Alan Greenspan: In his own words

(Fortune Magazine) -- Q: Chairman Greenspan, thank you very much for taking the time out to talk with us. I guess my first question is, as Topic A in the business world, which is what's going on in the capital markets and the housing sector, and maybe you could explain it to us, please?

A: Well, if we had several hours, I probably could do it in some detail. But let me just say that for reasons I point out in my just published book, this was an accident waiting to happen. If it weren't subprime, it would have been something else. And the reason is we have been through this type of event innumerable times over the centuries.

We get to a state of extraordinary exuberance, which when confronted with reality turns to unrelenting fear, huge withdrawals in the modern case, extraordinarily little liquidity and very considerable credit fears, but we know where it's going, how it's behaving. We just don't know the actual specific resolution. It's essentially part of innate human nature.

We have done this time and time again. We have never had the capacity to defuse a bubble which is essentially what we've dealt with, with respect to credit instruments, and I suspect the reason is that human nature being what it is that until we essentially reach the climax of euphoria, the fever doesn't break, the speculative fever doesn't break, but when it does, it turns on a dime, and we get the type of markets we have been observing for the last number of weeks.

It was not forecastable specifically but it was inevitable nonetheless.

Q: The second part of that question of course, you know what's coming, sir, which is how bad is it going to get? Is it going to spill over into the overall economy, I guess to a degree it already has, but is it going to cause a recession, what's your best guess? How would you tell?

A: Well, I've hesitated to answer those types of questions because the truth of the matter is that while we know the nature of what we are dealing with, and we know its sequence, we really can't judge exactly the degree of contagion into the real economy, and the reason, for example, in the United States is, remember, that the fundamental source of all of this has been the extraordinary events that led up to the end of the Cold War and set in motion a whole series of events, which created interest rates and real interest rates around the world, long-term interest rates, set off all sorts of rapid increases in assets, especially in residential construction around the world.

And what we observed in the United States is that those long, long-term real interest rates enabled our corporate sector to very significantly improve the balance sheets, which meant they run very long, their debt service is not bad, they're not crushed by short-term credit -- or I should say short-term debt -- squeezing in on themselves. Cashflow is quite ample, and hence the need to borrow is not all that great.

We do know that the housing market has a significant way to go on the downside. The price decline has not ended by any means that I can see, but housing in and of itself, if that's all there were to it, would not cause a recession unless it's already pressing down at a rate of change, which is not likely to increase. The real issue is whether house price declines by contracting wealth in home equities spills over into consumer expenditures as it did on the upside, obviously, and causes the economy to shrink.

I said awhile ago that I thought the probabilities of a real recession are about one in three. I don't think that's changed all that much.

That we're slowing down significantly is unquestionably the case. Whether it actually tilts into a meaningful decline is still on the table, and I know people make forecasts, but I've been making forecasts for years as everybody else has. The record of economists, business forecasters, and all analysts is not a distinguished one in this respect.

Q: Seven out of the last four recessions kind of thing, and I remember when you said that one out of three chances awhile back, people thought that was kind of bearish. It looks more accurate today, prescient back then, and interestingly Wal-Mart (Charts, Fortune 500) et al. is already suggesting that there's a slowdown in consumer spending because of the contraction in the housing sector, although I suspect that they'll use any excuse they can, like the weather. I've just noticed they do that over the years.

What about what Chairman Bernanke is doing? How do you see his response so far? How would you judge it?

A: I think the response of Ben Bernanke, the whole board now, all FOMC, I think it's been a very sensible one because they are confronted with something I was not confronted with, namely, a burgeoning evidence of finally coming out of this disinflationary trend and we're on the edge where it's hard to tell, but inflation is beginning to build.

Cost pressures are beginning to build around the world. This suggests that longer-term, the Fed's going to have to be tighter. Shorter-term, clearly, it's got problems with very significant credit disruptions and turmoil, and so, they are caught in the usual type of dilemma, which I and my colleagues at the time did not confront, namely, we had a disinflationary system.

