Inside Greenspan's View of the Economy

When Alan Greenspan talks, people listen. Today at the Epicor Perspectives 2007 user's conference in Orlando, Alan Greenspan told 2,000 attendees that the American economy has "tremendous strength and resiliency." He also noted several problem areas that need dealing with, including social security and Medicare, but overall he observed the future will deliver "well being and prosperity" because it is based on a sound foundation.

Greenspan limited his comments to themes touched upon in his book, the current national bestselling memoir, "The Age of Turbulence: Adventure in a New World." He did not directly mention retailing, information technology or any specific industry.

However, conference attendees learned that Gerald Ford was Greenspan's favorite president of the six he worked with, Ronald Reagan and Bill Clinton were two of the best president's he's known, and the following observations:

- On Black Monday, 20 years ago almost to the day, "people don't realize how close we came to destabilizing events. The president of the New York Stock exchange called and said he was going to shut down the exchange. A modest surge came in and it was avoided. The futures market in Chicago was close to shutting down. Goldman Sachs had a huge payment to make on the following morning and it was not sure the party could return the payment by the end of the day as the agreement called for. It almost didn't make the loan. If that had happened it would have destabilized the financial markets." In the end, no other shoe dropped, said Greenspan, "but there were a lot of dangerous points in the next 10 days."

- The stock market dropped 22.6 percent on Black Monday and "nobody really understands why it happened. This type of event is a human response, and the major driving forces are innate aspects of human nature. Things build up to a fever pitch and then turn on a dime with primordial fear. Nothing we have been able to do has prevented bubbles from bursting, and most efforts just aggravate them further. What happened on August 9 of this year produced similar numbers to what happened in 1998 with the Russian financial crisis. It happens over and over again as memories fade and exuberance builds up. There is no vaccine we can take to avoid it."

- After the 9/11 attack, "we had a sophisticated redundancy system in place to keep the economy going. Part of it was destroyed in Manhattan and there was a real fear that 9/11 could affect the American economy, but we learned from that day it was far more resilient than we had thought, and things soon stabilized and it came back.

- "We have a major problem with demographic changes taking place. Yesterday, the first baby boomer applied for social security. This is the leading edge of a tsunami, and if there is one thing both Democrats and Republicans have agreed upon it is they will not address this issue. The longer we wait, and we have waited too long, the more destabilizing it will be."

- "However, social security is not the big problem. We just have to close a two percent gap between revenue and payments to solve the problem. Medicare is en entirely different problem because it is not based on a fixed formula. We may not have enough physical resources to meet the entitlement for baby boomers, meaning hospitals and nurses and doctors. Also, new medical technology, which is amazing, is developing rapidly and upward cost pressure is enormous. This pressure will push us toward major co-payments, and if that is where we are going, let's get there soon to alleviate the pressure."

- "The Republicans are not the party of business. They are the party of competition and markets. Businesses can be monopolistic and anti-competitive. The Democrats and Clinton are not anti-business. They have been historically strong on international trade, but now both parties are beginning to turn protectionist."

Greenspan ended with commentary on the power derived from the U.S. Constitution and Bill of Rights. "What the Founding Fathers did for us was awesome," he said. "They created a view of human beings where we are all equal before the law, that we engage in voluntary trade, we protect individual rights and property rights. This is the reason so many foreigners put their money into the U.S. economy, and this has created an unprecedented level of economic well being and the prosperity."