Dr. Alan Greenspan
Per Jacobsson Foundation Lecture
Sunday, October 21, 2007 3:00 PM
Joan Veon asks question on creative destruction
HERE TO SEE A WEBCAST OF THE SPEECH)
Joan's question is about 3/4 of the way into the speech.
The only section transcribed of the speech is a stern warning to all countries.
Greenspan: Youll excuse me if put a post mortem on my speech. I stipulated that I am basically of the opinion that this is not a huge problem. But if the pernicious drift towards fiscal instability in the United states and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the current account deficit adjustment process could be quite painful for the United States and our trading partners. I think this suggests how critically important it is for those of us who are involved in the international community be acutely aware of how dangerous protectionism in underlining the flexibility of not only the global system but of our internal economies as well. And unless we address that problem, if it arises, I do not think we fully understand how significant a major blow to world economic prosperity, especially in the emerging nations that a reversal could be. And I truly hope we are acutely aware of what the dangers arise as they arise and bring whatever power a group such as this can bring to bear to turn such trends around.
Joan Veon: Have you, did you, do you see a need to put into play creative destruction given the past and current economic scenarios and some of the things you mentioned today?
Dr. Greenspan: I assume you mean by the phrase creative destruction do I believe we ought to have a global market system? Im not sure what the point of the question is. Have I got it right?
Joan Veon: Well, yes you do. At what point would you say we need to do something different than what were doing in todays market.
Dr. Greenspan: I can answer that in several different ways. We have been doing things different for quite a long period of years. And many of them turned out to be awful. So I think that the issue always rests in capitalist market economy which as you point out has its roots and its necessities in creative destruction because remember it is only creative destruction that creates higher standards of living.
Because by definition creative destruction is essentially moving the capital from less productive obsolescent industries to cutting edge technology related industries and by definition the moving a body of capital from the low output per man hour type industries to higher man hour output industries and that obviously raises the average and its only the average increase in productivity which generates higher standards of living. There is no other way that we have found and that includes having oil in the ground or gold somewhere. Adam Smith is right it is essentially the wealth of nations is determined by productivity and productivity can be advanced only in broad economies such as those which we deal with by a form of competitiveness and that generates creative destruction.
As I say in the book Ive just written there is a very significant problem here of the destruction part. Because remember when you move the capital from the lesser productive industries to the more, you also have to move people. And its always been a major problem in the fact that there are losers as well as winners and how to handle that problem is always been critical and necessary in order to maintain a viable market system. But the truth of the matter is there is no other system which has worked as well.
Does capitalism or globalization work perfectly? Of course not its got a lot of downsides its got a lot of problems associated with it but its always in comparison with what? Because every system which has ever been devised has to deal with innate human nature which is at root the fundamental driving force of all economic activity And there are certain qualities which we have that we dont particularly like but none the less its what creates booms and busts and euphoria and fear and all of that stuff and no other system handles it nearly as well as does market capitalism.
Question from Someone Else: Do you consider todays losses incurred in financial turbulence the elimination of wealth produced by financial engineering which lost some link with productivity growth and therefore is part of your creative destruction?
Greenspan: One of the fascinating things about recent years is the extent to which the finance industries throughout the world have gained increasing shares of national income. This is especially true in the United States there is less data in the rest of the world the problem is the data is poor but it is very clear that here in the United States that the share of income is rising and the reason it is rising is that the purpose of finance as we are all well aware is to create the most sufficient means of moving nations savings into productive capital investment which creates productivity growth and standards of living. And regrettably throughout the world a very substantial proportion of the worlds savings are wasted but in the United States because we have all of these financial products and these innovations and various institutions we for reasons that I get into in the book that Ive just written is an extraordinary we in the United States have an extraordinary capability to use the sparse savings that we have and it is sparse even including the savings we import or borrow from abroad which is our current account balance. We have maximized the use of our savings because we have a highly efficient financial system and that is created a maximum use and effective use of the savings and therefore the incomes of people who are in the financial systems have been enhanced because they are part of something that has created a higher level in GDP and productivity and standards of living.
In general I would say that financial engineering that has been going on has been a positive but remember that like all new products some of them fail. And I think for example that some of the various variations of collaterized debt obligations or special investment vehicles or various very peculiar types of financial structures which have become very prominent in the last four or five years are about to disappear from the scene. They have been tried and they have failed and the failure is that basically investors have been misled as to what the values of these types of products were and right at the moment for example let me take one obvious case. The amount of securitization of subprime U.S. mortgages is now almost zero after being approximately 20% of total originations in the United States and the reason is that they have failed. Now Im not saying that it is never going to arise and quite frankly I hope it comes back in part because I think that subprime mortgages serves a very useful purpose in this country but there is nothing carved in stone which basically says that every new ingenious financial product of the result of some brilliant mathematician is worthwhile and indeed lots of inventions are awful They fail and they deserve to fail . And thats part of the creative destruction process which I think is good and not bad.