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Realistbear

Greenspan: " Economy Worst Since W W 2 "

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http://money.cnn.com/2008/03/17/news/econo...sion=2008031707

Greenspan: Economy worst since WWII
U.S. financial crisis to continue for months, says former Fed chairman.
Last Updated: March 17, 2008: 7:11 AM EDT
NEW YORK (
CNN
Money.com) -- Today's economic condition could likely be seen as "the most wrenching since the end of the second world war," wrote former Federal Reserve chairman Alan Greenspan in the Financial Times on Monday..../

Al is too optimistic. A year ago he said the economy may "possibly" go into recession. Then he cut that to a 50:50 chnace. Now its happening. This article says Al thinks it is the worst since WW2. IMO its the worst. Ever.

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http://money.cnn.com/2008/03/17/news/econo...sion=2008031707
Greenspan: Economy worst since WWII
U.S. financial crisis to continue for months, says former Fed chairman.
Last Updated: March 17, 2008: 7:11 AM EDT
NEW YORK (
CNN
Money.com) -- Today's economic condition could likely be seen as "the most wrenching since the end of the second world war," wrote former Federal Reserve chairman Alan Greenspan in the Financial Times on Monday..../

Al is too optimistic. A year ago he said the economy may "possibly" go into recession. Then he cut that to a 50:50 chnace. Now its happening. This article says Al thinks it is the worst since WW2. IMO its the worst. Ever.

Stop sticking up for the man. I've saved a link somewhere where you say it's not his fault, ben won't cut rates etc, etc. I'll dig it out to remind you.

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Stop sticking up for the man. I've saved a link somewhere where you say it's not his fault, ben won't cut rates etc, etc. I'll dig it out to remind you.

It isn't his fault. He's just too optimistic that is all.

You have to remember that when the Brown syndrome* was raging in the US Al began a long series of IR hikes. But the conundrum kicked in and IR fell along with each Fed hike. What Al learned was that the rates that apply to the marketplace do not depend on the Fed. That is, under Brown-style miracle conditions where CREDIT was cheap and easy.

The reverse is now true. The more Ben and the CBs cut the higher the real rates will become due to risk aversion.

Al never had control of the HPI machine. It was politically motivated to give the people the miracle thjey all wanted. Endless supplies of MEW and everyone a property millionaire.

The fault lies squarely with the failure of governments to regulate. But to buy votes the governments gave the people all the wealth they wanted at the flip of a property or a twist of the MEW button and out flowed the cash.

I am surprised Ben has not learned the lesson of the Greenspan "conundrum." Real IR are rising as Ben cuts.**

______________

* Wealth from HPI

**

1 Year ARM 5.11% 4.69%

30 Year Fixed Jumbo 7.05% 7.04%

5/1 ARM 5.70% 5.35%

3/1 ARM 5.51% 5.19%

Edited by Realistbear

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I'm amused by his "worried" face. Has he appeared on TV recently?

He has questions to answer , anyone know how he's books been selling lately .

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I'm amused by his "worried" face. Has he appeared on TV recently?

I am most amused by Paulson. He is like a nervous rabbit that twitches at every question put to him. The looks of shock and horror with every expression are not the sort of image the US ought to be showing to the world. They need someone who does not look like they are on the verge of a mental breakdown. Walter Kronkite, for example. But I think Walt may have snuffed it by now.

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He has questions to answer , anyone know how he's books been selling lately .

I bought a hardback copy. I'm currently acting as a one-man lending library... It is a book that I think *everyone* should read... someone should scan it and put it on a P2P network... or record it for an MP3 player... it is quite long.

Greenspan answers a lot of questions in his book... quite honestly, in my opinion.

I think you mean he should be held responsible for his actions.

Edited by A.steve

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I bought a hardback copy. I'm currently acting as a one-man lending library... It is a book that I think *everyone* should read... someone should scan it and put it on a P2P network... or record it for an MP3 player... it is quite long.

Greenspan answers a lot of questions in his book... quite honestly, in my opinion.

I think you mean he should be held responsible for his actions.

Is it the longest apology in history? I sure hope so.

