Alan Greenspan made an appearance on The Daily Show to plug his new book, but instead of the shallow, softball exchange he may have been expecting, Jon Stewart knocked him back on his heels with one of the most insightful interviews I’ve ever heard.
They covered the myth of the Free Market, the Gold Standard, the Fed’s role in controlling the quantity of fiat money, inflation, irrational exuberance… all in the span of about 5 minutes and all in a comedic context.
The coup de gras is when Greenspan admits that even with all the complex mathematical models, neither he nor anyone else is any better at forecasting now than they were 50 years ago!
Pure Brilliance. This interview should be mandatory viewing for any student of FOMC operations and monetary history, and I think libertarians and many Ron Paul supporters will particularly enjoy it.
You can (and should) view the entire video at the Comedy Central Daily Show website. Here’s a sample of some of the exchanges:
Stewart: (after Greenspan’s explanation that the market moves on expectations of the Fed move, not the fundamentals of it) So the Fed, or whoever’s leading it, if they wanted to could in fact “goof” on all of us…
Greenspan: (smiles) You wouldn’t want to.
Stewart: When you say “Open Market,” I always wonder… Why do we have a Fed? Wouldn’t the market take care of interest rates and all that? Why do we have someone adjusting rates if we are a free market society?
Greenspan: We didn’t need a central bank when we were on the Gold Standard…[Conspiracy theorists note- the Fed was created 20 years BEFORE we decoupled from the Gold Std -Ed.] …people would buy and sell gold and the markets would do what the Fed does now… but by the 1930s most everybody in the world decided that the Gold Standard was strangling the economy and universally the Gold Standard was abandoned…
…you need somebody out there or some mechanism to determine how much money is out there because the amount of money in an economy relates to the amount of inflation…
Stewart: So we’re not a free market then- there is an invisible, there is a “benevolent” hand that touches us…
Greenspan: Absolutely, you are quite correct. To the extent that there is a central bank governing the amount of money in the system, that is not a Free Market, and most people call it regulation [this statement should forever be enshrined as a quote- Ed].
Stewart: When you lower interest rates, it drives money to stocks and lowers the return people get on savings.
Greenspan: Yes, indeed.
Stewart: So they’ve made a choice - “We would like to favor those who invest in the stock market and not those who [save]”…
Greenspan:That’s the way it comes out, but that’s not the way we think about it.
Stewart: Explain that to me. It seems to me that we favor investment, but we don’t favor work. The vast majority of people work, they pay payroll taxes, and they use banks. And then there’s this whole other world of hedge funds and short betting… y’know, it seems like craps. And they keep saying, “No no no, don’t worry about it, it’s Free Market, that’s why we live in much bigger houses.” But it really is, it’s the Fed, or some other thing, no?
Greenspan: I think you’d better re-read my book. [trying to work the plug into the surprising line of questioning- Ed.]
Stewart: Am I wrong that we penalize work by not making the choice to…
Greenspan: No, what a sound money system does is to stabilize the elements in it and reduce the uncertainty that people confront, and when people confront uncertainty they withdraw and it reduces economic activity…
Stewart: So it’s all about perception then. It’s about making people believe the system is sound. If the stock market is high, people feel confident in spending, and if it lowers, they feel less confident?
Greenspan: Well…uh…I think you have to realize, there are certain aspects of human nature, which move exactly the way you defined it. The problem is, periodically we all go a little bit euphoric until we are assuming with confidence that everything is terrific, there will be no problems, nothing will ever happen, and then it dawns on us- NO!
Stewart: And then it goes the other way.
Stewart: Huge Fear.
Greenspan: I was telling my colleagues the other day… I’d been dealing with these big mathematical models for forecasting the economy, and I’m looking at what’s going on the last few weeks and I say, “Y’know, if I could figure out a way to determine whether or not people are more fearful, or changing to euphoric… I don’t need any of this other stuff. I could forecast the economy better than any way I know. The trouble is, we can’t figure that out. I’ve been in the forecasting business for 50 years, and I’m no better than I ever was, and nobody else is either.”
Stewart: (Leans back in chair)…You just bummed the sh*t outta me!