    Those who can't change become extinct.

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    Staff Emeritus Julie's Avatar
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    Wow.

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    I just got a autographed copy of the book, and I also listened to Alan Greenspan give a short speech about it.

    Unfortunately, near the entrance to the bookstore was a bunch of people saying Greenspan's a liar and the economic doom is aproaching us. Then when I was at the same floor near Greenspan and was waiting for him to give his speech, some man yelled at Greespan and called him Anti-American and other insults.
    Last edited by wkllaw; 18 Sep 07, at 02:51.
    Those who can't change become extinct.

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    Staff Emeritus Julie's Avatar
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    Quote Originally Posted by wkllaw View Post
    I just got a autographed copy of the book, and I also listened to Alan Greenspan give a short speech about it.

    Unfortunately, near the entrance to the bookstore was a bunch of people saying Greenspan's a liar and the economic doom is aproaching us. Then when I was at the same floor near Greenspan and was waiting for him to give his speech, some man yelled at Greespan and called him Anti-American and other insults.
    If Greenspan was a liar, he would not have held the position he did for the last 20 years. That man could move the market by just uttering a couple of words.

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    Quote Originally Posted by Julie View Post
    If Greenspan was a liar, he would not have held the position he did for the last 20 years. That man could move the market by just uttering a couple of words.
    And sometimes the absence of any words affected the markets even more. Must have been strange to watch every single word you say, because even unrelated comments might be interpreted in a way it could cause quite some confusion...

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    Here is an interview by a hostile questioner that he recently gave:

    Democracy Now! | Alan Greenspan vs. Naomi Klein on the Iraq War, Bush's Tax Cuts, Economic Populism, Crony Capitalism and More

    And a quote

    NAOMI KLEIN: Mr. Greenspan, I’m wondering whether you feel that you share any responsibility in the rise of this economic populism, because, of course, you took over the Federal Reserve during the Reagan administration, and when Reagan took office, CEOs earned forty-three times more than their workers, and when you left the Federal Reserve, they made more than 400 times more than their workers. So the policies that you pursued -- deregulation, privatization, free trade -- have contributed to this extraordinary division of income that is really the fuel for this economic populism that you’re now denouncing. So aren't you the one that has caused this crisis of faith in capitalism? Or, at least, don't you share some of that responsibility?

    ALAN GREENSPAN: Well, look, the whole issue of what has happened in this country with respect to the increasing inequality of income is an issue I address and abhor in the book, and I point out that what is causing it to a very significant extent is the fact that skilled labor is under extraordinary demand as the technologies increase, and we’ve had a dysfunctional education system in this country, both in primary and secondary schools, which is showing up in all of the studies, which indicate that while our children in the fourth grade are doing fairly well relative to international comparisons, by the end of high school, they are in terrible shape. And as a consequence of that, we are not putting the proper number of people into the education cycle to get them up to skill levels, which creates much less, or would create a good deal less, in the way of income inequality.

    And I also argue in the book that we ought to be opening up our borders to skilled labor from all sorts of -- from all parts of the world, because if we were to do that, we would increase the supply of skilled workers, which our schools have been unable to create, and as a consequence of that, we would lower the average wage of skills and reduce the degree of income inequality in this country. It's a very important issue, and it's a very important issue which I raise in my book. And we have to confront this both at the education level and on the immigration level.

    And it’s not anything to do with what I am proposing. And just remember that the type of globalized economy that I support has taken hundreds of millions of people out of poverty. It’s created a standard of living throughout the world which is unprecedented in history. And to assume that that is something we should be apologizing for, I find, is wholly inappropriate.
    From his performance in this interview, at least, I like the guy. But his answer here is mystifying. He was chairman on the US Federal Reserve, not the World Bank. Seems he equates growth in other countries as equivalent to growth in our own and seems to think that lowering wages/increasing wages is dandy for the average Joe?

    Going to have to read his book - hopefully the library will get it for me.

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    dwarven pirate,

    Seems he equates growth in other countries as equivalent to growth in our own
    globalization means that this holds truer and truer with each day passing.
    There is a cult of ignorance in the United States, and there has always been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that "My ignorance is just as good as your knowledge."- Isaac Asimov

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    Quote Originally Posted by Dwarven Pirate View Post
    From his performance in this interview, at least, I like the guy. But his answer here is mystifying. He was chairman on the US Federal Reserve, not the World Bank. . . . [he] seems to think that lowering wages/increasing wages is dandy for the average Joe?
    Look at his argument and you'll understand it. He states that the average US worker is not skilled. If you "import" skilled labor, you create competition that reduces the price of their skilled labor, making the goods and services they produce cheaper. This benefits all the consumers of their goods and services, to include the average Joe.
    "So little pains do the vulgar take in the investigation of truth, accepting readily the first story that comes to hand." Thucydides 1.20.3

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    I read that book when it first came out.

    I enjoyed it quite a bit.

