Globe and Mail Update
January 25, 2008 at 7:52 AM EST
VANCOUVER — Alan Greenspan, in conversation with BMO economist Sherry Cooper in Vancouver Thursday.
Editor's note: This is a court reporter's record of the presentation. Recording was not permitted. Some sentences are incomplete, and in some cases words are to be missing because they were unintelligible to the court reporter.. Where words or sentences are unclear, we have used ellipsis.
SHERRY COOPER:
So good afternoon. It's a great pleasure we've been doing this again. This is third time I've interviewed you. The first time was about a year ago, in fact just more than a year ago and since we talked at that time about the U.S. market, we talked about how the serious decline in U.S. market is, but neither of us thought that it would have the enormous impact that it's had. Nor do we believe that contagion around the world would be as dramatic.
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Tell me why you think we were wrong on that, and so was, by the way, most of the community.
ALAN GREENSPAN:
I think that what is not the issue of, for example, the level of liquidity the number of related issues, but the fact that a very small niche of the American housing finance system, the subprime market, became collateralized and securitized and ended up with an extraordinary and very surprising level of outstanding mortgage-backed securities backed by subprime mortgages. I suspect, although I must admit I can't prove, that if there were never any collateralization of those securities issues specifically, I think that the level of originations of subprime would have been much lower because remember they were a very small segment of the market until the tail end of the housing bubble. And as you can see in retrospect, we couldn't really judge at the time was that the original subprime were securitized, they weren't subprime and therefore had very, very high rates of return on them but at that point in the ... United States rising you had an odd situation where the issue of foreclosures or ... was actually quite low extraordinary so-called margin of types or instruments. The demand for them, the hedge funds, pension funds, and everybody else looked to be an exceptionally high return, exceptionally low risk, became extraordinarily large the say hedge funds puts pressure on the ... basically the investment bankers in the United States, and the security returns to the lenders say ‘we need more paper' and what they basically did, they said to the lenders effectively - although I'm sure contracts are involved - is whatever you can get we will take to securitize and the underwriting standards collapsed. I mean, the amount of egregious action was quite extraordinary.
MS. COOPER:
Why did the effect of ... or other writer say what do you mean mortgages to people with no assets, no down payment?
MR. GREENSPAN:
Well, the truth of the matter is that nobody really knew at the time what those events were. We did know and I recall that very early on the Federal Reserve that there were considerable discussions about the issue of what some people were promising with respect to certain types of mortgages. But it was always considered the very small niche. The great surprise which we did not know quite late in the game was how large the originations were to become. The official data on originations were two years late and it wasn't until we saw data on the private sector which initially I saw was last year in office shortly. I basically looked at the data, I must say I didn't believe it, it doesn't seem credible to me. And it turned out to be very credible and indeed the issue is to this day we are not quite sure why it is such a small part of the market, eventually took essentially a quarter of the home sales. Now, I personally favour subprime mortgages.
MS. COOPER:
Yes, you do. You encouraged people to take invest in subprime mortgages.
MR. GREENSPAN:
No, I did not. That is one of those extraordinary events in the issue of reporting which never gets perfectly ....
MS. COOPER:
Set the record straight.
MR. GREENSPAN:
I'm trying to right now. In 2004 I went before a Credit Union room ... and I discussed the pros and cons of various types of consumer finance, and I pointed out that remember that fixed rate 30-year mortgages cost a significant amount over the adjustable rate mortgages to buy the insurance against the rise of interest rates. And I said that there are occasions in which that would be a very good thing, and indeed I made a presentation which said that over the past 10 years it would have been very sensible to have taken them out and then at the end of it they said of course if interest rates have gone up, it would have been something else.
MS. COOPER:
That part was left out.
MR. GREENSPAN:
It was there but that's not what the problem was.
Everyone started to say are you not — are you crashing the 30-year fixed rate mortgage, and so the next week, I mean seven days later, I appeared before the Economic Club of New York before 1,000 people and I get asked the question that were you really saying, that you prefer the fixed rate mortgages against the adjustable rate mortgage and the fixed rate mortgage.
