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Sunday, October 07, 2007

Non-Stop GreenSpeak

For anyone who hasn't had their fill of Alan Greenspan yet, here's a Wolf Blitzer interview of him from earlier today (I've had enough, so I didn't do much in terms of editing the transcript). The first part gives Greenspan's forecast for the economy, and the second covers issues in Greenspan's new book:

CNN Late Edition: ...Blitzer: Alan Greenspan, thanks very much for joining us.

Greenspan: It's been my pleasure.

Blitzer: Congratulations, first of all, on this excellent new book, "The Age of Turbulence." I want to discuss some of the more provocative words you write in the book. That's coming up. But let's talk about what's happening in the U.S. economy right now.

A lot of people are watching this program who are nervous, maybe understandably so, about what is going on. How nervous should they be generally about the American economy?

Greenspan: I think they ought to be cautious, but nervous doesn't help. I think the best way of putting it is that the American economy's rate of growth is definitely slowing down.

And because the housing industry, and most specifically, home prices, the odds of a recession over the next six to nine months have gone up from about a third, which is where I thought it was in March, to somewhat between a third and a half.

Blitzer: Now define recession. You're talking in terms like an economist. That would be successive quarters where there's negative growth; is that right?

Greenspan: Precisely. The odds of that happening are less than 50/50.

Blitzer: But that's not necessarily all that encouraging, if you think it is a 50/50 chance, or less than 50/50 that there would be recession, which would have very severe, very dramatic ramifications for American consumers.

Greenspan: No. Only if it is severe. At the moment, I'm just really postulating, if it happens, a mild recession.

Remember, Wolf, it's never clear what's going to happen 12 months out. Economists will give you forecasts that go out with a long series of digits. We really don't know. And we're always confronted with the fact that there's a significant amount of potential unknown. And we don't know what it is, but we do know that history tells us that something often happens. And that is why you can never say the chances of a recession are nil.

Blitzer: What needs to be done now by the president, by the Congress, by the Federal Reserve, to make sure there isn't even a mild recession?

Greenspan: I doubt very much if there is anything that can or should be done. Because remember, we have a very complex, self- calibrating, self-adjusting economy. And what our problem currently is, is the fact that we've got more than 200,000 newly constructed homes for sale in inventory.

And that's twice what ordinarily would be the case. Or I should put it this way, it's a 200,000 excess, and the absolute level of inventories of new homes is approximately eight months, when the normal is usually four. What that means is that builders around the country, having a very large stock of new and deteriorating new homes, are beginning fire sales in the marketplace. And prices are beginning to fall.

Blitzer: The housing market, the prices are going to go down. So is that bad or is that good?

Greenspan: Well, it depends -- it's the -- it depends on how fast it happens and how quickly we get it out of the way. There is -- at this stage, we're already in the price decline. And the difficulty that we have is that even though housing construction has come down very significantly, it's just basically a shade below where sales are, which means that the inventory rate of liquidation is very small.

And we have to accelerate that and get it out of the way before we can confident that the economy will get back on track.

Blitzer: How worried should Americans be about the decline of the value of the U.S. dollar?

And we're going to put a chart which shows a pretty steady decline over these past three, four years.

It's now to the point where the U.S. dollar and the Canadian dollar are virtually the same. The Canadian dollar might even be worth more than the U.S. dollar.

Greenspan: Well, unless you go abroad, which, of course, you can see the effect, there's no evidence that it is a significant element at this stage. What ordinarily would happen in history is, if the dollar would get significantly weak, you would get acceleration in inflation.

But even though I am, as you know, as I say in my book, the longer run has got more inflationary impact. There is no real evidence, right now, that that's a major problem.

Blitzer: The housing market and the bubble, the mortgage -- the credit crunch, all of that is clearly having an enormous impact right now. On "60 Minutes," you said this: "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn't really get it until very late in 2005 and 2006."

So what you're saying is that even Alan Greenspan, the former chairman of the Federal Reserve, did not foresee what has happened.

Greenspan: No, no. I was referring strictly to the subprime market.

Blitzer: That was -- in that quote?

Greenspan: Yes. The subprime market, per se, would not have been a problem if we had not securitized a very substantial amount of loans, meaning that what a lot firms, Wall Street firms, did was take large bundles of subprime mortgages, and because geographic diversification improves the quality of those loans, put them in package and sold them all over the world.

The problems that we're experiencing -- and frankly we just now seem to be getting out of it -- were largely the consequence of the corrosive effect of mispricing a lot of those loans because...

