Greenspan clarifies
[LBO 2005 http://www.leftbusinessobserver.com/Housing.html: “Froth,
as any beer-drinker knows, is a large collection of tiny bubbles”. AG
2007: “Lots of froths are equal to a bubble…”]
http://news.yahoo.com/s/nm/20070917/bs_nm/greenspan_dc_6;_ylt=Am7YIrFT00cOLJ0xdRKBtCIE1vAI
Greenspan clarifies Iraq war, oil link By JoAnne Allen Mon Sep 17, 2:51 AM ET
WASHINGTON (Reuters) - Clarifying a controversial comment in his new
memoir, former Federal Reserve Chairman Alan Greenspan said he told
the White House before the Iraq war that removing Saddam Hussein was
“essential” to secure world oil supplies, according to an interview
published on Monday.
Greenspan, who wrote in his memoir that “the Iraq War is largely
about oil,” said in a Washington Post interview that while securing
global oil supplies was “not the administration’s motive,” he had
presented the White House before the 2003 invasion with the case for
why removing the then-Iraqi leader was important for the global economy.
“I was not saying that that’s the administration’s motive,” Greenspan
said in the interview conducted on Saturday. “I’m just saying that if
somebody asked me, ‘Are we fortunate in taking out Saddam?’ I would
say it was essential.”
In his new book “The Age of Turbulence: Adventures in a New World,”
Greenspan wrote: “I’m saddened that it is politically inconvenient to
acknowledge what everyone knows: The Iraq war is largely about oil.”
U.S. Defense Secretary Robert Gates on Sunday rejected the comment,
which echoed long-held complaints of many critics that a key
motivating force in the war was to maintain U.S. access to the rich
oil supplies in Iraq.
Appearing on ABC’s “This Week,” Gates said, “I have a lot of respect
for Mr. Greenspan.” But he disagreed with his comment about oil being
a leading motivating factor in the war.
“I know the same allegation was made about the Gulf War in 1991, and
I just don’t believe it’s true,” Gates said.
“I think that it’s really about stability in the Gulf. It’s about
rogue regimes trying to develop weapons of mass destruction. It’s
about aggressive dictators,” Gates said.
Greenspan retired in January 2006 after more than 18 years as
chairman of the Fed, the U.S. central bank, which regulates monetary
policy.
He has been conducting a round of interviews coinciding with the
release of his book, which goes on sale on Monday.
In The Washington Post interview, Greenspan said at the time of the
invasion he believed like President George W. Bush that Iraq had
weapons of mass destruction “because Saddam was acting so guiltily
trying to protect something.”
But Greenspan’s main support for Saddam’s ouster was economically
motivated, the Post reported.
“My view is that Saddam, looking over his 30-year history, very
clearly was giving evidence of moving towards controlling the Straits
of Hormuz, where there are 17, 18, 19 million barrels a day” passing
through,” Greenspan said.
Even a small disruption could drive oil prices as high as $120 a
barrel and would mean “chaos” to the global economy, Greenspan told
the newspaper.
Given that, “I’m saying taking Saddam out was essential,” he said.
But he added he was not implying the war was an oil grab, the Post said.
DISMAY WITH DEMOCRATS
Greenspan, who in his memoir criticized Bush and congressional
Republicans for abandoning fiscal discipline and putting politics
ahead of sound economics, also expressed dismay with the Democratic
Party in an interview with The Wall Street Journal published on Monday.
Greenspan told the Journal he was “fairly close” to former President
Bill Clinton’s economic advisers, but added, “The next administration
may have the Clinton administration name, but the Democratic
Party … has moved … very significantly in the wrong direction.”
He cited its populist bent, especially its skepticism of free trade.
Clinton’s wife, Sen. Hillary Clinton, is the Democratic presidential
front-runner.
Greenspan, a self-described libertarian Republican, told the Journal
he was not sure how he would vote in the 2008 election.
“I just may not vote,” he was quoted as saying, adding, “I’m saddened
by the whole political process.”
Wall Street Journal - September 17, 2007
Greenspan’s Dismay Extends Both Ways By GREG IP
WASHINGTON — Former Federal Reserve Chairman Alan Greenspan spent
much of the past 40 years as an influential economic adviser to both
Republicans and Democrats, but today feels estranged from both. News
coverage of his memoir has focused on his criticism of Republicans
for forsaking their small-government principles. But in an interview
with The Wall Street Journal, Mr. Greenspan expressed just as much
dismay with the Democratic Party.