I said of course not. In fact, I am more than willing and have been more than willing to pay the premium for a fixed rated mortgage and indeed the mortgages that I've taken out have always been fixed rate. What I was commenting on and I said wasn't described properly in my earlier remarks was that there are certain occasions when it pays to take the adjustable rate mortgage. If, for example, you are a corporate executive who is going to be in certain cities for two years, it probably makes no sense whatever to take a fixed rate mortgage. Probably be far better to take an adjustable rate mortgage, to take the risk. So I strongly clarified my remarks saying that it's true one of the great inventions was the 30-year fixed rate mortgage in the United States.
That never got picked up.
Indeed the issue stayed that way until very recently when all of a sudden the original one comes up with not the one a week later. So I plead not guilty.
MS. COOPER:
What do you think triggered the initial decline in U.S. house prices?
MR. GREENSPAN:
Oh, I think that that is very clear. What was occurring was that once prices went up, it became increasingly less affordable to finance the mortgages that these high prices required. And where we had a very long surge of bids — remember one aspect of the subprime mortgage is that it financed a very significant increase in homeownership amongst Americans. And I thought that that was a very important thing in society where property development is a critical issue. You want as many property owners as you possibly can have, and therefore I said subprimes are risky but it's worth the risk in my judgment. It's worth the risk for the value, really, and indeed I hope that in all the revisions that are going to occur as a consequence of what has clearly been a debacle of unbelievable dimensions considering the size and nature of the market, I hope that we don't bury subprime mortgages. I think it's been a very valuable product in maintaining homeownership to a significant segment of our society and I'm worried because the usual response for these special events is to overregulate ... .
MS. COOPER:
Tell me, U.S. house prices began to go down and of course we've seen across the board any advocate average house prices falling and certainly surprises me but the situation hasn't even bottomed yet. How long do you think it would take and what will it take?
MR. GREENSPAN:
Well, first of all, what the nature of the problem turned out to be is, back to your earlier question about what subpressure ... was. What occurred was the issue of lack of affordability occurred fairly broadly and fairly quickly, and since it takes 4 months, 6 months, 8 months to build a single family home, demand fell abruptly, but there's an awful lot of construction under way and it started out once you start construction, you are far better off to complete it than to abandon it. So you have this huge surge of new single family homes coming on the market which are ... that looked to be 2, perhaps 300,000 excess above the norm. These are very expensive to maintain ... and needless to say just the inventory of these units is quite expensive.
And so what has happening is that the builders who can't afford this, they can't afford to mothball this, there has been very few instances pressing units on the market and that is pressing the prices down.
We've never had anything like this in recent history, and I've argued that the best analogy that I can see is what happens to prices with inventory liquidation of commodities generally, and it always appeared to me that prices tend to stabilize when the rate of liquidation is at a maximum. And I suspect that that is what is going to happen here. We are far from that.
MS. COOPER:
I was going to say when?
MR. GREENSPAN:
I think the best way of looking at this is that we've got this 200,000 or 300,000 excess, we've started to run it down in the sense that home sales are running slightly above houses beginning of prices but take it down maybe 10,000 a month at maximum.
MS. COOPER:
And what about all the foreclosures that will come on to the market?
MR. GREENSPAN:
Absolutely, so we've got this to go. So there are two elements here. One is an evaluation of what is the level of sales you are going to get, and two, what is it going to require to run down not only the excess we now have, but the additional that will come on because of foreclosure. Fortunately, it looks as though new home sales are likely to start to stabilize ... . Far more than half of the decline in home sales in DC (?) has been in a reduction in number of new homes sold and financed by either subprime mortgages or to quote, authentic mortgages.
