Tuesday, August 5, 2008

Greenspan, Again

Former Fed chairman Alan Greenspan has a commentary on the current financial crisis, over at FT.

He doesn't say anything different from what he sad in his interview last week with Maria Bartiromo, that the end of the financial crisis will not occur until the housing oversupply clears.

We found this comment by Greenspan interesting since it proves our point that Greenspan doesn't get the business cycle:

The cause of our economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has provedcapable of suppressing without severe hardship.

This is Keynes' old 'animal spirits' explanation for the business cycle. In fact, there is nothing inherent in the economy, or the nature of man, that suggests that the business cycle is an inevitable consequence of market activity. The business cycle is caused by Federal Reserve manipulation of the money supply. When the Fed increases the money supply, it distorts the direction of economic activity towards the capital good sector, when the Fed stops printing money the economy re-adjusts to the pre-money manipulation economy. Greenspan has a blind spot that prevents him from even recognizing this theory.

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