Wednesday, 23 October 2013

Greenspan Is Finally Getting Closer to Understanding Bubbles, but...

After 87 years, including more than 18 years as the chairman of the Federal Reserve, Greenspan is finally starting to get it,
Asset bubbles alone don't cause financial crises like the one in 2008, former Federal Reserve Chairman Alan Greenspan told CNBC on Wednesday. Instead, the combination of bubbles and leverage is the problem, he said.
"We missed the timing badly on September the 15th, 2008 [the day Lehman Brothers filed for bankruptcy]. All of us knew there was a bubble. But a bubble in and of itself doesn't give you a crisis," he said in a "Squawk Box" interview. "It's turning out to be bubbles with leverage." 
But this is only part of the explanation for bubbles and the following recessions (and depressions) so he's got some more work to do. Greenspan does not yet understand that there wouldn't be bubbles of such proportions we've had in recent years without credit induced leverage. Also, I doubt he'll make it to the next step of understanding what is truly going on as he now seems to have turned towards behavioural economics for an explanation (see here for more on why this is not a good idea). If you consider buying his new book, don't. Instead, study Austrian Economics to get to the bottom of what drives booms and busts as "Austrian" economists figured that out in large part before Greenspan was even born.

Read the CNBC commentary here.

On Bloomberg radio today Greenspan also said bank capital ratios should have been much higher (before the 2008 financial crisis). He also started talking about a 30% capital ratio... before being cut off, decisively so, by Tom Keene who chipped in a trivial question about forward guidance... Mr Keene sounded very keen indeed to avoid such talk about higher bank capital ratios on his program I must say...Little wonder the investment blogging world has expanded so rapidly.

Well, at least mainstream media will pick up some of Greenspan comments today regarding leverage, and hopefully his thoughts on substantially higher capital ratios (which should be higher than that recommended by Dodd Frank he said on Bloomberg radio). And that is a good thing.

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