The originations of those mortgages have gotten close to zero. Unless you want to say foreclosures are a negative sale, you can't get any lower than zero. There are some still potential weaknesses in the jumbo market but the major part of the market which is the conforming conventional mortgage which is what ... actually done reasonably well. In fact, sales financed by conventional performing mortgages if anything have edged up and cash sales have been relatively stable as best as we see from the data, which obviously means that we've come down a long way but there is no reason to expect us to go down significantly further because even though there is a tightening of mortgage — so-called home mortgages - it's not likely to push sales down all that much.
And indeed the fact that the 30-year yield, 30-year mortgage is actually going down, suggests that we may be close to the point where the actual sales levels start to bottom which means that if you get another couple of significant declines in starts, we will open up that gap and finally start to move the inventory quickly. And as I said, we don't have to ... at all, what we do have to do is get to a maximum rate of liquidation. Because once the prices of homes stabilize, something very dramatic will occur.
Because remember that specifically take this 900 billion dollars of book value of mortgage-backed securities provided by subprime mortgages, the real collateral there is the “ethany” ... in the homes.
And so long as prices are falling, it's very difficult for anybody to have any real judgment about what the potential losses are.
The time when you get prices stabilizing all of a sudden banks and other lenders can begin to get a judgment as to what their losses really are. Not just forecasting where the prices are going to go, stabilized, refinance, merge, other businesses but the system then needs to stabilize and everything falls into place. We are far from that point unfortunately, but until we get there we are going to have significant residual disruption in the financial markets, and the sooner we get to the stabilization home prices meeting, the sooner we get the level of new construction down to a point where you can get very strength liquidation the better.
MS. COOPER:
And yet at the same time we don't have a functioning market with these obligations ... so they are virtually bound at nothing when there is value, so financial institutions and investments are writing it down and seemingly endlessly and at the same time Washington, the White House, the Congress and the Federal Reserve are attempting to stimulate demand through lower interest rates and tax rebates. So we won't get the capitulation as rapidly as you would suggest is required to stabilized the markets.
MR. GREENSPAN:
Well, not necessarily because remember that tax cuts or tax rebates are not focused very specifically on the nature of the problem I've just described.
That if you just say step back and say what specific action at this point would stabilize the financial system? I would say some alchemy can pick up all of these 300,000 units and let them disappear, that would stabilize the market. I'm not suggesting that is probable. But what it does is it focuses where the nature of the problem is. Tax cuts are not likely to significantly support home sales. They may at the margin but the real issue at this stage is people are holding back from buying houses, prices are falling so there's more non-income related issues than purchases at home than there is in the general market. But what the tax cuts do is they support consumption to the extent that whatever the negative effects coming from the housing problems are, are partly ameliorated by holding consumption up.
For example, passenger motor vehicle sales have been doing surprisingly well at least to December and the numbers frankly are well above where I had expected them to be. I can't wait to see what the January figures are because markets in the United States are working far better than they are supposed to given our very complex commodities. But clearly to the extent that consumption stays up and the economy holds together, it's going to be far easier to get through the financial adjustment process which is to not that it is more going on. There's no doubt when you look at down, not only ... in the north but here not necessarily here but east and Toronto where you come from, I mean, in London, in Frankfurt, I mean where the real pressures were in the financial markets were real serious question about the counterparty risks that the banks were looking at there has been some easing, but what we need is a lot more in the way of adjustment before we see. You are quite right, the only pricing mechanism that we have is subprime mortgages which are open and so-called derivative markets, and some of those prices are bizarrely low and it's, you know, and the reason is that people are such reason of uncertainty that you for example, the maybe the next couple B minus ... will be priced at under 20 cents on the dollar and you may say it may not be worth that but they are also pricing triple As and double As at very significant discounts which a lot of people in the market don't perceive as credible but so long as you have this huge uncertainty there is a fundamental discount in all of those prices which if the prices of homes began to stabilize, you would get those discounts to rise.
So when we start to get there, it is to change rather quickly but we've got a way to go.
MS. COOPER:
Now, you've been quoted as saying that you believe there's a good chance that U.S. economy is in or going into recession. Did you really say that?
