Thursday, July 31, 2008

Greenspan Talks and You Should Listen

In a wide ranging interview on CNBC with Maria Bartiromo, former Fed Chairman Alan Greenspan provided one of the best overall analyses of the current economic situation.

As we have pointed out in the past, Greenspan studies the details of economic data better than any other economist. The one weakness Greenspan has is that, amazingly, he doesn't have a business cycle theory. This weakness displays itself briefly in the interview, but for the most part it is top notch commentary by Greenspan.

Significantly, as we have pointed out also, Greenspan understands that the current crisis is housing and housing finance crisis, rather than a full-fledged recession.

But,Greenspan does not, and this is where his lack of a business cycle theory comes in, discuss the current slowdown in money supply that could throw the economy into a full-fledged recession.

From his data digging, he points out that currently there are some 12 million homeowners that have negative equity in their homes. Of course, homes with negative equity are homes very susceptible to foreclosures and walk aways. It is these kind of numbers that cause Greenspan to say that the US is “nowhere near the bottom” of the housing slump.

Greenspan also warned that "Fannie and Freddie are a major accident waiting to happen," and speculated that the two may eventually have to be nationalized.

He very perceptively warned that the plan Treasury Secretary Paulson is pushing to put the Federal Reserve in the role of regulator of the financial sector is foolhardy and such a role by the Fed would end in failure by the Fed as all factors are never known in advance and thus it is impossible to regulate them in advance. Hear, hear!

He also very perceptively pointed out that the financial crisis shall ultimately pass, but the real long-term problem will be inflation and stagflation.

In a moment of complete honesty, he pointed out that during his reign as Fed chairman productivity growth suffocated inflation problems, but that now the tide has turned and inflation is a much bigger problem than when he was Fed chairman.

Part 1 of the interview is here.

Part 2 of the interview is here.

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