When we tried to get interest rates up, long-term rates went down and thwarted what we were trying to do. So we had a relatively easy problem in lowering rates without concern about triggering inflation. I regret that that is no longer the case, and that trying to balance these two issues I find very reminiscent of many occasions when I was sitting around the FOMC table. But these are good people, these are smart people.

They have somewhat better data than most anybody else, and I have full confidence that they will make the right decisions.

Q: So September 18th, a rate cut?

A: It's much too short a forecast for me to make, put on the record.

Q: Do you communicate with Ben Bernanke and other people at the Fed?

A: On occasion, but I've tried to stay away from anything remotely discussing monetary policy. The first year, with the exception of going to the Fed barber who does my hair.

Q: He does a wonderful job by the way.

A: Well, he's got a very easy job -- I don't have enough of it to make a difference. But aside from that, general discussions, but I've tried to stay away from policy discussions. I think it's -- I feel awkward doing it.

Q: Now of course people are pointing fingers at you, Chairman Greenspan, in terms of the so-called housing bubble bursting and saying that you're responsible or partly responsible. Look at what he said in 2004, adjustable rate mortgages are prudent. These are things that homeowners should look to invest in or buy. How do you respond to those critics?

A: I think revisionist history is coming on with a rush. The speech I made actually referred essentially to conforming mortgages at that time. Remember, subprimes were not on the horizon. They were there, but they were very small. The big rush occurred much later.

I was really taking a Fed study which had demonstrated that the insurance you're getting to have a fixed rate mortgage was very high, and that there are a number of people who perceive that they won't be in their home for two years, who would do far better with adjustable rate mortgages.

Now the truth of the matter is, the speech that was made in February, as I recall, 2004, and there was a big hubbub that somebody was raising the question that I was downgrading the 30-year mortgage. A week later, I was at the Economic Club of New York, and somebody asked the same question you just asked, and I said that I may have not made it clear that what really I was focusing on was a very small segment of the mortgage choices and that I thought that people who had special individual cases ought to be looking at adjustable rate mortgages.

Indeed, those took out adjustable rate mortgages within the next few weeks after I made both of those statements, had they refinanced into fixed rate 30-year mortgages 18 months later would have come out way ahead because a 30-year mortgage didn't change.

But I topped everybody by saying, look, I just gave you the pros and cons of adjustable rate mortgages which really should be viewed upon and expanded upon. I have never had an adjustable rate mortgage. I always pay the price for the insurance. I like 30-year mortgages. So the bottom line is, take your choices, but I would have written the same article, same speech, that I did in February 2004.

It was a good article. It was a good speech.

Q: You're talking to a 30-year fixed man myself. I have two tape recorders, too. What about the timing of the book? It must feel great to come out with a book right now. All of a sudden all this attention focused on the capital markets.

A: Actually, I was hoping that nothing would happen between early June when I actually went to press and today because in any forecasting that would have a short-term, long-term, three months is a very long time.

Now I'm fortunate in the sense that nothing that happened in the last several weeks, since early August, actually, was contradicted by what's in the book. In fact, what the book basically does is take the long sweep of history and it effectively comes to the end by basically saying that yield spreads are much too low, that people's view of a longer run is much too optimistic, and that human nature cannot deal with the type of optimism, the type of low tight yield spreads in junk bonds, in markets of all sorts, and something has to give at some point.

I did not anticipate it would happen as soon as it happened. I didn't appreciate that it happened as soon as it happened prior to the publication of the book, but I think people will enjoy reading the book in the context of what's happened because you can see the forces which are at play and it's replicated throughout a number of the experiences I've had, you remember the stock market crash of 1987, 9/11, the obvious, very extraordinary events of 1998, when Russia went into a default, and LTCM -- Long-Term Capital Management -- ran into very serious problems.

This is very interestingly like those periods. Not in the detail. But in the broad sweep of the how the innate aspects of human nature, which I point out in this book, I think are not employed for forecasting purposes enough.

It's not the fact that some ideas are irrational, it's whether they are sufficiently regular and forecastable. You can count that human beings will become euphoric on occasion, and in deep distress and fear.

