Now Greenspan's worried...
MoneyWASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan told France's Finance Minister Thierry Breton the United States has "lost control" of its budget deficit, the French minister said Saturday.
"'We have lost control,' that was his expression," Breton told reporters after a bilateral meeting with Greenspan.
"The United States has lost control of their budget at a time when racking up deficits has been authorized without any control (from Congress)," Breton said
Why wasn't Greenspan this worried about the deficit when he lent vocal support to W's tax cuts?
Greenspan could have also raised interest rates much, much earlier and contained the possibility of such deficit spending increasing under Republican leadership, but he knew very well the outcome would have been a loss of power for the W.H..
Greenspan as the chief FED has more power than anyone in the White House or any en y of the executive branch. For him to blame the deficit problem on Congress is laughable. He was probably the only person who could have driven the elected officials most responsible for the debt out of power by simply raising the ludicrously low interest rates.
With the War on Terrorism, Katrina and Rita that's not surprising but I'd like to hear Greenspan's comments verbatim not Breton's rendition of what was said.
Oh, and quit whining about the elections.He was probably the only person who could have driven the elected officials most responsible for the debt out of power by simply raising the ludicrously low interest rates
washingtonpost.com
A Price To Be Paid For Folly
By David S. Broder
In the wake of Hurricane Katrina, credible private experts are forecasting a federal budget deficit of $500 billion for this year, a sharp reminder of the government's fiscal folly.
For all the deserved criticism the Bush administration has received for its y and ragged response to the storm's ravages on New Orleans and the Gulf Coast, the long-term costs to the nation of the reckless disregard both the president and Congress have shown toward paying the nation's bills may be even greater.
In time those forced from their homes in Louisiana and Mississippi will be returned, and a degree of order will be restored to their communities. Business will recover. Mardi Gras will again be celebrated in the French Quarter. But our children and grandchildren will pay a continuing price for the refusal of our leaders to face the reality of an out-of-control budget.
The scale of the failure is measured by a set of numbers that Rep. John Spratt of South Carolina, the senior Democrat on the House Budget Committee, carries with him. They chart the annual increases passed by Congress in the national debt limit. In 2002 it was $450 billion; in 2003, $984 billion; in 2004, $800 billion; and this year, the House has passed an increase of another $781 billion, on which the Senate has yet to act. That totals a stunning $3 trillion in additional debt in four years -- a 50 percent increase in the ulative debt from all of America's previous history.
When you look at that record, the self-congratulatory tone of the Republicans who have been running Washington seems absurdly unjustified. In July, when the White House Office of Management and Budget said the deficit for this year would decline to $333 billion from $412 billion in 2004, President Bush said, "It's a sign that our economy is strong, and it's a sign that our tax relief plan, our pro-growth policies are working."
In August, when the Congressional Budget Office lowered the deficit forecast to $331 billion, Republican Rep. Jim Nussle of Iowa, the chairman of the House Budget Committee, said, "We're clearly on the right track. The strong economy, higher revenues and falling deficit projections are all results of the successful leadership and policies of the Congress and the president."
These judgments were faulty at the time. They made no provision for the continuing costs of the war in Iraq, or for the Republican plan to end the estate tax and make all the previous Bush tax cuts permanent. And, most of all, they did not realistically calculate the costs of the new Medicare prescription drug benefit and the looming obligations to the millions of baby boomers who are nearing retirement age.
Now those pre-Katrina estimates have been rendered even more ridiculous. In the first 10 days since the storm hit, the president asked Congress for emergency appropriations of $62 billion -- and the bills are just starting to come in.
The question is whether this will force the president and congressional Republicans to suspend their obsessive drive to reduce the revenue base of the federal government, or whether they will finally start paying the bills their government is incurring.
It is hard to be optimistic on that score. This president may not literally be incapable of reversing directions, but we have yet to see him do that on any significant matter. Treasury Secretary John Snow reportedly told congressional Republicans in a closed meeting that Katrina strengthens the case for making the Bush tax cuts permanent. Some Republicans in Congress are appalled at the fiscal wreckage, but the leadership on Capitol Hill has yet to assert its cons utional power of the purse or do anything but increase the damage by cutting taxes while simultaneously boosting spending.
The warning signs of impending economic calamity are every bit as evident as the forecasts of ruin for New Orleans when a major hurricane hit.
The runaway budget deficits are compounded by the persistent and growing imbalance in our trade accounts -- jeopardizing the inflow of foreign funds we have used to finance our debt.