MR. GREENSPAN:
I think the odds are definitely moved up, you know, we were talking a year or so ago it was a third or something like that, probably been a third and so much to say at the moment you and I spoke the worse it got. And I think we are now at a point where we are clearly at the edge or over, but remember what, there's something you have to be careful about here.
I'm talking about the probability of events which have not yet happened because if you look at the actual data, I mean, take for example today's data claims ... , there's never been a significant recession in which initial claims stayed down at the level they are today and ... .
MS. COOPER:
These are earlier claims for which are much lower than in any other point of recession.
MR. GREENSPAN:
Now, to be sure you look at the so-called continuum claims, you are dealing with obvious evidence of a very low hiring rate as well and indeed there are other facts that say very much the same thing.
MS. COOPER:
Well, unemployment has risen 11 per cent.
MR. GREENSPAN:
I was about to say that. The critical issue here as to why that the probability has gone up is that a recession is not just a continuum from a slowing growth economy. That we have got a slowing growth economy, that's a fact, and being the rate of growth of the U.S. economy at this point may be zero. But what we don't yet have is the discontinuities that are invariably happen when a recession happens.
There's something different about coming from a state of extended euphoria to growing fear. I'm not talking about financial markets, and what you always see is with recession ... very forecasts because there are discontinuity that occurs. You see breaks in data and decrease in unemployment rate, for example, is a type of information which one usually sees at the beginning of a recession.
Now we've had a couple of those, but not a lot yet. Remember that the American corporate sector has been reasonably legit. That we had a period of extended low, low prime interest rates which made the corporate sector to refund their short term liabilities... , and another thing I think we are not aware of is the extent to which the amount of cash flow in the American business which is ... purchase the shares of shareholders of companies which means that there's sort of a large buffer here of potential finance merely stopping the process. And if you look at the data, it's very clear that while the financial system in general is tightening up and it is increasingly more difficult to get loans especially subprime prime or below investment preloans, the investment business don't need them, and they have the cash flow and they are not pressing so that it is true that you can't borrow as easily as you used to, but it's also clear that you don't need to borrow.
This I think is probably starting to change.
But it is a very large buffer in the American U.S. corporate system which means that the usual pressures of finance on real economic activity are actually quite a good deal less than is typical in the past.
Therefore you have to say at the moment yes, the probability of a recession is 50 per cent, maybe even slightly more, but we are not there yet. And indeed even though the global economy is beginning to ... and Asia the export markets are coming down, China is slowing from an extraordinarily high rate, but it's coming off a bit, and this business about decoupling ... is I think partly an illusion.
The effect of what is going on in Europe, in Canada, and in United States and the rest of the developed world basically does have significant threat on the developing world and there is a global ...
MS. COOPER:
And therefore commodity prices.
MR. GREENSPAN:
Absolutely, yes.
MS. COOPER:
So you would argue that if the U.S. economy is in a recession or going into recession, that it wouldn't be a deep long recession, or would it?
MR. GREENSPAN:
Very interesting question which we don't really know the answer to. But we can guess.
MS. COOPER:
Okay. Guess.
MR. GREENSPAN:
Let me tell you what the ... on the side of the ... .
As I said in my book, the evidence is that the U.S. economy has become extremely exceedingly more resilient than it had in the past, and that we notice it in two places really. One, the fact that we had that extraordinary 23 per cent decline in Dow Jones industrial average on one day, Oct. 19, 1987. A day which I shall remember with many mixed feelings.
But all of U.S. history, ... as I suggested if you lose a fifth of the market value of firms, you are going to have some significant downward pressure on the economic activity. We had none. And when you look back and realize, ask the question why not, is that the financial system had gotten so flexible ... and the economic system because of the bipartisan deregulation coming from the 1970s was able to absorb shocks which historically we had never been able to do before.
MS. COOPER:
And the Fed ... eased aggressively.