    In light of the meltdown that happened after the book was written, it shows you what happens when brilliant minds buy into social philosophies that are inherently false (or evil if you prefer) .

    One thing struck me as chilling though, even when I was reading it.

    Did he really say that he hadn't read Atlas Shrugged until he was in his 30s?!?!

    And did he really mean that a man with his education and background couldn't see the FLAWS in Rand's presuppositions?

    Or was he merely giving himself the "I'm so dumb" excuse knowing that the economy was about to blow up?

    I think that this master of the universe lied and lied and lied about that point, folks.

    He knew perfectly well what was going on (and what would inevitably happen, too) and he was one the central characters that set this nation up for that great meltdown.

    Greenspaqn is an apologist for everything that's wrong with our country.

    Not just an apologist, but in fact, a co-conspirator in everything that's wrong with modern economic theory.
    Last edited by editec; 30 May 11, at 12:54.

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    Quote Originally Posted by editec View Post

    Did he really say that he hadn't read Atlas Shrugged until he was in his 30s?!?!
    Not everyone is fascinated by Ayn Rand.

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    Quote Originally Posted by DOR View Post
    Not everyone is fascinated by Ayn Rand.
    That is true.

    Greenspan was, however, according to his own words.

    And the economic policies of the last thrity years were in large part, in line with the theory of economic Darminism that Rand proposed as an idea model for the social contract.

    We have a history of banking bailouts over the last thirty years that shows us exactly where such an economic philosophy leads an economy, too.

    It leads to bubbles (because the supply/demand equasion becomes unbalanced) followed by economic crises as markets "correct".

    The "invisible hand of the market" keeps informing us that we are doing it wrong, but we keep ignoring those events and telling ourselves that we just need to juice up the supply side even more, and all will be right with the world.

    Why isn't it working?

    Because this kind of economic system we have needs a balance between investing and consuming.

    Trickle down theory does not help when the investment class has enough money and the consuming classes do not.

    Trickle down policies are only really helpful in the longer run, when the economy is out of balance in the opposite direction than what it has been since about 1970.

    The US economy is weaker than it could be because we have been abandoning the demand side in favor of the supply side rather consistently for the about four decades.
    Last edited by editec; 31 May 11, at 14:10.

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    Senior Contributor DOR's Avatar
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    editec,

    The alternative to market forces is state planning. Some countries tried that, and gave it up as a bad idea.

    The history of 20th century economics is littered with the carcasses of countries that could not resist trying to beat the market.

    Among the most successful economies are those that accepted that there will never be smooth, steady pace of growth and the best we can do is invest in education, infrastructure, productivity and adequate regulation.

    Sure, there are problems. But, when you've just witnessed the greatest increase in standards of living for the largest share of the world's population in all of human history, tinkering with the formula takes a very brave -- or foolish -- person.

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    And did he really mean that a man with his education and background couldn't see the FLAWS in Rand's presuppositions?
    Like?

    Not just an apologist, but in fact, a co-conspirator in everything that's wrong with modern economic theory.
    Modern economy theory has got the world out of the Dark Ages thank you very much. It's prevented the breakout of major conflicts as well. Economic Globalization and Liberalization has resulted in the highest rise in standards of livings globally for the majority of the worlds population for the first time in history.

    Why isn't it working?
    It's working fine. You want to see an economy that isn't working? North Korea, try that.

    And China. Don't get your hopes up. The CPC is struggling to control inflation and is at the same time creating artificial jobs - creating infrastructure and construction projects merely to boost domestic consumption and demand. Pushing up inflation. But if they stop doing that, then they have to be purely reliant on the whims of American and Western markets, currently not in a good shape. All is not rosy on the other side of the grass, in fact, Chinas situation is a bit more worrisome than Americas.

    Have a look into the Ghost cities of Inner Mongolia, and also into the unemployment rate amongst university graduates. Then look at their population which is about to peak in 2015ish or thereabouts, and the associated healthcare and social securities costs that will come with that.

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    Quote Originally Posted by DOR View Post
    editec,

    The alternative to market forces is state planning. Some countries tried that, and gave it up as a bad idea.
    That's a false dichotomy, amigo.

    One can have sage laws and regulations that businesses must abide without having "central planning."



    The history of 20th century economics is littered with the carcasses of countries that could not resist trying to beat the market.
    History is replete with formerly wealthy nations that allowed their Atlases to suck the life out of their economies, too.



    Among the most successful economies are those that accepted that there will never be smooth, steady pace of growth and the best we can do is invest in education, infrastructure, productivity and adequate regulation.

    No argument there.


    Sure, there are problems. But, when you've just witnessed the greatest increase in standards of living for the largest share of the world's population in all of human history, tinkering with the formula takes a very brave -- or foolish -- person.
    No thanks to the Atlases of banking swindles, I note, but you are right that mankind has made great strides in the last century and a falf or so.

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