1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/7652/greenspan-implies-that-we-dont-need-a-central-bank/

Greenspan implies that we don’t need a central bank

January 14, 2008 by

A very interesting interview in which Greenspan praises the gold standard, says that artificially low interest rates can cause the business cycle, and suggests that we could do without a central bank provided we also get rid of fiat money. Hey, this guy should be Fed chairman! (For the good stuff, go to 6 mins into the vid.)

{ 30 comments }

Robert January 14, 2008 at 2:28 pm

It doesn’t suprise me that he would make these comments as he and Ayn Rand used to debate these issues until the wee hours of the morning, according to what I’ve read.

DC January 14, 2008 at 2:38 pm

Alan Greenspan is great on the Fed when he isn’t its chairman.

eric lansing January 14, 2008 at 3:40 pm

“ah, my old ring… may i see it?”

precious…

Bruce Koerber January 14, 2008 at 3:45 pm

One thing about Greenspan is that he is a master of saying two or more things at the same time.

Regardless, I applaud him for speaking the truth to the public even though he does it in his usual veiled way.

Bruce Koerber January 14, 2008 at 3:47 pm

Dear Eric Lansing,

What a great analogy!

With warm regards,
Bruce Koerber

KC/DC January 14, 2008 at 4:51 pm

Greenspan argues the Fed did not create the housing bubble; rather, it was the result of a savings glut from the fall of communism globally. Further, he says the Fed only lowered short-term rates, adding the institution cannot affect long-term rates that apply to the housing market. I’m no expert in Austrian economics — still learning — so I’m wondering if someone here can address those points.

Cory Brickner January 14, 2008 at 5:04 pm

I love that he defends his actions as Fed chairman when the reporter brings up the current housing situation analogy with the Tech bubble.

Quite honestly, Greenspan is being disingenuous when he stated that because the Federal Reserve only has control over short term interest rates and that raising them “rapidly” throughout 2004 didn’t have any effect on long term rates, the housing bubble isn’t his fault.

The reason being because the Fed has control over the fraction reserve rates. All he had to do was reign in the money supply by upping the reserve ratios, or even quit buying T-Bills. Tightening the money supply would have certainly had a very quick impact on long term interest rates.

The reality is, Greenspan had a war to finance (counterfeit for), and there was no way he was going to rain on the Bush parade.

newson January 14, 2008 at 6:20 pm

“Your toe bone connected to your foot bone
Your foot bone connected to your ankle bone
Your ankle bone connected to your leg bone”

to kc/dc: just like “dem dry bones” says, there is interconnectivity between the short and long parts of the yield curve. banks can access cheap short-term money and ride the yield curve very profitably. as an example, after september 11 the extremely cheap short-term money made it very profitable to borrow at 1% and buy long-bonds. the buying pressure on bonds sent long-yields to thirty year lows. mortgages are priced off the long end of the yield curve.
do a google search on “carry trade”, if you want more on how this works.

greenspan is a fibber, and this is a comment pitched at the lay public only.

revo January 14, 2008 at 6:33 pm

It’s funny that Greenspan believed in real hard asset money in the 1960s when he wrote a dissertation about gold currency playing the most fundamental role of exchange in economies since the dawn of time, and when he sold his soul to run the most powerful position in the world he inflates the fiat (read: fake) money supply from $4 trillion to $10 trillion to keep all the Wall Street traders happy and all Americans experiencing rapid 4-5% annual inflation. Prior to Greenspan, inflation for the past century averaged 0-1%!! Now he’s saying the very institution that he sold his soul to run for 17 years wasn’t necessary? What a freakin hypocrite if we ever saw one! This is a spineless little geek who doesn’t dare stand up for anything that’s real and honest. Our global economy is in such shambles today because we have allowed mentally weak individuals such as Greenspan to take office. He oversaw the huge growth of such massive markets as the derivatives, interest-rate swaps, CDO’s, and mortgage industries, and he did NOTHING as Fed chairman to lay down ANY policy to impose regulation on them? I suppose they can regulate themselves? When the rest of the IRS, derivatives blow up, history will see that Greenspan will be the one to blame. Because poor old Bernanke just walked into a collapsing mine.