MR. GREENSPAN:
The Fed eased aggressively, but the Fed eased aggressively in the previous years but the economy went down. But not so much that, 9/11 was a really most extraordinary period where I said the current economic history is significant here, we are about to go through a huge crunch because remember that type of shock induces people to disengage from whatever they are doing in the marketplace. It's, in a sense, the reverse the division of labour which means that economic activity will fall, and indeed it did for about four or five weeks we came down, and I must say ... unemployment insurance shot — went straight up, but we then stabilized and started to recover.
And so that the evidence at least at this stage is that if we can stay away from protectionism and allow competitive forces to work, and the flexible economy to function, then it is very likely despite the good ... we are going through and we are going to go through, that its impact on realty is not going to be all that significant.
What I'm concerned about is that in the endeavour to react to this, that we end up with a good deal more in the way of protectionism and regulation which will do precisely and send precisely the wrong message. At the moment, I must say as concerned as I've been there hasn't been all that much of it and if we can manage to get through this process without a significant amount of legitifying the system, I would argue for a relatively short recession.
MS. COOPER:
Well, it's an election year and obviously everybody is talking about protectionism, but maybe the good news is that the next president won't be inaugurated for a year yet and so in the interim not much is going to change.
MR. GREENSPAN:
Hopefully that this process will have worked its way through by then and therefore we may not subject to the type of concerns that ... .
MS. COOPER:
What do you think the stock market is telling us and what do you think about bank stocks in particular. A degree to which large American banks are trying to sell well ... funds to improve their capital?
MR. GREENSPAN:
Well, the stock market is telling us, yesterday the Dow went up 600 points during the day. Unbelievable.
Basically tells you how uncertain the markets are about where the real values are, or very specifically in my terms, which I think is a crucial statistic, where home prices of the United States will end up.
And if we knew what that statistic was I would venture to say we could values ... of other place, it's the missing peg so to speak is where the value ... are and the result is that until that occurs you have this great uncertainty. The great uncertainty is a genuine significant declines ... the various domestic prices. For example, the ABX has prices far below where one would typically expect them, and where they eventually — when the prices of homes stabilized, the result is that when you have orders come in and you are a bank, the order says our job is to make sure that the revision for the potential value assets are ... and they are largely looking towards pricing which is ABX type pricing and you get these horrendous write-offs... . Now, I think the real big surprise to me is the extent to which the mortgage-backed securities backed by subprimes sold outside the United States, remember the original shock was probably bought in ... discovered it had this extraordinary large fundings of subprimes, and what is clear is essentially this big, exorbitant subprime mortgages went from an extraordinarily low level to a huge level because people will be trying to become homeowners and seeing in fact a very significant part of the American population was getting very large wealth ... by just owning a home, and as this catch-up began to push, which would not have been a big problem for anybody if it weren't for the securitization of these products.
MS. COOPER:
And so the securitized mortgages and the collateral life debt obligations that they allowed to ... which were rated at triple A, provided an extra bit of yield for investors and interest rates were low enough, the ... were low enough that the demand for these debts, this debt, these bonds was enormous which of course necessarily generated more originations and why shouldn't they have reduced credit quality, they didn't keep those mortgages on.
MR. GREENSPAN:
That's correct. Look at — go back a minute. If you did not — I don't think there is a single subprime mortgage held outside the United States. I mean, literal mortgage. In other words, if we did not have a securitized system, the amount of outstanding subprime mortgages would have been significantly less than it is today, and, you know, ... there would be no international implications whatsoever and we would have ... a problem, and clearly there's no question that we have had a lot of foreclosures and as is typical because home prices had never really declined in the United States and most bankers didn't believe that looking at the experience for example with Britain, Australia during the years when the prices began to peak out in the housing bubbles in Australia and the U.K. and number of other places, they did not go down.
And I think a number of people presume that there was clearly some stabilization going on, and I must admit I said to myself it seems not credible but look, look what has happened to these other countries. You know, you got —
MS. COOPER:
Toronto in the late '80s, early '90s, and you would have seen the prices overall actually did decline sharply.