Blitzer: In other words, enticing people to go out and buy a house with a subprime adjustable rate mortgage that they probably should have had no business buying.

Greenspan: Precisely. There was a lot of egregious activity. As I said in the speech in London the other day, a goodly part of this is that the demand for subprime securitized mortgages was very high because the rate of return was very high.

And at that time, home prices were rising significantly quickly so that foreclosures and delinquencies in subprimes were really small.

Blitzer: Have we seen the end of this crisis involving the subprime and the bubble?

Or is it going to get worse?

Greenspan: We are close to the end of this particular phase of it. In other words, we are beginning to see markets come back and come back normally. But...

Blitzer: A lot of people in the process are going to lose their homes.

Greenspan: Oh, indeed. There is still a goodly part of foreclosures in the pipeline for subprimes. I might add, it's only for adjustable rate subprimes.

Blitzer: Right. Well, why shouldn't the banks and the lenders work with these homeowners and work out a new schedule for -- because foreclosing a home isn't good for the bank either? Greenspan: No. In fact, that's precisely what is happening. A bank doesn't like to foreclose. They lose a lot of money when you foreclose. It's a fire sale, effectively.

Blitzer: Right.

Greenspan: And most foreclosures -- I shouldn't say most, but a significant proportion of foreclosures never end -- don't end up with the homeowner losing the home, because a work-out is constructive in manner which the lender finds it to his advantage to keep the person in the home.

Blitzer: A lot of people complain that the United States is losing manufacturing jobs to other countries around the world. But you take a different assessment in your book, "The Age of Turbulence."

You write this: "The loss of traditional manufacturing jobs in the United States is often considered a worrisome hollowing out of the economy. It is not. On the contrary, the shift of manufacturing jobs in steel, autos and textiles, for example, to their more modern equivalents in computers, telecommunications and information technology, is a plus, not a minus to the American standard of living. Traditional manufacturing companies are no longer the symbol of cutting-edge technologies."

You know, that's not a popular view, that the unions out there, a lot of people out there saying, you know what, they hate the fact that these jobs -- these traditional jobs at the steel mills or the auto plants, they're going to countries, whether in China or Taiwan or elsewhere.

Greenspan: The sad fact, and it is a fact, is that the only way to get standards of living rising is to gradually phase the capital out of obsolescent industries and technologies, into cutting-edge technologies. I mean, output per hour...

Blitzer: A lot of people would suffer though in the process of that transition.

Greenspan: There's no question about that. The one problem that we have is that there is no alternative. If there is going to be progress, there is going to be what Schumpeter, the famous Harvard economist, called "creative destruction."

There is no problem in moving the capital from the lesser productive industries into the newer, but we have people there. And the people are laid off or they lose jobs, and it is a struggle to find new avenues. And that's the reason why the major part of our education system, which is moving rapidly, are community colleges.

Blitzer: But you say one thing that could really help get this country, the economy going, is better and more sophisticated immigration into the country. You write this: "We can immediately both damp skilled-worker income and enhance the skill level of our work force by opening our borders to large numbers of immigrants with the vital skills our economy needs."

Now, you know you're going to be criticized for that. They are going to say, why should you let these people come in and get these jobs -- these are good jobs -- when there are Americans who could be getting these jobs? Explain why you think it is good to let the immigrants come in and take these jobs.

Greenspan: If there were enough Americans for those jobs, the rate of increase -- a skilled wage premium, which has been gradual, persistent in creating a significant inequality of income this country, if we were able to educate enough Americans to fill those jobs, those wages wouldn't be rising, inequality wouldn't be rising. And what I consider a very considerable threat to our society would not exist.

The reason I look for bringing skilled immigrants in is we pay the highest skilled wages in the world. We would attract a large coterie of very skilled people. The increase in supply would suppress the wage levels of the skilled and bring the degree of inequality back more into line.

As I point out in earlier chapters in the book, it's the relative issue which is the fundamentally important question that we have to address. Also, technology is moving at a pace faster than we are able to educate our children, not only the United States...

Blitzer: So basically you see a great value in opening the borders.

Greenspan: Oh, absolutely.

Blitzer: All right. Let's talk a little bit about an uproar that you caused when the book first came out. In the book on page 463, you write this: "I am saddened that it is politically inconvenient to acknowledge what everyone knows: The Iraq war is largely about oil."

Now there has been a lot of interpretations of what you meant, what you didn't mean. But give us a very quick summary of your explanation for writing those words.