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Congressman Ron Paul v. Alan Greenspan

-----

In Congress, March 1997

PAUL: We have talked a lot about the Consumer Price Index in an effort to calculate our cost-of-living. But in reality aren’t we trying to measure the depreciation of our currency? We’re looking at prices, but we’re really dealing with a currency problem.

When we debase our currency we do get higher prices, but we also get malinvestment, distorted interest rates, and increased deficits. And are we looking at the right prices? At times we see inflated prices in financial instruments.

Debasing the currency hurts some more than it does others. And a few benefit from inflation of the currency. This raises serious questions about our monetary policy.

We’ve had some famous economists who’ve told us to watch out for people who talk about prices because they’re only distracting us from the root cause of the issue, which is inflation of the currency.

GREENSPAN: Price increases are really the same thing as depreciation of the currency.

There are lots of different measures of inflation. When we were heavily industrialized, commodities such as steel and copper used to be very good measures of inflation in the economy. Today, services are far more relevant to the purchasing power of the currency.

PAUL: During the past 2 months foreign central banks bought $23 billion worth of our debt. Does Treasury Secretary Rubin have an agreement with them that they help us out like that?

GREENSPAN: In spite of what you might have read, there is no agreement.

PAUL: Well, they’re accommodating us, whether there is an agreement or not. And it seems as if you’re working to keep interest rates from rising, to maintain our trade deficit. If we had a perfect balance of trade, foreigners wouldn’t have all those dollars with which to buy our debt and absorb our inflation. If we had a balance of trade you’d have to raise interest rates.

GREENSPAN: There is no evidence that foreign holdings of U.S. Treasuries materially affect interest rates in the long run.

July 1997

PAUL: In the past three months we had a stock price rise of 25 percent. If that trend continued stocks would be up 100 percent in a year. Now, if that happened to commodities or the CPI you would be doing something.

I would like to suggest that we should do something. There is an awful lot of credit in the market causing malinvestment that will lead to a correction. No one has repealed the business cycle, so we’re headed that way.

Or perhaps you can reassure us otherwise. Maybe we shouldn’t concern ourselves with excess credit and malinvestment. And perhaps these stock prices are not an indicator similar to a Consumer Price Index.

GREENSPAN: We spend a lot of time looking at various economic forces, which we hope will tell us what is likely to occur in the near future. We suspect there are things going on, but we don’t know yet how important they are. But we are watching things very closely. We want to create the kind of monetary policy that will keep this expansion going on in a noninflationary way. That is what is required to keep growth going.

PAUL: So you’re saying stock prices are a lot less important than prices of commodities or consumer products?

GREENSPAN: Product prices are the most crucial. If you keep them stable you’re likely to keep the others stable as well.

PAUL: In a comment to one of my colleagues, you sounded hostile or fearful that wages might go up. I understand your concern. Monetary inflation will be reflected in higher wages. But where has the concern been about the escalation of stock prices? People are expecting them to go up 30 percent a year. It’s only natural that labor wants to share in all this new money.

GREENSPAN: Let wages rise – the more the better – as long as they are real wages. It’s only when wages rise faster than the rate of inflation that I have concerns.

PAUL: Real wages are down compared to 1971.

GREENSPAN: That’s a statistical problem, Congressman. I don’t believe real wages are down since 1971.

PAUL: The workers in my district aren’t convinced it’s a statistic.

GREENSPAN: Let me put it this way: The productivity increases of the ‘50s and ‘60s came to a dramatic end in the early ‘70s. Productivity flattened out after that, until recently. We all should be concerned about that, and I believe we are.

July 1998

PAUL: Mr. Greenspan, someone quoted you as saying you would welcome a downturn in the economy to compensate for the surge and modest growth we’ve experienced. Is it not true that in a free market with sound money, you never welcome an economic downturn? But what we’re hearing now is, when is the Fed going to intervene and turn down the economy?

Wouldn’t a free market operate a lot better than the market we use today?

GREENSPAN: When you have a fiat currency, which is what everyone in the world has—

PAUL: You don’t have a free market.

GREENSPAN: You don’t have a free market. Central banks determine the money supply, not the market. If you are on a gold standard, then the system works automatically.

