'Shocked" by the financial crisis that jammed the world economy in 2008, former Federal Reserve Chairman Alan Greenspan has changed his old position that bankers, traders, and investors are fully rational.
The evidence, he now says, shows that "animal spirits" - euphoria, herd instinct, and, especially, fear - can be counted on to bubble prices, stagger markets, and slump economies. At least in the short run.
In his book The Map and the Territory: Risk, Human Nature, and the Future of Forecasting (Penguin Press HC, 390 pages, $36), Greenspan looks forward - and back. He denies responsibility/credit for today's low interest rates (that's more China's doing, in his telling). He says banks need less Washington regulation and more reserve cash. And that failing companies need bankruptcy, not U.S. bailouts.
Freed from "Fed-speak," Greenspan, who will be at the Free Library on Friday night, blames low wages and high unemployment on the Obama stimulus of 2009 - and on rich Americans paying too much for poor people's Social Security and medical care. But our divided Congress needs to compromise, he adds, so the country can improve schools, roads, and the way we pay for health care and retirement.
We spoke last week for half an hour. Highlights:
Question: You say you didn't drive interest rates down.
Answer: The end of the Cold War, the fall of the Berlin Wall, changes in China [created] this huge flood of savings. . . . This created an asset boom and housing boom all over the world. So very clearly the long-term rate in the U.S. was driven by international causes.
Q: You've embraced behavioral economics - [the view] that investors can be influenced by culture, the times, the "herd." . . . What should the Fed do about price bubbles?
A: Stability creates the conditions for bubbles. It happens all the time. . . . The only realistic policy is to make sure there is not a lot of [financial companies borrowing too much. Or else, when] debtors default, you get contagion.
Q: Wasn't a main cause of the 2008 blowup not animal spirits but fraud - bankers, traders, rating agencies lying about loans and risk?
A: We do not press our fraud statutes adequately. . . . If it's misrepresentation, it's a fraud, it's illegal, and it ought to be prosecuted.
Q: Is Philadelphia Federal Reserve President Charles Plosser right, that the Fed can't do much to boost hiring or fix the economy in the short term?
A: Different views dominate the Federal Reserve. They change. . . . It's a malleable institution whose policies can get outside where academic opinion is.
Q: Do you agree with those who divide society into a small group of creative "makers," who build businesses and hire others, and a mass of "takers," who depend on them? Which group should government help?
A: This is one of the problems of democracy, ongoing since 1789. We're not going to resolve it soon.
Q: You say the government takes too much in taxes from successful Americans to pay for poor people's Social Security and medical care, and this depresses the economy. But doesn't retirement and medical spending also turn into business sales, and today's high corporate profits?
A: The data shows, if you cannot produce savings, your capital investment goes down. This turns out to be a very critical factor in productivity growth and standards of living. . . . You have this extraordinary dilemma: How do you allocate the funds of the society? The only thing that solves it is economic growth.
Q: Where do you go when you're in Philadelphia?
A: My wife [TV reporter Andrea Mitchell] is a trustee of the University of Pennsylvania, and when they meet, she insists I come to Philadelphia. . . . She stays on campus. She even got me into reading the Wharton Journal.
Alan Greenspan, "The Map and the Territory"
7:30 p.m., Friday, Central Library, Free Library of Philadelphia, 1901 Vine St. (Enter at back door, on Wood St.) Tickets: $36 (includes copy of book)
Information: 215-567-4341, freelibrary.com/authoreventsEndText