What you can count on is that will never change. There is no learning experience. We had the bubble of tulips in Holland back in the 17th Century. The South Sea Bubble in the 1720s. In the United States, we had the wonderful real estate boom of 1837.

Q: I missed that one.

A: I know.

Q: So did you!

A: Well, I was a little too young to understand what was going on.

Q: Right, yes.

A: But they were all alike. As I say, they differ in nature, but they are all driven by innate characteristics of human beings.

Q: I'm interested, when I was looking at your book, I saw that you prided yourself on being someone who had an analytic mind, but also that you're mind was open by Ayn Rand in terms of human behavior. Did you take both parts of that way of analyzing human nature when you were the Fed Chairman?

A: Well, the best way of looking at it is I started off as a mathematician, effectively, and I believed that human nature was not worth evaluating, and when I began to deal with economics, I dealt with it in a numerical mathematical analytical sense until I began to realize, there were very important missing variables in the forecasting system, and these all related to systematic activities of human beings, and even though we have not improved our capability of forecasting -- we really haven't.

I mean I've been doing this thing since 1948, and I can't say that my techniques have improved, nor do I know anybody else's techniques have improved.

But what is clear is that what causes these types of activities is built into human value preferences, and it's that type of purview, to examine human activity and human beings and cultures beyond the mathematics, and it was that that Ayn Rand clearly got me to focus upon which I had not been doing before, and I'm in her debt for many decades since.

Q: How do you reconcile the fact that some people call you Maestro, namely Bob Woodward, and on after that, and then there are people out there who are pointing fingers at you because of this housing problem that we have now, or problem in the housing sector, blaming you for the bubble of 2000, Mr. Easy Money Fed Chairman. Which one is it?

A: It's neither. I think I got undo praise, personally, for what was essentially the inevitable consequences of the fall of the Soviet Union which was obviously a seminal geopolitical event, but it was also a very important economic event because what happened was that prior to the fall of the Berlin Wall, we had two competing economic systems -- central planning and market economies -- and they would vie with each other, and it was not clear which had the winning side.

When the Berlin Wall came down, and we really looked at what amounted to in Germany, as close as you can get to an economic experiment where a country -- two countries -- with identical history, same culture, the only really important difference was the nature of their governments.

Q: The control to the experiment.

A: It was remarkable. The end result was that it turned out that East Germany which had been expected to have this average standard of living of about 75 percent of West Germany indeed had half of that, and the shock was so great in the Third World which had been playing with central planning that without any fanfare, without any debate, the shift towards market economy, especially in China, created a huge change in the world economy. Huge increase in activity.

Remember, we were going through -- leaving aside the most recent problems -- what may very well be the fastest-growing decade in world history so far as economies are concerned, and it all goes back to essentially moving a billion people slowly but inexorably from being behind the insulation of central planning to market economies, and that has had a dramatic effect on the whole inflation environment.

I go into the book in some detail on the economics of it, how savings and investment flows moved real interest rates down, coupled with a flattening of wage costs in the developing world, but it all comes together in the notion that the global economy went into a seriously impressive disinflation which brought all interest rates down, made a huge boom in the economy, huge increase in assets, and when lots of people would come up to me and say thank you for my 401(k), I was embarrassed, because I had nothing -- I was about to say -- go applaud the fall of the Soviet Union, but that sounded much too complex.

Q: Right.

A: So, we enjoyed an extraordinary period in the United States. I do grant that the Federal Reserve understood largely what was going on, and I think we calibrated monetary policy to fit the circumstances, but there were very broadly important forces, were international, and as a consequence, what we chose to do when we realized, as I indicated before, that bubbles will not run out until they essentially come to an end, you can't stop them prematurely. The fever has got to break by itself.

But, what we can do and did do, is make sure that the economy was sufficiently flexible and that the decline was absorbed in a sufficiently liquid environment and the recession that occurred subsequent to the dot-com boom is now very difficult to find in the revised data. In other words, we had a terrible decline in stock prices, the NASDAQ as you know collapsed, lots of people lost huge amounts of money, but not many people lost their jobs.

