Greenspan minus the gobbledegook Larry Elliott
Monday October 22, 2001 The Guardian For years, codebreakers have been struggling to unravel the secret language of Alan Greenspan. The best brains from the world's elite universities have burned the midnight oil to crack the code. But to no avail. Greenspan scrambles his thoughts in his own personal Enigma machine, from which they emerge as incomprehensible gobbledegook when he surfaces from the depths of the Federal Reserve. Until now. For we can now reveal that the years of toil have paid off and it is now possible to decipher what Greenspan really thinks. Here in its unexpurgated form is what the Fed chairman was going to say on Capitol Hill before the encoders got to work. "First things first. The terrorist attacks on New York and Washington last month were terrible events, and we must not shrink from our duty of bringing the guilty men to book. But when the politicians say that we are winning the war against Osama bin Laden they are utterly wrong. I've no real idea whether carpet bombing Afghanistan means we are achieving our military objectives, but I know one thing: the economic war has already been lost. All that remains now is damage limitation. And boy, is there plenty of damage. "The economic consequences of the war have yet to make it to the front pages of the papers or into the top slots on the TV bulletins. But they are profound, and it would be wise to wake up to the possibility that the global economy is now faced with a downturn that will be the worst since my predecessor, Paul Volcker, banged up interest rates in the early 1980s and forced us to endure all those dreary Bruce Springsteen songs about life in the rust belt. "It would be wrong to assume that all the problems of the economy have been caused by terrorism. We were already on course for a recession in the second half of this year, and that recession will now be longer and deeper. The initial shock to the American psyche from the attacks was profound, and has since been amplified by the anthrax scare. From a personal point of view, however, being able to blame the terrorists for higher unemployment, the bankrupt businesses and the cuts in investment makes it easier to escape my culpability for America's boom-bust cycle. "At this stage, I really can't tell you how bad things are going to get. But I would certainly beware of those who are predicting only a short, sharp recession followed by a rapid recovery early next year. "Last week's forecasts from the Organisation for Economic Cooperation and Development were a better indication of what might happen. The OECD estimates that growth in our 30-nation rich man's club will be just 1.2% next year, compared to the 2.6% it was predicting only four months ago. "My friend Lawrence Lindsay, economic adviser to the White House, is now admitting that the US will be in recession by the end of this year and will experience only sluggish recovery in 2002. That, too, sounds entirely plausible. The European commission says it cannot rule out a 'temporary contraction' in the EU economies, where unemployment is expected to rise from already high levels. Given what is happening to the German economy, the temporary contraction may last for some time. "Why then, you might ask, have share prices been rising these past few weeks? If things really are gloomy out there on main street, isn't it a bit strange that for the first time since the hi-tech bubble burst more than 18 months ago, there has been a return of the sort of speculative buying of shares in little-known companies with bags of alleged potential but no profits? "That's a very good question, and one that has led me to question my long-held belief in the efficiency of markets. Wall Street is expecting earnings to grow by 17% in the US corporate sector next year, which was always going to be a struggle but now looks utterly unrealistic at a time when businesses and consumers are coping both with the threat of bio-terrorism and the fear that there might be more "conventional" attacks on American cities. You do not need to be Sigmund Freud to work out that consumers who have seen the value of their investments halve, are in danger of losing their jobs, are still in a state of shock post-September 11 and fear that the Great Plague is coming to their neighbourhood shopping mall are not going to be in a mood to flash the plastic. "We at the Fed are doing what we can. Interest rates are being cut, but as the Japanese have found, the impact can be negligible if people prefer to save rather than spend. If our consumers save just one cent out of every dollar they were previously spending, that will cut demand by around $70bn, the equivalent of the president's fiscal package. And if they save eight cents in every dollar, returning the savings ratio to its long-term average, it would dwarf the monetary and fiscal stimulus to the economy. "To the extent that we have a solution for the savage downturn now under way, it is to reinforce the weaknesses that were already glaringly evident before September 11 - an excess of debt, an excess of speculation and an excess of spending. We at the Fed believe that the breakthroughs in new technology are for real. But railways were a real technological breakthrough as well, and in the mid-19th century there was a business cycle in which there was over-investment, vast amounts of hucksterism that encouraged wild speculation and painful periods when investors lost their shirts. It all sounds drearily familiar, and to the extent that my entire policy has relied on underpinning over-valued financial assets, the buck stops with me. "The fact is, however, that the alternative to what I am doing is a full-scale credit crunch. Irving Fisher said that a combination of excessive debt and deflation was the cause of the Great Depression, and that is what I am trying to avoid. But it won't be easy. We are the world's biggest economy, but we are awash with spare capacity bought on the never-never during the wild excesses of the late 1990s. A year of falling industrial production even before September 11 meant capacity utilisation was historically low, especially in the technology sector, where the bubble mentality was strongest. There was little appetite for fresh investment among entrepreneurs anyway, but now we are relearning that Keynes was right when he said that the future is too fraught with risk and uncertainty to believe in the infallibility of financial markets. "What does all this mean? It means that the global economy could be in for a very rough ride. It means that we could be at one of those points - as in 1929 and 1973 - when the prevailing economic orthodoxy is challenged. It means that politicians are going to be a lot more wary about handing over power to market forces (and central banks, for that matter). And it means my reputation is firmly on the line. "Now turn that machine back on and make sure this is turned into the usual nonsense." [EMAIL PROTECTED] Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
