Steve Liesman Sits Down with Dr. Alan Greenspan on POWER LUNCH

First on CNBC: CNBC Transcript: CNBC's Steve Liesman sits down one-on-one with Dr. Alan Greenspan, former Federal Reserve chairman and Greenspan Associates LLC president,  on CNBC's POWER LUNCH. A transcript from the interview follows:

LIESMAN: SUE, THANKS VERY MUCH. I’M HERE AT THE SIFMA CONFERENCE WHERE I JUST DID A ONE-HOUR DISCUSSION WITH THE FED CHAIRMAN, THE FORMER FED
CHAIRMAN, Alan GreenSPAN. THANKS FOR JOINING US.

GREENSPAN: MY PLEASURE, STEVE.

LIESMAN: THE MARKET IS DOWN OVER 200 POINTS RIGHT NOW. ARE WE LEARNING ANYTHING ABOUT THE ECONOMY FROM THE CONCERN ABOUT CORPORATE EARNINGS OUT THERE? WHAT’S YOUR VIEW OF WHETHER OR NOT WE MAY BE HEADED FOR A RENEWED SLOW DOWN AND CORPORATE EARNINGS TELLING US THERE IS REASON FOR CONCERN?

GREENSPAN: LET’S FIRST EXAMINE WHAT THE DATA SHOW IT IS FAIRLY OBVIOUS THAT WITH PRODUCTIVITY GAINING MODESTLY A LITTLE OVER 1% AT AN ANNUAL RATE, BUT MORE IMPORTANTLY, THE GENERAL CORPORATE PRICE LEVEL HAS FLATTENED OUT AFTER RISING, THAT THERE HAS BEEN A SIGNIFICANT SQUEEZE ON PROFITABILITY ON DOMESTIC EARNINGS. AND THEN WHEN YOU THROW IN THE WEAKNESS IN EUROPE AND ELSEWHERE ON FOREIGN AFFILIATE EARNINGS, YOU’RE GETTING A TURN IN THE OUTLOOK FOR EARNINGS, WHICH OF COURSE, HAVE BEEN VERY STRONG FOR A WHILE. WHAT THAT IS CATCHING UP WITH IS EQUITY PREMIUM WHICH IS ALSO VERY HIGH. ONE WOULD HAVE THOUGHT THAT WOULD HAVE GIVEN US DOWNSIDE PROTECTION. BUT IT DOESN’T BECAUSE ESSENTIALLY EARNINGS NOW ARE TURNING AND HISTORICALLY THAT HAS ALWAYS HAD A BIG IMPACT ON PRICES.

LIESMAN: IS THERE REASON FOR RENEWED CONCERN? WE’VE BEEN SORT OF LIVING WITH THIS SLUGGISH ECONOMIC GROWTH BETWEEN 1.5 AND 2 PERCENT DO YOU GET FROM HOW THE MARKETS ARE REACTING AND WHAT YOU’VE SEEN IN EARNINGS THAT MAYBE THE GROWTH LEVEL IS LOWER THAN THAT?

GREENSPAN: YOU MEAN, WHETHER THE — I’M SORRY THE –

LIESMAN: THE GDP GROWTH LEVEL IS LOWER THAN 1.5 OR 2 PERCENT?

GREENSPAN: NO, NO, NO I THINK THE ACTUAL MEASUREMENT OF THE GDP IS FAIRLY ACCURATE, CONSIDERING THAT IT IS NOT ALL THAT ACCURATE, A VERY ROUGH CALCULATION. THERE IS NO REASON TO BELIEVE THAT THERE IS A BIAS THAT IT’S A SIGNIFICANTLY LOWER NUMBER IT MAY TURN OUT TO BE THAT WAY BECAUSE CAPITAL INVESTMENT IS CLEARLY WEAKENING. THERE HAVE BEEN SOME SEMBLANCE OF SENSE OF STABILIZATION. BUT BECAUSE I HAVE ALWAYS SAID IN THE PAST THAT STOCK PRICES ARE NOT MERELY A LEADING INDICATOR BUT FAR MORE IMPORTANTLY, THEY ARE A CAUSE OF EVENTS. AND INDEED IF YOU LOOK AT THE ECONOMETRIC EQUATIONS WHICH WORK BEST, THE VALUE OF STOCK PRICES RELATIVE TO VALUE OF THE COST OF PRODUCING CAPITAL ASSETS NEW, IS A VERY CRITICAL DETERMINANT OF WHAT THE — OF WHAT BASICALLY GET IN PROFITS. THE RESULT IS THIS – THESE PROFIT FIGURES AND THE SIGNIFICANT WEAKENING THAT’S OCCURRING IN CAPITAL INVESTMENT THIS PARTICULAR STAGE MAY START TO STABILIZE. THEY’VE OFTEN GONE DOWN AND THEN STABILIZE. BUT WE DON’T REALLY KNOW.

LIESMAN: DO YOU FEEL AS IF WE’VE HEARD THE WORST NEWS OUT OF EUROPE OR IS THERE WORSE NEWS YET TO COME IN TERMS OF BOTH OVER THERE AND IMPACT ON THE U.S. ECONOMY?

