Alan Greenspan defends legacy

Summary

In this interview, Alan Greenspan, former chair of the Federal Reserve, discusses the potential impact of auditing the Fed, explaining why he believes it would lead to politically biased monetary policy. He defends his stewardship during the housing bubble, arguing that it was a global issue and that the Fed couldn't predict the exact timing of the crash. Greenspan also touches on his new book, 'The Map and the Territory,' where he explores the role of 'animal spirits' in economic forecasting, emphasizing the unpredictability of human behavior in financial markets.

Takeaways

• 😀 Greenspan argues that the Federal Reserve's operations are fully audited by outside accountants, but auditing its internal deliberations would be detrimental, leading to political influence on monetary policy.
• 😀 He stresses that the Fed’s independence is crucial, as political bias could result in inflationary policies, which is why the original designers of the Fed made governors' terms 14 years to avoid such influence.
• 😀 Greenspan responds to criticism of his role in the 2008 financial crisis by explaining that the housing bubble was a global issue, not limited to the U.S., and that its timing was impossible to predict.
• 😀 He defends his economic philosophy, suggesting that the failure to foresee the crisis was not due to negligence but because forecasting such complex events is inherently uncertain.
• 😀 Greenspan encourages readers to examine his book, *The Map and the Territory*, for a deeper understanding of his perspective on the financial crisis and economic forecasting.
• 😀 The concept of 'animal spirits' is central to Greenspan’s book, which challenges traditional economic models that assume people always act in their rational self-interest.
• 😀 Greenspan argues that emotional and irrational behavior, or 'animal spirits,' plays a much bigger role in economic decision-making than previously acknowledged.
• 😀 He explains that understanding 'animal spirits' can improve economic forecasting by recognizing the irrational factors that influence market behaviors.
• 😀 Greenspan reveals that one of the most surprising aspects of the financial crisis was the inability to predict the sudden collapse of Lehman Brothers, which he attributes to failing to account for irrational market behavior.
• 😀 Greenspan’s book has been well-received, with positive reviews highlighting his shift in thinking and contribution to a more nuanced understanding of economics and forecasting.

Q & A

What is Alan Greenspan's stance on auditing the Federal Reserve?

Alan Greenspan opposes the idea of auditing the Federal Reserve's deliberations, arguing that such audits would lead to a bias towards inflationary monetary policy. He believes that the Federal Reserve must remain independent to avoid political pressures.

Why does Greenspan argue that auditing the Fed’s deliberations would be a mistake?

Greenspan argues that political influence in auditing the Fed's deliberations could lead to decisions driven by political agendas rather than economic principles. This could result in inflationary monetary policies, which would undermine the Fed's ability to make independent and rational economic decisions.

What is Greenspan’s response to critics who blame him for the 2008 financial crisis?

Greenspan defends his role, stating that while there was indeed a global housing bubble, it was impossible to predict when it would burst. He suggests that the bubble was a worldwide phenomenon, not just an American issue, and that forecasting the timing of its collapse was beyond anyone's ability.

How does Greenspan explain the role of human behavior in economic forecasting?

Greenspan introduces the concept of 'animal spirits' to explain the role of human emotions like exuberance, anxiety, and depression in economic behavior. He argues that these psychological factors play a significant role in shaping economic outcomes, something that traditional economic models fail to account for.

What does Greenspan believe was the biggest mistake made in economic forecasting leading up to the 2008 crash?

Greenspan believes the biggest mistake was assuming that people always act in their rational self-interest. This assumption, which was foundational in traditional economic models, proved to be incorrect, as human emotions and irrational behavior had a larger impact on the economy than anticipated.

What is the central theme of Greenspan's book, 'The Map and the Territory'?

The central theme of Greenspan's book is to examine the limitations of traditional economic models and explore how human behavior, or 'animal spirits,' influences the economy. He discusses how understanding these factors is crucial for better forecasting future economic events.

How does Greenspan address the criticism that he ignored the risks of the housing bubble?

Greenspan argues that while there were signs of irrational actions in the market, the critical question was not whether the bubble existed, but when it would burst. He emphasizes that it was impossible to predict the timing of the collapse, and the broader economic implications were not fully understood.

What does Greenspan mean by 'spirits' in the context of economics?

In the context of economics, 'spirits' refer to the psychological and emotional factors, such as exuberance and anxiety, that influence economic decision-making. Greenspan argues that these factors play a larger role in economic outcomes than previously thought and can be modeled for better forecasting.

What is Greenspan's opinion on the importance of regulation in preventing economic crises?

While Greenspan acknowledges the role of regulation, he believes that the failure to predict the timing of the housing bubble was not primarily due to a lack of regulation, but rather because of the inherent unpredictability of human behavior in economic contexts. He emphasizes that even with regulation, irrational actions and emotional factors can still lead to significant economic upheaval.

How does Greenspan's approach to economic forecasting differ from traditional models?

Greenspan’s approach differs from traditional models by incorporating psychological and emotional factors into the economic analysis. He argues that economic models need to account for 'animal spirits' and the irrational behavior of individuals, which traditional models often overlook, to make more accurate predictions.