What Alan Greenspan thinks of China's ills

The humbled former Federal Reserve chairman thinks the Chinese economy needs a healthy dose of creative destruction.

Alan Greenspan, the longest serving chairman of the US Federal Reserve, was considered the greatest central banker who ever lived until the spectacular meltdown of the American housing market three years after his 2005 retirement.  

Bob Woodward, the famous Washington Post journalist who brought Richard Nixon down, described Greenspan as the maestro in his hagiography. Mervyn King, the former governor of the Bank of England, said Greenspan’s "departure from the central banking scene will deprive us of a source of wisdom, inspiration, and leadership", according to Neil Irwin’s The Alchemists: Inside the Secret World of Central Bankers.  

Under his watch, the US experienced one of its longest uninterrupted periods of growth during the 1990s and early 2000s, known as the Great Moderation. But he failed to foresee one of the biggest financial events in his long career -- the great crash of 2008.  

Many commentators and analysts are increasingly drawing parallels between the US before the meltdown and the current economic woes in China. It has become quite fashionable to use doomsday terms from the great crash -- like "Minsky moment" or "Lehman moment" -- to describe the Chinese economy.

So what does Greenspan make of the debt problem in China now? The humbled former maestro admitted to Chinese media that something was fundamentally wrong with his conceptual framework of the way the economy works. Then he went on to provide his diagnosis of China's ills.

Greenspan on Chinese debt

"The problem with the Chinese economy is, as I see it, that you had a very major expansion in debt in the so-called shadow banking system that has been well beyond anything which is stable and continuing," Greenspan told Sina Finance.

He explains that the greatest problem is the implicit guarantee that the government and the central bank will bail out banks and other institutions if they are in trouble -- even though they are making commercial loans and engaging in off-balance sheets lending.

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