Greenspan: If there were no oil under the sands of Iraq, Saddam Hussein would not have been able to build up the real resources that he did -- financial resources and other resources to threaten his neighbors.

He invaded Iran. He invaded Kuwait. He was threatening Saudi Arabia. And it was very clear to me, watching him for 30 years that where he was going was to try to control the flow of Middle East oil through the Straits of Hormuz, which, if you were able to do that, which is 18 million barrels a day out of 65 million -- out of 85 million barrels a day, he could have shut down a substantial part of world production. And the effect would have been devastating.

He would have -- I was fearful that he would do that if he could gain control, that is, purchase some nuclear device. And I have always been wondering with the problems of the -- when the Cold War ended, and there was very serious questions at that time whether or not the Soviet arms had been protected, I had always assumed that a lot of them flowed out. And I must admit, I'm very surprised they haven't shown up.

Blitzer: At this point. But do you still see oil as being a major factor, if not the major factor in driving U.S. policy toward Iraq right now?

Greenspan: Well, actually, I'm talking about my view in there. In other words, what the real economics of the dangers are. As far as the administration is concerned, I have no reason to disbelieve what they have been saying, namely that there were weapons of mass destruction. I thought there were weapons of mass destruction because of the way Saddam was behaving: What's he hiding?

Blitzer: Anyone who reads this book can't help but come away with your deep admiration for the economic policies that were practiced during the eight years of the Clinton administration, with the first secretary of the treasury, Lloyd Bentsen, then Bob Rubin who followed him, as opposed to your criticism of the way the economic policies, tax policies were followed by the Bush administration over these past 6 1/2 years or so. Is that a fair assessment?

Greenspan: It's a fair assessment up to a point. My real concern and angst was not initially with the administration but with the Republican Congress.

Blitzer: Which was spending a lot of money.

Greenspan: Well, they started off, you may recall, in 1994 with an agenda which, as a libertarian Republican, I found very important and should be pushed. As soon as they got into power they gradually morphed towards seeking different aims. And as I say in the book, they soon swapped principle for power and in the end achieved neither.

Blitzer: Cheney, the vice president -- and you were close with Dick Cheney for a long time. I don't know what your relationship is with him right now -- he responded in an article he wrote in The Wall Street Journal. And he said this.

The article entitled "The Real Bush Record": "President Bush's tax cuts -- following through on a tax cut he made to voters -- resulted in a shallower recession, a faster recovery, and a platform for growth that remains sturdy to this day. The fact is that in a time of unprecedented challenge, the United States has experienced nearly six years of uninterrupted economic growth and added more than 8 million new jobs since August 2003, more than all other major industrialized nations combined."

Is he right?

Greenspan: He's absolutely accurate, but that is not where my criticism was coming from.

My concern was basically that, as I said on many occasions, that President Bush did not exercise his veto to constrain Republican spending.

Blitzer: There were not vetoes when the Republicans were in the majority, but there have been four vetoes now since the Democrats became the majority.

Greenspan: It would have been far better to start off practice vetoing earlier on because I believe he could have constrained what I thought was frankly an -- egregious policies on the part of the Congress.

Blitzer: We are almost out of time, but economically, $2 billion, maybe $3 billion a week being spent on the war in Iraq. Can the U.S. economy afford $100 billion or $150 billion, $200 billion a year for this war?

Greenspan: Well, let me just say that the reason why Cheney's numbers are correct and indeed his views are correct, my concern is in the longer term, we are not confronting the long-term budget imbalances.

There is no question that we are spending a great deal on the war. Hopefully, that will come down. That will not solve the very significant longer-term fiscal problems, very specifically Medicare.

And I think that is what the Congress -- the Republican Congress failed to address. That is what we are failing to address now. And unless we get to it very quickly, it is going to become a major problem for this country.

Blitzer: And very quickly, on the Medicare and Social Security, what's the solution, simply to reduce benefits for the retirees?

Greenspan: Well, quickly, granted the economics, the demographics and the politics, I would forecast that there is going to be a very significant means test of Medicare in the future because we have just -- I agree with Jim Cooper from Tennessee, we can't meet the commitments that are currently under law.

Blitzer: And that means that if you're richer, you are going to get less benefits than if you're poorer.

Greenspan: Correct.

Blitzer: The book is entitled "The Age of Turbulence" by Alan Greenspan. The subtitle "Adventures in a New World." Mr. Chairman, thanks for writing it. Thanks for coming in.

    Posted by on Sunday, October 7, 2007 at 03:24 PM in Economics | Permalink  TrackBack (0)  Comments (5)

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