By Daniel Stanton
The former head of the US Federal Reserve has put pressure on GCC Central Banks to ditch their pegs to the dollar.
When the former chairman of the US Federal Reserve gives you advice, it is always going to be difficult to ignore it.
Dr Alan Greenspan, speaking at the Abu Dhabi Corporate Leadership Forum on Monday, argued in favour of the UAE dirham ditching its peg to the dollar.
When asked whether floating the dirham would help ease inflation, he responded: "It's probably the most useful thing that can be done."
When pressed to elaborate, he added: "I would be inclined in that direction."
Dr Greenspan made similar comments about the Saudi riyal in Jeddah earlier on Monday. It certainly marks a change from the head of the Fed who was once parodied in a newspaper cartoon as incapable even of choosing his breakfast cereal without burying the answer in ambiguous Fedspeak, and who once told an audience: "If I turn out to be particularly clear, you've probably misunderstood what I said."
On this occasion, he was crystal clear. Dr Greenspan pointed out that allowing the dirham to appreciate would make the UAE's exports less competitive and could harm the economy's drive to diversify away from oil income. Even so, he was on balance in favour of depegging to limit inflationary pressures.
On top of the media speculation about the future of the dollar peg in the Gulf, which seemed to reach its peak in December, this will add pressure to the heads of the Central Banks in the Gulf - excluding Kuwait, which made the break with the dollar last May.
The US economy has a zero growth rate at present, according to Dr Greenspan, and is headed for recession. The Gulf economies are headed in the opposite direction and run the risk of overheating if they are forced to emulate the Fed's rate cuts. This is a problem that is not going to go away.
At least Ben Bernanke got off lightly. At a private question and answer session held at National Bank of Abu Dhabi's head office later that evening, Dr Greenspan was asked whether the Fed had made the right decisions in response to the sub-prime meltdown.
He replied: "I try to stay away from commenting on my successor because he's got enough problems."
Greenspan is an idiot. His failed policies as head of the Federal Reserve are responsible for the housing morass which is having far reaching consequences all over the globe. Listen to his advice at your own peril.
All very well to float the GCC currencies but you wouldn't want to have a mortgage or run a business when interest rates rise to where they need to do their job in controlling inflation. Be careful what you wish for, the cure may be worse than the disease.