Thursday, February 12, 2009

Greenspan: I Was Clueless

I have long said that Alan Greenspan never had a theory about the business cycle. In his biography, he never touches on the topic. Thanks to a CNBC documentary, my belief is reinforced.

Greenspan told CNBC in an interview to be shown tonight that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.

Further, he said that, "...everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it.In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging."

Nobody knew it in 2004? M2 money supply grew at the then pre-Bernanke rapid rate of 5.2% n 2004. Anybody with an inkling of understanding as to how the business cycle works would have understood there were massive structural problems being created in the economy becasue of this money supply printing. If he had understood the business cycle, he would have known that he was creating a bubble.

Though, later in the interview, Greenspan seems to get that if he stopped printing money there would be severe problems, political and economic.

“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”

“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”

He knows that if he stops printing he will damage the economy, but he doesn't mention, or seem to get, the structural shifts caused in the economy, by his money printing. Fascinating.

1 comment:

  1. He is basically admitting that the entire government and media systems are dysfunctional to the core. There's a shocker... "in the end, all will be revealed"