GREENSPAN: I DON’T SEE ANY CLOSURE THERE I HAVE BEEN SAYING FOR OVER A YEAR NOW THAT THE ONLY SOLUTION TO THE EURO IS ESSENTIALLY A POLITICAL CONSOLIDATION OF THE EURO AREA BECAUSE I DON’T BELIEVE THAT YOU CAN HAVE ESSENTIALLY 17 WELFARE STATES WHERE SOME CENTRAL AUTHORITY IS CONTROLLING THE FISCAL AFFAIRS. THE WELFARE STATE IS, BY DEFINITION, ONE THAT EMPLOYS THE BUDGET IN A CERTAIN MANNER. AND THEREFORE, IT IS ONLY IF YOU CONSOLIDATE THE WHOLE SYSTEM THAT THE SYSTEM WILL WORK. AND I THINK WHAT WE ARE DOING NOW IS WE ARE SUBSTITUTING CENTRAL BANK CREDIT FOR THE FISCAL DEFICITS OF THE INDIVIDUAL COUNTRIES. THAT COULD WORK IF IT WEREN’T THE FACT THAT THE NECESSARY CONDITIONALITY WHICH IS COMING WITH THESE THINGS IS EFFECTIVE BUT WHAT YOU ARE DEALING WITH IS PEOPLE ON THE STREETS OF ATHENS AND MADRID IS THERE A LEVEL OF TOLERANCE.

LIESMAN: SAME THING APPLIES TO THE UNITED STATES IN TERMS OF COMING TO THE FISCAL CLIFF. HOW MUCH CONCERN DO YOU HAVE OVER THE FISCAL CLIFF AND POTENTIAL IMPACT ON THE U.S. ECONOMY?

GREENSPAN: I’M QUITE CONCERNED. I’M QUITE CONCERNED BECAUSE THE AMOUNT OF FRICTION WITHIN OUR POLITICAL SYSTEM IS NOT NEW. IF YOU LOOK AT THE CAUCUSES, THE DEMOCRATS AND THE REPUBLICANS GOING BACK, THEY LOOK VERY MUCH THE WAY THEY LOOK TODAY. IN OTHER WORDS, THE DEMOCRATS ARE CAUCUSING, THE LIBERAL AREAS, THE REPUBLICANS ARE — ESSENTIALLY CONSERVATIVE AREA. WHERE AS I MIGHT SAY THE POPULATION, IS MORE IN THE MIDDLE. THAT HASN’T CHANGED FOR GENERATIONS, WHAT IS DIFFERENT IS, THEY DON’T TALK TO EACH OTHER. AND UNLESS YOU CAN TALK TO EACH OTHER AROUND REACH COMPROMISES, WHICH ARE NECESSARY IN A DEMOCRATIC SOCIETY, THE DEMOCRATIC SOCIETY IS ONE IN WHICH ONE WOULD ASSUME THAT THERE ARE INDIVIDUALS WITH INDIVIDUAL RIGHTS AND WHICH EVERYONE HAS DECIDED TO LIVE TOGETHER IN COMEDY BECAUSE THEY HAVE CERTAIN THINGS IN COMMON. BUT IT IMPLIES YOU HAVE TO COMPROMISE, NOT YOUR PRINCIPLES, BUT THE WAY YOU IMPLEMENT THEM.

LIESMAN: WE ARE GOING TO RUN OUT OF TIME AND I’M GOING TO BE REMISS IF I DON’T ASK YOU AT LEAST ONE FED RELATED QUESTION WHICH IS DO YOU HAVE CONCERN THIS WILL ALL LEAD TO INFLATION? AND WE DON’T HAVE A LOT OF TIME FOR THIS ANSWER?

GREENSPAN: LET ME JUST TELL YOU SPECIFIC STATISTIC. I WORKED WITH HE AT THE FED AND BEFORE AND SINCE. IT’S THE RATIO OF MONEY SUPPLY DIVIDED BY THE CAPACITY OF THE ECONOMY TO PRODUCE GOODS AND SERVICES. THAT RATIO WHEN YOU MATCH IT UP AGAINST THE GENERAL PRICE LEVEL DOESN’T MOVE VERY CLOSELY OVER THREE, FOUR, FIVE-YEAR PERIODS. BUT OVER VERY PROTRACTED PERIODS IT DOES. THE DATA I’M WORKING WITH NOW, SHOWS THE RATIO BETWEEN THOSE TWO RELATIONSHIPS, THE PRICE LEVEL AND UNIT MONEY SUPPLY IS VERY CLOSE TO WHAT IT WAS IN 1925. WHICH MEANS THAT WHICHEVER’S CAUSE AND WHICHEVER IS EFFECT, THAT ASSOCIATED WITH INFLATION HAS BASICALLY BEEN UNIT MONEY SUPPLY. OVER THE LONG RUN. AND AM I CONCERNED ABOUT WHAT IS BUILDING UP? I THINK THE FED HAS THE CAPACITY TO BRING IT IN WHEN NECESSARY. SO, I’M NOT WORRIED ABOUT THAT. BUT IF IT IS NOT BROUGHT IN, I AM WORRIED.

LIESMAN: OKAY. FORMER FED CHAIRMAN Alan GreenSPAN, THANKS FOR JOINING US.

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