Mr. Greenspan, a self-described libertarian Republican, said he was
“fairly close” to President Clinton’s economic advisers — Treasury
secretaries Robert Rubin and Lawrence Summers and Deputy Treasury
Secretary Roger Altman. “The Clinton administration was a pretty
centrist party,” he said. “But they’re not governing again. The next
administration may have the Clinton administration name but the
Democratic Party…has moved…very significantly in the wrong
direction,” he said, referring to the Democratic Party’s populist
bent, especially its skepticism of free trade.
Mr. Greenspan told CBS’s “60 Minutes” in an interview broadcast last
night that Democratic presidential candidate Hillary Clinton is
“unquestionably capable” and “very smart,” but, still, his “tendency
would be to vote Republican.” Yet in his interview with The Wall
Street Journal, he said he isn’t sure how he will vote. “I doubt if I
would vote Democrat,” he said. “I just may not vote. At the moment
it’s extremely hard to say.
“I’m saddened by the whole political process, and it’s not an
accident that Republicans deserved to lose in 2006 — it wasn’t that
the Democrats deserved to win,” he said. “When it came time to rule,
all of a sudden their ratings collapsed, and the reason they
collapsed is they’re just as negative as the Republicans.”
In the Journal interview, Mr. Greenspan also said he had put the odds
of a national decline in housing prices at less than 50-50, at least
until a couple of months ago, based largely on the experience of
Britain and Australia. His book notes that in both countries, home
prices, after sustained booms, have “leveled out or declined
slightly, but at this writing have not crashed.” But he says he has
become less optimistic since his book was finished, when it became
clear the construction industry was unable to reduce the number of
housing starts below the rapidly falling level of home sales.
There is now a “very large” inventory of unsold, newly built homes
whose condition is deteriorating more rapidly, than, say, a steel
mill’s, and that puts pressure on builders to sell them quickly, he
said. As a result, “we have the capability of far bigger price
declines,” which will pinch home equity, lead to more defaults on
subprime mortgages and pressure consumer spending. The probability of
a recession, which earlier this year he put at one-third, is now
“slightly more than a third,” he said.
Mr. Greenspan was appointed Fed chairman by President Reagan in 1987
and served through early 2006.
“I was brought up in the Republican Party of [Barry] Goldwater. He
was for fiscal restraint and for deregulation, for open markets, for
trade,” Mr. Greenspan said in the interview. “Social issues were not
a critical factor. The Republican Party, which ruled the House, the
Senate and the presidency, I no longer recognize. It’s fundamentally
been focusing on how to maintain political power, and my question is,
for what purpose?”
He also expresses puzzlement over Mr. Bush’s and Mr. Cheney’s
continued advocacy of antiterrorism policies that have the effect of
curtailing civil liberties. If there had been additional terrorist
attacks in the U.S. after Sept. 11, 2001, he said, “Cheney’s and
Bush’s view would be now far more prevalent” in the U.S. But “when
events changed, they held the views that they previously held.” He
adds that while he doesn’t like their stance, “I don’t know what
should have been done otherwise” because he lacks the access to
classified information that they have.
A spokeswoman for Mr. Cheney said he “has enormous respect for Alan
Greenspan and considers him a good friend. He looks forward to
reading the book.”
Mr. Greenspan was himself a behind-the-scenes advocate of
overthrowing former Iraqi leader Saddam Hussein. He says he felt
“getting Saddam out of there was very important,” not because of
weapons of mass destruction, but because he was convinced the Iraqi
dictator wanted to control the Strait of Hormuz, through which a
sizable portion of the world’s oil passes. That would enable him to
threaten the U.S. and its allies. He said he conveyed that view to
both Mr. Cheney and then-Defense Secretary Donald Rumsfeld, another
friend from the Ford administration, but doubts that played a part in
the Bush administration’s decision to invade Iraq.
He recalls one administration official telling him such an argument
couldn’t fly politically, which Mr. Greenspan assumed to mean because
of Mr. Bush’s and Mr. Cheney’s background in the oil industry.
Yesterday, Defense Secretary Robert Gates, appearing on ABC’s “This
Week,” rejected the assertion in Mr. Greenspan’s book that the Iraq
war “is largely about oil.” Mr. Gates said, “it’s about stability in
the Gulf. It’s about rogue regimes trying to develop weapons of mass
destruction.”
