Alan Greenspan, American Economist, is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC. First appointed Federal Reserve chairman by President Ronald Reagan in August 1987, he was reappointed at successive four-year intervals until retiring on January 31, 2006 after the second-longest tenure in the position.
Speaking with Prannoy Roy of NDTV, Alan Greenspan gave his views on world economy and US financial crisis.
Do you agree with the policies that are underway right now in the U.S. to fight the financial crisis, the economic crisis… Do you agree to those policies? And if you were at the helm right now what would you do differently?
First of all let me say that this is type of the crisis which emerges in once in several generations it is characteristic of market economy as they do well for vast proportion of time…. periodically they do break down and they break down largely as a consequence of degrees of euphoria that tend to be cumulative over time and well these generate bubbles...some bubbles deflate without any consequence to the economy as indeed the dot com bubble there in the 1990s….Others deflate with extraordinarily difficult problems that are fostered at the end of it. It is extremely difficult to know when these are occurring because a financial crisis which is of course we are talking about is…. by definition is a break in asset prices of a significant amount which are unexpected and if they are expected then the market price you will get a situation in which there would be arbitraged the way as indeed the concern about the American dollar and the current account deficit was… so that.. I think that there were two relevant policies here.
One is the policies of the Federal Reserve and I think that they have done an excellent job and indeed were not with the fact that the Federal Reserve moved in when this very rare event when you have to substitute sovereign credit for private credit became evident following the crisis that began in September 2008. Similarly, the fiscal policies, which were directed at moving funds into the banking system during this crisis were also required for precisely the same reason. This is extremely rare and requires extremely rare actions.
You can only mitigate the nature of these consequences in part but you have to rely to a very substantial extent on a normal trade of powers of the market place itself which we are seeing in functioning. My own view is as I have mentioned probably on numerous occasions, I do not think we ought to be expanding the deficit very much longer in the United States because I think the long term consequences are very extraordinarily negative and I think we are probably at a stage taking too much risks so my argument basically is that we have had enough stimulus for the moment and I think we need to allow it to calm down because the major problem that we confront at the moment is an extraordinary amount of risk aversion. Risk aversion in the sense that American Corporations that are highly profitable are not moving that profitability into capital investment at the rate they would have passed relationships and at that deficit which is caused by fear and uncertainty is pretty much offsetting in dollar amounts the size of the stimulus and so what I think it is required here is to try to resolve our regular tolling system the problems that we have as quickly as we can and let the system calm down and let the curative process ease where I do not think we can spend our way out of this problem.
Dr. Greenspan, the worst case scenario being discussed right now is the double dip. The best case scenario is a prolonged period of slow growth in the economy like the U.S., Europe, Japan. My question is that against that backdrop you have emerging economies like India and China growing at rates close to 8%. The prominence of these economies do you see it shifting in the favor of emerging economies over the years ahead?
Well lets remember that we are all in the same global economy that we interact an essentially remember that there is a very substantial amount of demand for exports in an emerging age which are moved to United States specifically and to Europe and other countries in a developed world and if the developed world is not functioning properly as indeed it is not, this extraordinary boom that we have seen is emerging in India, in China, Indonesia, and in the long list of successful economies... that can't go on because it is so dependent on the issue at this stage… of exporting net to the United States and that is the demand in the United States and elsewhere is a major factor in the success in the East of Asia and until you get far more way for example in China have domestic domain generated internally and less on and less on export markets and the same pretty much in the East of Asia.
It is less so obviously in India which is far less dependent on export markets and for example the rest of Asia. Strangely enough, India is doing better than anybody at this stage in part because it is largely self contained. I am not going to argue that the inflation or the deflation is in large deficit and the very rapid growth in the money supply and to not to stabilizing over the long run… today India has managed to contain this problem but it can't do so continuously and I have considerable concerns that if we think in terms that we are going to decouple…that is an illusion. We are all in the same global market to the extent that we prosper the rest of the world will prosper and to the extent that the rest of world prospers we in the United States will prosper and I think that is good and we are finding that rising standards of living all around the world require an ever increasing specialization of labor and that in turn requires an ever increasing globalisation and that is all to the good so I think we are having very significant problems at the moment but the notion that somehow we are going to solve this by decoupling the issue of the developing world from the developed world that is I think an illusion.
What percentage chance do you think that there is going to be a double dip recession in the U.S.? What is the percentage? Probability.
I would say that it is somewhere between a fourth and a third. On the part of that side remember that in the United States there has been a very dramatic decline in construction both residential and non-residential. That is a major part of the economy it is now at the bottom. It has no place to go but up. Housing starts for example, are just extraordinarily low. They can barely get lower because replacement demand at the minimalist level is what we have now. Motor vehicle which is required extraordinarily in the United States for a number of years, But now we are running out of space. We don't have any room for new vehicles anymore and so that just comes down as well.
Inventory accumulation that is gone on in the United States but not to the point where it is in balance and therefore subject to interaction so there are actually down size limits to where the United States economy can go because we have already made much of the rustle construction necessary correction. The key variable in here, the best I can judge is essentially what happens to global equity prices because I think what we underestimate is the extent to which the stock market around the world have a very critical impact on the economic activity, unemployment and on general economic success.