Bubbles and leverage cause crises: Alan Greenspan
Greenspan reflected on the 2008 financial crisis and the questions it raised about the economic models used to predict risk.
Asset bubbles alone don't cause financial crises like the one in 2008, former Federal Reserve Chairman Alan Greenspan told CNBC on Wednesday. Instead, the combination of bubbles and leverage is the problem, he said.
"We missed the timing badly on September the 15th, 2008 [the day Lehman Brothers filed for bankruptcy]. All of us knew there was a bubble. But a bubble in and of itself doesn't give you a crisis," he said in a "Squawk Box" interview. "It's turning out to be bubbles with leverage."
Take the explosion of the dotcom bubble in the 1990s and even the stock market crash of 1987, he continued, they barely showed up in longer-term economic growth figures.
In his new book, "The Map and the Territory," the 87-year-old Greenspan reflected on the 2008 financial crisis and the questions it raised about the economic models used to predict risk. He looked at the shortcomings of current forecasting tools and how they can be updated to take better account of human nature.
"If you're looking at the distribution of outcomes, fear is hugely more important than euphoria or greed," Greenspan told CNBC. "Bubbles go up very slowing and then they go bang."
After the 2008 crisis, Greenspan said, he came to realize there was "something fundamentally wrong" with the way he and many colleagues were looking at the economy. "I was shocked, surprised, and since delighted at how many of the aspects of fear, euphoria and time preference ... [were] systematic," not random.
Greenspan's tenure as Fed chairman spanned four presidents and nearly 19 years—starting with his appointment in 1987 by Ronald Reagan and ending with his retirement in 2006, after George W. Bush tapped Ben Bernanke to lead the central bank.
Bernanke will step down at the end of his second four-year term in January.
President Barack Obama has picked current Fed Vice Chair Janet Yellen for the top job. Her nomination needs to be confirmed by the Senate.
Yellen is a "very bright lady," Greenspan said. She will surprise everybody in a good way should she become Fed chair, he added.
Greenspan also warned about the significant decline in net savings in the last year, and the drop in the household savings rate as well.
More from CNBC
PUL-LEEASE! What really causes this country's problems are 2 major factors:
1) The Fed
2) Corrupt politicians who rig the system in their favour...and their cronies' favour.
the blame;Strange the market skyrocked and I made a ton of money while Greenspan ran
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] Equity indices closed out the month of August on a modestly higher note. The Russell 2000 (+0.6%) and Nasdaq Composite (+0.5%) finished ahead of the S&P 500 (+0.3%), which extended its August gain to 3.8%. Blue chips lagged with the Dow Jones Industrial Average (+0.1%) spending the bulk of the session in the red.
The final week of August represented one of the quietest stretches for the stock market so far this year. The first four sessions of the week produced the ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'