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Among my holiday reading this year was Alan Greenspan’s biography cum economic analysis, “The Age of Turbulence”. In retrospect, the book’s publishing date of mid-2007 preceded almost precisely the unravelling of the housing market in mid-2007 that eventually led to 2008 becoming the year of the largest market crash since the Great Depression. The book is thus a fascinating glimpse into Greenspan’s brain on the eve of the crash.
In short, the erstwhile "Maestro" (as Bob Woodward tagged him in his 2000 book) clearly "missed it." One quote that really jumped out at me: "I was aware that the loosening of morgage credit terms for subprime borrowers increased financial risk, and that subsizdized home ownership initiatives distort market outcomes. But I believed then, as now, that the benefits of broadened home ownership are worth the risk." Ouch.
To get a glimpse of his current views, read his guest article in The Economist. At the end of the article, he points out that, to date, there has been $7 trillion in global sovereign credit pumped into the system ($1 trilion presumably from the US, which doesn't include the additional $1 trillion stimulus planned). This staggering amount of money is going to have to be inflationary at some point. With US Treasuries at 0%, it appears the market is more worried about deflation. But many economic commentators are very worried about inflation in years 3-10. (Today's WSJ had a good range of interviews with some of them, so called "Doomsayers.") Greenspan himself points to long-term inflationary risk as "the rate of flow of new workers to competitive labor markets will eventually slow, and as a result, disinflationary pressure should start to lift".
So my big prediction for 2009 is that we will begin the year nervous about deflation, and end the year nervous about inflation returning. Interest rates will need to go up again in 2010 and 2011 to choke off the inflationary stimulus.
What impact all this will have on venture capital and entrepreneurship, I'm still sorting out. One thing is true, venture capitalists and entrepreneurs are operating at a very different end of the economic spectrum, creating new products and services that never existed and thereby creating value. Hence, I remain a long-term bull about entrepreneurial prospects. As Greenspan points in one section that really resonated with me: "[The 1990s] technology boom came along and changed everything. It made America's freewheeling, entrepreneurial, so-what-if-you-fail business culture the envy of the world." I guess I'll keep that photo of me and Alan on my desk after all...