Five Questions for Alan Greenspan

As Federal Reserve Chairman Alan Greenspan prepared to make his final appearance on Capitol Hill today and tomorrow, an article over at CNN/Money attempted to assist our elected leaders by suggesting the following five questions to ask of the chairman:

1. Is bubble popping one of the Fed's jobs?
2. What qualities should your successor have?
3. What inning are we really in (interest rates)?
4. Should the next chairman keep his opinions to himself?
5. What do you want your legacy to be?

Well, we already know most of these answers and the ones we don't know really don't seem to be that important. Here's a much more interesting set of five questions:

1. Are you on crack?

While the Enron employees Q&A session with Ken Lay from 2001 was something that naturally arose while pondering five more interesting questions to ask of Mr. Greenspan, after a short chuckle, it was dismissed as being inappropriate. But, after thinking about it a bit more, there are some interesting similarities between Ken Lay in 2001 and Alan Greenspan in 2005:

• Unwavering confidence and trust, built up by both men over many years has recently been questioned
• It is not clear that either man understands that which he oversees
• Both men rely on wizardry (accounting/statistical) to explain the soundness of that which he oversees

It is as if all the anecdotal accounts of real estate investor behavior today are the equivalent of anecdotal accounts of Enron accounting practices four years ago. People can look around and sense that there is something seriously wrong, but their leader seems unconcerned or is unaware.

2. Do you believe everything you say about the health of the economy?

For example, from last month's testimony before the Joint Economic Committee of the U.S. Congress, you made the following statements:

Despite the uneven character of the expansion over the past year, the U.S. economy has done well, on net, by most measures. Real GDP has grown by 3.7 percent over that period, the unemployment rate has fallen to 5.1 percent, and core personal consumption expenditure prices have risen a historically modest 1.6 percent.

Surely, you know the details of how all of these statistics are calculated - that they are all manipulated and misleading. Don't you?

It is perhaps understandable that you have to say that things are going well, then cite these statistics, because otherwise financial markets may have an adverse reaction. But, do you actually believe this?

3. How does it feel to have created more money in the last 18 years than was created in the previous 200 years?

While it is clear that you have no choice in creating the money needed to help out with government borrowing, the personal and business credit creation juggernaut of the last 18 years is all yours. How does it feel to have created so much money?

4. Could you elaborate on your comments about how Fed policy replicates the gold standard?

In the context of your answer to question #3, please expand on these statements you made in July 2004:

Once you decide that a commodity standard such as the gold standard is, for whatever reasons, not acceptable in a society and you go to a fiat currency, then the question is automatically, unless you have Government endeavoring to determine the supply of the currency, it is very difficult to create what effectively the gold standard did.

I think you will find, as I have indicated to you before, that most effective central banks in this fiat money period tend to be successful largely because we tend to replicate which would probably have occurred under a commodity standard in general.

5. When do you think our next financial crisis will be?

Last year, former Fed Chief Paul Volcker made the prediction that "there is a 75 percent chance of a financial crisis in the next 5 years". What's your prediction?