Former Fed Chairman Alan Greenspan Surveys the State of the World Economy

Former Fed Chairman Alan Greenspan Surveys the State of the World Economy


FARRELL: You will have in the handout bios, of course,
Chairman Greenspan needs no introduction. And we have so many interesting things to
cover today that I’m going to jump right away into the conversation. Because there is so much to talk about, we
will try to cover a range of topics, which will mean that we won’t get to hear all you
have to say on any given topic. But I will ask questions for the first half
hour or so and then turn it over to the audience. So, if you have questions, we’ll bring the
mike over and — and have you put (ph) them (ph). But let me start with the U.S. and the current
situation. We’ve had some mixed news lately. We had pretty flat GDP growth in the last
quarter. On the other hand, we had an unusually strong jobs report for the last month. Where are we, in your view? Do we see the
economy finally recovering and on the other side of this recession? Or is this another
false start? GREENSPAN: That’s the toughest question. Why
don’t we — why don’t we leave that ’til last? (LAUGHTER) First of all, let me just say that the first
quarter is going to be revised down to probably minus 0.7 or 0.8. The numbers are extraordinarily
weak. But fortunately, there are data that come
— if you look at the monthly pattern, it’s improving through the quarter and April looked
fairly good, as far as we could judge. We don’t know exactly how it — how it’s going
to play out. But the important issue is that we are seeing certain signs which we haven’t
seen before. There’s one little statistic — several statistics
that I use. We watch railroad freight car loadings and weight them by industrial production.
And they have moved up fairly decidedly in the last several weeks. Most importantly, for the first time, we’ve
actually seen commercial and industrial loans break out of a very narrow band. And the reason this is important is with the
very large amount of reserve balances held by the depository institutions, it’s going
to require a very specific breakout before all of those monies, which are sitting net
idle — and they’ve been sitting net idle for months and a couple of years, really. There’s no evidence that QE1, QE2 or QE3 is
actually filtered into the economy, with the exception of causing asset prices to go up.
But if you look at the flow of where the funds are moving, they’re just stuck dead in those
deposits, earning 25 basis points. They’re starting to move. And the way you
can see that is that part of those reserves are being drawn on to make commercial and
industrial loans, which is the most sensitive part of the financial system. All of that
is good. I’ll answer the — the last part of the question
at the very end when I’ll have more — I’ll have more information. (LAUGHTER) But the real interesting question here is
have we been going through, for the last five years — the last five years, a particular
type of economy which essentially makes these false starts inevitable because we’re running
up against ceilings? I think the answer to that question is yes.
And I think that it’s essentially a very deep-seated problem, best described by the fact that there
is an extraordinary pall of a lack of confidence in the system. But rather than just think in terms of psychology,
what I do is I take a look at where are the weak points in the economy? One of the things that I think is very useful
to do is to take the gross domestic product and instead of breaking it down into consumption
expenditures and government spending and business spending, take the whole GDP and segregate
each item and calculate its life expectancy. Software is three to five years; industrial
buildings, 35 years; haircuts, one month. (LAUGHTER) But you get a very interesting statistic.
