EDITOR'S NOTE: Alan Greenspan, the former Fed Chair who was once considered a “monetary maestro,” explains the FTX debacle as another iteration of the Greater Fool Theory (GFT). If you’re not familiar with this theory, it suggests that you can profit from any overvalued asset, even one lacking intrinsic value, as long as there’s a “greater fool” who’ll be willing to pay a higher price down the line. In the case of FTX, it was “not a result of lax risk management, inadequate accounting procedures, or some feature inherent to crypto — it was pure fraud,” he says. We can apply this statement to all cryptocurrencies. Considering their nascent status, they have no real fundamental measure. They have no real adoption as “currencies.” They’re purely speculative assets. But even traditional assets can be subject to GFT, as it thrives on bubbles, and anything can bubble. What about gold? Perhaps if there was an oversupply of the yellow metal, a GFT scenario would apply. But unlike cryptocurrencies or traditional dollar-based assets, gold also happens to be the very basis of intrinsic value, not a derivative of it. And that’s why central banks and smart investors are aggressively purchasing gold. As far as the potential for a gold bubble due to an oversupply, the industry is nowhere near it.
Former Federal Reserve Chairman Alan Greenspan says crypto is “too dependent on the ‘greater fool theory’ to be a desirable investment.” However, he noted that the collapse of crypto exchange FTX was “purely fraud,” rather than the result of a feature inherent to crypto. He does not expect the FTX contagion to spread far beyond the crypto space.
Alan Greenspan on Crypto, FTX, and US Economy
Former Federal Reserve Chairman Alan Greenspan shared his views on cryptocurrency, the collapsed crypto exchange FTX, and the U.S. economy in a year-end Q&A published by Advisors Capital Management this week.
Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from 1987 to 2006. He was appointed chairman by four different U.S. presidents. He joined Advisors Capital Management in September 2016 as Economic Advisor to the asset management firm.
The former Fed chair was asked to comment on the FTX meltdown and whether he expects contagion from it. “I do not expect the fallout from FTX to spread beyond the cryptocurrency/NFT [non-fungible token] space,” Greenspan replied, citing “the information that has come to light so far.” He stressed:
The collapse of FTX was not a result of lax risk management, inadequate accounting procedures, or some feature inherent to crypto — it was purely fraud.
“Fortunately, although FTX and firms like it have increased marketing of their products in recent years, the lack of any noticeable widespread market reaction to FTX suggests that they are still fairly concentrated in the hands of a relatively small subset of investors,” Greenspan described.
“Moreover, the differences we observed in the aftermaths of the popping of the tech bubble and the popping of the housing bubble showed clearly that credit-fueled asset bubbles create far more contagion when they ultimately deflate,” he opined. “There does not appear to be a significant amount of leverage dedicated to the cryptocurrency/NFT space at this time, so I do not expect contagion to spread very far beyond this particular asset class.”
The former Federal Reserve chief added:
With respect to the wider crypto universe, I view the asset class as too dependent on the ‘greater fool theory’ to be a desirable investment.
Greenspan also shared his view on the U.S. economy and the Federal Reserve’s fight against inflation. Commenting on whether a recession is required to bring down inflation as some economists have suggested, he said:
A recession does appear to be the most likely outcome at this time.
However, he does not believe “a Fed reversal that is substantial enough to avoid at least a mild recession” is warranted. “Wage increases, and by extension employment, still need to soften further for a pullback in inflation to be anything more than transitory. So, we may have a brief period of calm on the inflation front but I think it will be too little too late,” Greenspan concluded.
Originally published by Kevin Helms at Bitcoin News