At a private dinner the other evening where many of the men and women who have steered economic and fiscal policy during the past two decades were expressing their alarm about this situation, one speaker summarized the feelings of the group:
"I think it's 1925," he said, "and we're headed for 1929."
[email protected]
Last edited by boutons; 09-26-2005 at 07:30 AM.
What if it's merely an inflationary period, as opposed to deflation that occurred in the great depression? Not to say that a worldwide depression couldn't happen again, but the money shortages aren't as big a problem now as they were back then."I think it's 1925," he said, "and we're headed for 1929."
With all the people owing $$$ on the highest % of homeownership ever, a bit of inflation wouldn't hurt debtors one bit, providing that real earnings keep pace somewhere close to inflation. I know it would help me out with all of the loans I have for my land, cattle and equipment.
Bushs spending was out of control before the hurricanes
You should know Bush doesn't spend the money, Congress does. you need to learn a little about the U.S. Government.
the republican controlled congress
how many vetos has bush used?
anyone
anyone?
"inflationary period, as opposed to deflation"
I think the point was a 1929-size financial catastrophe is on the horizon, not any parallel set of cir stances.
Well, not that I agree with the spending binge, but that would require a worldwide economic depression, and would be somewhat out of our control.
If inflation takes off, and interest rates go up, all those people with very dangerous variable-rate and interest-only mortgages from the housing bubble will be in extreme pain, to the point of foreclosure.
Krugman has totally lost all confidence in Greenspan as an apolitical operator :
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February 18, 2005
OP-ED COLUMNIST
Three-Card Maestro
By PAUL KRUGMAN
Allan Greenspan just did it again.
Four years ago, the Fed chairman lent crucial political support to the Bush tax cuts. He didn't specifically endorse the administration's plan, and if you read his testimony carefully, it contained caveats and cautions. But that didn't matter; the headlines trumpeted Mr. Greenspan's support, and legislation whose prospects had previously seemed dubious sailed through Congress.
On Wednesday Mr. Greenspan endorsed Social Security privatization. But there's a difference between 2001 and 2005. In 2001, Mr. Greenspan offered a convoluted, implausible justification for supporting everything the Bush administration wanted. This time, he offered no justification at all.
In 2001, some readers may recall, Mr. Greenspan argued that we needed to cut taxes to prevent the federal government from running excessively large surpluses. Even at the time it seemed obvious from his tortured logic that he was looking for some excuse, any excuse, to help out a Republican administration. His lack of sincerity was confirmed when projected surpluses turned into large deficits, and he nonetheless supported even more tax cuts.
This week, Mr. Greenspan offered no excuse for supporting privatization. In fact, he agreed with two of the main critiques of the administration's plan: that it would do nothing to improve the Social Security system's finances, and that it would lead to a dangerous increase in debt. Yet he still came out in favor of the idea.
Let me make a detour here. The way privatizers link the long-run financing of Social Security with the case for private accounts parallels the three-card-monte technique the Bush administration used to link terrorism to the Iraq war. Speeches about Iraq invariably included references to 9/11, leading much of the public to believe that invading Iraq somehow meant taking the war to the terrorists. When pressed, war supporters would admit they lacked evidence of any significant links between Iraq and Al Qaeda, let alone any Iraqi role in 9/11 - yet in their next sentence it would be 9/11 and Saddam, together again.
Similarly, calls for privatization invariably begin with ominous warnings about Social Security's financial future. When pressed, administration officials admit that private accounts would do nothing to improve that financial future. Yet in the next sentence, they once again link privatization to the problem posed by an aging population.
And so it was with Mr. Greenspan. He painted a dark (and seriously exaggerated) picture of the demographic problem, and said that what we need is a "fully funded" system. He then conceded that Bush-style privatization would do nothing to improve the system's funding.
But privatization "as a general model," he said, "has in it the seeds of developing full funding by its very nature." Nice metaphor, but what does it mean? Clearly, he was trying to create the impression of links where none exist.
Mr. Greenspan went on to concede that the opponents of privatization are right to worry about the huge borrowing that Bush-style privatization would entail.
Privatizers claim that financial markets won't be disturbed by all that borrowing because the Bush plan prescribes offsetting cuts in guaranteed benefits for the workers who open private accounts. Mr. Greenspan, who does know a thing or two about markets, put his finger on the reason why those prospective future benefit cuts wouldn't offset current borrowing in the eyes of investors: "Well, the problem is that you cannot commit future Congresses to stay with that."