And the growth of the economy continued moving, and the same thing happened after 9/11. In other words, the critical issue here is we cannot forecast very well, we cannot suppress bubbles, but we can create a sufficiently flexible economy that aside from the gyrations of financial markets, there is no need for significant retrenchments in real economic activity or employment, if we know how to handle it.

And I say in the age of turbulence that the crucial issue of regulation is not to determine what people do but create a system which no matter what they do, it doesn't do significant harm to the economy, and I think if we can maintain the degree of flexibility we have exhibited in recent years and not get protectionism and not get all the forces of constraint that regulators are thinking of, I think we can do reasonably well, even though, as I point out in the last chapter in the book, that there is a very important change going on, and that we're going to have to confront more of what we saw prior to the fall of the Berlin Wall, and we know how to handle it.

The question is, will our politics allow the Federal Reserve to --

Q: What is that exactly, spell that out?

A: What we're to do?

Q: What were the problems before the Cold War and what do we have to do after?

A: The basic problem before the Cold War is we were living in fiat money economy.

Q: What money?

A: Fiat money, meaning an economy of paper money which, remember went off the gold standard in the 1930s, and prior to the 1930s for a couple of hundred years or more, prices were absolutely flat. Subsequent to that the price level went up many, many fold.

In fact, we now consider low inflation as good. But lower inflation is still rising prices, and so what we have got is rising prices and it has been suppressed in recent years by the global disinflationary forces, but they are coming to an end.

I don't know whether it's this year. I'm not even sure whether we're looking at it in the context of today's turmoil in the marketplace, but out there somewhere I'm reasonably certain, we're going to return to a more inflationary environment, which means that inflation premiums and long-term interest rates go up.

It means that stock prices are going to have some difficulty moving forward, and the critical instrumentality that this government has to prevent the inflationary forces from really taking hold is the central bank, but as one should remember, what Paul Volcker was subjected to when he endeavored to put the press on a highly inflationary environment, the politics, the populist politics, was awful.

Q: Right.

A: People as soon as the economy got better, which was in the early 1980s, not only stopped berating Paul Volcker, but they had amnesia as to what they had called him prior, and I think it's important that we remember that.

Q: You seem to be much more at ease speaking in terms of talking to me here versus Senate testimony. Is it nice to be able to speak your mind?

A: Yes. There's only one restriction that I'm involved in. I don't talk about current monetary policy or what the Federal Reserve is doing. They have got enough problems than to have somebody carping from history about what they're doing.

Q: But still, people have criticized you, of course, naturally, subsequent to speeches that you give, saying why doesn't he just shut up?

A: Well, I ask them, what would they like me to do? In other words, I have been looking at the world economy since 1948. That's my profession, that's what I do. Do they want me to become a logger or a brain surgeon? What do they have in mind? I'm a little old to determine a new career, but that's what I do.

If I had been presented with a request that, yes, we would like to appoint you Chairman of the Federal Reserve in 1987, but subsequent to your term, you're not allowed to discuss anything about the economy, I would have turned it down.

Q: What should we be worried about the most right now in terms of the economy?

A: Yes. Strangely enough, I think it's politics. We have a dysfunctional political system in the sense that there are very serious fiscal problems out there, most importantly as I go into detail in my book, Medicare. As best I can judge, when we get as inevitably we will get a very large increase in the retiring populations, the baby boom inexorably retires, given existing commitments with respect to Medicare, according to the trustees who look at these data with some detail, we either are going to have to raise taxes very sharply or cut benefits by half.

The one thing we can be reasonably sure of is that taxes alone cannot solve the Medicare problem which means that existing benefit levels cannot be sustained. They need to be cut. We know that now. No politician wants to confront this. And this is a very sad event because what's at stake here is the fiscal stability of the American government.

Q: How will it be resolved ultimately?

A: Ultimately, it'll be resolved either in crises or the political way that I see through all this, is inevitably that it's going to be a system in which those with incomes above X, I don't know what X is, necessarily, will essentially be 90 to 100 percent co-payments. For all practical purposes, the only Medicare that would be government-financed with the resources that are available will be in the lower, possibly in the middle income groups. I don't see how under any existing scenarios, granted this extraordinary change in the demographics, how we can afford under existing projections of economic growth because remember, after the baby boom generation comes a generation which is much smaller.

