Former Federal Reserve Chairman Alan Greenspan said the fiscal deficit in the U.S. is “scary” and the government needs to reduce entitlement programs.
“We’re involved in a dangerous game,” Greenspan said today at a foreign-exchange conference in New York sponsored by Bloomberg LP, the parent of Bloomberg News. “We’re increasing the debt held by the public at a pace that is closing” the gap between our debt and “any measure of borrowing capacity,” Greenspan said. “That cushion is growing very narrow.”
U.S. companies may be holding back on investment because of the rising federal deficit, which causes uncertainty about future tax policies, Greenspan said in an opinion article for the Financial Times this week. Weak investment by businesses in capital equipment and fixed assets has helped to crimp the U.S. economic recovery, he said.
“You need” austerity, said Greenspan, a paid speaker at the event. “We’re going to have to start to cut” from government entitlement programs, he said, adding that reducing the budget is better than raising taxes in closing the U.S. budget deficit. Still, Greenspan reiterated that he supports allowing tax cuts enacted under President George W. Bush to lapse at the end of 2010.
The White House Office of Management and Budget in July projected the deficit for fiscal 2010, which ended Sept. 30, at $1.47 trillion and the gap for fiscal 2011 at $1.42 trillion. President Barack Obama formed a commission in February charged with presenting a plan by Dec. 1 on how to reduce deficits over the next decade.
Greenspan said that if the Fed decides to expand its balance sheet through purchases of bonds, a process known as quantitative easing, it may not be enough to get “money moving” and spur growth in the U.S. economy.
“It is very difficult to think through the scenario by which you induce” commercial banks to lend, Greenspan said. “If you don’t do this, quantitative easing can’t do anything to speak of.”
Lately, I've been a big fan of Greenspan, now retired he's been articulating the correct view. The bubbles must have left his brain in retirement.
1) Reduce entitlement programs: Has to be done, we can't keep asking people to pay more and more taxes to support a growing number of entitlement programs. It's just math.
2) Holding back on Investment: There's little reason to make equipment investment for economic reasons, the government is only making the decision to not do anything that much easier.
3) Reducing the budget is better than increasing taxes. Yes! Eventually, it will be a little maybe a lot of both because spending is just too big and it will take to long to reduce it to conservative and affordable levels. I say this, "Let's start with spending cuts and then come to the tax payer second. Let's prove to the voters we can really implement significant reductions first."
4) Allowing the Bush tax cuts to expire. I have to agree with Greenspan. We are going to have higher taxes someday and these were always meant to be temporary so lets get it over with. BUT, lets get some real spending cuts on the table so the voters aren't carrying the burden completely.
5) QE might not be enough to get money moving? Again, I have to agree with Greenspan. We are in a deleveraging environment. Buying bonds to lower rates does not induce people or businesses to re-leverage themselves when we are in a deleveraging environment. Even if they wanted to borrow more, it's quite difficult for banks to find qualified borrowers, as a banker I know this first hand.
At some point in the near future, we as American voters need to realize that the day of the government wasting tax payer money trying to prop up asset values and economies is only making the problem of paying for it worse.
It's actually in our collective benefit to stop and let the markets work freely and reset asset prices to levels that are supported by income levels and natural levels of supply and demand, not stimulus and more debt. It might create pain in the short run but in the long run it's the healthy solution for our country.
Hope all is well.
J.D. Rosendahl, Rosey