Because what that shows is that all of the shortfall that now exists in the economy is
the result of a decline of assets with life expectancies of greater than 20 years — mainly
structures, but not wholly that. But just as importantly, what you find is
that — that it is not a fixed point — at 20 years, things stop. You can start with software, which is the
shortest of the capital investments; that’s doing rather well. And short-term equipment
is doing well. But 18, 19-year life expectancy industrial
equipment is not; and long-term capital structures are doing extremely poorly and have barely
recovered. FARRELL: Now, if you — if you hone in on
this long-term investment question, is this a structural aspect of our economy now — that
value is being created with less assets? Or is this something around the investment psychology
that’s preventing people from making rational investments that would be longer term? GREENSPAN: Well, I think the best thing to
do is to ask — where do those numbers come from? And one of the things I find very useful — first
of all, structures, of course, is two-fold. It’s non-residential and residential. They
both have fundamentally the same cause, but they’re obviously very different economic
phenomena. But what I do for the business part is I take
a look at two things. One is the — the share of liquid cash flow, which corporations choose
to invest in illiquid long-term assets. That’s a very extraordinarily useful measure
of the long-term confidence of business, because it doesn’t ask you what they think. It looks
at what they do — not what they say. Who cares? But what they’re doing is exactly what you
think they would be doing in a period such as this. That ratio, which during periods of boom,
has gone up very significantly; the ratio has basically gone up to capital investment
being 50 percent higher than cash flow. That’s rare, but it gets there. The day that that — the — the freakish (ph)
— from — from 2009 was the lowest ratio of investment to cash flow since 1938 — I
should say peace time. But more — just as importantly, there is
another indication of the — the — the actual pattern is not linear. It actually accelerates
the farther out it should go into the distant future. And the way — way you can tell that is that
the spread between five-year U.S. Treasury notes and 30-year bonds is — I think is extremely
elevated slope, meaning that the rate of discount is going up very rapidly. But that ratio now or that — that slope is
the largest in American history. FARRELL: Now, are these investors scared unnecessarily
or are they being wise? Because, in fact, you know, if you can create $18 billion of
market cap as WhatsApp did with very little capital investment, very few employees — better
off focusing your money on those short-term investments than trying to build the capital
that will require malls and roads and — and whatnot. GREENSPAN: Well, actually, before I went to
the Fed, I spent a good deal of time in corporate board rooms discussing capital projects. And
I could tell you how they do it and why — or what — what you see in those board rooms
is very informative. You find that there’s a specific project which
the chairman of the board or the chief executives are terribly desirous of getting — it — a
director’s authorization. And so, they get a product manager and he
comes up and he gives all these wonderful things about this new — new investment and
it’s going to have an after tax rate of return of 20 percent over a protracted period and
all the bells and whistles. And somebody asks, “What is the variance of
that forecast?” And if he says, as he would have to, “Well, we — there is a not insignificant
probability that the investment could be minus 10 percent” — gone. (LAUGHTER) And it is fascinating to watch how the response
to a very wide spread is very negative. So, it’s not so much what people think; it’s what
their ability is to see into the future. I mean, for example, one of the reasons that
it’s very difficult to get authorization for a long-term assets — not only in the United
States, but every place else — is that you’ve got, specifically in the United States, an
impossible notion of where tax rates are going to be 20 years from now; there’s almost no
way. Twenty years ago, we could, because it was
a pretty — there was a pretty standard view of what they might be. But now, we’re dealing with all sorts of things,
including climate problems, environmental problems and now, of course, the resurrection
of the Cold War, to a greater or lesser extent. These are not irrational reactions. These
are basically fundamental causes of uncertainty. And so, I look at the business sector basically
in the context of what is an average long-term expected rate of return and the — then what
the variance is to the extent that you could — you can use it. And there is — we’ve recovered some — some
from the lows. And I think that’s the reason why we’re getting some of this sort of rise
in commercial industrial loans and things that are moving. But the problem is that if this all begins
to cause long-term interest rates to start to move; that is going to stop dead in the
water. And what will cause the interest rates to
move, basically, is what is the effective capacity of the economy. And if as a number
of people suspect that we’ve got major problems in our labor market where a very significant
part of the potential workforce is not working — but more importantly, we’re retiring part
of the best part of our labor force and it’s showing up. And you can see it — the data
are very disturbing. On the issue of physical capacity capability,
we have — we have a considerable amount of slack, but it’s distorted. And we’ve got — the
real problems, as we said before, are basically in the long-term assets, mainly construction. And as you could expect, there are huge problems
in part of — part of the economy, which is very largely in that area. If, for example, you take a look at a proportion
of structures — if it’s residential or non-residential, the GDP — those numbers are from — from
the peak in 2006 down through 2011, that went down 5 percentage points of GDP. Now, not all of that is short-term, but we
are going to get reasonably long-term losses right now. And it’s going to be very difficult
to get the economy through enough capacity to get it really moving. FARRELL: There’s some real caution on the
U.S. But since we do want to touch a couple of regions, let me move to another area where
there’s a lot of question as to what the future holds, but very critical to the global economy,
which is China. Is China stalling, finally, after decades
of extraordinary growth? Or can it restore this very high growth model for another decade?
What will happen and how will its contribution to the global economy evolve? It is now technically the largest economy,
on a PPP basis. And does that mean anything? GREENSPAN: That’s because of their purchasing
power parity. That — that’s a wonderful statistic, but they’re not there yet. China’s a very interesting case, which I think
— you start off 20 years ago. The per capita GDP — or I should say the United States — was
40 times what it was there. Now it’s five times and it’s closing. The problem that disturbs me is that as you
close the gap, what we — what we — what we see is very substantial productivity increases.