MR. GREENSPAN:
They went from — they went down in the United States, but not sharply. And it was, you know, big crunch in savings and loans and commercial banks. So there was a good deal of history which probably created a sense of tranquility in these markets which we now know is clearly ... .
MS. COOPER:
Back to the question of the sovereign funds. These government-owned funds that are buying or investing billions and billions of dollars in the American financial system from... does that concern you? I mean, there has been no protectionism. We haven't heard a peep out of congress.
MR. GREENSPAN:
Well, I would say that if they were private funds I would say there was extraordinary desire to ... of course global economy and you want that to occur. I must admit, I am a little uncomfortable in the sense that these were sovereign, but I also have to admit that there's very little evidence as I am aware that those funds are being used inappropriately.
Certainly Norway, very large one, is again standard pension fund and I think that is true generally, but I grant you there's a certain sense of unease really of the anticipation of what might happen rather than what is happening. But all in all, I would say do I think they are desirable or not desirable, I think unbalanced they are desirable and the hard word is good, not bad.
MS. COOPER:
Well, certainly not going to help the situation for the banks and the investment dealers. What about inflation in all of this, what about the fact that the fed is finally very aggressively and my view continue to tug at interest rates aggressively, we have got stimulated fiscal policy now, oil prices have come down but they are certainly still high.
Are you concerned about the inflation down the road?
MR. GREENSPAN:
Well, as I point out in my book, I am quite concerned about it. In fact, I make the argument, which I think even looking back over the years seems to be holding, is that we had a very dramatic change from the end of Cold War when we had this shift of beginnings, shift of almost a billion workers from what was then the Third World developing countries who are largely in part or in whole from another central planning and ... and they began to move en masse especially from China, from being insulated from the competitive marketplace in the world to entering the marketplace and, as you know, China became a massive major manufacturer and in fact most rampant capitalist economy that we know at this particular stage. And the result of this has been undeniable ... coupled with the obvious decline of real long-term interest rates which has an effect of essentially inducing this big surge and bubbles everywhere, stocks, real estate, and pretty much across the globe in 20 to 40 countries. That, however, is now coming to an end, meaning not that a billion people have actually moved, but half of them have. And we are at the rate of change which is at a maximum, and it's the rate of change which determines the disinflationary pressures which of course is what script the world economy.
Remember last year almost, in fact every developed country and almost all developing countries, had inflation rates in several figures. That is utterly unprecedented. It's now changing, and you are beginning to see that the rate of flow, for example, people from the provinces in China is past its peak of rate of change.
MS. COOPER:
Rates are actually rising.
MR. GREENSPAN:
They are, and indeed you can see that where the best price index which is the U.S. import price, those prices went down until the spring of last year and they have now turned back up, and as a result as you point out, it's the wages are going up and the place of the adjustment and the result is that the disinflationary pressures which pressed everything down are now beginning to come off. It's not a positive inflationary pressure; it's the removal of disinflationary forces. But it's showing up in the underlying unit right across which incidentally is ... slowing down somewhat in part because the rate of immigration is slowing down, as is evidenced by the extraordinarily high level of buybacks by corporations of common stock.
MS. COOPER:
And investments and ... .
MR. GREENSPAN:
Yeah, and that's basically saying we can't find opportunities to use this capital other than in the foreign communities which are still doing very well and this is beginning to reflect itself in slow growth ... and if you begin to look across the globe, this is wage pressure beginning to move. This is universal. You can see it everywhere. And prices aren't going to move. Clearly oil prices are. But the one unexpected factor has been the implication to follow this ... and what we see is fascinating. As people stand ... they basically go to more high protein types of foods, meat and milk, and as you know, the amount of — think in terms of the amount of grain that human beings consume, they consume more of it in terms of in other words the corn ratio and all the various ratios suggest that as you increase the livestock, you increase grain consumption, and you increase the price of grain. In other words, I don't what the prices are on the Winnipeg Grain Exchange, but I know down the road in Minneapolis, the ... hard wheat contracts are $10 a bushel.