Grant January 14, 2008 at 6:35 pm

Does anyone know how much control over the Fed the chairman really has? He always seemed like a “fall guy” to me.

newson January 14, 2008 at 8:33 pm

to kc/dc:

greenspan’s asserts that the raising of short-term rates from 2004 onwards had no effect on the longer end of the curve (in his words, a “conundrum”), thereby exonerating the fed for the housing bubble/bust.
that long term rates have risen is due to foreign central banks, notably the japanese and chinese, stepping up to the plate and amassing vast holdings of us t-bonds. this market has been a convenient parking ground for investing their enormous usd receipts. if they repatriated export earnings, their own currencies would rise, and this goes against their mercantilist instincts.

what would be really interesting to know from greenspan is the degree of coordination between the fed, the boj and the people’s bank of china in this game. maybe that chapter will be in “turbulence II”. not.

Ken January 14, 2008 at 8:33 pm

Does anyone know the date that this interview was done, and is it available in it’s entirety as it seemed to be cut short.
TIA

Richard Wicks January 14, 2008 at 8:41 pm

Here’s an interesting take:

http://www1.investorvillage.com/smbd.asp?mb=4245&mn=179299&pt=msg&mid=3448437

It’s a theory that Alan Greenspan intentionally subverted the fiat dollar to force us all back onto a hard monetary standard.

The author has made a few mistakes in his thesis, but it’s an interesting read just the same.

Richard Wicks January 14, 2008 at 8:43 pm

Whoops! Wrong link in my last post.

Here’s the right link:

http://www1.investorvillage.com/smbd.asp?mb=4245&mn=179229&pt=msg&mid=3447457

KC/DC January 14, 2008 at 9:34 pm

Thank you, Newsom.

Brent January 15, 2008 at 12:01 am

I know he has oft-repeated that he *proved* the Fed doesn’t influence longer-term rates, but his repeated assertions do not make it true.

Investors simply have expectations about the Fed’s actions in the future.

Stefan Karlsson January 15, 2008 at 5:56 am

I’m not impressed. Greenspan is trying to have it both ways by first claiming that his policy had nothing to do with the housing bubble and then say that central banks could possibly cause troubles (Only it didn’t in his case).

Had he really wanted to make the case against central banks he should have admitted that his policies were responsible for the housing bubble (and the tech stock bubble).

As for his nonsense that only long-term rates matter for the housing bubble and that central banks cannot influence long-term rates, I’ve already replied to that in a previous blog post, both of these claims are false as a lot of loans were made in so-called adjustable rate mortgages which are controlled by short-term interest rates and as long-term interest rates reflect expected future short-term interest rates and can accordingly be influenced by the central bank. I discussed this in a more extensive way in a previous blog post:

http://blog.mises.org/archives/007168.asp

Keith January 15, 2008 at 8:40 am

I’m not an economist, but it seems to me that blaming Greenspan for the bubble is like blaming your accountant when you spend too much money.

It seems pretty simple to me: you can’t spend more money than you have, even if you own the printing presses.

The present system is run by people that overwhelmingly think you can do this. 90% of the voting population also believes it and will vote for someone who proclaims to continue doing it.

ed January 15, 2008 at 10:16 am

While no huge fan of the Fed, there is a certain aspect of the invisible hand to the housing bubble. We call it a stock bubble from the 1999 to 2001 but we are still at those highs. We call it a housing bubble due to low intereste rates caused by Greenspans Fed. But today rates are the same or lower then they were 2-3 years ago. Credit requirements have increased certainly, but that has zero to do with the fed. The big bust is in the collatoralized secutirty market almost entirely subprime and near subprime assets based securities. Prime is getting hit as well marked to market.

But that is a credit issue not an interest rate issue. I’d also argue its a “new product” issue where the bundling of securities were created and marketed to buyers who wanted them. Another counter point is this. Investors in fixed income had nowhere to invest to get natural rates of return (assumed to be higher if the Fed weren’t around) But again the rates today are equally as low and there is no scrambling for high yield debt as there was 3 years ago.

So this is just boom bust? Ok maybe, but laying all at the foot of the Feds low interest rates is a bit much. Quite a bit of it is pure marketplace randomness. Additional fuel specific to housing was the tax benefit on housing profits, product development of mortgage securitization, sell out by the ratings agencies, Overseas purchases of US debt (possibly indirectly due to Fed policies)

vinnie January 15, 2008 at 4:40 pm

“I’m not an economist, but it seems to me that blaming Greenspan for the bubble is like blaming your accountant when you spend too much money.”

Your analogy would make sense if Greenspan directed fiscal policy (government revenue and spending) and if we were discussing budget deficits and not market bubbles. Greenspan was involved in monetary policy, which has to do with controlling the supply of money and has nothing to do with the federal budget.

