(Hollywood, Fla.) When former Federal Reserve Chairman Alan Greenspan speaks, advisors listen. This truth was eagerly acknowledged by Frank La Salla, Pershing managing director who introduced Greenspan on the first day of the Pershing’s INSITE 2008 financial products and services conference (June 4-6). “We finally got you,” La Salla jokes, referring to how popular Greenspan is as a speaker and commentator worldwide and how tough it can be to capture some of his time.
Greenspan’s Latest Viewso Commodity prices: a result of demand and supply, globalization and population growth — not speculation. o Inflation control: the most vital element in sustaining economic growth; by concentrating on inflation, policy-makers guarantee the other. o Current housing crisis: no evidence that low interest rates since 2000 were responsible. o Housing prices: will have to stabilize before the current crisis ends.o U.S. dollar’s current weakness: a result of the interest-rate differential with the euro, which will revert as U.S. rates rise. o Power of central banks: has fallen with the proliferation of sovereign wealth funds and hedge funds, which is why we see less intervention in foreign-exchange markets. o Future of U.S. economy: With the aging U.S. population, expect higher taxes or cuts in benefits as productivity gains (historically 3 percent a year) cannot keep up with higher health-care costs; globally, countries with younger populations are at an advantage.
Source: U.S. Global Investors, Pershing
The first theme highlighted by Greenspan was the rapid pace of change, which is only becoming quicker and quicker in the 21st Century, the former Federal Reserve chairman insists. “And this creates turbulence,” as well as angst about the painful issues that arrive from change and the creative destruction of the markets.
Stagflation, for example, is a risk, according to Greenspan, and it follows 20 years of disinflation. “There’s no evidence of it” yet, he insists. But “politicians must handle [the risk] thoughtfully.”
Food and energy costs are in an upward trend in the long term, and that means “the old notion of core inflation that excludes food and energy prices is no longer the way to look at the world.”
Have we dodged a recession? “It’s too soon to say,” Greenspan says, adding that the odds of a mild vs. a severe recession are roughly equal at 50-50. The verdict won’t be clear “until we see the end of the decline in home prices,” which he doesn’t expect to happen “for months.”
Greenspan says, “When you can guess a crisis [is coming,] the markets adjust.” But that was not the case with the sub-prime crisis that spread worldwide in August 2007. “There are dangers, when you don’t anticipate something.”
But he cautions policymakers and observers about being too quick to address such problems with regulation. “If the market does not resolve [a problem], then regulation will not help,” Greenspan explains.
In terms of the fallout from the credit crisis, including his legacy, he doesn’t shy away from the issue of whether or not the low interest rates he oversaw in recent years were so low for so long that they have hurt the United States. “This could be credible, if the data said this,” but it hasn’t, he concludes.
In addition, he points out, “This is a global issue,” Greenspan says. And he describes how central bankers in Washington, D.C. and elsewhere “lost control” of long-term rates. “There was little we could do to influence long-term global interest rates,” he adds, referring to the first theme of his presentation, the rapidity of change.
At the end of Greenspan’s presentation, he shared his overall opinion on the U.S. presidents with whom he’d worked. This includes Gerald Ford (from 1974 to 1977), when Greenspan led the Council of Economic Advisors, and Presidents Ronald Reagan, George H.W. Bush, Bill Clinton and George W. Bush (1987-2006) during his tenure as chairman of the Federal Reserve.
Richard Nixon: “Very intelligent, but extraordinarily conflicted, personally.”
Gerald Ford: “Not able to be tough for the [presidential] election, but my favorite president, a remarkable human being.”
Jimmy Carter: “Very little contact with him.”
Ronald Reagan: “More intelligent than most people realize, very effective and remarkably consistent.”
George H.W. Bush: “A real professional, knowledgeable in foreign affairs, a friend for decades, but we did not get along well [during his time in the White House] because of his views on monetary policy.”