We are not on a gold standard because leaders of the 20th and 21st centuries don’t want a market that functions in that manner. I personally have feelings of nostalgia for the gold standard, but as you know, I’m a very small minority among my colleagues.

PAUL: So we have to accept the downturns.

GREENSPAN: No, we don’t accept them or regard them as desirable. Our goal is maximum sustainable growth in the economy. But maximum growth in the short-run may not be sustainable in the long-run.

February 1999

PAUL: Many economists view the price of gold as an indicator of inflation. The higher the price goes, the greater the worries about inflation and the value of the dollar.

You have said that central banks, who are the major holders of gold, are willing to loan or sell gold in increasing quantities should the price rise.

Since we are no longer on a gold standard, are central banks selling gold to hold its price at a certain level?

GREENSPAN: No. They are selling gold for two reasons: one, to reduce their storage costs for gold, and two, it’s considered a poor asset to hold since gold does not yield any interest.

July 1999

PAUL: Mr. Chairman, in your opening statement you said we should be especially alert to inflation risks. You admitted today as you have done in the past that the business cycle of booms followed by busts is not dead.

Since you took office in 1987, the money supply as measured by M3 has shot up $2.5 trillion. The Consumer Price Index has gone up 44 percent. Capitalization in the stock market has gone from $3.5 trillion to $14 trillion.

It’s not a matter of anticipating that a problem might arise – we’ve already created one, and we’re going to have to deal with it. How are you going to handle it? In 1979 and 1980, under similar circumstances, the Fed raised interest rates as high as 21 percent to save the dollar.

And why on earth would you want to stay around for this calamity? I would think you’d want to get out while the getting is good.

GREENSPAN: Dr. Paul, it is not by any means clear that the increase in money supply is reflected in stock prices. A lot people assume it is, but the evidence is not clear.

PAUL: Excuse me, but in your 1966 article didn’t you argue that the increase in money supply was indeed the factor that led to the Depression?

GREENSPAN: No, that was not my argument. In 1927 we adopted an easy money policy to swing the flow of gold in favor of Great Britain. That policy was but one of the possible creators of market speculation in 1928 and 1929. We don’t see anything like that happening today.

We don’t know if we have a significant bubble at this time.

We do know that inflation is a monetary phenomenon but we don’t know exactly what money is. It is not any of the M’s people use – M1, M2, M3, MZM. They’re only proxies people use when they talk about inflation. We have great difficulty identifying something we can call true money.

February 2000

PAUL: Good morning, Mr. Greenspan. I see you have stayed on the job in spite of my friendly advice last fall. At least you remember the days of sound money, even if it’s only nostalgia, so I’m pleased to have you here.

We have talked a lot about prices today, but for the sound money economist the money supply is the critical issue. If you increase the supply, you create inflation.

If we aim at a stable price level, we’re making a mistake. Technology and other factors can keep prices contained, but if you’re increasing the money supply we still have malinvestment, excessive debt and borrowing.

Someone mentioned that the Fed might be too tight with money. I disagree. The last quarter of 1999 might be historic highs for an increase in Fed credit. Over the last three years the Fed has not once been in the target range for M3. You went over it, in fact, by $690 billion. Everyone likes it now because the bubble is still growing. But what happens when it bursts? Can you reassure me it won’t? Will M3 shrink?

GREENSPAN: Let me assure you we believe in sound money. We believe if you have a debased currency you will have a debased economy. As I’ve said earlier, the difficulty is defining what money truly is. We have been unable to define a monetary aggregate that will give us a reliable forecast for the economy. Until we find a reliable “M” we will go light on the use of monetary aggregates for monetary policy purposes.

PAUL: So it’s hard to manage something you can’t define.

GREENSPAN: It’s impossible to manage something you cannot define.

July 2000

PAUL: I would like to get your comments on the Austrian free market explanation of the business cycle.

My understanding of it is this: once we embark on a policy of creating new money, which is inflation, we distort interest rates and cause people to do dumb things. They overinvest, they malinvest, they create overcapacity, and all of that has to be corrected.

In the 1920s, the Austrian economic policy explained what would probably happen in the 1930s. The Austrians predicted the breakdown of the Bretton Woods agreement. None of the Austrian economists were surprised when Japan’s bubble burst in 1989.

