Greenspan: Gamekeeper Turned Poacher

Why does an interview with former Fed Chairman Alan Greenspan attract so much attention? Sure, Sir Alan is not short of experience: he was the longest-serving head of the most important central bank in the world. But he is not the Fed chief any more. Nor can he continue to lay claim to the ‘maestro’ moniker that wore during his time at the Federal Reserve. By his own admission, the economic philosophy that guided him over a 40-year career was flawed (although he stops short of accepting any blame for the US housing market bubble and the subsequent sub-prime crisis).  Does his audience not find it odd that a man, who previously prided himself in the fact that his congressional testimonies were nigh on incomprehensible, has now discovered a vernacular that is not only unequivocal, but grimly pessimistic? In a recent CNBC head-to-head, Greenspan predicted a Greek default and the failure of the US Congress to reach a debt ceiling agreement before the August 2^nd deadline. He also dismissed Fed’s quantitative easing programme as a failure; it did nothing more than weaken the dollar, he shrugged. He has become yet another doom analyst, but without having the track record to justify it.

At least one element of his economic philosophy certainly still holds true: people tend to respond very well to incentives. As he is on the payroll of hedge-fund giant, Paulson & Co., Alan Greenspan’s incentives are very different to those during his tenure at the Fed. His motivation to make comments that are advantageous for the engagements of his employer is likely to be high. When it comes to shedding a previously-acquired impression of an individual, people tend to show deal of inertia. This is a tendency that Paulson can use to great effect. Investors should therefore regard the wizened Greenspan with a more jaundiced eye before he costs them any more money.

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• Behaviouralising Banker Bonuses II
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