MS. COOPER:
Of course now we are seeing the diversion of a good deal of corn to fuel, ... fuel and because corn prices rose so much, a lot of the wheat product was taken off the market to replace the corn and because corn rates going up we have poultry prices going up, livestock prices going up, dairy, eggs, et cetera.
So food prices are rising. Now, in the global ... slowdown whether it's U.S. recession or not, we just said that commodity prices are likely to edge downward. What you are saying is in a reasonable short modest recession, we get a rebound in activity and with that we may well get inflation.
MR. GREENSPAN:
That's my concern, yes.
MS. COOPER:
And what would the policy makers, what should they be doing?
MR. GREENSPAN:
Well, I think that the only thing that the policy makers can do in the United States is to recognize that the federal reserve has got to be allowed to do what it's supposed to do in those conditions. And that what I am in fact saying is that the trade market grows as it goes out, that's exactly what this issue is all about.
MS. COOPER:
Of course. Right now growth is being corrected and taking action regarding the growth slowdown in the U.S. rather than tightened because of inflation.
MR. GREENSPAN:
Well, I don't answer that question. History or the long term.
MS. COOPER:
Long term.
MR. GREENSPAN:But if confronted with this type of thing completely, the Federal Reserve has got to start to tighten up to offset the switch and the balance and —
MS. COOPER:
Do you think ... inflation is a risk in the future?
MR. GREENSPAN:
Of course. Basically with we are talking about — I'm not talking the next year or so, I'm talking several years in the future. But if we are going back to the type of monetary system, which is remember we are talking about five ... now we've had something which has looked like the gold standard for almost 15 years, that is not continuing as we go forward. So the federal reserve and indeed I suspect most central banks are going to have to press down a little harder, and that's going to create political problems, and as I argued in my book that it's essential that the American political system enable the federal reserve to act in a way that a central bank has to because low inflation is demonstrated to be a slow provider of maximum economic growth in standards of living.
If we allow inflation to pop up again, we are going to find that stock ... is something that mergers ... , and we remember what that did in the 1970s.
MS. COOPER:
I do remember in the 1970s as well that there was a lot of and Paul Volker that tight monetary policy was certainly not good for the little man, the farmer, the construction people. But fortunately it was more rhetoric than any kind of action and that that was allowed to independently break the back of inflation which took a much bigger jump in interest rates than anyone had ever imagined, and in fact the housing market played a huge role in that because ... deregulation money is so important to deposit... and the money was loaned for housing and the prices that is less than the actual fact that having no money at all to lend. In some respects here we are back in the situation where banks don't want to make loans.
This is credit crunch which is overlaying all the other things that we've been talking about, how long — how does that work itself out and it's global, it's not just the United States?
MR. GREENSPAN:
Indeed. Remember that it started off as far as the United States was concerned in this collateral backed commercial paper, asset-backed commercial paper and remember that it was a relatively novel form of short term financing. All of a sudden after Aug. 9 the volumes fell off very dramatically and yield spreads of acid back commercial paper relative to the standard old fashioned commercial paper or financial opened up very dramatically.
Well, since then, as you know, the decline in stabilizing has gone up slightly, and the spreads have come down a great deal and importantly the extraordinary pressure which was manifested overnight which spiked after Aug. 9 is now simmered down, we went through the usual year end problems that occur every year, but the three month ... have been coming down and coming down quite considerably. And it's the same effectively that this part of the problem is easy but A rated banks are lending to A rated or double A corporations fairly freely, but the issue is that we can resolve this problem but until we resolve the pricing of this very large amount of subprime all day and indeed jumbo securitized securities, then we still have an overhang of valuations because there's a very large — it's a very large amount of money.
