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Greenspan's Prescient Call

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March 01, 2007 – Comments (5)

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I'm a huge Alan Greenspan fan. I think he really embodies what economics is all about: that reality rarely conforms to theory and predicting anything is a tricky business. That's why I was so surprised earlier in the week when I saw the headlines saying that Greeny had predicted a recession for this year.

On Tuesday, Greenspan appeared to be a latter-day Nostradamus as the market hit the skids in a big way and Dow components like Alcoa (NYSE: AA) and Exxon (NYSE: XOM) got whacked.

I think what all this really showed, though, was that people can no better decipher Greenspan's double-talk today than they could when he was the chairman of the Federal Reserve. I haven't been able to find a full text of the speech he gave, but piecing together the quotes I've seen in other publications, I have been able to get a pretty good idea of the gist of it.

It may be a bit of an oversimplification, but basically Greenspan was saying that recessions happen after periods of growth, and since we've been in a long period of growth, there's going to be a correctionary period ahead for us. He said it could happen this year, but it wasn't probable. It's not even clear what he was referring to when he said "recession" -- economists have used the word to describe periods of economic slowdown, as well as stretches when GDP actually declines.

In the end, Alan Greenspan continues to be the Confucius of economics -- he is a great source of universal economic truths, but his statements can rarely be taken at face value. So next time you read something from Greeny, sit on it and let it sink in for a while before assuming that he meant what it appears he said. After all, my favorite Greenspan quote is:

"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said."

Fool contributor Matt Koppenheffer is currently looking for a good Greenspan poster to hang over his bed. He owns no stocks mentioned in this article. The Fool's disclosure policy says "everything has its beauty, but not everyone sees it."

5 Comments – Post Your Own

#1) On March 01, 2007 at 4:32 PM, HappyEndingz (< 20) wrote:

More Greenspeak?

Two days ago I just happen to be reading Market Wizards by Jack Schwager. In his interview with James Rogers is this quote:

"I remember why I became even more bearish on the weekend before Oct 19, 1987. The week before Alan Greenspan (then the Fed Chair) announced that the balance of trade was getting much better and things were under control. Two days later, the balance of trade figures came out, and they were the worst in the history of the world. Right away I said, This guy is either a fool or a liar. He doesn't have any idea what is going on."

My view of our former Fed Chair is that while in office he had a responsibility to provide damage control to the political machinations of which ever persons or parties were in the WhiteHouse on his lengthy watch. Much of this task was to obfuscate facts so as to keep the herds from stampeeding.

But now, with no political obligations -

Is he speaking in plain English?

I would be afraid, very afraid...

thomas

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#2) On March 01, 2007 at 4:54 PM, TMFKopp (98.26) wrote:

That's a fair question.

For anyone that is studied in economics, the science is so couched in assumptions that it's difficult to really translate economic models to real life. Economics, for instance, assumes that we are all reasonable -- which we're not, not at all.

Maybe you're right, or maybe Greenspan simply understands the vast limitations of economics in delivering the predictive power that many would like it to have.

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#3) On March 01, 2007 at 5:29 PM, Greshm (97.28) wrote:

Or maybe...

http://caps....959252154676

Greshm

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#4) On March 01, 2007 at 9:55 PM, HappyEndingz (< 20) wrote:

yeah, what he said...

Greenspan says what he truly believes.

I am not studied in Econ. Macro and Micro was all I cared to sit (sleep) thru.

But for someone like Greenspan who has access to unsanitized Unemployment (and underemployment), GDP, M3, and trade deficit numbers, I believe he knows the strong probablility of a U.S. recession in the near term.

I sorta wonder though - how long and how deep will it be? I am having visions of bread lines and workers in 2nd/3rd world countries pointing to their television sets while commenting on how awful it is to live in America.

thomas

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#5) On March 02, 2007 at 5:59 AM, TMFKopp (98.26) wrote:

I'm crossing my fingers that that's not the case - I wouldn't call myself a fan of bread lines.

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