Transcription
Bloomberg Audio Studios, podcasts, radio, news. Lizzy, we learned, of course, that Alan Greenspan, the chairman of the Federal Reserve for 18 years, has died at the age of 100. One of the great central bankers of our time. He steered the US through stock market crashes in 1987 and 2001 after the September 11th attack. Buddy faced criticism over easy monetary policy and the so-called Greenspan put.
Now, we wanted to think about Greenspan's legacy, uh, of course, contested. Joining us now is Mvin King, who is the former Bank of England governor to discuss. Uh, Lord King, thank you so much for being with us. I mean, how to sum up such a life, the impact of this man on the United States and abroad. But I wanted your thoughts, uh, a contemporary in part. How do you think of Alan Greenspan?
>> Well, he was a great man, and I like to think that this is an end of an era because I think in American public life, there have been three great centurions: Alan Greenspan, George Schultz, and Henry Kissinger, and all three reached and died at the age of 100. I was privileged to know them all. Alan, of course, I was closest to because we were opposite numbers for several years. Uh, and I was a deputy at the Bank of England when he was chairing the Fed, and I kept in touch with him and saw him quite often after he left the Federal Reserve. And when I was appointed governor of the bank, I went to Washington to see Allan and asked for advice, and he gave me the best advice I think that anyone gave me, which was, "Keep the mornings free to think, read, and write." And that was enormously helpful and important in working out how to play the role of a central bank governor.
>> Lord King, thank you for joining us this morning. What other lessons should central bankers today take from Greenspan?
>> Well, because he had an unrivaled ability to think for himself and delve into the details of data on the economy. He didn't just rely on someone putting a piece of paper in front of him saying, "This is the latest official statistic on the labor market or production." He would talk to business people directly. Uh, and he would find out for himself what was going on. And I think, you know, the, the high peak of that performance was in the 1990s when he was really the first to spot the impact of faster productivity growth in the US economy. Greenspan in office, as you say, was widely respected. I mean, I remember markets hung on every word that he uttered. Uh, although cryptic as it often was, as our own editor-in-chief John Miggleweight has said, the Greenspan Fed managed to avoid even one single quarter of falling year-on-year GDP during his tenure, even in the dot-com bust. You know, that was an incredible achievement and run over that 18-year period. And yet, Greenspan did fall out of favor in some senses, particularly after he left office. His policies were seen perhaps as having resulted in moral hazard in economic bubbles later. He sort of departed just before the housing bubble burst. Now, there also almost seems to be a reversal of that because he was, you know, out of office for so long, and maybe a rethink about that. But, but in terms of that moment where, and those years where he was out of favor, how credible do you think that is? How do you think about that, um, you know, that, that, that moment, that time frame when when his policies were criticized?
>> Well, I think that would be an unfair thing to do for him. He presided, as you said, over a long period of sustained expansion and low inflation for almost 20 years. That's a remarkable feat to be able to manage. Circumstances were not difficult for part of that time, though within two months of taking office, he had to deal with the 1987 stock market crash where prices fell by around 30%, biggest crash since, uh, 1929. And he dealt with that deftly and swiftly and, and received praise for that. So he did have to handle some quite tricky problems. I think later on, I mean, my experience has been that politicians and others will always want to find someone to blame. And once Allan had left office, he was an easy target for someone to blame. But the problems that arose in the banking sector were largely the decisions taken by banks themselves. And I think Allan admitted afterwards that he had assumed that banks would focus on managing the risks they were taking in their own self-interest. And of course, they didn't. They took wild risks which resulted in their, the need for them to be rescued by the Fed and by the US Treasury.
>> Now, that didn't do the banks any good. I mean, it was a near-death experience for many of them, and they, if they came through it, the people leading the banks did not come through it. They left. So, you know, and, but Aaron recognized that.
>> Nevertheless, the idea that somehow the state should manage and run everything is not an idea that's either be carried on. It really doesn't make much sense. Allan had deep convictions that sound money and a market economy were the way to a prosperous democratic society.
>> And what he demonstrated was that he had these deep inner convictions which enabled him to go through difficult periods and come out the other side still pursuing the right policies. When you have a leader of an institution, whether it's a central bank or any other institution, who doesn't have these personal intellectual convictions, they get blown around. They take advice from one person, then they hit a difficult patch. So, they get rid of the first advisor, look around for others, and that's a recipe for chaos and volatility in policy. What Alan brought to the Fed, which the rest of the world admired enormously, was a coherence and consistency of approach to monetary policy, and he was a figure that everyone revered. I've never forgotten going to international meetings in which the finance ministers, all politicians, would sit around with absolutely rapt attention to Allan as he talked for about 45 minutes without stopping about what was happening in the world and at dazzling them with an array of obscure statistics, you know, concrete production in Missouri and all kinds of numbers. They were absolutely amazed by it. They'd never seen anything like it.
>> M>> But of course, what he was doing was managing to grip their attention while trying to avoid being particularly clear. And he famously said in an appearance before Congress, you know, "Senator, if I seem unduly clear to you, you must have misunderstood what I said."
