-->Auszug aus Protokoll seines dieswöchigen Auftritts vor dem
Wirtschaftsausschuss des Senats.

kopiert aus dem aktuellen Credit Bubble Bulletin von Doug Noland

...

I will include some notable dialogue from chairman Greenspan’s testimony Wednesday before the Senate Joint Economic Committee:



Congressman Paul Ryan: “I think if you look at the last year over monetary and fiscal policy, I think it’s a good story that can be told. Number one, when the tax cuts were announced last January the markets responded favorably. When we got more into the serious business of actually writing the legislation in the spring, the markets clearly took that as a serious note. And when they passed in July I think we saw a great recovery where we had the greatest quarter growth in 20 years. Combine that with the fact that we had very accommodative monetary policy, with expansion of the monetary base, I think what you saw last year was a great success story in economic expansion to where we are today, where consumption is growing well, where we have business capital expenditures growing at double digits, the exports growing at double digits, to the point where we are today where the foretold employment expansion to the household survey tells us a good story. And even now the employment survey has shown that we have created 500,000 jobs since January, and to the point where we now see that disinflation or deflation is off of the horizon.



My question to you, Mr. Chairman, is this: Now that we do see that essentially deflation is off the horizon, why does the Fed seem to be ignoring sensitive market signals like gold commodities and the steep upward-sloping yield curve? These signals have traditionally placed advanced warnings of excess liquidity and inflation. Shouldn’t the Fed at this time be looking at normalizing the federal funds rate? After all, having an economy that is growing an average of about five percent, and a Fed funds rate at one percent seems to be an unsustainable posture over the long run - shouldn’t - wouldn’t it be prudent to have small adjustments now, say before gold hits 500, so that we can avoid larger adjustments in the future, such as what took place in 1994?”



Chairman Greenspan: “Congressman, I can’t obviously stipulate where the Federal Open Market Committee is going to go or not go, because, one, I can guess, but I’m not sure, and in any event, if I could guess I shouldn’t say what I guess. But the crucial difference between now and in the past is an extraordinary productivity acceleration. Remember that if you take the non-financial business structure of our domestic economy, you can disaggregate it in a manner to get the causes of price change. In other words, we know that two thirds of consolidated costs are unit labor costs. We know what proportion are import costs. And if you take the non-energy part of our non-financial business, we know what parts are energy costs, so that we can see the structure of costs moving.”



What is different from the past is that in the past we had very little productivity gain and a very rapid response. Here what we are finding is that productivity is running in excess of compensation of employment, or has been, which means that unit labor costs are falling. To be sure, they are falling at a pace less than had been the case last year, but they are still falling. And that means that the price pressures are not anywhere near where they would be under normal circumstances. And when you look at the past, the issue of addressing a particular potential inflationary problem has got to take into consideration all of the various elements involved in that current situation. And remember that any particular monetary policy that you embark upon has risks, and you have to balance the risks against the benefits. When you have the benefit of a very significant increase in output per hour, it means that you can go in a much more measured pace than you would be required to go in the past.



And the reason why we have stayed at one percent federal funds rate over all of this period is not that we thought that inflation had gone away and that it was no longer a problem; it's that we believe that given the underlying structure of costs and prices and profitability that the emergence of inflation at a reasonably rapid pace, which would create great concern on our part, was nowhere on the horizon. And that therefore we could calibrate the structure of monetary policy in a way that we did not have to take undue risks, which invariably you do no matter what the policy is. And that essentially is what our recent history has been. Where we go from here is an issue that the Federal Open Market Committee will address in a couple of weeks and therefore.”







Congressman Ron Paul: “I find it interesting that you, as (well as) the previous Chairmen of the Federal Reserve, I remember four total, they’ve always advocated that we in the Congress spend less, and really the advice hasn’t been taken. Currently, our national debt is going up over $700 billion, and we’re pursuing, once again, a policy of guns and butter, and nobody seems to have much concern. But I think the Fed participates in this as long as you control a monopoly control over money and credit, and you can accommodate the Congress. I mean, if we spend, and nobody is going to buy those Treasury Notes, we know if you want the interest rates at 1 percent, you’re going to buy them. So, in a way, you’re complicit in what we do here in the Congress. But I don’t see that coming to an end with the monetary system that we have.



