Turbulent Greenspan

Greenspan Says…

The Age of Turbulence is autobiography of the former Fed Chairman, Alan Greenspan. Published by Penguin in India, it is available for the list price of Rs. 695 (the hardbound edition). To know how the fed chairman saw international politics and finance, this book is a must read. The book is based on the public information and yet the opinions of Greenspan differentiate this one from several others on the subject. Here are some of the rather unique excerpts from the book:

On Financial Crisis in other countries

U.S. played a role in bailing countries out of the financial crisis in 1990s. This is what Greenspan has to say about the crises and the handling by U.S.:

“In Late December, Mexico revealed that it was in the brink of financial collapse…

None of us had forgotten the Lai\tin American debt crisis of 1982, when an $80 billion default by Mexico had triggered a cascade of emergency refinancing in Brazil, Venezuela, Argentina, and other countries. That episode nearly toppled several giant U.S. banks, and had set back economic development in Latin America by a decade…

In the following weeks, the administration huddled with Mexican officials, the International Monetary Fund, and other institutions. The IMF was prepared to offer Mexico what help it could, but it lacked the funds to make a decisive difference. Behind the scenes I argued … that US intervention should be massive and fast. To forestall a collapse, Mexico needed sufficient funding to persuade investors not to dump pesos or demand immediate repayment of their loans. This was based on the same principle of market psychology as piling currency in a bank’s window to stop a run on the bank – something the U.S. banks used to do during crises in the nineteen century…

The [IMF] and other international bodies more than matched some $20 billion of guarantees from the Treasury [Of U.S.] to offer Mexico … $50 billion. These weren’t giveaways, as opponents had claimed; in fact the terms were so stiff that Mexico ended up using only a fraction of the credit… The [U.S.] actually profited $500 million on the deal.”

He also talks about the Asian crisis in 1997 placing special emphasis on S. Korea:

“A default by a nation of Korea’s size (of economy) would almost certainly have destabilized global markets. Major banks in Japan and elsewhere would likely have failed, sending additional tremors through the system. Shell-shocked investors would have withdrawn not just from East Asia but from Latin America and other emerging regions, causing development to stall. Credit would very likely have become much tighter in the industrialized nations as well.

About Creative Destruction

Greenspan says that creative destruction is the process of destroying the old in order to create new and is integral to the capitalism. While he concedes that this causes great discomfort to the masses, he says efficient reallocation of capital means that a sector that is not able to grow fast enough is punished. As an example, he quotes GM’s decision to cut 30000 jobs.

“…In expectation that the growth will continue, investors bid up the total market value of Google stock to eleven times that of GM’s. In fact, the General Motors pension fund owned Google shares – a textbook example of capital shifting as a result of creative destruction.

“…And then we arrived in Venice. As necessary as creative destruction is for material standards to improve, its no coincidence that some of the worlds most cherished places are those that have changed the least over the centuries.

“…nothing is more stressful for people than the perennial gale of creative destruction. Silicon valley is… an exciting place to work but its allure as a honeymoon destination as…gone largely unrecognized.”

Workers in Capitalism

While he is all praise for the ability of capitalism to deliver growth and raise the living standards of people, he also admits that the growing job insecurity is not a healthy trend.

“Most companies … maintained extra inventory and backup teams of employees…

Standby inventories and workers are all costs, and standby work hours produce no output. They produce no revenue or added productivity.

“Job insecurity historically a problem mainly of blue collar workers, became an issue starting in the 1990s for more highly educated, affluent people. This came through dramatically in survey data: in 1991… 25% were afraid of being laid off. In 1995 and 1996… 46% were afraid.”

Stock Market

Stock Market, one of the most visible institutions of finance capital is all the more important today because most of the households are invested in the stock market. Greenspan returns to the questions related to stock markets again and again and examines various aspects of the same. Some interesting observations are:

“America was turning into a share holders nation… at $9.5 trillion, [market] now was 120% as large as GDP. That was up from 60% in 1990, a ratio topped only by Japan at the height of its 1980s Bubble.

“…for most economists, price stability referred to product prices… but what about the prices of income earning assets, like stocks or real estates? What if those prices were to inflate and become unstable? Shouldn’t we worry about the price stability of nest eggs and not just the eggs that you buy at the grocery store?”

The following section is as relevant as it was at the time of 2000 dot com boom:

“How do you draw a line between a healthy, exciting economic boom and a wanton, speculative stock-market bubble driven by the less savory aspects of humans nature? As I pointed out dryly to the House Banking Committee, the question is all the more complicated as the two can coexist: “The interpretation that we are currently enjoying productivity acceleration does not ensure that equity prices are not overextended.” An example that intrigued me was the epic, multibillion dollar competition involving Qwest, Global Crossing, MCI, Level 3, and other telecom companies. Like the railroad entrepreneurs of the nineteenth century, they were racing to expand the Internet by laying thousands of miles of fiber-optic cable… There was nothing wrong with this … except that each competitor was laying enough cable to accommodate 100 percent of the projected overall demand. So while something of great value wa being built, it seemed clear that most of the competitors would lose, the vale of their stock would plunge, and billions of dollars of their shareholders’ capital would evaporate”

On Americans

“America’s isolation runs so deep that people still haven’t let it go. There is always a presumption that since America is better, we should go it alone.”

He is ostensibly referring to the Monroe Doctrine propounded in 1823 which advocated neutrality of America in the military affairs of Europe. But the doctrine is anyway a history at least since 1900 when America attacked Philippines.

Nonetheless, he goes on to explain that there was a major shift in the thinking of fed in that it should not only look at internal issues but also at things like “warning signs of a possible international financial breakdown”. And once this thinking was clear, he goes on to tell:

“Behind the scenes,…I began to try to coordinate a policy response. We argued, quietly but urgently, for the need to increase liquidity and ease interest rates throughout the developed world.” This argument led to G7 issuing a joint policy statement on combating inflation and fostering growth.

Conclusion

Greenspan expresses his opinions on a variety of topics. In this variety, his praise of capitalism, limitations of managed economies like USSR, third world etc., the ideological premises of market economics are the themes he keeps on visiting again and again. While it is difficult to agree with him on many of the opinions he expresses, the book is a must read for anyone who is interested in modern finance and international politics.