Alan Greenspan on Monetary Policy and the Economy
“Monetary policy has reached its outward bounds of effectiveness”. That is somewhat of a bold statement and could be easily dismissed as being overly pessimistic except for the fact that it is a statement made by former Fed Chair Greenspan. Overnight, he provided some views on monetary policy in recent times and poignantly pointed out that the various QE (quantitative easing) programs have “not helped all that much”. Stating that there are two metrics for the effectiveness of QE, Mr. Greenspan confirms that we have indeed seen an expected impact of higher P/E ratios but have not seen any evidence of desired lending activity and the resulting pickup in the economy.
Mr. Greenspan attributes poor US and global growth to low output per hour (or productivity) citing the US productivity growth rate as around 5.5% for the past 5 years (depending on how it is measured). Indeed his recent analysis has indicated two thirds of 31 major countries examined have experienced less than 1% productivity growth over the last 5 years.
Furthermore, corporate investment everywhere has come down significantly as a percentage of GDP “and when corporate investment falls, productivity sags”. So why have corporate investments declined? This is said to be due to the fact that gross domestic savings have been severely undercut by social benefit increases, themselves a result of demographic issues. Aging populations around the world are, he says, a political problem and one that is “extremely difficult to solve”.
In disagreement with IMF Director Christine Lagarde, Mr. Greenspan is not convinced that negative interest rates are a net positive stating that they "hurt financial intermediaries that require positive interest rates”. His focus was not on the policies of negative interest rates themselves, but the sequences of policies that have resulted in the need for their adoption now.
The interview illustrates Mr. Greenspan’s willingness to voice opinion contrary to the mainstream zeitgeist; exemplified no better than by President Obama’s State Of The Union quote “anyone claiming that America’s economy is in decline is peddling fiction”. One thing that can be said about Alan Greenspan is that just prior to the GFC he disseminated publicly his opinion of the growing risks. Some may recall his frequent use of the word “frothy” in the context of the housing market. The counter catchword use by then Fed Chair Bernanke and others at about that time was “contained”. History serves to educate here regarding the accuracy of these two points of view.