We are now the biggest debtor in the world. We have a foreign debt of $1.5 trillion, which is 20 percent of Gross Domestic Product. Because of our current account deficit, we are now borrowing more than a billion dollars a day to finance our prosperity.

My question is: Where do the Austrian economists go wrong?

GREENSPAN: I once attended a seminar given by Ludwig von Mises. I am aware of the Austrian teachings and believe a lot of them are still right.

The remarkable thing about the behavior of economies is they rarely square with forecasts as much as one would hope they did. Economists continuously struggle to understand which structure is likely to move the economy in one direction or another. Their views change from decade to decade. For instance, in the 1960s most economists believed a little inflation was desirable. The vast majority no longer hold that view.

PAUL: I was hoping you would say don’t worry about these Austrian economists even if their past predictions did come true.

GREENSPAN: As I said, economies are difficult to forecast.

February 2001

PAUL: Mr. Chairman, you’re getting a lot of suggestions these days about what to do with interest rates. That’s likely to continue because I suspect we’re moving into – you don’t call it a “recession,” but a “retrenchment.”

In many ways we have an unmanageable system, and that is the key to what is happening in our economy.

You are continuously asked to lower interest rates. Let me remind my colleagues that when somebody says “lower the interest rates” they’re saying “inflate the money supply.”

If we concentrate on prices and find that the Producer Price Index is satisfactory, for example, we neglect the fact that the money supply is surging and causing a lot of mischief.

In your testimony today you talked about “excesses” and “imbalances” and the need for “retrenchment.” In 1996 you were justifiably concerned with “irrational exuberance in the stock market.” Since then the money supply as measured by M3 has gone up $2.25 trillion. The stock market has soared. I see the imbalances as a consequence of excessive credit.

I don’t believe you or anyone can know what the proper rate of interest is. Only the market can dictate that. I don’t think you know what the proper money supply is. You admit you don’t even have a good proxy for measuring the money supply, yet that is your job.

Now you’re talking about monetizing other securities like state bonds and foreign bonds. Isn’t it ironic that with a $5.7 trillion debt we’re running out of things to buy?

GREENSPAN: But of that $5.7 trillion a large part is held in trust funds of the U.S. government. The net debt is really $3.5 trillion, of which the Fed owns more than $500 billion.

When we look at State and local securities to buy, we’re looking to maintain the same degree of risk we have when we buy federal government securities.

July 2001

PAUL: A few decades ago the Keynesians believed they could eliminate the business cycle. Your conclusion was that they can’t because they can’t control human nature. I agree with you on that point.

You keep interest rates artificially low by increasing the money supply. Human nature is such that businessmen will, under those conditions, overbuild their businesses. In a recession, which we have now, this has to be liquidated.

The hard money school says that when you manipulate interest rates, you have made it a certainty that we will have a recession. And now you’re trying to get us out of it by resuming the inflation, the debasement of the currency. This sometimes works and sometimes doesn’t. Right now it isn’t working.

GREENSPAN: As long as you have a fiat currency, which is a statutory issue, a central bank should try to replicate what a gold standard would do. Even when the gold standard was functioning close to its ideal in the late 19th century, the economy still experienced business cycles. These were very much like what we’ve observed in the last couple of years.

Given the fact that we have a fiat currency and that is the law of the land, we’re doing as good a job as one could do under the circumstances.

February 2002

PAUL: You said that Enron provides encouragement that the force of market discipline can be counted on over time to foster a much greater transparency. That’s exactly what the market does with money.

In 1979 and 1980 we saw sudden and rapid devaluations of fiat currencies around the world. That was the market forcing transparency on us.

Do you see any corollary between the way the Fed runs the monetary system and the way Enron operated?

GREENSPAN: Enron tried to imply that their earnings were much greater than they really were. They tried to obscure the extent of the debt they had. We’re not doing anything like that. I hope your analogy is inappropriate.

PAUL: I guess we’ll all keep hoping.

July 2002

PAUL: I don’t think the Federal Reserve has done a good job protecting the value of the dollar. Since you have been chairman we’ve experienced rampant inflation of the money supply. We have created $4.7 trillion worth of new money in M3. Since last January it has gone up over $1 trillion. If you keep printing new money the dollar can only go lower.

