So nice of David Gregory to make sure we all got to hear what the man who's been wrong about everything, Alan Greenspan, thinks about what we should d
December 14, 2009

So nice of David Gregory to make sure we all got to hear what the man who's been wrong about everything, Alan Greenspan, thinks about what we should do now to fix the economy he helped to mess up, or whether or not the Fed should be audited.

MR. GREGORY: This is an interesting question about our role in the world, how the rest of the world sees us, our commitment to capitalism and, in corporate America, Dr. Greenspan, the notion of where is the certainty? Washington is a big question mark now when it comes to climate policy, healthcare policy. A lot of businesses saying, "Look, we don't know what's coming down the pike." There's no impetus to grow, to expand, to invest.

DR. GREENSPAN: That's the key problem; that is, investment occurs when you have a stable economy and when you can foresee what's going on in the future. Because, remember, you make a risky investment which may have 10 years or 15 years life to it, and unless you have some semblance of a notion as to what is out there...

MR. GREGORY: Hm.

DR. GREENSPAN: ...you're going to be reluctant to invest. And that is key. I mean, I agree with Jim in this respect. I think it's very critical that we get the uncertainties out of the system.

MR. GREGORY: Do you think additional stimulus for jobs makes sense at this stage?

DR. GREENSPAN: No. I think what is missing in this whole discussion is that the--what I presume to be the major source of the recovery, and that is the remarkable increase in the amount of stock market wealth that has occurred in the last six to nine months. People think stock prices are just paper profits. They are not. They create real purchasing power and, most importantly, they create a fluidity into the financial system which is the reason why even though banks are not lending freely at this particular stage, they are solvent and the problems that we had six to nine months ago have disappeared, because essentially $5 trillion worth of increased equity is pouring into the economy. And you can see it in the retail sales figures. 401(k)s, for example, have increased by half a trillion dollars.

MR. GREGORY: And yet the president says Wall Street's to blame. He just said it in his radio address. Is that the wrong message?

DR. GREENSPAN: Well, the problem is that there is an issue here, namely that this is a bivariate type of economy.

MR. GREGORY: What does that mean?

DR. GREENSPAN: It means that, it means that...

MR. GREGORY: Don't try to slip that in here where we can't understand something.

DR. GREENSPAN: Well, it's my old Fed...

MR. GREGORY: Exactly.

DR. GREENSPAN: It's my old Fed speak coming back.

MR. GREGORY: Exact--old habits, yeah.

DR. GREENSPAN: I can't break the habit. Look, there were two economies here, which is very unfortunate. The economy is being driven in a positive sense by big business and wealthy individuals. Small business, small banks and a very significant part of the unemployed are not prospering. I'm particularly concerned about where the job machine is relevant to small business...

MR. GREGORY: Mm-hmm.

DR. GREENSPAN: ...which are doing miserably. They're getting--have great difficulty financing and great difficulty in creating jobs.

[...]

MR. GREGORY: Let me turn to another question about the role of government, and that is the role of the Federal Reserve. Dr. Greenspan, Paul Krugman, liberal economic economist for The New York Times columnist, wrote this this week about what the Fed ought to do: "There's also," he wrote, "I believe, a question of priorities. The Fed sprang into action when faced with the prospect of wrecked banks; it doesn't seem equally concerned about the prospect of wrecked lives. And that is what we're talking about here. The kind of sustained high unemployment envisaged in the Fed's own forecast is a recipe for immense human suffering--millions of families losing their savings and their homes, millions of young Americans never getting their working lives properly started because there are no jobs available when they graduate. If we don't get unemployment down soon, we'll be paying a price for a generation." Does the Fed have more to do?

DR. GREENSPAN: I think the Fed has done an extraordinary job, and it's done a huge amount. There's just so much monetary policy and the central bank can do, and I think they've gone to their limits at this particular stage. And you cannot ask them to create more than is physically possible. They, they stopped what essentially was a major financial collapse by interposing sovereign credit for private credit for commercial paper, for essentially blocking a number of problems which emerged especially, incidentally, in conjunction with the Treasury, the so-called TARP program, where they put capital into banks.

MR. GREGORY: Mm-hmm.

DR. GREENSPAN: I thought at that point was essential. The difficulty is there is a limit. And if the Federal Reserve does not, in fact, pull in all of the stimulus it's put into the economy, then down the road is inflation. It's a long way down the road and it's not immediate. But the question is, you cannot ask a, a central bank to do more than it is capable of doing without very dire consequences.

MR. GREGORY: Are you worried about the Fed's independence?

DR. GREENSPAN: Very much so.

MR. GREGORY: What do you think the consequences of some of the legislation on Capitol Hill are now?

DR. GREENSPAN: If, in fact, specifically, they take away the amendment that was passed in 1978 which prohibited the GAO, the General Accounting Office, from auditing monetary policy, if that is removed, I think that will very significantly compromise Federal Reserve independence. And what you will be getting is a monetary policy more dedicated to political short-term considerations, not to the longer-term considerations which the Federal Reserve Act was specifically constructed to do.

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