The rate of growth of the labor force is going to be half of what it had been during the time of the baby boomers. In advanced countries such as the United States, we've exhibited no capability of increasing productivity at greater than the three percent rate over any protracted period of time. We're at the cutting edge. We're not smart enough to be able to do more than that.

When you put all those numbers together you essentially conclude that there is only very few exits to this very serious problem. The one which is probably the least politically difficult is essentially to make it simply akin to a welfare program, but those who are supporting social insurance think that is anathema, but the problem is that the arithmetic is inexorable here.

I don't see how you get around that. Unless some extraordinary event, unforeseen, and I can't even figure out what that would be. But prudent policy is such because nobody can figure out what that event is, would be to adjust the longer-term now, not when it becomes a serious problem for people who have already retired and are told after the fact that they will not be getting the real Medicare that they expected.

Tell them now when they're still not retired and have the choices of working longer or doing other things to adjust rather than go for a number of years. It's not only not prudent, I think it's unethical and immoral for a government when confronted with these types of events not to take action. What do we elect people for?

Q: You served is it six or seven Presidents?

A: Well, both Bushes, Clinton, Reagan, Ford.

Q: That's six. So six, and you were Fed Chairman under four. A: Correct. Q: Who's your favorite?

A: The person I liked the best was Gerald R. Ford. He was the most decent man in politics I ever had any relationships with. I sort of facetiously argue in my book that anyone who is willing to do what is required to become President of the United States should be banned from office. Gerry Ford is the one person who I wouldn't apply that to, and I suspect that had he not come to the presidency through Nixon's resignation, probably would have never run.

Q: Did he have the intellectual firepower to be President? He obviously did because he made it through.

A: Yes, he did. He was not as smart as Nixon or Clinton, but I think there was enough to make up for that which made him an extraordinary man.

Q: Your relationship with both Bushes strained at times. The elder Bush blamed you in part for his defeat because of rate cuts or lack thereof.

A: No, I wouldn't cut rates sufficiently, quickly.

Q: Yes, sufficiently quickly, I guess, to be precise, you're right, and it seems that your relationship with President Bush at least in the headlines, the younger President Bush was strained. It seems like you were disappointed that Paul O'Neill left or was forced out or resigned. Did you have a difficult relationship with the Bush presidents?

A: Well, it's a mixed relationship. He was extraordinarily good with respect to --

Q: Which President?

A: Well, actually, George W. Bush, was very cognizant of the importance of having an independent Federal Reserve. Never in his six, seven years in office, did he in any way second guess or try to second guess the Federal Reserve. When asked about whether we approved or disapproved of actions by the Fed, he said, they're an independent agency. We don't discuss it. I very much appreciated that. That was extraordinarily important for our institution.

Where I had difficulties were on the fiscal side, and as I point out, we had a situation where the Republican Party had the presidency and both houses of the Congress and the surplus. And I said, nirvana. We dissipated it, and as I said in subsequent chapters, the election of 2006, the Republicans deserved to lose, and the reason they deserved to lose is that they had originally come to office with major important policy initiatives and they went out of office solely seeking power, and in the end they achieved neither. And I find that very saddening.

Q: Did any presidents ever call you up or members of their office and ask you to cut interest rates?

A: Not directly, but a few hinted it. However I will tell you is no politician ever called me up and asked me to raise interest rates.

Q: I knew that, right. But they did, would you resist it?

A: I said, I mean it's -- we have no choice but to respond to the way the economy is moving and there's a mistaken belief that they call me, for example, and I would somehow change the pattern of what the FOMC is doing. It's a decision of a group of people, a lot of them PhD's, all extremely expert. And if somebody said without reasons why we should cut interest rates, they wouldn't get a hearing, and they shouldn't.

Q: The reason would be for an election.