That’s — that’s the only way to get the type of growth you see. But it is turning out that virtually none
of it is indigenous. All of it is basically borrowed or whatever you — words you want
to use. But the — there — there’s a very interesting
study by Thomson Reuters and they — that it’s been doing for the last several years.
They’ve been asking — they’ve been trying to figure out who are the hundred most innovative
corporations in the world. The latest report — 45 were American; zero
were Chinese. And this — it raises a very interesting question as to whether that’s
an accident. In an authoritarian state, the issue of innovation
is very difficult — or I should say this basic indigenous innovation. Of course innovation
is something nobody thought about before. If they thought about it, it’s not innovation.
The problem that you have however, is that if you have restraint occurring in the society
about where you — what you can think about, what you can talk about, and even though China
is changing, I think in a very positive direction, it’s doing so very slowly. And so that the issue of going outside the
conventional wisdom, which is what basically happens, that is very difficult to do in an
authoritarian state. They cannot do it in Russia, they cannot do it in China, they surely
cannot do it in North Korea. And that’s going to be a problem. FARRELL: You mentioned Russia, which of course
dominates the headlines today with Ukraine situation and otherwise. What’s your sense
of how big an issue for the global economy is the current Russia situation, both their
role in the energy world, the sanctions that the U.S., the E.U., may put on them, either
now or in the future, is this a big additional source of uncertainty from your point of view,
or marginal? GREENSPAN: Well I was involved in studying
up the sanctions against Iran early on, and I was fascinated in the extent to which the
issue of the power of the American banking system and their correspondent banking, that
we were able to actually get some really significant impacts, which really were beginning to work. But it’s very different in Ukraine, because
there’s really nothing you can touch, and when you can touch it, it hurts us more by
comparison, like NATO. It hurts NATO more than it hurts us, or rather hurts them. And the reason for that is that I’ve always
thought that Europe made a mistake in not trying to wean itself off Russian natural
gas. I think I can’t remember the number again, I think something like a third — a third
of Eurozone’s gas is probably coming from — directly from Russia. And it may be more than that, I’m not sure,
but natural gas is not like crude oil. Crude oil you can move around physically, and it’s
very easy, and if, for example, the Russians were to cut off their shipments of crude oil
to the rest of the world, we could rev up, there’s maybe 2-3 billion barrels a day, excess
in Saudi Arabia, which could be perked up, and Lord knows what’s happening in North Dakota.
I mean we’re just doing an awful lot there. But natural gas is very tricky. The only way
we can get gas to Europe is by liquefaction, and we — up until three or four years ago,
we were going to be the major recipient of liquefied natural gas, and we had built up
all these facilities, and then all of a sudden this Mitchell corporation in Texas devised
frackery– fracking, and it changed the world wholly around. And what we’re — what we’re seeing now is
that we don’t have facilities, as far as I remember, that are — will go online to ship
the stuff from, for example, the North Dakota fields out into the European pipelines. That’s
at least a year away, and certainly even much more than in volume. And the reason is, is that liquefaction is
a very expensive operation, and the boats that you have to employ to get it there is
another factor which is very critical. So it will be a long time before we can create
from our fields a significant solution to the European…. Because another aspect of liquefied natural
gas which is very relevant to this, is that because it is such a difficult process, most
of the new facilities are committed in advance. In other words, you don’t build a plant to
export liquefied natural gas unless you guarantee the markets, which means you have to sign
contracts. And so this is not going to happen easily
here, but the Russians have, in the past, shut down the flow of gas through Ukraine
… FARRELL: So another big source of uncertainty
that I’m hearing, I know you’ve mentioned … GREENSPAN: Well this is a big one … FARRELL: And you’re saying that it will have
a significant impact, at least in the short term, because not too much can be addressed. GREENSPAN: Well we’re fortunate in a certain
sense that the winter was rather mild in Europe, and that meant that they built up inventories
of regular gas, and so it’s not going to hit Europe until you get into the fall and early
winter. But if the Russians decide at some point to
turn the knob, I don’t know what we’d do about it. They were turning the knob before we had
the really obvious, at least in my judgment, Putin deciding that it was a mistake to break
up the Soviet Union, let’s put it back all together — let’s put it back together again.
