Ex-Fed chiefs run to form
Commentary and weekly watch by Doug Noland
CNBC’s Andrew Ross-Sorkin, March 15, 2013: ”The question of the morning: Do you want to break out the phrase again, ‘irrational exuberance’?”
Alan Greenspan: ”No, I don’t think it’s quite appropriate in this type of environment. In fact, a basic way of looking at this degree of exuberance or non-exuberance is to take a look at what we call the equity premium. As you know, it’s the extent of the measure of whether stocks are overvalued or undervalued. And right now, by historical calculation, we are significantly undervalued. The reason why the stock market has not been significantly higher is there are other factors compressing it lower. But irrational exuberance is the last term I would use to characterize what’s going on at the moment.”
Ross-Sorkin: ”Is this a Fed-fueled rally?”
Greenspan: ‘‘I think you can fully explain the rally in terms of basically the issue of the removal of what economists call ‘tail risk’. That is, what has been sitting out there virtually most of this year – and part of last as well – has been the European problems, which have every characteristic of caving in the economies of the world as a whole, and that has been temporarily removed. The result is removing of that key factor has allowed the markets to move up. It’s not because earnings are moving all that well, as you know, earnings – expectations at least – have been either been flat or down for awhile. What’s basically been doing – the valuation structure and it still’s got a way to go as far as I can see.”
Paul Volcker, March 4, 2013, upon receiving the Lifetime Achievement Award for Economic Policy from the National Association of Business Economics (NABE):
”I have two other things on my mind, at least one of them may strike you as a bit unusual. But I think it is a too much neglected subject despite the fact that it seems to me to have been a major underlying ingredient in the financial and economic crisis we have. And what I’m talking about is the international monetary system.
”Of course you know it’s hard to call it a system. A system concerns itself with some interrelated parts and a mechanism that are working together to produce some stability and progress. That’s hardly a description of the international monetary system. And as many people have said, ”international non-system”.
The reason I say it – I’m not going to elaborate on it right now – just look at one characteristic of that system: in the first seven or eight years of this century, where the biggest characteristic of this system was a big surplus on the part of China, a huge accumulation and employing those surpluses into US dollars. And, looking at the other side, the United States running the biggest deficits that it had run – in my memory anyway. The biggest economy in the world running current account deficits some years 5% or 6% of GDP, financing most of the large federal deficit by foreign purchases – so happy to lend at very low interest rates in a seemingly prosperous world.
”Now would anybody really design a system that would permit the Chinese to run cumulative surpluses – and Japan on top of it – in trillions of dollars cumulatively over a few years? And we ran deficits of that size for a period of time without suspecting that something is going to happen in a serious way to upset the system. It’s all very nice to be able to finance your external deficits very easily while it happens. But sooner or later the world is giving you a lot of rope for this exorbitant privilege of the reserve currency.
”But at what point does the rope get to the point where it strangles you? And we’ve tried to avoid that. I’m not sure that’s true yet. But the lack of discipline in this system – which is replicated within Europe, where deficits can go along more or less indefinitely in the euro zone until finally, finally something happens to interrupt the parade and we find ourselves with a degree of international indebtedness that is not easy to manage.”