Q&A: Greenspan on Bubbles, Saddam, Cheney and Bernanke By Greg Ip
In an interview in conjunction with the release of his memoir, Alan
Greenspan discussed a wide range of subjects: the increased role of
bubbles in business cycles; the global roots of what he now
acknowledges was a housing bubble; his advice to the Bush
Administration that Saddam Hussein should be removed before he gained
too much control over the world oil supply; Dick Cheney; and the
benefits of introverted Fed Chairmen. “The Age of Turbulence:
Adventures in a New World,” published by Penguin Press, is to be
released officially today. (See related story.)
At the Brookings recently, you talked about the role of psychology in
business cycles. The book doesn’t get into that much.
It’s inferred. Sort of post-book. What strikes me about the current
period is it’s wholly consistent with my generalized view of how
important innate human characteristics are in sustaining the business
cycle. I’ve always been concerned that in setting up an econometric
model you take history irrespective of whether it’s up or down, and
there’s an implicit judgment that the coefficients work symmetrically
on the upside and downside. There is a general belief for example
that capital gains on homes has a buoyant effect on consumption going
up and precisely the same on the other side. I’m beginning to
question whether that premise is true.
For example, the academic literature seems to have established that
for most of us, the pain of a dollar of loss is far greater than the
pleasure of a dollar of profit.
Yes. Fear is the driving force on the downside. Elements of wishful
thinking and euphoria form the upside. When we look at the external
world it’s very obvious. Fear is a far more dominant projector of
action than is euphoria or anything like that. The division of
labor … essentially creates competition and specialization and
hence rising productivity and growth. Fear invariably and universally
induces disengagement and disengagement is negative division of labor.
So a bubble is the inevitable end of every business cycle?
It comes to an end under two conditions. One is a bubble, or some
variation of a bubble, in which capital investment is projected with
expectations which are not realistic. The other is … you get an
inventory cycle. [At the bottom of the cycle] inventories are
liquidating .. and consumption is above production and as it goes up,
production goes above consumption until [inventories need to be
liquidated again]. There is no irrational euphoria, it’s just
misjudgments.
At the Fed you said housing was in a froth, but you avoided calling
it a bubble. From the vantage point of 2007, can you say now that it
was in a bubble?
Oh yeah. Lots of froths are equal to a bubble… What was driving
prices higher was essentially the aftermath of the decline of the
Soviet Union and the fall in real long term interest rates which
drove up residential prices all over the world. And indeed, the U.S.
was not at the top of the list by any means. It drove them up sooner
in Britain and Australia as I recall. I find this issue that the
Federal Reserve created the housing bubble just utterly devoid of any
awareness of who created all the other bubbles. And they all look
alike. Long-term real interest rates moved [in] parallel all over the
world and the results were what you always get: a fall in equity
[risk] premiums, a rise in price:earnings ratios, huge increases in
liquidity, and large increases in the market values of assets.
Many people, including some former colleagues of yours from that
period, believe the Fed kept interest rates too low for too long,
thereby contributing to the housing bubble and problems in subprime
mortgages. Do you agree?
We kept them too low for too long because we were effectively
creating an insurance against [deflation]. The problem in making
choices is that you recognize that if you miss, you can end up with
interest rates too low, too long. The question is, what did that have
to do with the housing boom? Remember that long term Treasury rates
and mortgage rates stayed flat from early 2004 through the summer of
2005 [while the Fed raised the federal-funds rate from 1% to 3.5% in
0.25 percentage-point steps]. We tried effectively to get mortgage
rates up as part of our incremental 25 basis point operation and we
failed… If we were dealing with an inflationary environment, we
would have had no trouble getting the 10-year [Treasury yield] up…
Had we [raised rates] earlier, do you think we wouldn’t have gone
through exactly the same phenomenon?
Your book criticizes the Republican Congress and the Administration
for abandoning small government principles. Is Dick Cheney part of
the problem or part of the solution?
I don’t really know. I mean you have to understand how profoundly
impressed I was with Dick Cheney during the Ford Administration. And
he and I remain very close in the years subsequent. Indeed, he was
the only person who showed up at both my 50th and 70th birthday
parties. And I still hold him in high regard. There’s an
extraordinary intelligence there. He has very good judgment on
issues… I do know that other than the issue that we had on the
deficit [whose importance Cheney downplayed] that he had very much
the same ideas as I had. I have no reason to believe his views from
the Ford administration have changed.