And working at that. And he has a very considerable weapon. FARRELL: So he could have a huge impact on
Europe, but of course even before Russia and Putin’s Ukraine adventure, Europe has been
a source of pretty significant instability, and we seem to have subsided from the panic
days of 18, 24 months ago. Is it over? If they can bystep the Russia thing, is Europe
going to be OK, or what is your sense about how robust the … GREENSPAN: Well this is another statistic
that I collect every week, which is the size of the ECB balance sheet. And you could see
the crisis emerging as all of a sudden it started up as all of that — and essentially
what the ECB was doing was taking the — taking the sovereign credit embodied in the euro,
and lending it out, first with very strict conditions on the metric (ph), which didn’t
help the situation. And then finally, with this other monetary
transaction thing, in which they basically considered, and it worked, but, it worked
— there’s no drawing on that facility. But Europe got to the point where if it didn’t
work, I mean if it didn’t stop the run in say Greece, Portugal, Spain, Italy, there
was no other place to go. See, in the United States, if our banking
system fails, our sovereign credit of the federal government can bear without. But in
Europe, what they have only is the euro and the individual members which don’t always
agree with each other, in fact rarely do, and you have basically two euro areas. It’s
the periphery and – it’s north and south, and I sat in in the very early stages of 1994,
’95, ’96 … FARRELL: You were an early skeptic of this
experiment. GREENSPAN: I would show up in Basel, Switzerland,
where the Bank for International Settlements would host the G10 governors. And it was just
fascinating because the G10, which of course was 11 countries, had regular Sunday dinners,
it was no staff, nothing. And because — with the exception of Canada,
Japan and the United States, they were all European, I would — I had — I was sitting
there at the birth of the euro, which was fascinating to watch, before they had a name
for it. And they were all acutely aware that there
were cultural differences which were significant. And they basically were trying to replicate
the type of monetary system which the United States had, which was with the 50 individual
states, with a single currency. And there was a recognition that you couldn’t
logically say that cultural differences and differences in language and the like were
not a problem. But there was a remarkable conviction on the part of the European central
bankers that it could be made to work. And maybe because most of them looked for
— you know, had seen two major wars on the European continent in less than 30 years,
and they were always looking to the future as to what we could we do to prevent that. And so it wasn’t so much getting the euro,
but it was another step towards political integration of the EC. And so you could see
that’s where they were going. In any event, the general notion was, to be sure, the Italians
and the Spaniards are different from the Germans and the Austrians. But when we get them all into a single currency,
the Italians would behave like Germans. Well that might have seemed a crazy view, but the
markets believed it, because what you see for example with the Italians, is that my
recollection was that the spread of lira-denominated bonds was 500 basis points over the German
bund. And as we approached January 1st, 1999, the
beginning of the official euro thing, we collapsed that spread down to about 20 basis points.
And so everyone said well, the financial markets believe it, maybe it is true, and indeed,
for a decade, the system worked extraordinarily. I couldn’t believe it, but there it was in
front of my eyes, they made it work. The problem is in retrospect, we realize that there was
such a global boom going on that there was no such thing as non-competitive nations,
because everyone could sell everything they could make. But with the 2008 crisis, the whole thing
opened up, the spreads opened up dramatically, and back to where they were prior to the onset
of the euro. Remember prior to the onset of the euro, it was not that. That — Greece and Portugal and Spain and
Italy somehow managed, they all had serial devaluations, and their unit — their unit
costs continued to rise relative to the northern — northern European groups. And the result of that was that when they
came together, there was only one currency, you couldn’t devalue anymore. But for ten
years, they didn’t need to. But when you ran into the break in 2008, the whole thing unwound. And the ECB was very limited in what it could
do to help, because it was constructed by the Maastricht Treaty, which was Germanic
in virtually every respect. And indeed the euro was supposed to be replicating the Deustche
mark. But from day one, the day the show, that none
of the southern European countries basically behaved like northerns. And in fact the book
I finished last year, I go through this in some detail. It’s very interesting to see
how it — how it evolves. But where we are now is that Mario Draghi
basically took the European Central Bank out of Maastricht, and said whatever is required
to save the euro, we will do. And the reason why that was working was Angela Merkel was