>> Well.
>> That was a great secret of his success. On that point, Caroline hinted at the sometimes cryptic nature of the way he spoke, speaking deliberately in riddles perhaps to try to keep markets guessing. Is that a model that you think the current Fed chairman, Kevin Walsh, is returning to, not putting his dot on the plot, changing the way the Fed communicates?
>> No, I think there's a difference. I think that Allan, together with his predecessor Paul Volcker, represented the peak period of mystique in central banking and obscurity. I think that's gone. I think that central banking today has moved on to a world where it's very important to be clear about what you know and what you don't know. And I think what Kevin Walsh understands is that putting dots on a plot, saying where you think interest rates will be in two or three years' time, is foolhardy because you don't know where interest rates will be, even though you set them yourself, because the world is unpredictable. The world is always changing. What's important is to say to people, "This is what we do understand about the economy, but this is what we do not understand, and there are things that will happen in the future that we can't easily predict, and we're not going to try and predict the, the unknowable. What we're going to do is to respond." And I think clarity in communications is not served well by pretending to know what policy you're going to implement in the future, and it detracts from focusing on today's decision.
>> Yeah, look, I think you've said, um, a lot of very, uh, interesting things from firsthand experience about Alan Greenspan, but also things that are very relevant to today. I like, you know, you mentioned mystique and obscurity, but also it was a time of intellectual heft, wasn't it, and expertise? And this brings me to another point about the UK today. We are thinking about Brexit 10 years on and the political instability that we've seen in those years. You know, we're in line maybe for another prime minister, possibly Andy Burnham, within weeks. And so we're thinking about what that transition and what this new administration in the UK is going to look like, who Burnham may pick as chancellor. How do you think that the Labour government under Burnham delivers on the great challenge now for Britain of growth and prosperity? Something that you say, you know, Greenspan was instrumental in helping to deliver in the US. I mean, that's a massive challenge for Britain today.
>> It is. And that's why I return to the point I made earlier, which is I think Andy Burnham will need to develop and have clear intellectual convictions of his own which he believes in, which will enable him to ride through the occasional difficult patches which he's bound to confront. And we don't know what those convictions are. They're rather vague at this stage. Well, fair enough, he's not been in office. He hasn't been asked to produce an alternative plan. But from now on, he will be asked and confronted with a whole series of very difficult questions. You know, how much will you spend on defense? What will you do about the triple lock for old age people? Are you going to start to change social care now rather than wait until the end of the parliament? There are a whole range of difficult questions, practical questions. But I think what's very important is the only way to tackle them in a convincing way so the public understands why difficult decisions are being taken is to have an overarching vision of what all this adds up to. So I'll give you one concrete example.
>> Abolishing winter fuel allowance for old age pensioners did made no sense as a single individual action. The only way you could explain and sell what you were doing was to do it in the context of a budget for the public finances as a whole, where we needed to raise more money, we should contribute that, and why pensioners might benefit from some other of the other measures in the budget, even if they lost from this particular one.
>> It needs an overall story to persuade people that there are difficult decisions to be taken.
>> Yeah. Yeah.
>> But the reason for taking them is to ensure that the economy will improve so that our children and grandchildren will not be burdened by an unnecessarily high level of debt, which will raise taxes on them.
>> Which helps make the case for more hope under Burnham than Starmer, because by all accounts, he is a better communicator. He's better at painting a vision. Let me ask you then, what is the best-case scenario for the UK economy under a Burnham premiership, when he's going to be just as fiscally squeezed as his predecessors?
>> Well, I think the best case is that he is bold and takes some difficult decisions, but explains why they're being taken in the interest of future generations. And I do think that one thing that's been underestimated is that I think that growth in the UK economy, whatever the government does, is likely to return to its pre-financial crisis level of around 2% or so a year. We've, we've been through a very unusual period in which interest rates have been held down to very low levels, and as a result, companies that would otherwise have gone out of business or contracted and released people and investment to more successful firms. That has been, uh, happening on a much smaller scale than would normally be the case. And that switch of people and resources from poor to good companies is always part of the underlying aggregate increase in productivity, and I think we'll get that back. So I don't think we should be pessimistic about the long run. What we need to find is a government that is prepared to put forward a comprehensive plan of difficult decisions which will not be seen as attractive to many voters, but they will understand the reason why because it's being done in the interest of future generations. And the biggest issue in the UK is that we save, as a country, less, a smaller proportion of our national income than any other major industrialized country. And we have to increase the national saving rate in order to switch resources to investment and to exports. And that means that we can't go on consuming at the same rate as we have. That's not a happy outcome in the short run, but it's a necessary condition of putting our country back onto a course for greater prosperity in the future.
>> Yes. And it's really the, the question, I think, that has dogged a number of, you know, leaders. It's about whether voters will go for that, whether they'll stick with that kind of maybe tougher plan. Mvin King, thank you so much for being with us. We really appreciate your time. That is the former Bank of England, Governor, Lord.