WASHINGTON—Alan Greenspan, former chairman of the Federal Reserve, discussed his op-ed entitled Activism Tuesday, published by International Finance on March 3, at the Council on Foreign Relations. Greenspan defended his “controversial” statement that the sloth of economic recovery in the United States since the 2008 collapse of investment bank Lehman Brothers is due to too much “government activism.” Greenspan faults government activism for the current hesitancy observed in corporate cash flow and investments.
In introducing Greenspan, former U.S. Deputy Secretary of Treasury Roger Altman, current chairman of Evercore Partners Inc. alluded to Greenspan’s history, in particular his involvement during and after the 2008 financial collapse. “There are people who need no introduction…less than Alan needs no introduction,” Altman said.
Greenspan spent the majority of his presentation discussing his data analysis processes and the steps he took to reach his conclusion that government activism is the major cause for the tepid recovery of the U.S. economy. It was Altman who crystallized Greenspan’s overarching argument of the ineffectiveness of government activism in the financial sector, in addition to the overall impotency of the 2009 stimulus bill.
“The implication is that if we had not had the stimulus…investment, growth and jobs would have been better. And that’s a very important question,” Altman said.
Greenspan stated that the major damage inflicted by government activism is overcrowding in the credit marketplace, though he has not completely solidified absolute proof for his sentiments. “The basic issue against any gross stimulus is the crowding out issue. The data I have [collected] only applied to the offset of the gross stimulus…I’m still trying to find the means in which I can convert rhetoric to numbers,” Greenspan said.
Greenspan noted that major corporations like Microsoft and I.B.M. are not affected by crowding out in a deficit of this size—the deficit would have to increase two-fold to affect such major entities. The ‘who is being affected’ then, said Greenspan, “are ones which are known to be B-rated corporations. Where the shortfall is in investment is very largely in small businesses and in construction.”
The U.S. government has always been active in the financial market, Greenspan noted. The contemporary problem however is that activism breeds overcrowding, which does nothing to encourage risks in a financial market that has been hit so hard in the last two years. Increasing the number of variables a corporation must deal with, Greenspan said, has negative effects in such an economic environment.
“About a fifth of the shortfall in capital investment is attributed to crowding out,” Greenspan said.
In Activism, Greenspan concluded that the first misstep of the government was the 2009 stimulus bill, which prefaced “the tepid recovery in the United States…” Greenspan argued that—barring an economic threat such as “a full-blown Middle East crisis affecting oil prices”—less government meddling in private corporate cash flow and a lessening of policy on financial risks will start the revival of the U.S. economy.
Any notable recovery since the 2008 collapse, Greenspan wrote, is nominal.
The current government sentiment that unless the federal government reaches in to save the market, the cash flow won’t “move by itself,” is incorrect said Greenspan, “what we need to do now is calm down and let these things [move] by themselves.” Recently, Greenspan noted, the rate of government activism has reduced, and the rate of cash flow has come up.
A defining characteristic of U.S. hesitance since the 2008 Lehman Brothers freefall “is the degree of risk aversion to investment in illiquid fixed capital,” Greenspan wrote. Businessmen may be saying that the road to recovery is here, but Greenspan doesn’t “like what businessmen say. The basic issue is what they do. This ratio of capital appropriations as a share of the cash flow is not saying what they believe; it’s saying what they’re doing…that is creating this pulling back of the expectancy in the GDP.”
Greenspan concluded “the current government activism is hampering what should be a broad based robust economic recovery, driven in significant part by the positive wealth effect of a buoyant U.S. and global stock market.”
“It’s classic Greenspan,” noted one attendee.