Thursday, 07 Oct 2010 09:41 AM
By: Dan Weil
It’s highly unlikely that ex-Federal Reserve Chairman Alan
Greenspan would call himself a Keynesian. But he obviously
agrees with the legendary economist John Maynard Keynes that
“animal spirits” represent a crucial ingredient of a healthy
economy.
A crisis of confidence grips the economy, Greenspan says. That
helps to explain why GDP growth slipped to 1.7 percent in the
second quarter from 3.6 percent in the first quarter.
Capital investment should have climbed sharply in recent months,
as corporate profits soared, Greenspan writes in the Financial
Times. But that investment has fallen short, and that combined
with a collapse of the consumer sector has depressed the
economy, he says.
“These shortfalls (are) the result of widespread private-sector
anxiety over America’s future,” Greenspan argues. “(And they)
have defused much, if not most, of the impact of the
administration’s fiscal stimulus.”
Moreover, the government’s intervention in the economy through
that stimulus has itself increased the anxiety, he says.
“The instinctive reaction of businessmen and householders to
uncertainty is to disengage from those activities that require
confident predictions of how the future will unfold,” Greenspan
writes.
Both the corporate and consumer sectors are unwilling to invest
in illiquid assets, such as real estate Greenspan says. Instead
there has been a massive move to the safety of Treasuries.
“It is this rapid rise in aversion to illiquid risk that
explains a large part of the anemic recovery in the U.S.,” he
writes.
Government intervention in the economy is a problem now,
Greenspan says. “Almost all economists and policymakers agree
activist government was necessary in the immediate aftermath of
the Lehman bankruptcy,” he says.
But the $862 billion fiscal stimulus has been of questionable
value, Greenspan notes. And he’s not too impressed with the new
financial reform law.
“It is going to take years to address the unprecedented
complexity of final rulemaking required in the massive
Dodd-Frank bill,” Greenspan writes.
“The inevitable uncertainty engendered will inhibit financial
innovation and intermediation, and render the rules that will
govern a future financial marketplace disturbingly conjectural.”
Uncertainty will be the result, he says. “This is bound to have
a significant impact on economic growth.”
Star economist Robert Shiller agrees with Greenspan about the
confidence deficit, though he thinks more government
intervention is needed to boost confidence rather than less.
“In a broad sense, damage to morale — which Keynes called
“animal spirits” — surely ranks as one of the most important
reasons for the American economy’s persistent weakness,” Shiller
wrote in The New York Times.
Meanwhile, James Grant, editor of Grant’s Interest Rate
Observer, shares Greenspan’s wariness of government
intervention, telling Bloomberg that regulators are looking
behind at the last crisis instead of ahead at what dangers lurk.
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