very concerned about the euro breaking up, because that would mean that the subsidy that
the Germans were getting with a weak euro relative to the shadow Deutsche mark would
be eliminated. The Germans had a big export competitive advantage,
so that they had reasons to want to keep it together, the Greeks wanted to keep it together,
and everyone wanted to keep it together. And so when Draghi basically said we’ll do whatever
has to be done, the markets believed it, they didn’t have a single loan of the so-called
— of the monetary transactions, which was the name they put on that particular facility. And the whole thing turned around, but never
fully, because there’s a thing called target two, in the European Central Banking system,
which is the intra-central bank net lending to each other. And all of the 17 countries are members of
that. And when you look at who is lending to whom, it’s sort of obvious. But net — the
Germans, major, and the Netherlands, and Finland and the like, were net creditors, basically
Spain and Italy are the two big debtors. That is still existing, in other words, the
amount — the amount of net lending has come down between the north and the south, but
it’s still there, and is not evident to me that the cultural differences have been resolved,
so a very long answer to a very short question. FARRELL: Another source of uncertainty, we’ve
left a few places of the world off the table, Latin America, Africa, others we can come
back to them in the questions, but I know you’re all eager to ask some questions. If
you don’t I have plenty more to go, but let me now turn it over to the audience. I ask you please to raise your hand as one
of these — the microphone will come to you, and please hold the microphone close to your
mouth so we can hear you properly. Yes, why don’t we start right here. QUESTION: My recollection is that when you
had to testify before Congress, you were really mystified by the ’08 collapse. And I guess
my question is what kind of metrics you used to evaluate. Sounds to me as if you’re using
the metrics that are now coming out in Piketty’s new book. Maybe you understood all this before,
but I guess my question is what do you think are the metrics the rest of us oughta understand
in terms of evaluating … GREENSPAN: Are you talking — well it’s … QUESTION: Capitalism, and the … GREENSPAN: You know, this is a different — there’s
a whole series of questions implicit in that. Let me just tell you there are two issues,
let me do it one at a time. I always presumed that individuals acted mainly rationally,
but a significant part of it was irrational in the way they decided. But, since it’s very evident that progress
is only made through rational insight, syllogisms, that everything else sort of washed out. In
other words, the telegraph was not invented by somebody who had an intuition. He had to
go think it through. So that I always thought that it would wash
out and the irrational would be — wouldn’t be there, and the people acting in their own
rational long term interest, would essentially sustain the system, and indeed we had — through
2007, we had been through an extraordinarily long period of economic stability, with very
little weakness, and it’s a very unusual period. But what happened in 2008, September the 15th,
2008, I remember the day very well, Lehman defaulted, and a fundamental thing happened.
It was the greatest financial crisis in world history. To be sure, it wasn’t the greatest
economic crisis, that was the Great Depression. But for the first time ever, all financial
markets shut down, and most importantly, the overnight markets. And that required sovereign
credit coming in, and eventually it created a system which basically tried to hold — tried
to hold the thing together, which it did. The difficulty that I have with my view, was
that that was not supposed to happen. It’s the first time it ever happened, and it probably
will not happen again for 50 years. But it will happen, and it will happen because where
my flaw in my reasoning was that animal spirits so to speak, actually have a systematic capability
of acting — people — people get fearful, or euphoric in a very systematic, demonstrable
way. So I just — this book I was mentioning I
wrote last year, I sat down and said to myself, where was I wrong? How did I miss the most
important thing in economics in my lifetime? And you know, what is it that caused the boats
to back up outside of Singapore within days of that, never happening before? In the United States, the last time we actually
had markets shutting down, was in 1907, when the call money markets shut down for one day,
it — that’s the overnight rate back then. It never shut down during the 1930’s, and
indeed it’s an unprecedented event, which I’m in the process still of bringing together
how to figure it out … FARRELL: You were not the only one who missed
this one. But if I may, let’s turn to a few other questions, because I know there were
several hands up … GREENSPAN: Just one quick issue on — we’ll
come back to the … (CROSS-TALK) FARRELL: … more generally, ahead. I was
going to wrap up with that. We had a question all the way on the back, please. QUESTION: Your meetings with Chinese officials,
did it ever occur to you to suggest perhaps they could form a study group on Atlas Shrugged? GREENSPAN: No, it never — it never did, but
