Education

Governments not just here but elsewhere too have argued that higher education should be expanded in order to increase the rate of economic growth, and to promote social cohesion. There is no objective evidence that either of those propositions is true. While it is the case that it's difficult to see a competitive economy based on ignorance, if you consider what's happened in Europe in the last few years, an expansion in higher education across the board has been accompanied by a deceleration in economic growth.

The case for greater social cohesion is no more convincing. Although more young people from working-class backgrounds have a university education, the number of middle-class people receiving higher education today as a proportion of total students is pretty much the same as it was when I was here - when only 6 per cent of 18-year-olds went to university. So while I'm totally supportive of opportunities for all young people, if you're really concerned about social cohesion you should be focusing on preschool, primary and secondary education.

Lord Chris Patten, Chancellor of Oxford Univ., Hilary Term, 2004









Economic Behaviour

The Mayor of NY, Bloomberg, said ‘The economic uncertainty our two countries face’ – and he means Britain and America – ‘is beginning to feel similar to the economic downturn we experienced six years ago. But this time the stakes are higher because more people owe more debt and so do our governments. It is time for us all to get our house in order because the sun is rising on our borrowing bacchanalia’. But Allan Greenspan, do not agree. He is observing a fairly dramatic acceleration of the degree of globalisation, consequences of the end of the Cold War, as one of the key characteristics of the switch in geopolitical events which occurred when central planning fell into full disrepute.

He says: 'When Berlin Wall came down, it revealed the economic room behind the Iron Curtain that was just unanticipated and remarkable; shifting economic activity engendered in the developed world to the developing world. That is largely because so many of them which had been under various forms of central planning as Third World nations have moved towards the export model of the Asian Tigers and created a very rapid rate of increase in growth.

But we are also getting a significant dispersion of what economists call surpluses and deficits of all types of economic units. One of the characteristics of that is that you get a significant increase worldwide of both assets and debt. So it is certainly the case that debt has gone up significantly relative to incomes, but then so has assets. So the question of evaluating the degree of bacchanalia or whatever you wish to call it really requires to get a sense of where the stresses in the system are – and there are unquestionably stresses – but it is not that leverage is all that much greater or its consequences are greater. It is that we are dealing with a world economy in which the balance sheets have all grossed up at a faster pace than, say, nominal gross domestic income worldwide. Clearly, if you look at the ratio of debt to income, it has been going up – but it has been going up for a hundred years. No one has been arguing for a hundred years that the world is coming to an end.


I am critical of Administration letting public spend imprudently, as my concern is with the Republican Congress, who came into majority rule in 1994 with a platform which a libertarian such as myself was very much in favour – I should say liberal, now that I am in Britain. They started off all right but then they morphed into a different type of party which essentially sought to cement their power. As I say in my book, the Republican Congress largely swapped principle for power and in the end achieved neither. It manifested itself in one of the most extraordinary expansions in
fiscal levity, if I may use a comparable term, and it could have been stopped if President Bush had been willing to use the veto.

But the critical issue is not the current deficit issue – it is the fact that we are about to undergo a tsunami of major dimensions with respect to the movement of the fairly productive, so-called baby boom generation into retirement. That is going to double the number of retirees and where, for example, our medical system is quite capable of handling the existing retiree load, it very clearly under existing law is not going to be able to do it henceforth.

That same problem does not exist here in Britain. The situation here is not anywhere near the type of demographic structure that we are going to be running into in US. There is also an interesting question about what people’s motives are. You can say that they are seeking power – I happen to know in the case of the Republican Congress that that is what they were doing. The reason I know it is they said so. With respect to people who are expanding governmental programmes because they believe they are appropriate, that is a wholly different issue. You can make judgments as to whether or not they are funded properly or they are properly structured, but when you are talking about motives you have to have evidence.

The worry about consumer debt here in Britain refers to the problem that you have variable interest rates. In the States, we have a very significant amount of our consumer debt at fixed interest rates and therefore when short-term interest rates change, it has very little impact on the debt. Here it is different. I have always thought, and indeed it has certainly been the case in the United States,
that consumers by and large know what they can afford. They very rarely get
themselves in trouble.

What happened is that in order to diversify you had to securitize – put all the mortgages into pools and then sell assets against them, securities against them. What happened was that we sold a very large part of them all over the world. That is why the problems that are existing – both in UK and US.

Sub-prime asset-backed securities (as they are technically called) had very large yields because they were subprime. Numbers of hedge funds, pension funds, investment banks, all seeking to improve their yield – which had been pushed down by a long-term decline in interest rates – started to buy these things very aggressively. So the securitisers, who were selling them very quickly, started to put pressure on the lenders to give them more mortgages. They said: We’ll buy anything you give us.

