Delusion or Dementia

Alan Greenspan, aged 87, is best known as an American economist who served as the Chairman of the Federal Reserve of the United States, its central bank, from August 1987 until February 2006, when he handed over to Uncle Ben. As such he was the second longest serving Chairman throughout the Fed’s near 100 year history and his apparent success in delivering stable growth, not to mention his wizardry over markets, earned him the title of “maestro” by none other than Bob Woodford of “Watergate” fame, albeit that post the 2007 financial crisis Al’s gone from hero to zero.

Central Bankers’, like their political masters, need an element of luck and none more so than with the timing of their spell in office. In Greenspan’s case his timing was impeccable in that his “success,” was nothing to do with his mathematical models but more to do with his presiding over a period of rapid credit growth which, surprise surprise, lifted all financial boats, including stocks, real estate and GDP, as can be seen within the following chart.



Despite this, Greenspan continues to deny that rapid credit growth had anything to do with the housing and stock-market bubble, adamant that it’s near impossible to identify a bubble, thereby absolving himself and the rest of the Fed board, saying that he didn’t see the financial crisis coming.

He is currently doing the rounds of media interviews, in conjunction with the release of his new book, “The Map and the Territory: Risk, Human Nature, and the Future of Forecasting,” in which his publisher comments, “Like all of us, though few so visibly, Alan Greenspan was forced by the financial crisis of 2008 to question some fundamental assumptions about risk management and economic forecasting. No one with any meaningful role in economic decision making in the world saw beforehand the storm for what it was.”

Apparently, now that his financial models have let him down, Al is exploring the world of anthropology, psychology and behavioral economics, belatedly realising that markets are irrational and driven by animal spirits that defy maths. He has also recognised, after the horse has bolted, that leveraged debt creates fragility, albeit that he doesn’t appear to have shared this observation with the current Fed members.

We have commented on this extensively, the latest being last week’s blog, “At the Margin?” A repeat of the first chart, but updated to now, shows that lessons haven’t been learned, with policymakers still under the belief that leverage will solve the debt problem.



Greenspan’s descriptions of his “surprise” about the 2007 financial crisis sounds very similar to his description of surprise over the Lincoln Savings & Loan Association scandal of the late 1980s, which ended up costing the US tax-payer $3 Billion, following an earlier study of Lincoln’s finances by Al where he allegedly found nothing wrong, advocating that Lincoln receive an exemption for risky direct investments.

Dementia is a word used to describe a group of symptoms including memory loss or confusion, so perhaps Greenspan’s recollection of the aforementioned events is more to do with the ageing process rather than plain delusion?


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