Greenspan on the greenback

Alan Greenspan, the longest serving US Federal Reserve chairman, delivers his verdict on the likelihood of US recession, the future of the dollar pegs and the threats facing the rise of sovereign wealth funds. Tamara Walid reports.

Alan Greenspan talks about the US recession as though it has already arrived.

"We are at stall speed, and at a stall speed anything that goes low will get lower," he says with the assurance of an economist that has seen recessions come and go since he was first appointed US Federal Reserve chairman under Ronald Reagan in 1987.

The most striking thing about the former Fed chairman as he takes to the stage at the Abu Dhabi corporate leadership forum, is how frail the 82-year old economist has become. But as he delivers his health check of the US and Gulf economies, there is no doubt that his mind is as sharp as ever.

The talks kick off with the US economy; how bad is the US slowdown and will it be more severe than previous recessions.

"I suspect that it might be but not significantly so. There's an issue here of what you mean by recession and I use the term not in the view of two-consecutive quarters of negative growth, but rather that the actual economy will recede," says Greenspan, adding that the probability of this occurring is better than 50-50, attributing this to the fact that the country's "GDP is growing at zero" at the moment.

Greenspan, however, is still optimistic. He sees a good sign in the degree of flexibility that is beginning to reflect into the economic system in the US and a big part of the world.

"In the US we have been able to withstand significant shocks to our economy without the type of contractions that history suggests were supposed to happen," he says, recalling, in recent years, moving through deregulation to the opening up of markets to "essentially engaging significant globalisation thrust and creating flexibility".

This was the exact factor, Greenspan believes, that enabled the economy to withstand the stock market crash of 1987, which resulted in the market losing a fifth of its value in one day without any obvious consequences in gross domestic product (GDP).

"And then again the 9/11 shock created a very dramatic drop in GDP in just six weeks and then the economy stabilised and we came back," he says.

What's more, Greenspan believes that those same "forces" are still present today, but that current financial problems are much "deeper" than the US economy has experienced in quite a considerable time.

"I would not be surprised to see that we move lower than we did in the last... centuries. But I would be surprised if we had anything of a very serious dimension because our system basically adjusts fairly quickly," he reassures.

Greenspan discussed this same system lengthily in his book The Age of Turbulence: Adventures in the New World, where he lists the many reasons that make the US economy so resilient; one being financial regulation and securitisation that have made the economy better equipped to absorb shocks. The recent crisis, however, in banking securities and other financial instruments might have altered his view on financial liberalisation.

"It has changed my view in a sense that, what I found remarkable... is that very sophisticated professional investors; hedge funds, investment banks, bought all sorts of securities, which look extremely complex and difficult to judge with respect to their value," he says, adding that a good part of the valuations were not market valuations but model-based statistical valuations. Greenspan says he has always assumed that allowing markets to make value judgments will eventually lead to them "getting it right".

"I must say I was appalled by some of what went on, but the argument is not that we therefore should regulate, but fix it, because regulators know far less about risk and they are far less adept at dealing with risk valuation models than the people who are trying to preserve their institutions' equity. One of the mistakes that were made is that a full realisation of how significantly flawed some of these risk management valuation models are, is only now becoming evident," he says.

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