Greenspan: Recent Decline 'Typical' of Recovery

Alan Greenspan
Alan Greenspan

Former Federal Reserve Chairman Alan Greenspan said that the recent stock market decline is “typical” of a recovery, and that international instability has more to do with the recent decline than problems in the United States.

“What we’re looking at is an invisible wall, which we’ve run into here. Which, essentially, as far as I can see, is a typical pause that occurs in an economic recovery,” Greenspan said in an interview with CNBC. “Ordinarily we’re saying that the stock market is driven by economic events, I think it’s more in the reverse.”

“I will grant you that this is not a normal economic recovery. We’ve just come out of what I believe is the most extraordinary and virulent global financial crisis that the world has ever seen,” he said.

“This recent decline is more international than it is a domestic affair,” he said, adding that “there is an inherent instability in the euro system.”

"I don't know where the end game is. Something has got give here. One possibility is there are fewer members of the European Monetary Unit," said Greenspan, who was Federal Reserve chairman for 19 years before retiring in 2006.

In the US, the lack of hiring is due to businesses being shocked by the collapse and dramatically pulling back on spending, Greenspan said.

“There is clearly a short term fear factor involved,” he said. “People don’t want to hire because they’re terribly concerned they have to let them go. The average work week has been going up which is another way of telling you that they’re more intensively using what they got before they’re hiring.”

He added that the jobless rate will begin to lower once the markets improve and output per hour decreases. "You don't hire when you're fearful," he said.

The hiring that has occurred so far, has been done by larger companies. The current recovery is “dominated by large banks, higher income individuals and bigger business,” Greenspan said. In past recoveries, small businesses have typically done most of the hiring and have started to pull the economy out of a recession, he said.

The ADP Employer Services report released Wednesday, for example, showed that large and medium sized businesses with over 50 employees reported an increase in hiring in June, while small businesses with fewer than 50 workers reported a decrease. (Read "Jobs Market Barely Budges in June as Hiring Stays Weak")

One of the reasons that small businesses are not hiring, Greenspan said, is because smaller banks are loaded up with commercial loans—a less attractive investment—and aren’t lending. “Small business is in real serious trouble,” he said.

In the far ranging interview, Greenspan said that raising the capital gains tax in the US would be ill advised. He also added that the financial crisis could not have been foreseen.

“It is just not feasible to forecast a financial crisis,” he said. “A financial crisis by definition is a sharp abrupt, unexpected decline in asset prices.”