The 42.35% Chance: A Chat with Greenspan

If you want to know what former Fed Chairman Alan Greenspan thinks are the current chances of a recession, try this: When I sat down with him to do a “fireside chat” in Washington D.C., he said that he thought the odds of a recession were higher but still below 50 percent.”

“So higher than one third but less than 50 percent?” I asked, pressing him to be more specific.

“Yes,” he replied. “42.35 percent.” He did say it with a smile. But he made sure to say a little later that forecasting is still more “art than science.”

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It was a little daunting to undertake this “chat,” given Dr. Greenspan’s well-known propensity to converse in that unusual dialect of English called “fedspeak.” It seemed even more challenging when, right at the beginning, he described himself as “highly introverted.” He was explaining why the most difficult thing in writing his new book, The Age of Turbulence: Adventures in a New World, was using the word “I” because he had never before used it any of his work.

But, over the next hour and forty minutes, he turned out to be outgoing and humorous in our discussion, sometimes restricting himself to a single word answer like “yup.” No Fedspeak there.

He also used the “I” word. He talked about how when he was a child he would entertain relatives not by singing or reciting poetry but by doing math problems in his head, with numbers fed to him by his mother. On reflection, he allowed that this may have been the beginning of his preparation for testifying before Congress. While of course, he wouldn’t comment on the current Fed decision, he did say that that, in personal terms, the “best economic decision” he had ever made in his life was deciding, at age 18, not to be a professional musician and instead to seek employment elsewhere.

More seriously, on the broad economic issues, Greenspan said he was his raising his recession odds from that one-third he had cited earlier this year because of overall financial markets and concern about the overhang of unsold new houses in the United States. But he also said that the situation was improving because of the “easing” in the global financial markets and that the “economics of fear” are not as strong as they were a few weeks ago. Moreover, he added, “the global economy is still doing well.”

Energy has been a big interest for him – before the Fed, during his years there, and since. Why? The reasons were its scale and its overall impact on the economy, Dr. Greenspan replied. But, he said, “People are not aware of how fragile our tie to energy is. We have got to cut back on oil consumption in this country.” As the starting point, he advocated a $3 a gallon gasoline tax, similar to Europe, though phased in over a few years, with rebates to lower income families. He did indicate that he didn’t necessarily think it was very likely politically.

Inevitably, I asked him about what is now probably the most famous sentence in The Age of Turbulence -- his much-cited comment about oil being the reason for the Iraq war. He clarified that he was not talking about getting access to Iraqi petroleum reserves, as some have suggested. Rather, it was the serious risk that Saddam Hussein would eventually get the weapons to dominate the Persian Gulf and control transit of oil from the region, posing a major threat to the world economy, which depends on that oil.

On climate change and global warming, he said, “The scientific evidence of a global warming trend is pretty much irrefutable.” But he expressed skepticism about the success of the-now-much-discussed “cap-and-trade” type system for controlling it. “Unless we get the technology to change significantly, you can’t reach the goals we talk about without a significant decline in economic growth or an outright decline in output and employment.”

On the “housing bubble,” he said that the United States was one of more than 40 countries in which interest rates – and mortgage rates – fell dramatically around the world because of “disinflationary” pressures resulting from the end of the Cold War and the opening up of the world economy. “The international forces were so dominant, they were suppressing our interest rates.”

Since he said that “The Delphic Future,” the last chapter in The Age of Turbulence,was the one that he hoped people would focus on. I asked him what are his major worries for the future.. The former Fed chairman put “income inequality” at the top of the list.

“You cannot have the benefit of capitalist market growth without the support of a significant proportion or virtually all of the people,” he said. “If you have an increasing sense that the rewards of capitalism are being distributed unfairly, the system will not stand.” He put particular emphasis on improving educational opportunity in the country.

Noting that the U.S. economy had grown 70 percent during his 18-year tenure as Fed chairman, I asked him about the balance between “luck” and “skill”. Dr. Greenspan’s reply indicated that he regarded himself as a “lucky” fed chairman.

“Global economic forces are beginning to have a very significant impact on global economic events. As a result, central bankers will be less powerful than they were in earlier years. There is a balancing force in global markets.”

He said that he and his team at the Fed “had a lot of luck. Being in a disinflationary period made it easier.”

“We’re at a turning point,” he said. “My successors will not have it as easy as my colleagues and I did. I’m reasonably certain that the post-Soviet change was a one-shot force, and we seem to have gotten to the maximum point of disinflation and are now on the other side of it. Inflationary pressures are likely to start to rise, although it’s still very early.”

And what about the pressures he personally had felt as chairman of the Fed. He replied that they were constant, pervasive, and “subliminal.”

His last day at the Fed, he said, he had a very strange feeling. “I got in an elevator and for the first time in almost 20 years, I was alone.” How was it?

“It was liberating,” he replied.


Daniel Yergin is CNBC’s Global Energy Expert, and chairman of Cambridge Energy Research Associates. He conducted the “fireside chat” – Alan Greenspan’s recent appearance in Washington D.C. -- at George Washington University. It is now on the C-Span website. He is author of The Prize: the Epic Quest for Oil, Money, and Power and of Commanding Heights: the Battle for the World Economy.