I will tell you something, I had a very close relationship with Ju Rarji (ph), and I will
tell you, for someone who was born, bred and educated essentially during the cultural revolution,
I had never run into anybody who knew more about how capitalism worked than Ju (ph). So the answer to your question is no, I never
did, but I had a suspicion I might never had — I probably didn’t need to. FARRELL: Great. We have a question right here
in the front. QUESTION: My question is really directed to
both of you, and it starts off with the observation that Diana did some exceptional work, I think,
around 2005, and thereabouts, talking about the extraordinarily large global liquidity
problem that we were seeing emerge, I think it was historically large. And I’ve always thought that that was really
one of the reasons why the financial markets got weaker and weaker and weaker. It was really
hard to deal with all of this liquidity in there. I’m wondering, both of you, what’s
your view on the, you know — that liquidity and what it did to the markets, and the financial
markets in specific. I’m also very curious about your views on Japan, and how they’re
QE experiment is apt to work. FARRELL: Well I’ll only state the facts, because
I’m sure people want to hear, but I think you’re right in saying some of the work that
we’d done, honed in on an interesting dynamic, which was in 1980, the stock of financial
assets was one time GDP, global GDP. By 1990, it was twice, by 2000 it was three times global
GDP. And so this level of leverage, that the value
of financial assets, over the underlying flow of economic activity, was demonstrating a
characteristic that we’d never seen before, and we didn’t call it either when we were
looking at this, but we certainly knew this to be a different dynamic. But your thoughts
on that, I think, would be great. GREENSPAN: Well what the data shows, and indicated
at the very beginning, is that we did have QEs essentially, first developing here, and
then the Bank of England, and then it spread around the world. There is evidence that it had a significant
impact on asset prices, basically because if you force down the real long term rate,
the cap rate on real estate goes down, the price earnings — the earnings price ratio
goes down in the stock market. And we had an asset explosion all over the
world, in other words, you know, people parochially think that the housing boom and the stock
market boom, the dot com boom, were a U.S. phenomenon. They were, but you find it everywhere else.
I mean in the housing boom, housing prices in the United States went up about on average.
Not only that, but we had very much the same thing in Canada and Australia, without the
secondary consequences of the toxic subprime problem. So it wasn’t — it’s — these things
just were everywhere. FARRELL: Did you want to say a word on Japan
as well? GREENSPAN: Well Japan had … FARRELL: The same issue, of course. GREENSPAN: Japan was growing at 4 percent
a year for years, and I don’t know if you remember Herman Kahn (ph). Herman Kahn (ph)
wrote a famous book forecasting that in the 21st century, Japan would overtake everybody,
just in time to miss it. And I was having a very interesting conversation
with Kiichi Miyazawa, who then was finance minister, just after the crash, and he was
prime minister prior to that. And I went through my let the markets liquidate, et cetera, rhetoric,
and explaining how it was working in Japan. And it implied that the loan losses would
require very significant bankruptcies, and I said, you know, we — resolution trust corporation,
actually much of the — we did exactly the same thing very successfully, the very same
story. And I went through this, and Miyazawa with
his perfect English, sat there and listened to me, and then he smiled and he said Alan,
you’re quite correct on your diagnosis of what’s happening here, but you just do not
understand Japanese culture. For a bank to call a loan which bankrupts
a company, induces a loss of face, and that is culturally not acceptable. And I think
that’s the reason, fundamentally, that Japan was caught up in a very cultural bind, where
to do the type of liquidation required after the huge boom — remember that the value of
real estate in the palace in Tokyo was equal to the value of the real estate in California.
Now that tells you that something was awfully skewed. FARRELL: We have a number of questions. I
see here microphone came up. If people can’t — can people still hear in the back? Great.
Yes, hand all the way in the back. QUESTION: Thank you. I have a question on
another new book that came out recently, it’s Michael Lewis’ book about high frequency trading,
Flash Boys. My question is have you read it already? What do you make of Mr. Lewis’ statement
that the stock markets in the U.S. are basically rigged because of the way that high frequency
traders can actually manipulate market prices? And if not, generally speaking, what in your
view is the economic and social added value that this type of trading adds to financial
markets, and should they be regulated more strictly? Thank you. GREENSPAN: Well, let’s first start off with
the issue of what those types of organizations do. The first thing they do is they make money.
