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“A Dangerous Game”

Posted by Larry Doyle on October 8, 2010 10:57 AM |

Alan Greenspan will certainly not go down in history as the best Federal Reserve chairman. In fact, I think the history books will judge Greenspan very harshly for having overseen the biggest bubbling up within our financial system in eighty years. That said, Greenspan is not a total nitwhit. I believe Greenspan is now working diligently to recover his reputation. How is he doing that? More often than not, I witness Greenspan trying to put forth tmore of the truth rather than the party lines promoted by Wall Street and Washington. What did Greenspan say recently? Let’s navigate a Bloomberg commentary,

Greenspan Says U.S. Creating ‘Scary’ Deficit by Borrowing,   

Former Federal Reserve Chairman Alan Greenspan said the U.S. fiscal deficit is “scary” and the federal government needs to cut spending on entitlements.

“We’re involved in a dangerous game,” (LD’s highlight) Greenspan said yesterday 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, 84, was chairman of the Fed from 1987 until 2006, when he was succeeded by Ben S. Bernanke.

“It is crucially important that we put U.S. fiscal policy on a sustainable path,” Bernanke said in an Oct. 4 speech.

“The only real question” is whether adjustments to taxes and spending will come from a “careful and deliberative process” or from a “rapid and painful response to a looming or actual fiscal crisis,” Bernanke said in Providence, Rhode Island. U.S. lawmakers should consider adopting rules that limit federal spending or debt, he said.

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.

Should the Fed increase “excess reserves and they just sit there on the asset side of commercial banks’ balance sheets not being relent, you’ve merely gone through an interesting bookkeeping exercise,” Greenspan said. “You’ve got to break that psychology that prevents that current trillion” in reserves from being relent, he said.

Two-year Treasury yields fell to the lowest ever yesterday, setting or matching a record for a fifth consecutive day. Investors have stepped up bets that the Fed will resume buying bonds to keep borrowing costs low.

“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.”

U.S. central bankers have kept their benchmark lending rate near zero for almost two years. In March, they finished $1.7 trillion in purchases of Treasuries, mortgage-backed securities and housing agency bonds.

A slowdown in growth in the middle two quarters of this year prompted the Federal Open Market Committee last month to warn that inflation rates were “somewhat below” its mandate to achieve stable prices and full employment.

New York Fed President William Dudley, who is also vice chairman of the FOMC, went further in an Oct. 1 speech when he called current levels of unemployment and inflation “unacceptable.”

“Further action is likely to be warranted,” Dudley said.

The game is not only dangerous BUT depending on the sports analogy you would like to use, the game has many innings, quarters, periods, or holes left to play. 

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • phil trupp

    These experts have added little, if anything, new. These are old arguments being made without pointing to workable solutions. Everyone knows what ails us; the mantras are by now ingrained in the financial community. So how do we implement a way back–or forward?

    I followed Greenspan closely when he was at the Fed. His tenure was marred by a distressing arrogance so outrageous that members of the House Financial Services Committee were at their wits end trying to get Mr. Greenspan off Cloud Nine. I recall congressmen complaining that he was “disconnected” from the real world, “out of touch,” and they were right. I also recall Mr. Greenspan in an interview with 60 Minutes actually boasting that, indeed, he was handing out deliberate jibberish before congressional committees because, in his mind, the members were too ignorant to grasp his wisdom.

    During Mr. Greenspan’s tenure as Fed Chairman. he made only one good and memorable call: Beware of “irrational exuberance.” As a grateful nation, we must applaud.

    Now he offers Harvard Business School bromides. Everything you have quoted in this article, you, Larry Doyle, have expanded upon with intellectual depth. I don’t see that kind of depth in Mr. Greenspan, even with the great advantage of hindsight.

    As for Mr. Dudley: Are we to applaud more of the obvious? Of course unemployment levels are unacceptable. Keynes detailed the dangers of unemployment a long time ago, as did Adam Smith who said that of all economic evils, unemployment was the most pernicious. So, Mr. Dudley, having cut across the dotted lines, where to from here?

    I am constantly amazed at the lack of creative thinking by today’s economists. They are good historians, but they are prone to spout old and fixed ideologies. Like fish, they congregate in schools: Friedman, Hyack, Keynes, and the new devotees of Krugman, to name just a few.

    So where does all this collected wisdom lead? Where is the thinker who breaks through the dogma and finds an acceptable pragmatism?

    I know, I know…It’s easy to sit on the sidelines and be critical. But it is getting less easy and more frustrating. We speak glibly of the “best and brightest,” and yet one has to wonder how bright one must be to have engineered the meltdown of 2008, a meltdown that surpasses 9/11 in pure chaos and destruction.

    Mr. Greenspan, for one, never got out of his cozy, clubby environment and as a result allowed bubbles to rise and burst before his very eyes. Mr. Dudley, pointing to the most conspicuous contemporary concerns, suggests that current levels of unemployment and inflation (I seriously question the inflation call) are “unacceptable,” and must be addressed.

    Gentleman: Let’s put our heads together, leave our musty little schools of dogma, and find solutions to the economic problems where the devils certainly are in the details.

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