gwendolyn davidson · @northanger
17th Dec 2010 from Twitlonger
Greensquawk: (19631) Greensleeves, (10895) Aynrand, (241) Germania, (10208) Germanicus, (492) Gismonda
:: Greenspan - Part 1
http://www.cnbc.com/id/15840232/?video=1680587782
{00:26} I find your show frankly quite edifying… The other thing, since I can use this time to propagandize you, would you kindly get a little less LIBOR on your streamer and more 10-year note? I know what LIBOR is because it very rarely changes. The 10-year note's what it's all about… The one thing I do is I turn you on to find out what's going on in the markets and I always wait for certain critical things and I like to look — the very first thing — if you tell me what the ten year note is doing I'll tell you what the rest of the world is doing.
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{01:43}
Reading some of your musings in October about the amount that flowed out of the illiquid assets into liquid assets because of the risk being so paramount in everyone's mind. That has subsided quite a bit in the past two weeks and I'm wondering what you make of it?
[note: Greenspan's "Fear Undermines America’s Recovery" appears in Financial Times, 06-Oct-2010]
http://www.ft.com/cms/s/0/4524339a-d17a-11df-96d1-00144feabdc0.html
Remember, we're talking about illiquid assets. The reason why I choose that particular concept is it was terribly obvious to me that something very unusual was going on in the corporate sector in which we're getting this huge buildup in liquid assets. Why are we doing that? And the answer became very clear if you looked at the data. We've constructed a data system in which we measure the ratio of fixed investment — that is mainly plant and equipment — as a share of corporate cash flow, mainly non- financial corporations.
The reason that's important is that — having served on innumerable corporate boards before I came to The Fed — I was acutely aware of the extent to which there's a very significant restraint on the part of taking liquid cash flow and sinking it into aluminum rolling bills [note: it sounds like "aluminum" to me :o)] or into things which you can't unwind as the only way you get your money back is through depreciation. And that to me is sort of the critical measure of how uncertain or certain people are who are making corporate decisions, with respect to new plants, have about the future.
Moreso than hiring?
Oh yes. Hiring is a short-term phenomenon, it's not irrelevant obviously, but it doesn't tell you about how they view the longer term future. And every corporation looks out as far as they can and if it gets very cloudy out there they pull in their horns, and the best measure I've found to judge that is essentially this ratio of fixed investment, which is a conversion of liquid cash flow into fixed capital investment. In March of this year that ratio was at the lowest level in the history of the series, which goes back six decades. And I suspect it's probably the lowest since the Great Depression. Concurrent with that, you know we've had this huge surge in liquid assets — cause if you're not going to put the cash flow into capital investments, where does it go? mainly into liquid assets.
Now, most interesting, we're also seeing that in the household area. People are basically investing far less in physical assets — mainly homes — and their cash flow is going to repay debt. This is a phenomenon, which incidentally, is also evident in many other countries. We're getting the very same data system in the United Kingdom, for example.
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{06:51} The average age of assets we're reproducing, or all goods and services we're reproducing, is coming down. And indeed, that gap is describing the whole degree of lethargy. All of the shrinkage in GDP, all of the sort of stagnant sense we have… we have 2½ to 3% GDP and we think that's terrific — it isn't terrific. Coming out of a recession as deep as the one we've been through, we have not had — except for the big inventory swing — essentially what we need to get back to a balanced economy, and until and unless we get that risk sense down, and get a sense of more normality rather than this deep-seated fear, this economy's going nowhere.
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{08:24} What we need instead of this extraordinary depressed construction center — including residential and non-residential — we need these longer ??? assets to come back because that's where the whole in the economy is.
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{09:03} What do you attribute this fear to?
What I've been trying to do is to separate the various potential causes of this. ??? in the business community it's the aftershock of the crisis, the regulatory problems in finance basically. Because remember, without financial intermediation our system does not work. And then finally it's the deficit. The data… the only one you can measure cleanly is the deficit. And what I think frankly, much to my surprise, is the extraordinary amount of crowding out that is occurring as a consequence of the United States Treasury preempting the flow of savings in the economy. What that is essentially doing, which is what the data show with high statistical significance, is that approximately a third of the decline in capital investment, as a share of cash flow, is directly attributable to the crowding out by the U.S. Treasury borrowing and savings of the community ahead of all other borrowers. Because remember, unlike any other borrower in the market, the U.S. Treasury will pay whatever interest rate is required to gain the funds required to fund the difference between expenditures and revenues. Those numbers are significant, I did the same thing for the United Kingdom and getting surprisingly similar results. I tried it in certain other countries, some of them work a little bit better some of them a little bit worse. But so far, it's most dominant in the United States.
[Note: at the beginning of Part 2, Greenspan clarifies this issue]
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{13:19} First of all, if we did not have, for example, the whole debt problem — or increasingly the European problem — the outlook for the market would be terrific. And the reason it would be terrific is that equity premiums are at 50 year highs.
