Greenspan says he was wrong to think rationality would prevail in the economy
November 7, 2013 | By Heather Forsgren Weaver | HeatherForsgrenWeaver@gmail.com
Former Federal Reserve Chairman Alan Greenspan told a National Press Club Book Rap Nov 6 that his new book, "The Map and the Territory: Risk, Human Nature, and the Future of Forecasting," is a detective story.
Greenspan said that he wanted to discover “step-by-step” how the crisis happened. He started out by believing human rationality would prevail. He began his examination by asking whether this was true.
“I gradually proved to myself that it was wrong,” Greenspan said. “It is an interesting experience to look yourself in the mirror and say you are wrong.”
Everyone knew that there was a housing bubble, Greenspan said, but no one knew the bubble would burst on Sept. 15, 2008.
“From 1983 to 2005-2006 [is] a period of extraordinary stability and the euphoria is starting to build because it is not altogether crazy to believe that if you have had this long period of stability that the next six months are going to be stable,” Greenspan said. “It is unfortunate that how it happens is that the system will break down. It will not only break down but a necessary condition to when it breaks down is that no one expects it to happen.”
The bubble in the housing market caused the financial collapse because it affected the financial markets as compared to earlier bubbles that just affected the stock market, Greenspan said. The markets closed down for the first time in more than a century, he said.
The much-derided Troubled Asset Relief Program or TARP wasn’t a disaster, Greenspan said, but the uncertainty caused by continued government intervention is the reason the economy is growing more slowly than people want. This uncertainty leads Greenspan to believe in a cloudy future.
“The outlook will depend certainly on whether the uncertainty can come down,” Greenspan said. “I’m not overly optimistic about where we are going.”
Greenspan is pessimistic about the future because the economic uncertainty is exasperated by the dysfunctional political system where too many policy issues are “uncompromiseable,” Greenspan said.
In order to get the economic house in order, the budget needs to be more balanced, which will require either significant spending cuts or raising revenues. Both ideas are not politically popular, Greenspan said.
“The Congress is caught in a problem of arithmetic so they choose to do nothing,” Greenspan said. “Someone has to make that political decision.”
Greenspan complimented the press corps, saying “Those in the press corps that strived to be objective without bias” did 'an extraordinarily good job' covering the financial crisis of the last five years."
While Greenspan is not aware of any member of the press corps who has a specific knowledge of economic statistics, that wasn’t necessary, he said, because “what we were dealing with was human natures. Press people are knowledgeable about human nature because they are human beings.”
NPC President Angela Greiling Keane interviewed Greenspan about his new book. The event was a fundraiser for the National Journalism Institute sponsored by the Club's Book and Author Committee.