I do have a question dealing with your statement in the first paragraph about rising wealth contributing to the recovery. This last recession has been written about quite extensively as being unique. It came about not because you raised interest rates, as it is traditionally for the Fed to raise rates, we go into a recession, then there’s liquidation, and debt is wiped off the books, then there’s a restoring. This time, it just stopped because people ran out of steam, there wasn’t enough consumer purchasing power, and we had a recession. But you very quickly, and efficiently came in and lowered interest rates very aggressively, and prevented the conventional liquidation and the corrections that have come in the previous recessions.



And Congress didn’t hesitate for a minute to follow in its Keynesian path and rapidly and excessively raise spending. But, in addition to this, we have this very unusual and unique form of financing for our houses, which has caused tremendous inflation in our housing prices, through the financing of Fannie Mae and Freddie Mac, which in some ways the Fed participates, in some ways foreign central banks participate extensively in this. Anyway, we have a housing bubble, housing prices go up, and that I assume participates in this wealth, because the consumer has gone out and borrowed sometimes more than their equity. Equity prices are soaring. That to me is like saying we had great wealth when the NASDAQ was 5,000, then all of a sudden that great wealth dissipates rather quickly. So I do not see how we can say that we have true wealth without savings that’s created artificially by the excitement of easy money, and easy credit, and artificially rising prices, because people go out and get into further debt. To me, it seems like the bubble leaked, and you patched it up quickly, but we’re back on the same track again of very excessive spending, excessive borrowing, and we never had the liquidation. What really were you thinking about when you were talking about the rising wealth that has helped in this recovery?”



Chairman Greenspan: “The wealth, the term wealth in this context is a technical, statistical term, which is related solely to the question of the market value of net assets of households. Now, one can argue whether or not the market values that are placed on claims on physical assets are high or low, remember that all judgments of wealth essentially are discounted values of forward expected returns. And that’s a people’s sense of risk aversion is a critical fact in determining where stock prices are, and hence, where that wealth is. But, having said that, whatever it is does impact by all of the statistical analysis we are able to adduce on consumer expenditures. And the reason for that is that people, when they become wealthy, wealthier in paper terms, as you would put it, do have collateral to borrow and to spend, and they do. And that has, indeed, been an important factor in consumer expenditures over the last decade.”



Congressman Paul: “My question is, is it real collateral, that’s the question.”



Chairman Greenspan: “Well, the point at issue is, it gets to the more fundamental question, if you’re sitting out there with a big steel plant, and you say that is wealth, the question is, it’s people’s judgment as to what are the amounts of steel and the profitability

that will be engendered to enable what’s the value, the ongoing value of that steel plant. And people’s views can change quite dramatically, even if the physical plant doesn’t change one iota, even if, indeed, the amount of steel they’re producing and selling doesn’t change. What I’m trying to get at here is, you’re raising the much broader question with respect to how are assets valued in the marketplace, and we have rational or not rational procedures by which those evaluations are made.”



Congressman Paul: “I’m afraid we’re confusing debt with assets. That’s my contention.”



Chairman Greenspan: “No, debt and assets are two wholly different things. And the Federal Reserve I would say does not make that mistake.”



My comment: The Greenspan Fed specifically avoids the critical issue of true economic wealth creation. Instead, aggressive interventionist policy is focused on the blatant manipulation of financial wealth and asset prices generally. This flawed and reckless central banking has nurtured cumulative monetary disorder, irreparable price distortions, and endemic misallocation of resources. A painful adjustment period - call it financial crisis and Depression - is unavoidable specifically because of the ever-widening disparity between our perceived financial wealth and the true economic wealth creating capacity of our maladjusted Bubble economy.