Alan Greenspan predicts the panic and crash of 2007 - 08-Sep-07 - Generational Dynamics

According to an article in the Wall Street Journal, former Fed Chairman Alan Greenspan called today's market conditions in many ways "identical" to those preceding several previous market panics and crashes:

"Former Federal Reserve Chairman Alan Greenspan said the current market turmoil is in many ways "identical" to that which occurred in 1987 and 1998, when the giant hedge fund Long-Term Capital Management nearly collapsed.

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"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907," Mr. Greenspan told a group of academic economists in Washington, D.C., last night at an event organized by the Brookings Papers on Economic Activity, an academic journal.

Mr. Greenspan, Fed chairman from 1987 to 2005 and now a private consultant, said business expansions are driven by euphoria and contractions by fear. While economists tend to think the same factors drive expansions and contractions, "the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria."

The euphoria in human nature takes over when the economy is expanding for several years, and leads to bubbles, "and these bubbles cannot be defused until the fever breaks," he said.

Bubbles can't be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and "stopped the nascent stock-market boom," but when stopped, stocks took off again. "We tried to do it again in 1997," when the Fed raised rates a quarter of a percentage point, and "the same phenomenon occurred."

"The human race has never found a way to confront bubbles," he said."

Greenspan certainly knows what this fear is like. Born in 1926, Greenspan grew up during the massive starvation and homelessness of the 1930s Great Depression, during which this kind of fear was rampant.

This isn't the first time that Greenspan warned of a coming financial crisis resulting from the current bubbles, but it appears to be the first time that his warnings have resonated with general investor sentiment. In fact, Greenspan's warnings may be partially responsible for Friday's "mini-panic" that resulted in a 2% fall in Wall Street markets.

I've been following Greenspan's changes in attitude on this web site since 2003, and I summarized what I found in my 2005 article, "Ben S. Bernanke: The man without agony."

In fact, Greenspan's own attitude went from euphoria to fear. In January 2004 he was patting himself on the back for avoiding any major economic harm from the 1990s dot-com bubble:

During 2004, his speeches became increasingly anxious, and early in 2005, he completely repudiated his previous reasoning, "because yields and risk spreads have narrowed globally."

His public remarks became increasingly alarming, culminating in his "swan song" speech at the end of August, 2005, the last major speech he gave a Fed chairman.

This speech, which has been almost completely ignored by the mainstream press and by investors in general, was a warning that now, in 2007, he's repeating explicitly.

Since becoming a private citizen again, Greenspan's speeches have been hot and cold.

Many of his speeches have been fanciful defenses of his own policies. A year ago, he blamed the housing bubble on the fall of the Berlin Wall. And a month ago, he blamed any economic problems on other countries. He essentially repeated Ben Bernanke's claim, first made in 2004, that America's astronomical public debt is not America's fault, but is the fault of "a global savings glut" in other countries.

Greenspan's latest remarks are a return to his 2005 state of alarm, turned up a few notches, and in much more easily understood language. He's well aware by now that a financial crisis is coming, and that he and Ben Bernanke are going to be blamed. You hear this all the time from TV pundits, as in the hysterical rant by CNBC's Jim Cramer. I also see it in the many e-mail messages I get from people who place the entire blame on the two Fed chairmen.

Now, no one has been more critical of Alan Greenspan and Ben Bernanke than I have, but not because they're to blame for the coming financial crisis. I've been critical of them because they keep saying such incredibly stupid things, and because they have no idea what's going on in the world, but instead continue to apply simplistic economic theories that have failed time after time after time.

The current crisis was not caused by Alan Greenspan or Ben Bernanke or other nations' central banks. It was caused because huge masses of people, entire generations of people, used credit abusively after the people in the generation that survived the 1930s Great Depression all disappeared (retired or died), all at once, in the early 1990s.

Neither Greenspan nor Bernanke could have done anything about it, although they'll be blamed. Bernanke will especially be blamed because it's obvious that he's stumbling along with absolutely no idea what's going on. He's a Professor of Economics at Princeton University, but often appears to know less than his freshman students.

Generational Dynamics Web Log for 08-Sep-07
Alan Greenspan predicts the panic and crash of 2007

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Generational Dynamics Web Log for 08-Sep-07 Alan Greenspan predicts the panic and crash of 2007

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Generational Dynamics Web Log for 08-Sep-07
Alan Greenspan predicts the panic and crash of 2007