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{14:30} As I've indicated last time I was here and… everywhere else I've been talking. I think we are underestimating, and continue to underestimate, how important asset prices, very specifically equity values, are. Not only for shareholders and the like, but for the economy as a whole. A very big part of the bounce coming out of this crisis
was the very dramatic rise in the market value of the equity of the banks. Because the market value of equity is essentially the backup for financing your liabilities -- all of a sudden they became highly liquid, the ratings on the liabilities went up — I can't prove this… I suspect almost all of the TARP repayment are capital gains.
{15:40} You reminded me of a person doing research… This is new stuff that you're trying to put together to explain this phenomenon… but you're collecting data to prove this thesis that maybe it has to do with crowding out due to deficits, or causing — that's amazing to me — you could publish this, essentially… in a scientific journal.
{16:20} I'm in the process of putting all the econometrics together, in fact. I'm writing a book right now, in which it started off as half of a joke only with a title: "The Econometrics of Human Nature". I mentioned this as a joke to my publisher in Britain and he said it's a terrific title.
Greenspan - Part 2
http://www.cnbc.com/id/15840232?video=1680623935
{00:08} Dr. Greenspan, we were just talking off camera a little more about your idea about how the Treasury and how the Federal government is keeping a lot of what's been happening, uh, that they're to blame for some of what happened. Maybe you could explain that a little bit more, because I have to admit I was a little bit confused.
{00:24} I don't like to use the word "blame" because I don't think it characterizes the analysis that you have to look at. These are the data. What the facts are, is that the statistical evidence shows a very high significance that Federal borrowing is preempting a significant amount of the savings that would ordinarily flow and finance private capital investment. So that, the reverse is also true. When the deficit comes back down it's going to release funds and that I would expect that we would get a pickup as a consequence in private capital investment. Not completely, in other words, I can't say that it's a one-to-one tradeoff, but it is a significant — I think, relative to the stimulus, it is a very big offset to the stimulus.
{01:20} Which means that this vote that we're waiting from the Deficit Commission could be hugely important.
{01:24} I would say -- no -- the fourteen votes are utterly irrelevant. The question is, what is the President and what will the leadership in the Congress decide to bring forward on the Debt. And here it's going to be very tricky because, as Ronald Reagan told me, I remember vividly, he was confronted with major problems of cutting back the deficit because he had made promises during the 1980 campaign… Big tax cuts, and big increases in the military. And the laws of arithmetic require you to address a very significant part of the rest of the budget. And I said, "How are you going to do this, Mr. President-Elect (at the time)"? He said, "Provided we treat everybody equally harshly, it will work". And you know something, I've thought about that over the years and it's actually got a very significant scientific basis.
We can cut this budget, but only if everybody is treated equally. And I should think that we cannot do it in the regular appropriation process. You cannot do it piecemeal. Everybody [would] put up a tax increase, everybody on one side is against it, and vice versa. So what we've got to do is to create aggregate compromise budgets. Very similar to what, basically, the leadership of the Commission has put together, and to put that up for a vote. It would fail, you'd bring it back. Instead of amending it piecemeal you bring back another budget -- because that is the only way to get the concept of treating people equally harshly effectively operating. This business of the way we're doing it now, will not work.
Greenspan - Part 3
http://www.cnbc.com/id/15840232?video=1680623781
{06:08}
Trichet yesterday with his press conference, and getting a few raves this morning in the Financial Times because of this element of surprise that he has supposedly introduced trying to keep the markets offguard. The Financial Times says this morning: Don't play Trichet at poker. Who's the better poker player, Bernanke or Trichet?
[Press conference Jean-Claude Trichet: Introductory statement with Q&A]
http://www.ecb.int/press/pressconf/2010/html/is101202.en.html
[ECB: Trick or Trichet]
http://www.ft.com/cms/s/3/8977e252-fdf9-11df-853b-00144feab49a.html
It's probably a draw. It's called a diplomatic draw.
Are you impressed with that strategy with what the ECB has done?
I think they've got a terrible problem. I mean, to the extent that they increased their purchases of bonds of the various different countries, they of necessity take the pressure off the political system within those countries to do what has to be done. If, at the end of the day, the individual countries do not bring their fiscal situation to stability — remember, this is not just an issue of lowering their deficits. If you have a deficit, I don't care how low it is, you're still selling bonds. And it's very obvious when you get to the type of problem that Greece, and unfortunately Ireland, ran into it. The issue is not just reducing the deficit, you've got to turn a surplus before the markets credibly believe you know what you're doing. And I think that what Jean-Claude Trichet is caught between is the issue of trying to maintain a degree of liquidity in the system to prevent crisis… Joe, you pointed out in the beginning, the yield spreads have come down quite significantly the last few days in Portugal and Spain and Italy. The issue, essentially, is that you got to be careful that if you are too accommodative to the markets the fiscal situation will break down. The only chance — since it is a necessary condition to solve the problems of the EU — let the individual countries run fiscally stable positions. If they didn't do it originally, they better start acting like Germany or the system will break down. To everybody's detriment. And so Jean-Claude Trichet has got a really rough problem. I mean, he can basically solve the financial problem. He can just can flood the — he can just basically guarantee all of the debt of all of these countries. I wouldn't want to look for the economy that's going to emerge as a consequence of that, but he could do that. It doesn't solve the problem. There is no alternative to the individual countries to creating fiscal stability, and to coin a phrase, acting Germanic.