A: That would scarcely interest any of them. It is fascinating -- the Fed was fascinating in one respect. We knew which presidents appointed which members of the Federal Reserve Board, but if you read the transcripts of the FOMC, you would be very hard-pressed to make a determination of which member is a Democrat or Republican or has leanings in any particular direction because that's not the way our deliberations went. T

hey were all focused on what our legislative mandate was. How do we implement monetary policy, which maximizes sustainable economic growth and maintains price stability, and we in fact interpreted the mandate for economic reasons that a necessary condition for long-term sustainable long-term economic growth is stable prices.

Q: Okay. Let's see, a couple of fun questions I wanted to sprinkle in here. Who's a better sax player, you or Len Garment?

A: I think Len Garment was better. He stayed a little bit longer than I did in the music business.

Q: Okay. Talk about, you were contributor, I guess -- how would you describe your relationship with Fortune Magazine? A consultant to, a contributor to, you wrote for?

A: Well, I had worked for Sandy Parker at the National Industrial Conference Board, in the very early 1950s, and I learned a great deal from him. He was an extraordinary writer and very unusual in many respects. He then moved to Fortune in I believe 1952, or something, the early 1950s, as a first chief economic writer, and he tried to get me to go with him, and the then management -- I'll explain who they were at the time and what happened subsequently -- balked and said, we don't need another economist.

So, Sandy put me on -- and everybody agreed -- they would put me on as a consultant, and I did many market research operations for writers, which was Sandy Parker and Gil Burck, and a number of others at the time. But the final voice of my not coming aboard was of all people Hedley Donovan. Hedley Donovan in 1974 had a dinner for me and he said the worst mistake that he ever made was not hiring me. So I felt as though -- it all came out nice in the end.

Q: I think that's right. I think -- how would you characterize -- the worst not-hiring decision ever made, or however -- we'll find a more elegant to phrase that.

A: Sounds like a triple negative.

Q: It does, but I'll get around that somehow. Are you a Yankee's fan?

A: I was from the age of eight to the age of 12. Really strong. I can give you the starting lineup of the 1936 New York Yankees, and if you pressed me, I probably could remember a lot of their batting averages.

Q: Go ahead, do a few of them. I mean not batting averages, the lineup?

A: The lineup was Bill Dickey as Catcher. Bill Dickey was catching. Lou Gehrig was of course at first base. He hit .354 that year. Remarkable -- he had 200 runs batted in or something like that. At second base was Tony Lazzeri who was a longtime Yankee. Frank Crosetti was at short. Red Rolfe was at third. George Selkirk in right field, Joe DiMaggio was of course --

Q: The Clipper?

A: The Clipper. That was his freshman year. He batted .323. And the ... it was Jake Powell, when he had a lot of other guys. Who incidentally, one of them was it turns out Dixie Walker. Dixie Walker went to the Dodgers just as I was looking at the Yankees and saying it's very tough really for them, they never lose.

So I took my allegiance over to the Brooklyn Dodgers, and so I had a different team to root for but down deep, I've always had a very responsible reaction to when I see the old-fashioned pinstripes of the New York Yankees. It's the same uniform I first saw them playing in, in 1933. And you can't get that out --

Q: So you're still a bit of a Yankee's fan.

A: Right, you can't get the kid out of an adult.

Q: A couple more serious questions, then we'll wrap up here. What should the average American who owns a home be thinking right now? Should they be scared?

A: Well, there is no question that there is an overhang of inventories, especially, newly-constructed, unoccupied single-family homes, which occurs as a consequence of demand falling off, and you can't stop the in-process production supply line.

I judge there are about 200,000 units which are excess. And at the rate we're going now, where you look at the level of new home sales and the rate of housing starts, we're running off a very small number of these inventories a month, and unless we either get a pickup in new sales or a decline -- even further decline -- in housing starts, it's going to be very difficult because these units are going to overhang the structure and move prices ever inexorably lower.

Existing home inventories, incidentally, of course, are much larger, but not as worrisome as the new home inventories because people are living in many of the homes. They're not vacant.