Now if they make money, they have to be buying low, and selling high. That is precisely what
market stabilization is. And what the difference is in this fast trading,
is a matter of degree. There was a regulation of the Securities and Exchange Commission,
of — in recent years, which requires that when an audit comes in to a broker, he is
required to seek out amongst a whole series of potential sources, for the highest bid,
or offer. That takes a matter of seconds, but the technology
has so extraordinarily changed over the — over recent years, that people who want to front
load the actual transaction, have the capability of doing that. Now it’s — first thing, all of the data indicate
that the cost of transactions in the stock market have come down very significantly in
recent years, and they all relate to this particular issue, so that the question is,
is the market rigged? The answer is in an odd way, it is rigged
by the SEC regulation. If they would repeal that, I think you would find that the ability
of all these people to compete with one another, would disappear in that the convergence would
occur in a manner which everyone would get the lowest — the lowest bid, or the — would
able — would able to get the lowest transaction costs. I don’t think the market is any more rigged
than it ever is, but I don’t know what rigging the market is without being very specific
about what they do, and in most instances, it’s either a structural problem in the market
itself, which can be changed, or it’s a regulation which is creating an unnecessary impact. FARRELL: Question, just pick (inaudible) second
row. QUESTION: Can I get you back to Japan, you
talked about Japan in the past, what about Japan in the future? Are you optimistic about
Abenomics? Arrow one and arrow two, monetary and fiscal seem to be getting recently good
reviews. Arrow three, growth policy, not getting good
reviews. There are some also who predict that perhaps Japan will be the center of the next
major global financial crisis. What’s your assessment of how Abenomics will do? GREENSPAN: Well, Japan’s got a very major
problem in the sense that the population is aging. And more importantly, if you look at
the way, over the years, financial markets have worked during periods of normal interest
rates, you would find that the JGBs would be — ten-year JGBs would be yielding 1 percent,
when the rest of the world at ten-year maturities would be yielding 5 and 6 percent. And the reason, of course, as I’m sure you’re
aware, that the issue of Japanese savings, which was the reason of the postal saving
system, which create a huge amount of money going into yen-denominated assets. And the reason that it didn’t go abroad, largely,
was because of the fact that what Miyazawa told me, it’s essentially it’s a patriotic
issue involved here, and it’s a cultural issue, and they just didn’t do that sort of thing. So that you tried– there’s very little in
the way of Japanese residents buying in dollar-denominated, or Deustche mark-denominated anything at the
time. And I think that that still exists. It is not a problem now because everybody
is at 1 percent on a ten-year, but I don’t think it’s going to stay that way. And I think the real problem of Japanese policy
is going to emerge when there is a significant increase in global interest rates, which will
happen eventually. But there’s also another problem here, in the sense that Japanese,
for decades, had a significant current account surplus. And that surplus has come down and down and
down, and at some point it’s going to turn negative. Basically as the population ages,
and as more and more consumption, and more and more necessarily lack of — lack of savings,
because they’re consuming the savings, and that means that the current account does indeed
come down. But at the point they go to a current account
deficit for a protracted period of time, it necessarily means they’re going to have to
borrow money in the global markets at global interest rates. And with the size of the stock of the yen-denominated
Japanese debt, that can create some real instabilities. So I’m worried about what can happen there.
It hasn’t happened yet. The Bank of Japan is a very sophisticated operation, and I always
got along with them extremely well, and learned a great deal about what they do. They are
acutely familiar with all of this. FARRELL: Let’s try to squeeze in a couple
more questions. We’ve got one gentleman in the back, third row up from the back. Please
introduce yourself. M: Chairman Greenspan, you haven’t said very
much about the role of emerging markets, apart from China as an engine of global growth,
and there is much in the literature suggesting that this is a secular phenomenon, as opposed
to a cyclical phenomenon. I’m wondering if you might opine about what you see the role
of emerging markets being in terms of driving growth over the next ten years or so. GREENSPAN: Well let’s go back to the issue
of the end of the Cold War, when the Berlin Wall came down, and the economic ruin behind
the Iron Curtain was far greater than anyone had anticipated. That caused a dramatic change
in third world nations who would be – were largely neutral, as you remember at the time. And almost all of them abandoned various different
forms of Fabian socialism and collective types of markets. Now remember that Nehru was a
pure Fabian socialist in a — in an orthodox sense. I mean he really, seriously believed that
you could run India with a bunch of excellent technocrats, and it didn’t work, but it became
obvious that none of that worked in the Soviet Union, and so you’ve got this huge change
