If There's a Crisis ...

If there's a crisis, we'll all get together and solve it - or hopefully solve it.
Alan Greenspan, June 23, 2005

During last week's Senate Finance Committee Hearing on U.S.-China Trade Relations, there were a few interesting exchanges between Senator Max Baucus (D - Montana) and Alan Greenspan. Yes, this hearing is old news by now, but some of this discussion really is worth a closer look, even belatedly. The complete hearing is still available at CPAN via this link, and there is some additional coverage here and here.

It is becoming clear that when Alan Greenspan goes to Capitol Hill, the Q&A session following the prepared remarks is much more interesting than any of the prepared remarks. While the mainstream financial media does cover both, they seem to miss some of the real gems within the Q&A session.

Speaking of real gems, Treasury Secretary Snow was also present for this segment of the hearing. Come next January, he' going to be the government's highest profile guy on the U.S. economy - that's a scary thought. It took the panel about a half hour to ask Snow his first question, and they probably regretted doing so - on a few occasions, when the CSPAN cameras panned back to the committee table while Snow spoke, Senators could be seen rolling their eyes.

The contrast of alternatively listening to Snow and Greenspan was fairly remarkable - Snow sounds like he's still giving his social security stump speech, picking a few phrases and just repeating them over and over. Can you imagine what former Treasury Secretary Robert Rubin must think when he hears Snow talk?

Anyway, back to Max Baucus and Alan Greenspan - this exchange is about efforts to get China to revalue their currency:

Baucus: There may be some sort of general discussion, but I don't know if there's much action. Back in the late nineties, there was massive intervention. I mean banks, you were part of it, Secretary Rubin was part of it, Larry Summers was part of it. There was a coordinated response to deal with the Asian currency crisis - very coordinated, and very aggressive. And it worked pretty well. And part of the problem too is that a lot of those Asian countries - it was a capital flow problem. Perhaps they opened up too quickly, so capital flowed in when things were going well - the trouble is the capital all left when things weren't going too well. We've got two choices here - we try or we do nothing. I understand all the technical problems, but there's got to be some attempt here, some way, to sit down with the relevant countries and get some order here, because we all know that by and large, we are all better off the more there is some stability in currency markets, when we're all pretty much working off the same game plan, rather than if not.

Greenspan: Actually Senator, I think that the very fact that there is this very major set of discussions that are involved in the international financial arena, is leading us in that direction. Because remember we all are groping as to what the appropriate balances are because we are dealing with something we have never seen before. We have never seen the extent of dispersion of current account balances worldwide, with the implicit very large capital flows that we are observing. We have never experienced this before. We are learning how it is working, and I think as a consequence, we are gradually approaching the point of addressing the types of issues as you place them. There is no crisis at this particular stage.

Baucus: No, we're trying to avoid one.

Greenspan: Look, if there's a crisis, we'll all get together and solve it - or hopefully solve it. But that's what we're trying to avoid. And one of the ways you avoid it is not introducing the types of actions which are actions based on frustration, which don't address the real serious problems.

Baucus: If I might Mr. Chairman, it just seems to me that we run the risk of too many of these decision makers trying to address some of these subjects in private. It's legislation, Senator Schumer's, or whoever it is, it's proposals by the administration, it's getting this a lot more out in the open. Because I firmly believe that the more it is in the open, the more we'll have a better solution. And I firmly believe that the administration is not doing enough yet, out in the open, and bringing more people in, bringing the congress in, on an honest basis, because we risk real peril her if we don't.

It should be pretty clear that the central banks of the world and the IMF don't need or want any help from Congress on this issue. If anything bad happens, they can always print up more money - that seems to have worked for the last twenty years.

This segment is a bit long, but it does, in a round-about way, cover Greenspan's view toward the U.S. economy and it's place in the global economy. Senator Baucus asks a very good question, and after an apparent filibuster attempt, demands an answer:

Baucus: Mr. Chairman, it has often been stated by the Federal Reserve that increased flexibility of the American economy will likely facilitate any adjustment without any significant consequences - you know better than I about the huge current account deficit we are projected to face at the end of the year - I figure it is about $780 billion - which we'll need about $3 billion daily to finance. At the same time our economy appears increasingly dependent upon cheap credit to fund consumer spending and there are certain segments of our housing sector that have bubble like appearances. My question really is - shouldn't we do more than just let the quote "free market" take care of it? By definition, market flexibility will correct it. By definition. The trouble is that there are very significant adverse consequences for a lot of Americans when that happens. For example, people dislocated from jobs. There are some that can adapt to market flexibility a lot more easily than can others. So, don't you really think that we need stronger policy options to minimize the adverse consequences of free market flexibility, that by definition will correct some of this?

