Former Federal Reserve Chairman Alan Greenspan said that crypto is “too dependent on the ‘greater fool theory’ to be a desirable investment.” However, he noted that the collapse of the crypto exchange FTX was “purely a scam” rather than the result of a feature inherent in crypto. He does not expect the FTX contagion to spread far beyond the crypto space.
Alan Greenspan on crypto, FTX, and the US economy
Former Federal Reserve Chairman Alan Greenspan shared his views on cryptocurrencies, the collapsed crypto exchange FTX, and the US economy in his year-end Q&A published this week by Advisors Capital Management.
Greenspan served five terms as Chairman of the Federal Reserve from 1987 to 2006. He was appointed chair by four U.S. presidents. He joined Advisors Capital Management in September 2016 as an economic advisor to the asset management firm.
The former Fed chairman was asked to comment on the FTX meltdown and whether he expects contagion from it.” I do not expect the fallout from FTX to spread beyond the cryptocurrency / NFT (non-fossil token) space,” Greenspan replied, citing “information that has come to light so far.” He emphasized.
The collapse of FTX was not the result of loose risk management, poor accounting practices, or some feature inherent in crypto, it was pure fraud.
“Fortunately, FTX and companies like it have increased the marketing of their products in recent years, but the lack of a noticeable broad market response to FTX suggests that they are still fairly concentrated in the hands of a relatively small subset of investors,” Greenspan explains.
“Moreover,” he opined, “the differences observed in the aftermath of the bursting of the tech bubble and the housing bubble clearly showed that credit-fueled asset bubbles cause far more contagion when they eventually deflate.” At this point, there does not appear to be much leverage specific to the cryptocurrency/NFT space, so we do not expect contagion to spread significantly beyond this particular asset class.”
The former Federal Reserve chairman further stated that
With respect to the broader crypto universe, I see this asset class as too dependent on the “greater fool theory” to be a desirable investment.
Greenspan also shared his views on the U.S. economy and the Federal Reserve’s fight against inflation. Commenting on whether a recession is needed to bring down inflation, as some economists have suggested, he said.
A recession appears to be the most likely outcome at this point.
However, he does not believe that “a Fed reversal substantial enough to avert at least a mild recession” is justified. Wage growth, and thus employment, still needs to soften further for the recession in inflation to be more than transitory.” So inflation may settle temporarily, but I think it will be too late,” concluded Greenspan.
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