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Alan Greenspan on the Credit Crisis

By: Hans Lysglimt, Publisher; Farmann
November 26, 2007.

Alan Greenspan addressed the Norwegian investor community on Friday November 23, 2007 in Oslo. Photographing and recording the event was strictly forbidden, I can see why, we have to respect that. I will therefore here just briefly memo Greenspan’s central line of thought and my brief comments to that.

The address has been referred extensively by the media. I am sure the Monday November 26, newspapers will have more references to the address. See Google for a number of articles and quotes:


Alan Greenspan:
”I will attempt to put the current credit crisis in context. “

Greenspan immediately brought up the credit crisis, named it a credit crisis and emphasised that new events had happened since he finished his book “The Age Of Turbulence” in June.

”The credit crisis was an accident waiting to happen. If it had not been the sub prime market, it would have been something else.”

Greenspan was clear, this is a credit crisis, not just a “sub prime mortgage”, or “housing” crisis, it is much broader than that, Greenspan chooses his words carefully. It happened to be sub prime that got hit first. Sub prime happened to be weakest link in the financial chain. The credit crisis is thus not contained to the sub prime mortgage market.

Greenspan went on about how the current situation, from the fall of the Berlin Wall, is something fundamentally different than what we have seen before. Savings rates went up in the developing world, flooding the world with capital, more than what could be absorbed. Interest rates then went down world wide.
Labour cost went down world wide. This was all disinflationary, it kept inflation low “during my tenure”. Investor risk perception went down over time. Confidence came way up. Liquidity went dramatically up. Asset prices surged across the board.

”There are two stories:
Euphoria continues to feed on itself.
Invariably it crashes.”

”There is only so much risk that investors can temporarily set aside.”

A number of unique historic events have given us this unique situation. This situation can only persist for so long. Developing countries have cut cost in the developed world and kept inflation low. Savings have lowered interest rates giving a surge in assets prices. Increased confidence and reduced risk premiums. This has been going on for 18 years while investors have lowered and lowered their risk premium as things have seemed safe and fine. Sooner or later something has to give. Something has to give first, sub prime mortgages gave in first, more will follow.

”People suddenly realize; There is no nirvana out there.
This is abrupt.
The market swings 180 degrees, suddenly.
Primordial fear sets in.”

”Economists have a tendency to presume symmetrical behaviour on the upside and the downside.
Evidence does not suggest this is the case.
Fear is different from greed.
It is different when euphoria changes to fear.
The downturn of the market is not the mirror image of the upswing.”

Greenspan is acutely aware of the psychology of the markets. Greenspan is warning against a very sudden swing.

Greenspan went on to say the markets changed on August 9, 2007.

”As we speak, the market is just becoming aware that the decline in housing is not stopping.”

Greenspan thought earlier this year that the inventory of homes could be liquidated in an orderly fashion. But inventory has kept rising. Price declines have a tendency to max out when inventory is at its highest.

”We are nowhere near max inventory in the housing market yet. The decline has therefore just begun.”

The market has not yet really started to liquidate houses. We will eventually get a selling climax in this credit crisis. The volumes are still low. This tells us that we have not yet seen the real market prices. In the beginning of a decline sellers are still holding on to ask prices. The big falls happens dramatically. When the sellers eventually give in and hit the offering prices. People move in to buy assets they perceive as undervalued.

”A selling climax occurs. We are still a good deal away from that.”

”We are beginning to see all sorts of asset prices weakening ...(so) where home prices stabilize is critically important for the economic outlook.”

There will be huge losses.

Yes, Greenspan, choosing his words carefully, said “We are beginning to see all sorts of asset prices weakening.” Read again; “All sorts of asset prices”, not just a limited weakness in house/home prices. This decline is coming across the broad range of asset prices as a consequence of the credit crisis and a reversal of the unique situation we have had for the last 18 years.

For the impact on the economy and the financial sector Greenspan is asking himself the same questions the rest of us are.

How far will it fall?
How will this impact the financial system?
What will be the contamination to the other parts of the financial system?

Greenspan was then asked this question: “Is the US market flexible enough to absorb this crisis?”

”That is the crucial question!” he answered.

History has shown us that bursting credit bubbles has always lead to economic contractions. When 9/11 happened he was amazed at the resiliency of the market to absorb the shock. In 1987 we saw the same, that the market was able to absorb the shock. There is increased flexibility in the market now. There is increased flexibility from deregulation and the enormous increase in the size of the global financial markets. ”Today’s flexible system is the best protection we have.”

”It is conceivable that this crisis will be absorbed by the markets, even this time.
We just do not know that.”

So, in my summary; There is a credit crisis, it is real, it has just begun and it is getting worse. Greenspan calls the market swing to August 9, 2007. This swing is playing out as we speak. There is both the immediate credit crisis and a there is a broader turn of the prevailing forces of the last 18 years. The markets are just realizing the seriousness of this credit crisis. The markets will eventually turn to fear, this has not yet happened, it will.

The question is not if this will be bad, it will be bad, massive losses. THE QUESTION IS IF THE MARKETS WILL BE ABLE TO ABSORB THIS CRISIS OR NOT? WE DO NOT KNOW THAT. The markets ability to absorb this crisis will be tested, in a hard way. This might be the biggest test of global financial markets since WWII. This test has just begun. We can hope that the markets are flexible enough to absorb this, they might not be… “we just don’t know that”…

My conclusion:
You want to be out of this market before it is tested for real, before “primordial fear” sets in. I repeat what I said in my November 21, column on LewRockwell.com; “sell your capital assets now and sit put in cash.”


Ask yourself; are people still mainly in greed modus operandi or in fear MO?
I believe it is still prevailingly greed modus.
Just go out in the street, right now…, look “the market” in the eyes… still greed.
You do not want to be in the market when it turns to primordial fear.

You might even want to short the market:


Don’t stay out at sea when you see dark storm clouds come in over the horizon.
Head into port.
You want to sell. Now.

Former FED chairman, now Citizen Alan Greenspan was invited by Norwegian brokers First Securities, who undoubtedly paid top dollar for the privilege. Our nod to them for this surprisingly good use of Norwegian oil money.

To republish this article on your website please contact: (hans at farmann.no)

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