What Is Greenspan Up To? (Part 2)

Curiouser and curiouser. Greenspan uses the “R” word in Hong Kong, and the Chinese stock market goes down 9% the next day. Now the sequence of the two events might have been pure coincidence (the main cause for the Chinese sell off was the announcement that the powers that be were going to tighten margin lending to cool off the overheated stock market), but one can believe that Greenspan’s comments might have heightened nervousness in other markets and fuelled the fire. And now, as the Financial Times tells us (“Greenspan risks new row with Fed“) he’s done it again, although almost assuredly with less dramatic results (note that, as of the early a.m., this story is not on the Wall Street Journal’s website).

As you doubtless recall, Bernanke had a scheduled appearance before Congress, which gave him the opportunity to reassure the markets, and Greenspan backpedaled somewhat, saying recession was “possible” rather than “probable.”

Now I had gotten on my high horse when I read Greenspan’s remarks, which was right before the markets started their dive:

It is singularly odd (one might even say out of line) for a former Fed chairman to intrude on the turf of the current Fed chief. So why is Greenspan making predictions about the US economy, ones that seem to be at odds (at least in tone) with Bernanke’s?

I cited Dean Baker’s theory, which was that Greenspan was trying to position the coming recession as an inevitable end of a cycle, rather than the result of the housing bubble he helped create coming to an ugly end.

It may simply be that Greenspan has an insatiable appetite for the limelight. Or as others have speculated, his remarks may be financially motivated. He gets paid very large amounts of money to speak, plus he has a book coming out. Never hurts for someone like him to maintain profile, right?

But this second go at Bernanke seems almost pathological. In a Bloomberg interview, he clearly feels free to make comments about the economy, even though his status as former Fed chairman means they will be treated more seriously than perhaps they should be (remember, the Fed has access to lots of information from its member banks that isn’t public). And in an interview with a news service he talks about seeking anonymity!

It was Clinton that made it acceptable for former top level government officials to take highly-paid public speaking gigs and seven figure book advances. Before that, former presidents never did anything so, ahem, common. Even people like Kissinger, who did maintain his profile, did so discreetly, by sitting on a few corporate boards, doing very highly level consulting, and speaking very selectively.

Similarly, Paul Volcker, who undertook a considerable financial sacrifice to stay at the Fed until he was satisfied inflation was under control (it was widely known that his wife was terribly ill and he was having trouble paying for her treatments on his salary) did not hurry to sell his services to the highest bidder once he left the Fed. And he never commented on the economy, the banking system, or Fed policies after he left office. The contrast between his behavior and Greenspan’s couldn’t be starker.

Here is the latest chapter:

Alan Greenspan risked stirring renewed controversy on Tuesday when he told the Bloomberg news agency that there was a “one-third probability” of a US recession this year.

The former Federal Reserve chairman’s comments are starkly at odds with the relatively upbeat assessment made by Ben Bernanke, his successor, in testimony to Congress last week.

Mr Greenspan’s latest remarks come barely a week after he told investors in Hong Kong that he thought a US recession this year was “possible”. The earlier comments spread quickly through the investment community, spooking investors and contributing to turmoil in financial markets.

Following a global sell-off in equities and other assets, Mr Greenspan was forced to clarify his statement, declaring he had said that a recession this year was “possible” but not “probable”.

The markets appeared to take Mr Greenspan’s latest comments in their stride but the remarks show he has decided not to keep quiet in the light of the past week’s experience, highlighting a dilemma for Mr Bernanke.

The Fed chairman is inclined to think it is not Mr Greenspan’s fault the market takes his comments so seriously. Moreover, such is the respect and goodwill towards Mr Greenspan within the Fed, as well as in markets globally, that there would be little benefit for Mr Bernanke in being seen to clash publicly with him.

However, the apparent second-guessing of the Bernanke Fed’s economic view by its former chief risks adding to the volatility and undermining the current chairman’s efforts to establish his authority in the markets.

Mr Greenspan on Tuesday told Bloomberg he was “surprised at this recent episode”. He said: “I was aware of the problem that if I stayed public I could make it difficult for Ben. For the most part it has worked. I was beginning to feel quite comfortable that I was fully back to the anonymity I was seeking.”

He said there were signs that the US’s economic expansion was ageing. “We are in the sixth year of a recovery. Imbalances can emerge as a result,” he said.

Mr Bernanke has not put any figure on the likelihood of a US recession this year. However, his public remarks suggest that, while he feels there may be some chance of a hard landing so painful that it results in negative growth this year, the likelihood of that is much less than one in three.

Mr Greenspan’s interview overshadowed a speech by Mr Bernanke later in the day, in which he called for new legislation to tighten controls on Fannie Mae and Freddie Mac, the government-sponsored mortgage finance institutions.

Mr Bernanke said their portfolios “represent a potentially significant source of systemic risk”. He suggested that the two institutions should only keep on their books loans that promoted low-cost housing.

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