in China, the Asian tigers. The whole third world, in effect embraced
capitalism, and you’ve got this extraordinary change, especially in China, in the extent
of GDP in the developing nations. And for a protracted number of years, the growth rate
in the developing nations were almost twice that in the developed world. They created major increases in savings because
they couldn’t consume all the new income, and they eventually led to that savings glut,
which Ben Bernanke originally identified, and created a dramatic change in the structure
of third world, or developing nations, and the developed world. That is coming to an end. The rate of growth
in the developing world, especially in some of the — I mean Latin America is an obvious
case where, no doubt Venezuela and Argentina holding down the whole system. And it’s also true, I mean India is not making
the progress that China has made, and I’m — I don’t know whether they’re going to eventually
conclude that China is still a developing nation, but it’s going to run into the fact
of its inability to create indigenous innovation. And so I think that the big movement in the
increasing in the share of the GDP in the developing world in the sense of global GDP,
I think that is now questionable. The only area which is still functioning are the Asian
tigers, who still are formidable. But — and there are certain Latin American countries
that are doing very well. But that sharp divergence, I think, it’s my judgment, is probably over. FARRELL: Let me — we’re coming to the end,
and we’ve been very — we’ll be very disciplined about ending on time, but maybe I’ll loop
it back to the very beginning. You brought up Piketty’s new book. Who would have thought that a French economist
book would be the top sell — number one top seller. Quick question for the audience, how
many of you have read the book? How many of you have read reviews of the book? There we
go. At its core, he’s asking fundamental questions
about capitalism, which has been the topic that you are a big spokesperson for. What
do you think of his ultimate diagnosis about capitalism yielding an income concentration,
a wealth concentration model, and what do you think about his policy proposals? GREENSPAN: Well it isn’t capitalism, it’s
something else. The question is, what is it that is create — everyone know what the Gini
coefficient is? It’s a measure of the degree of income … FARRELL: I think we can assume people know. GREENSPAN: … and wealth inequality. Well
the Gini coefficient has been rising fairly conservatively recently. But there is a fundamental
problem that I discuss in my book a year ago, in which you’ve got — the best way of putting
it would be that there is no evidence in human history that the intelligence level on average
has changed. That is — you read Euclid, or Newton, and
Einstein, they all are extraordinarily perceptive, at about the same level. You’ve got a compositional
change, but there is no evidence that the average IQ of the human — human population
has changed. On the other hand, you’ve got an issue of
ever-increasing technology, which is basically irreversible because ideas build on ideas
build on ideas. And we’re finding even now, that the issue, the system is becoming so
complex because what causes rising standards of living is a rise in the share and the ratio
of assets, in an economy, to hours. And all the basic data very clearly show that
per capita GDP is very closely related to the proportion of capital that’s employed
over the number of hours worked. That’s been the case since cavemen developed tools. But the problem here is there is no evidence
that the degree of technology is slowing down. It does mean that fewer and fewer human beings
have the capacity to work in it, and to make it function. That means that their marginal product is
increasing all the time, and so you have individuals who contribute to the wealth of the nation
in ever-increasing proportion. We’re getting to the point that the depth of the technologies
are such that fewer and fewer people can function in it. At the end of World War II, the United States
had a work force which was basically, the median was high school graduates. They had
the capacity to operate steel mills, assembly plants, the automobile manufacturers. The technology of the time, so that the — that
the cutting edge technology could be handled by people back then with essentially a high
school education. That has gradually and increasingly changed, and we’re finding that we’re getting
the — an ever smaller group of people can run the system. And that’s creating a very marked rise in
the Gini coefficient. Strangely enough, Piketty talks in terms of the rates of the term, but
essentially he’s saying the same thing that I am, the education system in the United States
can’t move fast enough. The one thing I think we can do — and I think
that income inequality is a very dangerous political phenomenon. One thing we can do
to be very helpful instead of talking, is to take H1B immigration quotas, which limit
the amount of people who can come into the United States with high skills. Everyone in this room is being subsidized
by the fact that we don’t allow our competitors to come in from abroad. All of our incomes
would be lower. That would do more to solving the issue, at least temporarily — it won’t
do it permanently, but temporarily, then most anything else I can think of. FARRELL: We could continue this conversation
all afternoon, I am sure, but it is one-thirty, and I will let you all get back to work. But
very importantly, thank you so much Chariman Greenspan. Fantastic (inaudible). Thank you.