Greenspan: Negative Rates Will Eventually 'Warp' Investment Patterns

Mar 1 2016 | 11:01pm ET

In a wide-ranging interview, former U.S. Federal Reserve Chairman Alan Greenspan has stated that he believes the pursuit of negative interest rates for an extended period of time will eventually distort savings and investment. 

“I wouldn’t say dangerous, but it is clearly non-productive,” said Greenspan, who led the Fed for nearly twenty years before handing the reins over to Ben Bernanke in 2006. “This situation is a distortion. The big argument about excessively low interest rates for a very long period of time is that it warps the investment pattern on real investments.” 

The onset of negative interest rates in the euro zone and Japan have raised eyebrows among economists and financial industry professionals, who voice concern that central banks have run out of ammunition in their efforts to stimulate growth and generate inflation. Indeed, the JCB sold 10-year bonds for a negative yield for the first time this week.

Greenspan is not sanguine about economic growth in the U.S. or abroad due largely to anemic business investment, which undermines the ability of companies to become more productive. During his time at the Fed, Greenspan repeatedly pointed to the massive gains in productivity as a key factor in the strong economic growth enjoyed by developed nations over the past two decades. 

“We’re in trouble basically because productivity is dead in the water,” he said during the interview, which was with Bloomberg’s Tom Keene and Michael McKee. “Real capital investment is way below average. Why? Because business people are very uncertain about the future.”

The reasons behind this uncertainty are multi-faced, continued Greenspan in the interview, but include new regulations that have curtailed traditional lending. “The regulations are supposed to be making changes of addressing the problems that existed in 2008 or leading up to 2008,” he said. “It's not doing that. Too Big to Fail [was] a critical issue back then, and now. And, there is nothing in Dodd-Frank which actually addresses this issue.”

When asked about the U.S. dollar’s recent strength and its likely path forward, Greenspan noted it is “hard to see where it goes from here. There are so many huge unknowns. In my experience, I’ve never seen this many unknowns.”

As for whether he’s optimistic about the future, Greenspan answered with traditional bluntness. "No. I haven't been for quite a while,” he said. “And I won’t be until we can resolve the entitlement programs. Nobody wants to touch it. And that is gradually crowding out capital investment, and that's crowding out productivity, and it's crowding out the standards of living."


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