So I think we're going through a period which is not over yet, and it's important that we bring this to an end sooner rather than later because it's a corrosive effect on the economy, it's a corrosive effect on home equities, especially of the prime borrowers who are not in trouble. Remember they've built up a huge equity on average. It's only been in the last year or so that prices have actually started down.

Q: Bill Gross at Pimco suggested bailing out homeowners. Would that be prudent? Is there anything that can be done?

A: Well, you can and as President Bush suggested have government guaranteed organization like the Federal Housing Administration essentially guarantee loans and refinance them. That's a very difficult political decision and it's a very expensive one if you do it in a wide-scale basis.

I'm not sure where I come out on that one, as yet, but I'm hoping that we can get this issue resolved.

There are undoubtedly a very large number of people who I thought sought their first home, were able to finally become homeowners, which I think is very important for a country in which property rights are so critical that there be a very broad support for property rights, and home ownership is the most ...

So I've always been in favor of enhancing home ownership in this country, even though it is risky in the subprime area.

I don't know where you draw the line because a lot of the subprime lending has been frankly truly egregious, and I think in many cases, criminal fraud.

Q: Two last ones. Sarbanes-Oxley. People whining about it. Has it been a help or a hindrance? Does it need to be refined?

A: It's not as bad as it could have been considering that it was passed virtually overnight in a very extraordinary period.

I think that one of the critical aspects of Sarbanes-Oxley, which puts the burden on the chief executive officer and the chief financial officer, to essentially sign off on the bookkeeping. Bookkeeping has become so arcane and so capable of being manipulated, and if I were to have time to get into it, I would explain that most bookkeeping is forecasting because there are so many accounts on the balance sheet which are projections which are arbitrary in many respects.

I would like the CEO to tell me, leave aside how he put the books together, the books that we printed, or actually the accounts that we printed, do they reflect the true state of this company? I don't care whether you've got this problem with this regulation or not. Is it meaningful?

That's been important. What has been unfortunate is Section 404, which has put burdens I think unduly on the corporate sector. It's by no means clear to me that that's any serious positive effect, but it has created a monopoly in the accounting industry. It's created extraordinary activities on the part of individual corporations to do certain things about their books. I'm not sure it's advantageous.

Q: And derivatives. Is the great derivative blowup still to come? Some people have suggested that this latest event, it could certainly be worse. Long-Term Capital was one. This is another one.

A: You've got to remember, there are derivatives and there are derivatives. They all -- I mean corn futures is a derivative.

Q: Well, credit derivatives, esoteric.

A: Well, credit derivatives I think are an extraordinarily valuable thing. What they do is they move the credit from the initiator of the loans, which are highly leveraged financial institutions. They put the credit risk, sell the credit risk, to those with very less leverage and capable of absorbing losses. That's had a very positive effect on the international financial systems, had a very positive effect on American banking.

Interest rate derivatives, foreign exchange derivatives have been very valuable in shifting risks around in an appropriate manner. We have not had a failed major institution in a very long period of time.

And one of the reasons is they've been able to pass off risks that in past generations they would have had to have and run into a very significant financial problem.

So I think financial intervention has been extraordinary. What you have to be careful about is collateral debt obligations which have gotten much too sophisticated, are priced by extraordinary mathematical models, and they are very difficult to value.

And what we have found is we have left this to credit rating agencies and what they designated as the so-called Triple-A tranches of a lot of these vehicles, turned out to be selling as though they were Double-B's.

And I think we're going to find that there's going to be no regulation, but a lot of the collateral debt obligations, collateral loan obligations, these special investment vehicles, all of which are highly questionable, I think people are going to be frightened to deal with those things for a long time, and many instances, a lot of them, are just going to disappear because they've been tried. They don't work.

But the big derivative markets continue to increase at a very rapid rate, and the reason is that they are important instruments for risk dispersion throughout the world.

Q: Finally, is Andrea happy that you're retired or does she find you just being a pain around the house?

A: If I were around the house, I would be a pain, but she may have experienced the extent of my retirement for a minute or two, because that's about as long as I was retired. So she hasn't come upon it yet, and I trust that she never will.

Q: Good. All right, well, thank you very much, Mr. Chairman.

A: Pleasure.