Former Fed Chairman Greenspan Sees No Dow Bubble (Transcript)

Former Federal Reserve Chairman Alan Greenspan said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend, that the U.S. economy probably will grow more slowly next year than some forecasters predict and indicated that a record U.S. stock market isn’t in a bubble.

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

AL HUNT: We begin the program with former Federal Reserve chairman and author of this book, “The Map and the Territory,” Alan Greenspan.

We’ll talk about the book in a minute, Dr. Greenspan. First, the general forecast for economic growth in 2014 is about 2.5 to 3 percent. Is that your assessment?

ALAN GREENSPAN: It’s a little on the upside, frankly. There’s no doubt that there’s been some acceleration going on, but there’s an overall suppression that is going on in the economy largely because we have a very heavy overhang of uncertainty.

HUNT: Closer to 2 percent than…?

GREENSPAN: I would be closer to 2 percent.

HUNT: OK, there’s some economists who believe that not only is that a problem right now – that overhand of uncertainty – but the aftereffects of the financial crisis are more, not permanent, but more long lasting than some, supposedly. We’re not going to have those 4, 5 percent growth for the foreseeable future. We’re going to be stuck around 2 percent. Are you one of those pessimists?

GREENSPAN: I am. I’m – I think there’s a big dispute – and should be a big dispute – as to what causes it. And I discussed it at some length in the book and largely I’m essentially saying that the degree of uncertainty that is being injected, irrespective of whether it’s a political cause or a non-political cause is creating significant reduction in so-called long-lived asset investments.

And that’s been down in a way I’ve never seen it before and that’s where all of our problem rests; in the long term future investment.

HUNT: Wall Street - too big to fail. The four largest banks today are 30 percent larger than they were in 2008. Does that concern you?

GREENSPAN: It sure does.

HUNT: What should we do about it?

GREENSPAN: Well, there are many things we should do about it. The first is, basically to put up the capital requirements. For reasons I go in the book, largely that we are showing inadequate capital by – in that - and until we solve that problem, we’re going to have a major issue in the banking sector.

HUNT: And some of your comments, though, you’ve even toyed – not directly – but, you toyed with the idea that maybe we ought to think about breaking up banks if they get too big to fail. JPMorgan, the largest bank, currently has eight suits against it – they’re all allegations, or most of them are – on everything from bribery to mortgage fraud. Should we think about breaking up JPMorgan?

GREENSPAN: You’re asking the wrong person. I was on a JPMorgan board -

HUNT: But you’re not now.

GREENSPAN: - for ten years. I am unclear as to what the nature of the allegations are. All I can tell you is that when I was there for all of that period, the major concern of the bank was to maintain its AAA status and its reputation. As far as I know, that has not significantly changed.

HUNT: Well, I’m not asking you to comment on the allegations, I’m saying, has it gotten so big – so big that we’d be better off if it were broken up?

GREENSPAN: Well, the main issue really rests not so much on the issue of size, but the question of size and inefficiency. What the too-big-to-fail issue is, is that we’re supporting banking institutions who are not only very large, but not very efficient and they are using the scarce savings of the society, which his critical for economic growth.

HUNT: But, you’re worried that some banks may not be, I gather by your earlier comments.

GREENSPAN: I think that is a safe statement.

HUNT: Because you don’t want to specify which ones.

GREENSPAN: I’d just as soon not.

HUNT: OK. In your book, after a lot of bigger self-examination, you conclude the market is sometimes less rational, particularly when it comes to finance than you long thought. If so, what are the implications for policy makers? Should the Fed try to prick asset bubbles with interest rates?

GREENSPAN: Well, the difficulty is that – and this is technically – quick history, would you think this important? We used to have mainly inventory cycles which were easy to handle, that didn’t cause these unstability. We had a major improvement in too big to – basically, shortening the lead times on deliveries in a manner which inventory levels were kept – were very substantially reduced.

The result of that is we don’t have major inventory cycles anymore. And because you don’t have major inventory cycles, you get a euphoria in the economy and what happens is the inevitable result of that are bubbles.

HUNT: Well, let me talk about euphoria. The stock market is going gangbusters; 16,000 in Dow, what, 1,800 for the S&P? Some people say it’s not in bubble-like conditions yet, but do you think it’s some irrational exuberance?

GREENSPAN: Just remember, the stock price generally goes up about 7 percent in the year over the longer term.

HUNT: Right.

GREENSPAN: But, didn’t go anywhere since October 2007. And the result of that is we’re just now breaching that. We have had no growth in stock prices for years. The result of that is that the valuation of stocks has been extraordinarily under value.

HUNT: So, this is a return to normalcy as opposed to a stock market bubble?

GREENSPAN: Correct. This does not have the characteristics, as far as I’m concerned, of a stock market bubble. It could come out that way, but I don’t see it at this stage.

HUNT: Let me ask you this; Pope Francis, this week, in a new exhortation, called on public officials to reject trickle-down economics – his word – and reject what he calls the absolute autonomy of market and financial speculation and to focus more on the problems of inequality. Does the Pope have a point?

GREENSPAN: I’d just as soon not discuss that issue, basically because I don’t know very much what the Pope said and unless I see the full detail of it, I don’t think it’s proper to -

HUNT: OK, well, let’s leave the Pope out and talk about it generically. You have worried about income equality in the past.

You’ve given speeches about it and, yet, a lot of the prescriptions in your book for cutting spending, cutting entitlements, cutting taxes on investors would exacerbate that even more.

GREENSPAN: Well, let me put it to you this way; I’m not necessarily for cutting benefits, provided we fund them. And so, the arguments in the book are essentially that we are underfunding our various entitlements and the entitlements are such that unless they are funded, they – remember, these are used for consumption. They eat into the savings of the society.

HUNT: Speaking of funding, what do you think of the economic feasibility, desirability of a value-added tax that is not regressive?

GREENSPAN: The trouble with a value-added tax is that it has no limits to it and Europe has accepted that. And I think the effect is -

HUNT: Singapore, New Zealand; there’s a lot of places that have value tax.

GREENSPAN: There may be, but it depends on an aggregate amount of taxation in the system. And I have no objection to raising taxes, but I do think that a value-added tax is not in the American system.

HUNT: OK. Janet Yellen is almost certainly going to be confirmed as the new Federal Reserve chairman. I know you don’t talk about current Fed policy, but what’s the biggest challenge that will face Janet Yellen, who you, by the way, have praised?

GREENSPAN: Yes. The biggest challenge – I have phrased that because she’s very good. The biggest challenge of the Federal Reserve in general is going to – that she’s facing is largely the question of what do you do when you essentially require to return to normal expansion or contraction of the balance sheet?

Right now, they’re still expanding the balance sheet. They’re going to have to come to a halt and the problem, basically -

HUNT: Want to say how soon they are likely to come to a halt?

GREENSPAN: I don’t want to comment on that because it’s a critical issue.

GREENSPAN: Let me just say this; eventually, we’re going to have to stop expanding and stop – and start bringing it in. That process is going to move interest rates higher and it’s – by an indeterminate amount and that is going to create major problems for the Federal Reserve, as it always has, politically.

HUNT: Dr. Greenspan, thank you so much for being with us.

***END OF TRANSCRIPT***

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