Recent episodes in which Fed officials hinted at a shift toward higher interest rates have unleashed significant volatility in markets.
ALAN GREENSPANBy far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives.
More Alan Greenspan Quotes
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Some succeed for a time. But while there may occasionally be mis-configurations among market prices that allow abnormal returns, they do not persist.
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The worst have failed; investors no longer fund them and are not likely to in the future.
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I didn’t believe in absolutes, moral or otherwise. If I couldn’t prove a proposition with facts and figures, it was without merit.
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Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets.
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I cannot conceive of a politically feasible solution to this problem which will overdo cutting the deficit, where overdoing means harming the economy. It might be technically possible, but it is not realistic.
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I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.
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If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine.
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I came to a stark realization: chronic surpluses could be almost as destabilizing as chronic deficits.
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The process of innovation is, of course, never ending.
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I have one other issue I’d like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here.
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Even though some down payments are borrowed, it would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity.
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Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.
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The probability of ten consecutive heads is 0.1 percent; thus, when you have millions of coin tossers, or investors, in the end there will be thousands of very successful practitioners of coin tossing, or stock picking.
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In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.
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While these tendencies were no doubt in train in the “old,” pre-1990s economy, they accelerated over the past decade as a number of technologies with their roots in the cumulative innovations of the past half-century began to yield dramatic economic returns.
ALAN GREENSPAN