Alan Greenspan: QE Failed the Real Economy, Unwinding will Unleash Market Volatility, Recommends Gold

As the US Federal Reserve officially “concluded” its QE 3.0 program this month, former Fed chief Alan Greenspan has been quoted by the Wall Street Journal as giving his assessment and predictions from such actions. (hat tip Zero Hedge)

Mr. Greenspan on the QE’s efficacy: (bold mine)

He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.

“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”

Mr. Greenspan fails to include the massive debt build up as part of the asset based 'success story'.

Yet it’s one thing to be an insider and it’s another thing to be outside the corridors of power; personal views radically changes. In the case of Mr. Greenspan he goes from defending incumbent policies (as insider) to critiquing them (as outsider). 

Ironically, Mr. Greenspan initiated today's de facto easy money “aggregate demand” policy-standard, which his successor Mr. Bernanke improvised.

On QE withdrawal:

He also said, “I don’t think it’s possible” for the Fed to end its easy-money policies in a trouble-free manner.

“We’ve never had any experience with anything like this, so I’m not going to sit here and tell you exactly how it’s going to come out,” Mr. Greenspan said. But he noted that markets often react to changes in central bank policy unpredictably and not entirely rationally. Recent episodes in which Fed officials hinted at a shift toward higher interest rates have unleashed significant volatility in markets, so there is no reason to suspect that the actual process of boosting rates would be any different, Mr. Greenspan said.

He said the Fed may not even have that much power over the timing of interest-rate increases. The problem as he sees it is an interest rate the Fed pays on the money banks park at the central bank, called reserves. Fed officials plan to use this tool as their primary lever for raising interest rates when the time comes. If bankers decide to put this money to work, creating inflation risks, the Fed may be forced to raise rates, even if the economy isn't ready for it, he warned.

“I think that real pressure is going to occur not by the initiation by the Federal Reserve, but by the markets themselves,” Mr. Greenspan he said.

chart from zero hedge

With world debt levels going bonkers, the path to a relatively tighter money policy would naturally cause 'adjustment strains' which may be characterized as “significant volatility in markets”. 

Of course this won’t be limited to just the financial asset markets.

Finally. Mr. Greenspan seems to have reverted to his pristine position as 'gold bug'.

Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.

In 1966, the pre-Fed chair Mr. Greenspan penned this classic Gold and Economic Freedom article on the gold standard, here is an excerpt...

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

This just illustrates how power changes people. 

But I agree with the Maestro here, in today's massive manipulation of money and markets, gold is an insurance.