George P January 15, 2008 at 5:02 pm

To Revo,
Touche, Greenspan is a carrerist who put his ambition above the nation’s interests. I fear for my country when I think that people like him are entrusted with great power.

newson January 16, 2008 at 2:39 am

to ed:

the proliferation of financial products is a symptom of the malaise, not the cause. the massive volatility of interest rates, asset prices and exchange rates is all traceable back to removing the stabilizing effect that gold used to provide the financial system.

derivative products only thrive where there is volatility. history bears this out, futures on tulips were a feature of tulipmania.

fundamentalist January 16, 2008 at 8:58 am

Ed: “Ok maybe, but laying all at the foot of the Feds low interest rates is a bit much. Quite a bit of it is pure marketplace randomness.”

You’re looking at the data and trying to find correlations that you can use to build a theory. Certainly that’s the MO of mainstream econ. But as Mises pointed out, you need to approach data with sound theory in mind first; otherwise the data will lead to a mass of contradictions and contradictory theories. This is especially true of history. You can prove any theory by historical data if you look long enough at it and are selective in what data you use.

Austrians approach the sub prime issue with a very sound theory of the business cycle that admits that business people make mistakes, and random errors will cluster once in a while. But when we experience failure on the scale of the sub prime lending fiasco, it’s reasonable to look for a cause beyond randomness and the Austrian Business Cycle Theory offers one: lowering interest rates affect those industries the most that are most sensitive to interest rates. Housing is very sensitive to small changes in interest rates, from construction to lending. After 2001, the Fed lowered short term rates to around 1%, which pushed huge amounts of new money into banks for lending. Long term rates and mortgages didn’t fall as much, probably because of fears of inflation. So banks have lots of new money to loan but borrowers have no incentive to borrow at existing long term rates. What do banks do to get rid of the new money the fed has given them? They lower credit standards. They start lending to people with bad credit. That may sound stupid, but consider that the bank will not hold onto the loan very long. It will sell the loan in a package to other investors. So the bank is protected if interest rates rise. The purchasers of the packaged loans thought that they were protected because the risky loans were mixed with a lot of good loans. They guessed wrong, but that happens a lot with new financial instruments. People get over confident.

Keith: “you can’t spend more money than you have, even if you own the printing presses.

It’s true that it takes two people to tango or to transact a loan. And many people spend more than they earn and are not financially literate. But what keeps a lid on such stupid decisions and prevents them from getting out of control as they did in the sub prime fiasco? Interest rates and credit standards. They are the walls that keep the barbarians from looting the city. Who controls the height and strength of those walls? The feds.

Artisan January 16, 2008 at 9:04 am

I don’t understand what you mean ed:
Bad mortgage collaterals… that is a credit issue not an interest rate issue.”

Wouldn’t you agree that the mortgage problem arose as the credit rates were lifted more than expected from those lows … making out of so-so lenders, suddenly bad lenders.

If credit was 15%, there would be
1. less bad lenders
2. less chances for them to see the Fed push a rate hike

Where I agree though: certainly the attention paid to the rates as to determine the amount of liquidity flooding the market is (according to Rothbard) mostly exagerated.

The Fed has more powerful means to add liquidity.

fundamentalist January 16, 2008 at 10:26 am

Artisan: “The Fed has more powerful means to add liquidity.”

But isn’t the effect the same? If the fed buys bonds, it increases the supply of money, which lowers interest rates. If the fed lowers reserve requirements, banks have more money to lend and that lowers interest rates.

Inquisitor January 17, 2008 at 12:36 pm

Three words: open market operations.

subhi January 17, 2008 at 4:39 pm

Greenspan headed an “institution” for 19 years and he now says, he never believed in it’s charter.

effay January 17, 2008 at 5:18 pm

Alan Greenspan: shameless as always.

Independent January 27, 2008 at 11:36 pm

All who are interested in what Greenspan is really taking about would be very interested in the book titled, ” The Creature From Jekyll Island.” Read this and be informed about the whole history and underlying structure that rules our life and politics. The island in the title is where the first meetings were held by the financial elite to plan the establishment of the Federal Reserve Bank. This “bank” is a privately owned business entity. Find out who owns it and the aim. Book is very well written and notated with extensive bibliography for further research. ISBN 0-912986-39-5

dculling February 6, 2008 at 7:02 am

After reading much about Milton Friedman and his work little if anything is surprising to me in economics anymore. I suggest everyone read up on Milton Friedman’s theories and have your own epiphany.

Comments on this entry are closed.

Previous post:

Next post: