. Part 1 of 4 Alan Greenspan speech on 9/27/05 - âUS Economic Flexibilityâ and analysis. SouthAmerica: I heard the Alan Greenspanâs speech live on Bloomberg radio and these are some of the thoughts that crossed my mind during his speech. Here is a copy of Alan Greenspan speech of September 27, 2005 and some of my comments. ********** Remarks by Chairman Alan Greenspan âEconomic flexibilityâ To the National Association for Business Economics Annual Meeting, Chicago, Illinois September 27, 2005 Today I should like to reflect on some of the ways in which economic policy both affects and is affected by the increasing flexibility of the U.S. economy. For this country's first century and a half, government was only peripherally engaged in what we currently term the management of aggregate demand. Any endeavor to alter the path of private economic activity through active intervention would have been deemed inappropriate and, more important, unnecessary. In one of the more notable coincidences of history, our Declaration of Independence was signed the same year in which Adam Smith published his Wealth of Nations. Smith's prescription of letting markets prevail with minimal governmental interference became the guiding philosophy of American leadership for much of our history. ********** SouthAmerica: Also published on December 26, 1776 Adam Smith publishes âThe Wealth of Nationsâ Edward Gibbon publishes âThe History of the Decline and Fall of the Roman Empireâ 35th and last volume of âDiderot's Encyclopedieâ published ********** Alan Greenspan - 9/27/05: With a masterful insight into the workings of the free-market institutions that were then emerging, Smith postulated an "invisible hand" in which competitive behavior drove an economy's resources toward their fullest and most efficient use. Economic growth and prosperity, he argued, would emerge if governments stood aside and allowed markets to work. Indeed, within a very few decades, free-market capitalism became the prevailing stance of most governments' economic policy, even if it was often implemented imperfectly. This framework withstood the conceptual onslaughts of Robert Owen's utopians, Karl Marx's communists and later, the Fabian socialists. The free-market paradigm came under more-vigorous attack after the collapse of the world's major economies in the 1930s. As the global depression deepened, the seeming failure of competitive markets to restore full employment perplexed economists until John Maynard Keynes offered an explanation that was to influence policy practitioners for generations to come. He argued that, contrary to the tenets of Smith and his followers, market systems did not always converge to full employment. They often appeared to settle at an equilibrium in which significant segments of the workforce were unable to find jobs. In the place of Smith's laissez-faire approach arose the view that government action was required to restore full employment and to rectify what were seen as other deficiencies of market-driven outcomes. A tidal wave of regulation soon swept over much of the American business community. Labor relations, securities markets, banking, agricultural pricing, and many other segments of the U.S. economy became subject to the oversight of government. The apparent success of the economy during World War II, which operated at full employment in contrast to the earlier frightening developments during the Depression years, led to a considerable reluctance to fully dismantle wartime regulations when the hostilities came to an end. However, cracks in the facade of government economic management appeared early in the post-World War II years, and those cracks continued to widen as time passed. At the macro level, the system of wage and price controls imposed in the 1970s to deal with the problem of inflation proved unworkable and ineffective. And at the micro level, heavy regulation of many industries was increasingly seen as impeding efficiency and competitiveness. By the early 1980s, the long-prevalent notion that the centrally planned economy of the Soviet Union was catching up with the West had begun to be discredited, though it was not fully discarded until the collapse of the Berlin Wall in 1989 exposed the economic ruin behind the Iron Curtain. ********** SouthAmerica: If you forget and donât take in consideration the costs related to the Military Industrial Complex and the massive costs related to the Vietnam War â Then you can blame the 1970âs inflation on government regulation. ********** Alan Greenspan - 09/27/05: Starting in the 1970s, U.S. presidents, supported by bipartisan majorities in the Congress, responded to the growing recognition of the distortions created by regulation, by deregulating large segments of the transportation, communications, energy, and financial services industries. The stated purpose of this deregulation was to enhance competition, which had come to be seen as a significant spur to productivity growth and elevated standards of living. Assisting in the dismantling of economic restraints was the persistent, albeit slow, lowering of barriers to cross-border trade and finance. ********** SouthAmerica: Their solution - deregulating large segments of the transportation, communications, and energy. They did a great job â They bankrupted many of the major communications companies, the entire airline industry, and they are doing a great job regarding energy â they created Enron â a fast collapsing power grid structure of the US economy, and so on. (If the idea was to wreck the foundations of the US economy then they did a great job). Quoting from my article published on September 2002 â I said the following: âCountdown to Armageddonâ. â¦Until recently, I used to believe in a completely free market economy. Today I know there is a place for government regulations and government protection of its industrial base against foreign competition. Deregulation has been a disaster in the U.S. to the airline, the energy, and the telecommunications industries. For example; many airlines are on the brink of bankruptcy in the United States. Business Week magazine of August 5, 2002 reported that since the Telecommunications Act was passed in 1996 to deregulate the telephone industry, investors have lost over US$ 2 trillion as the stock prices tumbled 95 percent or more from their highs. The crisis could relegate the U.S. to second-class status in the communications industry in the future. I used to think that governments at all levels usually wasted lots of money, and that they were a very poor allocator of resources. I used to think that the free open market system was the best allocator of resources. Today I have my doubts about unregulated and a savage and destructive type of capitalism I have seen in operation since the mid-80's. It started with the savings & loan scandals and debacle of that industry in the 1980's and culminated with the latest string of company scandals on Wall Street. I believe that the government has a role in stabilizing the economy. For years, an overvalued financial market built on misleading and false information sent highly misleading signals to investors who eventually lost trillions of valuable national savings, which were misallocated to unneeded and wasteful investments. Investors lost over US$ 2 trillion in the telecommunications industry and over US$ 1 trillion in the dot.com fiasco. These investments are gone and will have an impact on many people's retirement plans in the future, since a lot of their pension money was invested in these promising areas. ********** Alan Greenspan - 09/2705: As a consequence, the United States, then widely seen as a once-great economic power that had lost its way, gradually moved back to the forefront of what Joseph Schumpeter, the renowned Harvard professor, had called "creative destruction"--the continual scrapping of old technologies to make way for the innovative. In that paradigm, standards of living rise because depreciation and other cash flows of industries employing older, increasingly obsolescent technologies are marshaled, along with new savings, to finance the production of capital assets that almost always embody cutting-edge technologies. Workers, of necessity, migrate with the capital. ********** SouthAmerica: That is the natural way of a business life cycle: development, maturity, and decline. .