MS. COOPER:
Well, as the economy slows we see low ... rising and group has announced that their credit card losses have been raised a bit, so the situation certainly is still spiralling downward rather than stabilizing at this point.
MR. GREENSPAN:
Well, I think that's right. Although, it's moving from one sector to the other. For example, recent days we ran into a monoline problem which —
MS. COOPER:
These are the insurers of the bonds that are now so perceived to be so risky we've seen that here in Canada where one of our major banks held a good deal of the localized ... debt obligations on their books but it was in fact insured by a small ... unfortunately that our business.
MR. GREENSPAN:
It's a big issue in the United States. Half of the admissible debt in the United States is insured, half is not. Indeed, in recent months cost of insurance has gotten so high that a lot of municipalities just decide to go without it, but as you point out, that so much is involved in so many different areas that depending on insurance as though it were real than find that all of a sudden that your insurer needs insurance, then you are in serious trouble.
MS. COOPER:
Well, the fact the Dow yesterday is 300 points up because New York announced that they are going to get together with the bank to see if they can help out those insurers.
MR. GREENSPAN:
Imagine what that little piece of information did to the stock market, imagine what a real big piece of information would do.
MS. COOPER:
Yes. In either direction. Certainly. What worries you today? What — aside from all we've been discussing. Your book by the way I found fascinating, for those of you who haven't read it, it read is as a memoir reads like fiction, although I know it was factual.
MR. GREENSPAN:
I hope it wasn't.
MS. COOPER:
What a ladies man you are. ... that's media stars I think. Your book was more your view of global economic issues over the, you did call it the age of turbulence. What are the worries that you see?
MR. GREENSPAN:
You are talking about all I'm worried about as far as the world economy is concerned. I'm worried about protectionism, that's my greatest concern. I think as I try to point out in my book that globalization has been extraordinarily valuable for the world's largest ... taken hundreds of millions of people's property, created degrees of wealth which is awesome in all respects, encouraged all various such things ... clearly it's increased the concentration of income within countries even as globally the distribution of income has become more equal. But the pressures for protectionism have not by any means gone away, and I'm concerned that if we get into some form of global reception which after this extraordinary boom is inevitable at some point, that there will be a very significant entrenchment in the opening up of markets. Because remember that what globalization has done in a way, very few people I think are aware of, is displace a very — global markets and the pricing of those markets have displaced a very significant amount of activity which is largely done by administrative government, say, before the 1970s or during the '70s actually, and that the system is working. In other words, there is a sense in which the international version of ... and visible ... is actually creating a stable system. And we've got huge volumes of so-called over-the-counter ... and varieties of all sorts of other types of securities which even in this context of all sorts of problems are working very well and distributing risks around which is essentially what needs to be done by regulatory agencies of various different regimens.
Governments per se now have less hold on the citizen than they did 30 or 40 years ago. Markets are impinging on that. And what this means is that in the our monetary global world will... but it's dramatically altered in the whole way our civilization works, and I certainly trust you would recognize that and don't try to turn the clock back because if we do, I think we are going to find very serious problems as consequences.
MS. COOPER:
Well, of course much of the rhetoric and the election campaign has to do with tightening up NAFTA or preventing illegal immigration or bringing the dogs back home, all these code words for exactly what you are talking about, and it's bipartisan really both sides seem to — the public likes to hear that. But in fact, we've seen that in quite a number of elections in the last 25 years, in fact, I can remember Ross Perot in the giant... actually preceded one of the biggest booms in down growth in U.S. history. Why don't we kind of get off it already, or is it just rhetoric, political rhetoric that no one will take action?
MR. GREENSPAN:
You finally asked me a question I really can't answer. It is you would think that it matters ... and to the extent that it doesn't, I think that's sad or putting it another way around, it's remarkable ... .
MS. COOPER:
Let's hope that continues. So Mr. Greenspan, it's been a pleasure once again talking to you. I'm sure that the audience will join me is saying that this has been an extremely worth while hour. Thank you.
MR. GREENSPAN:
Thank you.
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