Greenspan: Fix System Before Stimulus

The famously inscrutable Alan Greenspan used some uncharacteristically candid language to describe the dire plight of the American economy Tuesday night at the Economic Club of New York.

“Since the collapse of Lehman Brothers in September, we have been exposed to the most rapid and unremitting set of gloomy statistics that I have ever seen,” the former Fed chairman said in remarks prepared for delivery at the club’s 401st meeting at the New York Hilton.

And as for the current debate in Washington over spending versus tax cuts, Greenspan said he has “little to add” about the question of government stimulus spending, but he asserted the government must fix the financial system as a whole before delivering stimulus spending and tax cuts.

“We need to assure that the repair of our financial system precedes the onset of major fiscal stimulus,” he said. “Unless we are successful at that, in my judgment, the positive impact of a fiscal stimulus will peter out after its scheduled completion.”

“Remember,” he added, “the real test of fiscal stimulus is not whether it temporarily expands GDP, but whether it primes the pump for private demand.”

Greenspan also warned that American debt, which has been dramatically increased by the economic stimulus spending in Washington, can’t increase forever.

“Much of the fiscal deficit is being funded by foreigners who see U.S. government debt as the ultimate safe haven in all this turbulence,” Greenspan said. “The long American history of honoring our obligations, dating back to Alexander Hamilton, remains a powerful attraction to foreign investors. But there is obviously a limit to the expansion of U.S. federal debt.”

He also predicted further U.S. home value declines, saying that federal policy makers must be prepared for a longer housing slump.

“Unfortunately, the prospect of stable home prices remains many months in the future,” he said. “Accordingly, efforts to reprice and reset mortgage terms need to adjust for the likelihood of further declines in prices, possibly by linking the extent of mortgage relief to a home price index.”

Finally, Greenspan said that – despite his preference for low federal regulation of the financial markets, he sees “no alternative to a set of heightened federal regulatory rules for banks and other financial institutions.”

But he said, “We need not rush to reform. Private markets are imposing far greater restraint at the moment than would any of the current sets of new regulatory proposals.”

Copyright POLIT - Politico
Contact Us