Former Fed Chairman Alan Greenspan says Market crisis ‘will happen again’

“The crisis will happen again but it will be different,” he told BBC Two’s The Love of Money series. He added that he had predicted the crash would come as a reaction to a long period of prosperity.

“They [financial crises] are all different, but they have one fundamental source,” he said. “That is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that it will continue.”

While I agree that the next crisis will be different, the rest of what Greenspan said is nonsense. Crashes do not happen because of prosperity. Crashes happen because the Fed and people like Greenspan do not understand the difference between prosperity and a crack-up boom.

It’s easy to see that Greenspan is attempting to absolve himself of blame for the crisis. That ploy does not work.

The reason the next crisis will be different is everyone from the Fed, to Congress, Obama, the Treasury, and central bankers in general are all acting to prevent the last crisis. It’s too late for that.

Mr Greenspan, who when he ran the US central bank was hailed as a man who could move markets, also warned that the world’s financial institutions should have seen the looming crisis.

“The bankers knew that they were involved in an under-pricing of risk and that at some point a correction would be made,” he said.

What a hoot. Greenspan said it was impossible to see a bubble until after it burst, did not see the housing bubble coming at all, and indeed purposely held interest rates too low too long in response to the last recession, now says the financial institutions should have seen this coming.

This is hypocrisy at its finest.

He also warned that Britain, with its globally-focused economy, would be harder hit than the US by the current recession and collapse in world trade.

“Obviously we’ve both suffered very considerably but … Britain is more globally oriented as an economy and the dramatic decline in exports globally and trade generally following the collapse of Lehman Brothers had dramatic effects in the financial system of Britain,” Mr Greenspan said.

“It’s going to take a long while for you [Britain] to work your way through this.”

Road to recovery

In order to prevent the situation arising again financiers and governments should look to clamp down on fraud and increase capital requirements for banks, the former central banker said.

However despite his belief in a brighter future, the former Fed chief did warn that the path to recovery should steer clear of protectionism as applying strict regulations could hamper recent developments that have opened up global trade.

“The most recent endeavour to re-regulate is a reaction to the crisis. The extraordinary impact of these global markets is making a lot of financial people feeling they have lost control.

“The problem is you cannot have free global trade with highly restrictive, regulated domestic markets.”

Ding Ding Ding we have a winner. Greenspan is correct “you cannot have free global trade with highly restrictive, regulated domestic markets.”

And what bigger regulation is there than the Fed itself? The answer is “none”. The Fed micro-mismanaged this crisis by its manipulative interest rate policies. Yet for all his faults, and Greenspan has many, the one thing he has consistently gotten correct is his stance in support of free trade.

Indeed, one of the biggest risks now to the global economy is a huge round of protectionism. Unfortunately, it’s probably only a matter of time before Congress overreacts. That’s human nature, Congressional style.

Blamed by some for not doing more to prevent the crisis, Mr Greenspan denied any responsibility for the problems gripping the global economy.

“It’s human nature, unless somebody can find a way to change human nature, we will have more crises and none of them will look like this because no two crises have anything in common, except human nature.”

Human nature is is what allows people like Greenspan to never see their own role in the mess they created. It’s human nature to blame someone else. The way to get Greenspan and Bernanke out of the way so that their “human nature” does not add to the problems is to abolish the Fed.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List