You once championed gold, and you know that gold has to be undermined if fiat money is to work. Central banks dump hundreds of tons of gold to make sure gold does not discredit their paper money. I think there is a concerted effort to do that.

GREENSPAN: As far as the United States is concerned, we don’t do it.

February 2003

PAUL: You mentioned in your speech last December that price levels essentially remained stable under gold. But after we went off the gold standard, prices rose ten-fold. Then you said when inflation was out of control in 1979, monetary policy changed direction and brought it in line. This gave you confidence that central bankers had learned how to manage a fiat currency. Now your main concern is deflation instead of inflation.

But I seriously question whether inflation is a dead issue. Over the last 3 months Fed credit has gone up at the rate of over 28 percent. Price indices such as the Consumer Price Index and Commodity Research Bureau Index are rising. Gold is up 36 percent over the last 18 months. Oil is up 60 percent. Medical care costs are skyrocketing, housing and education costs are going up. And all we can do is print money.

You have lowered the discount rate 12 times and there’s still no sign of good economic growth. When will you express a concern about an inflationary recession?

GREENSPAN: We are still concerned about inflation. We seek stable prices, and stable prices mean no inflation or deflation.

I would say the prices of gold and oil are war-related and not related to monetary policy. The best statistics we have still indicate very low inflation with no evidence of an acceleration.

We will continue to monitor the economy as best we can to make certain we keep prices stable. They are stable now, and we hope to continue that indefinitely into the future.

February 2004

PAUL: Mr. Chairman, does it ever occur to you that maybe there is too much power in the hands of those who determine monetary policy? You have the power to create financial bubbles, the power to change the value of the stock market within minutes by the wording of a sentence.

GREENSPAN: Under our system of fiat money it is inevitable that the producer of the money supply will have inordinate power. For that reason, and because we are unelected officials, it is mandatory that we be as transparent as we conceivably can.

Remember, the power we have is all granted by you. We can’t do anything without the agreement or acquiescence of Congress. One of the reasons I’m here today is to convey to you what we’re doing and why. I’m sure all of my colleagues are fully aware of the responsibility that Congress has given us.

PAUL: I agree that the responsibility is here in Congress.

July 2004

PAUL: In yesterday’s testimony you said inflation in the long run is a monetary issue, but various factors affect inflation in the short run. I contend that it’s a monetary issue anytime. Yet our temptation here and with central banks is to focus on the government’s measure of CPI. Once you increase the money supply and thereby lower interest rates you’re going to lead investors and others into making mistakes, even if consumer prices remain stable.

During the slowdown in 2000 and 2001 you inflated aggressively by lowering interest rates to the unprecedented level of 1 percent. But what has it accomplished? Manufacturing hasn’t recovered, savings hasn’t recovered, the housing bubble continues, the current account deficit continues to grow as our foreign debt grows, and consumer and government debt are both rising.

Since fiat money has never survived for long periods of time, is it possible that we’re at the beginning of the end of the fiat system that replaced Bretton Woods 33 years ago?

Perhaps, as you said, we may have to address overall monetary policy, both domestically and internationally, in order to restore real growth.

GREENSPAN: Once you go off a commodity standard and turn to a fiat standard, it is very difficult to create what the gold standard did. Yet we have tried to do just that. I’m pleased that we are not getting the long term inflationary effects of fiat money. I am surprised by that fact, but as best I can judge, it is a fact.

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Is it the longest apology in history? I sure hope so.

It isn't an apology, as such... it is an explanation. It reads like his autobiography... it says the stupid things he thought - and he leaves it to the reader (with hindsight) to judge if he was being foolish at the time. He is honest about his political affiliations and gives details about how those coloured his judgements... He talks about meeting Blair and Brown - and how their strategy discussed with him was rather different to that related in our media. Greenspan explains how he was successful in business; how he related to people socially, and how he landed the top job at the Fed - and how surprised he was that he was, essentially, unopposed by anyone senior - no matter what he said. He talks about advising Russia on central bank policy - and of his experiences in China when he advised them.

It discusses current-affairs up-to and including 2007.

Edited by A.steve

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