His popularity ratings are quite low and he’s sometimes portrayed as
sinister. Is that an accurate characterization?
Not in the slightest. He has strong views but manipulator, that he’s
not. He’s been very straight with me. Clearly we don’t hold the same
views we did back in the Ford administration and don’t have similar
objectives. As I point out in the book, it’s unrealistic to believe
that people in public office and public life will not have their
views changed as indeed mine were between, say, 1977, when I left the
Ford Administration, and [now].
Tell me about your views on the importance of deposing Saddam.
My view of the second Gulf War was that getting Saddam out of there
was very important, but had nothing to do with weapons of mass
destruction, it had to do with oil. My view of Saddam over the 20
years … was that he was very critically moving towards control of
the Strait of Hormuz and as a consequence of that, control of the oil
market. His purpose would be very much similar to [Venezuelan
President Hugo] Chavez’s actions and I think it would be very
dangerous for us. So getting him out to me seemed a very important
priority.
Did you share this view with Cheney and Defense Secretary Donald
Rumsfeld?
Oh yeah.
Do you think it influenced the Administration’s decision to invade Iraq?
Their decision had been made prior to my discussions with them. My
recollection is that someone said, ‘We can’t deal with oil because
it’s a major political problem’ [because both Bush and Cheney came
from the oil industry]. But it was not Cheney or Rumsfeld.
Isn’t it ironic that you, a Republican, seem to have respected, Bill
Clinton, a Democrat, most of all the presidents you knew?
Look, the Clinton Administration was a pretty centrist party. Pro-
international trade. I could see myself fairly close to [Robert]
Rubin and [Lawrence] Summers and Clinton and Roger Altman and a
number of the other people there, but they’re not governing again.
The Democratic party has moved away, I fear very significantly in the
wrong direction.
And I’m saddened by the whole political process. It’s not an accident
that Republicans deserved to lose in 2006, and I said it wasn’t that
the Democrats deserved to win and they proved they didn’t deserve to
win by having been very effective on the negative side. But when it
came time to rule all of sudden their ratings collapsed, and the
reason they collapsed is they’re just as negative as the Republicans.
I mean, we have some very fundamental problems that require action.
Now it turns out politics is less important , domestically , than it
was, because globalization is taking over an ever increasing part of
the decision making process with the exception of national security.
How is your successor, Ben Bernanke, doing?
He’s doing excellent. I think he’s handling policy quite sensibly.
And not of a small matter, his regulatory views are very close to
mine in virtually every aspect I’ve seen. What he’s essentially doing
is carrying forward the major regulatory issues I developed with
staff, like on [government-sponsored mortgage companies] Fannie [Mae]
and Freddie [Mac] and numbers of other questions that have emerged. I
really appreciate that.
He’s an extraordinarily intelligent guy. I had previous contact with
him at Jackson Hole [in 1999]. He was one of the very few people who
supported us on the issue of not targeting asset prices. And very
many of his views were consonant with things that I believe. The
trouble is he’s as introverted as I am.
At least Bernanke eats lunch with the staff in the cafeteria. You
never did that.
He’s more gregarious than I.
In your book, you refer to Paul Volcker as “introverted and
withdrawn.” Isn’t that like the pot calling the kettle black?
He’s worse than I am. I think though … where the issue of policy is
really complex and not just a survey of other people’s opinions, you
want somebody who is comfortable with his own judgment. Volcker …
may not have been open and jovial and outward-going but he had strong
convictions. And that’s not inconsistent with introversion. I would
be uncomfortable with a “hail fellow well met” central banker.
Because he might be too anxious to please? Yes.
Do you aspire to a job in public life again?
I don’t think so. There’s no other job in public life that is like
chairman of the Fed. [This] gets around to a question of whether I
should just be shutting my mouth and going fishing. I confronted the
issue. Since 1948 I have spent every single day thinking how the
economic and political worlds have changed. If somebody had said to
me in June or July of 1987, ‘We’d like you to become chairman of the
Federal Reserve, but you’re never allowed to discuss any economics
after you leave,’ I’d have said, ‘Forget it.’ What do they want me to
do? Become an anthropologist? The best thing I can do is try to stay
away from the sensitive issues where it gets me second guessing what
Ben is doing… I understand and am very much sensitive to my talking
and what for example, my friends at the Fed may think … and I try
as hard as I can to stay away from tha