Bubbles are a function of human nature according to Greenspan

Alan GreenspanThe former Chairman of the US Federal Reserve (Fed) Chairman Alan Greenspan has always been a student of economics. After the financial crisis, he became a student of human nature. Sitting in his office overlooking the Washington Monument, Greenspan is eager to share his insight that in his latest book “The Map and the Territory”, to be printed in the fall.
The 88-year-old Greenspan was Fed chairman for more than 18 years in the period 1987 to 2006, he managed to bring the economy in many crises primarily through lower interest rates and optimism.
But after leaving office, he has experienced a remarkable fall. He apologized for having believed too many of the big banks again reconsider his views on the economy. Greenspan is currently president of the consulting firm Greenspan Associates LLC.
“The economy will do everything necessary in the short term, supported by a strong rise in the stock market”, he says, but remains worried that “we may be facing a new downturn”. According to him, the biggest challenge facing the Fed is how the central bank to cut its huge balance sheet with minimal consequences. “It will not be easy, and obviously it is not clear how it will happen”, said Greenspan, hoping that the Fed will stop smoothly the current monetary course.
The former chairman of the US central bank expects sharp market reaction after the first rise in interest rates. “Look what happened when I first started talking about reducing the amount of the bond program. Markets are always sensitive”, he added, but is not sure that proper communication will play a major role. “One of the areas to which they always felt doubt during my term was how effectively we can communicate with the market because they predicting the movements of the Fed. It was a battle that I’m not sure I always win”, says Greenspan.
“We can not overlook the fact that the valuation of assets have a huge impact on economic activity and no central bank that does not comply with what is happening not only in the credit markets, which, of course, is the main mandate of the Fed but of different asset markets”, he said in relation to the recent comments of Fed’s assessment of capital markets.

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