Greenspan on the greenback

The issue at hand, says Greenspan, is not so much failing to measure what type of risks might occur but the "mathematics have been inappropriate" because the current models fail to fully capture what immigration does to US business. "We get into states of euphoria that builds up," he adds.

What is almost impossible to do is forecast such dramatic change in the economy, which is the main reason for the ongoing crisis, believes Greenspan.

"If we could forecast, it would be a problem but it doesn't create a discontinuity in the prices of assets and risks because what we do in these cycles is we underprice risk for significant periods of time and history tells us that the aftermath of that is usually very destabilising," he says.

What's worse is that there is no learning curve, says Greenspan. Seldom are the lessons learnt from these experiences, he points out, which in turn results in building up bubbles of all kinds.

"The thing that we have to invest in is this curve; it's not to throw out the whole process which in a way is of extraordinary value; economic flexibility, economic growth and indeed in the global model is taking hundreds of millions of people out of poverty. We shouldn't be throwing that out but should be saying: how do we fix it?" says Greenspan.

He is obviously against re-regulating the market, but strongly advocates fixing it. Re-regulating, he thinks, is equivalent to going back to "the euphoria period when finance was very restricted" and when there weren't as many bubbles and world economic growth was slower.

"The choice is not how to maintain this growth. We either have to accept the issue that we want open markets where risks are taken and if you don't have risks you can't create markets. But if you're taking risks, problems emerge and what one tries to do is to fix them but not go back to that hole, to old periods of highly-regulated economies."

Should Greenspan and financial regulators in the US have warned investment banks when the crisis in the US subprime mortgage market seemed imminent? Greenspan says he tried.

"For people who say we and the rest of the central banks should have raised flags, I say we did," he says, adding that he met with investment bankers who were buying the mortgage products as early as 2004, and expressed his concerns, but demand for these products and other derivatives was too strong.

He recalls meeting a number of bankers back in the year when he pointed out: "I have advanced degrees in mathematics. I cannot understand what some of these products are doing."

Greenspan's warning, however, fell on deaf ears. "When the markets are caught in the grips of euphoria, I don't care what you tell people, they don't want to hear it, they don't want to believe it," he says.

Furthermore, earlier in 1996, when Greenspan questioned the markets' behaviour, calling it "irrationally exuberant", his words of warning were neglected. The markets' reaction was limited to the next 24 hours, he says, adding: "Then they went on for another five years".

Today, the results of this on the US economy have been dramatic. The subprime mortgage crisis and housing oversupply has sent the economy to the brink of recession. The big question here is whether the US economy will drag the rest of the world down with it, as has been the case historically.

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