The first sign of any form of crisis occurs when it became evident that the valuations of these securities were just wrong. What occurred then is everybody pulled back immediately. To be sure, a lot of the very questionable lending practices showed up as, first, defaults. In many cases it was default on the first payments.

It fell apart, and the reason it fell apart is we had one of these euphoric bubbles where everything is going up and the thought that they might ever go down is just never considered. That, I might add, is an extraordinary characteristic of every bubble. Human beings do not learn from one bubble to the next. We are now coming to the end of honeymoon period of globalization. we have been through a golden period, and the golden period is essentially the economic consequences of the end of the Cold War. That is a one-shot event. It is not a permanent change in the rate of change, it is a level adjustment. We are now approaching, if we have not already passed, the maximum rate of change. The disinflation which that produced is gradually dissipating and inflationary pressures are beginning to mount and you are beginning to see the effects which you point out. It was truly a golden period and it is in the process of being over.

There is a famous event in the United States where one bank which was in serious trouble and had lending lines in Japan, some rather inexperienced – maybe he had only a four-year term, who knows – inexperienced funder called up his Japanese counterpart and said, ‘We’re having trouble funding our balance sheet in the United States. Can you help us out?’ The answer on the other end was, ‘Give us some time to think about it’. The next minute their whole balance disappeared from Japan. In other words, if you say you are in trouble, that is not going to attract funds. That is going to make it go in the other direction.


With regard to the health system in the US my problem is profound, in the sense that what we are not recognising is that we have got a system currently which if you press it out over the long run – in other words, take the nature of the Medicare benefit, extrapolate it to essentially twice the size of the current retiree population, and match it against the tax structure which is creating revenues – you conclude that with frankly what appears to be a very optimistic forecast of a level of medical expenditures out fifteen or twenty years, meaning lower than I think the normal trend would suggest, you can balance the system, if there were no tax increases, by cutting benefits in half – or alternatively, doubling the tax rate.
All I hear on the stump in the United States is people one way or another trying to create new benefits for somebody. In every case, in all the ways in which they are coming at it, it is painless. The one thing I am certain about is it is not painless. Indeed, it is going to be a very painful fiscal adjustment. The longer we wait, the more painful it is going to be. Unless and until I see somebody stand up and say let’s solve this problem and recognise what the problem is – that we do not have enough real resources out in the year, say, 2025 to meet the physical requirements of a Medicare entitlement – because remember, it is not only cash for entitlements really. We do not have enough, in any realistic sense, numbers of hospitals, pharmaceutical companies, nurses, doctors. In short, the promise is not essentially fulfillable. Talking about how you are going to expand it or change it – incidentally, all the ways that everybody is talking about, whether you are spreading costs, it is all painless. I think that is a grave disservice to
the American electorate.

I came out of the mathematical school. I am sort of academically deeply steeped in all the complexities of econometrics. The only problem I have is that I would trade all the full information system calculations – wonderfully elegant mathematical systems – for a single series which told me: one, what is the relative state of euphoria on the one hand or fear on the other? And how do I know when it is going to swing from one to the other? If I had that, I could build the most clever econometric model which would have remarkable forecasting capabilities. I can
do a model which will capture the expansion phase of the business cycle and the fearbased part of the correction, which is often twice as fast as the other side, so that the coefficients are in general twice as large. So that when you mix them together, which is what most econometricians do, you get what mathematicians would say is a highly biased set of coefficients. But I can separate them and I would get very good results.

My only problem is I do not know what button I push to find out whether it is the
expansion/euphoria or the fear thing – both of which are fundamental characteristics,
innate characteristics, of all of us. We swing back and forth.

It is the only way that over the years I began to realise what it is we are dealing with. One of the things which hit me very recently was I was reading an article that was going over the various bubbles that have gone on over the generations. It asked: why is it that we do not learn from bubbles? My answer back to the page was immediately: but human nature does not change. Indeed, it is really awesomely eerie how one of these crises looks like the other. I should not say even looks – it feels like the other. In other words, the degree of fear is all over it. What they really are is – I am a banker, I am afraid to lend to you because I do not think you are going to pay me back. You may look at me and say: I am wealthier than you are and I have got a lot more money than you.

But the system freezes up because the issue of trust, which is so critical to a market system, disappears. You take trust out of the market and it will collapse. These are all human traits which are incapable of being improved upon because they are the same, generation upon generation upon generation.'

Allan Greenspan, Chatham House, 1 Oct 2007