Greenspan unplugged

I had a chance to see Alan Greenspan at Pershing's Insite conference in Florida last week. I've seen Greenspan speak on previous occasions, but this was the first time since August 2007 and the start of the current downturn. Each of the previous appearances featured much fawning and fluff, but what set this one apart was the tough questions (or at least tougher questions) from Moderator Frank La Salla. Some of the highlights (and I paraphrase):

On recession - The chance of a severe recession has softened. But the chance of a recession is still greater than 50 percent. I think we will look back at this period and find that this was indeed a recessionary period.

On criticism that he left rates too low for too long and contributed to the current housing crisis - We've heard a lot of this lately, and it would be true if it was supported by the data, but it is not. We saw a steep increase in the price of homes in 2000, when the Fed fund rate was still 6 percent. It was after that that we started decreasing the rate. It was a call we made at the time because we didn't want a situation like Japan in the 1990s. Home prices are a function of long-term interest rates. Twenty years ago we could influence long-tern interest rates, but the power of central banks to do (since about 2003) so no longer exists. This is due in large part to the rise of the global market.

On oil prices - Oil prices are more of a function of supply and demand than of a weak dollar. Less money is going back into oil capital investment, which means the buffer against shock is smaller. Consequently a hurricane or problem in Nigeria will have a much greater impact on price than we've traditionally seen.

On Libor - Why are the rates so high? Banks don't trust one another. In the 19th century, when there was a run on a bank, the bank would put the actual gold bars and whatever other hard assets they had in the front window. People would see the assets and the lines would disappear. Today, it's much more sophisticated, but we at least need more of the impression that the capital is there. If that happens, rates will begin to come down.

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