Greenspan: Senator, let me just preface my remarks by suggesting that what we are confronted with is the consequences of an extraordinary change in globalization in recent years which is, augmented trade and current account balances throughout the world - at the same time that process has created an increasing rate of growth and economic activity virtually world wide and has redounded very specifically to the benefit of the United States economy. We are looking at the extension of what has gone on in our economy when we moved from local markets to national markets. What we are observing now, and very specifically in the last decade or so, is the emergence of national economies, spilling over sovereign borders and in the process creating a much broader global market system, the statistics of which will begin to show very significant increases in the dispersion of current account balances, and trade balances, in the same way that had we in the United States been measuring trade imbalances amongst the 50 states, we would have found a very large increase in the dispersion of trade surplus and trade deficit within the United States. So this is a process really, which reflects a broadening of globalization which is, in my judgment, something of some significant positive force for world economic growth and prosperity.

Baucus: If I could remind you again Mr. Chairman, because our time is so limited here.

Greenspan: I was going to get to your question.

Baucus: Up to now ... well there's still a little time here.

Greenspan: In the process you create a very significant amount of winners and losers, and the basic problem that we confront is, given that the advantages are so much greater than the deficits, how do we take care of those who are on the wrong side of this process. And I do emphasize that what our international trade policy should be focusing on, is how we put resources, basically the resources that we gain from globalization, to assist those who are on the wrong side of the adjustment to retrain, come back, and if necessary, at least get a means of redress which recognizes that there are very significant problems in any competitive, any advance in economic activity. Indeed you can not have an advance in economic activity, unless you have obsolescent industries and cash flow move in to finance the cutting edge types of capital investments which we are engaged in, in the United States. It would be nice if it were different, but the world only gives us the choice of stagnation or advance, and if we choose advance, it occurs only in the context of moving capital from older industries to newer industries with the consequences that that clearly has - it's that process problem which I think we should direct our efforts to adjust.

Baucus: Well, you're very good at using my time. Mr. Chairman, you've been around. Mr. Chairman, the problem is this. I don't see a plan. I don't see a plan in the United States. I think frankly too much burden is on your shoulders. Too many people in this country think, "well the Fed will take care of it". It's all monetary policy. The administration, the congress, the free market era - we don't have to do anything. And I think that philosophy is controlling too much. Our country is great because of free markets. It is the strongest country in the world because of the free market system in our country. But at the same time there are huge dislocations. And increasingly fewer and fewer people are able to adapt to those dislocations. And you yourself said that we need some kind of a readjustment plan of some kind in this country in education. I don't see one. I don't see one. I don't see the administration proposing any plan that addresses that and I don't see the congress coming up with anything significant that addresses that, and I also do believe, and I'll give you a chance to respond, if you think this country should or should not spend comparatively more time on legislative policy and fiscal policy to take some of the burden away from the Federal Reserve which is trying to account for some of this with monetary policy.

Greenspan: I think the critical problem, as you point out Senator, is the issue of education. The problem as I have emphasized, and I don't want to go over it in detail at the moment but, where the real adjustment process is going to be required, where the retraining and the like, rests in the problems that are associated with our inability to move our children sufficiently through primary and secondary education, into college and beyond, to create an adequate level of skilled workers to staff the ever increasing...

Baucus: Do you see that in this country? Do you see the United States sufficiently addressing that?

Greenspan: I do not.

Baucus: I thank you. I don't either. I think that's a huge problem.

Greenspan: If we do not, whatever else we do, is not going to be helpful. If we do, nothing else will be necessary.

As in last month's congressional testimony, Mr. Greenspan once again stresses that the solution to our job/trade problems lies in bettering our educational system so as to better compete globally - currency adjustments will not do much to save jobs and trade barriers would be a disaster.

This seems like an all too convenient answer - really a cop-out when you think about it - especially when espoused by someone who has been instrumental in creating an entire generation of crazed consumers and speculators with the easy money policies of the last fifteen years.

Why be better educated when you can day-trade or flip condos?

This is the "we'll innovate our way out of our problems" approach to combatting the problem of losing jobs to cheap overseas labor - you'd think with all the visits to the White House over the last few years, the Bush Administration would be on board with this assessment and working towards this goal, if it is realistic at all.

Education will save us? That's an all too convenient answer for someone who is retiring in six months.