Yet the chairman managed to avoid admitting the obvious - that borrowing on the scale the Bush plan requires would substantially increase the risk of a financial crisis. And the headlines didn't emphasize his concession that crucial critiques of the Bush plan are right. As he surely intended, the headlines emphasized his support for privatization.
One last point: a disturbing thing about Wednesday's hearing was the deference with which Democratic senators treated Mr. Greenspan. They acted as if he were still playing his proper role, acting as a nonpartisan source of economic advice. After the hearing, rather than challenging Mr. Greenspan's testimony, they tried to spin it in their favor.
But Mr. Greenspan is no longer en led to such deference. By repeatedly shilling for whatever the Bush administration wants, he has betrayed the trust placed in Fed chairmen, and deserves to be treated as just another partisan hack.
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March 4, 2005
Deficits and Deceit
By PAUL KRUGMAN
Four years ago, Alan Greenspan urged Congress to cut taxes, asserting that the federal government was in imminent danger of paying off too much debt.
On Wednesday the Fed chairman warned Congress of the opposite fiscal danger: he asserted that there would be large budget deficits for the foreseeable future, leading to an unsustainable rise in federal debt. But he counseled against reversing the tax cuts, calling instead for cuts in Social Security, Medicare and Medicaid.
Does anyone still take Mr. Greenspan's pose as a nonpartisan font of wisdom seriously?
When Mr. Greenspan made his contorted argument for tax cuts back in 2001, his reputation made it hard for many observers to admit the obvious: he was mainly looking for some way to do the Bush administration a political favor. But there's no reason to be taken in by his equally weak, contorted argument against reversing those cuts today.
To put Mr. Greenspan's game of fiscal three-card monte in perspective, remember that the push for Social Security privatization is only part of the right's strategy for dismantling the New Deal and the Great Society. The other big piece of that strategy is the use of tax cuts to "starve the beast."
Until the 1970's conservatives tended to be open about their disdain for Social Security and Medicare. But honesty was bad politics, because voters value those programs.
So conservative intellectuals proposed a bait-and-switch strategy: First, advocate tax cuts, using whatever tactics you think may work - supply-side economics, inflated budget projections, whatever. Then use the resulting deficits to argue for slashing government spending.
And that's the story of the last four years. In 2001, President Bush and Mr. Greenspan justified tax cuts with sunny predictions that the budget would remain comfortably in surplus. But Mr. Bush's advisers knew that the tax cuts would probably cause budget problems, and welcomed the prospect.
In fact, Mr. Bush celebrated the budget's initial slide into deficit. In the summer of 2001 he called plunging federal revenue "incredibly positive news" because it would "put a straitjacket" on federal spending.
To keep that straitjacket on, however, those who sold tax cuts with the assurance that they were easily affordable must convince the public that the cuts can't be reversed now that those assurances have proved false. And Mr. Greenspan has once again tried to come to the president's aid, insisting this week that we should deal with deficits "primarily, if not wholly," by slashing Social Security and Medicare because tax increases would "pose significant risks to economic growth."
Really? America prospered for half a century under a level of federal taxes higher than the one we face today. According to the administration's own estimates, Mr. Bush's second term will see the lowest tax take as a percentage of G.D.P. since the Truman administration. And don't forget that President Clinton's 1993 tax increase ushered in an economic boom. Why, exactly, are tax increases out of the question?
O.K., enough about Mr. Greenspan. The real news is the growing evidence that the political theory behind the Bush tax cuts was as wrong as the economic theory.
According to starve-the-beast doctrine, right-wing politicians can use the big deficits generated by tax cuts as an excuse to slash social insurance programs. Mr. Bush's advisers thought that it would prove especially easy to sell benefit cuts in the context of Social Security privatization because the president could pretend that a plan that sharply cut benefits would actually be good for workers.
But the theory isn't working. As soon as voters heard that privatization would involve benefit cuts, support for Social Security "reform" plunged. Another sign of the theory's falsity: across the nation, Republican governors, finding that voters really want adequate public services, are talking about tax increases.
The best bet now is that Mr. Bush will manage to make the poor suffer, but fail to make a dent in the great middle-class en lement programs.
And the consequence of the failure of the starve-the-beast theory is a looming fiscal crisis - Mr. Greenspan isn't wrong about that. The middle class won't give up programs that are essential to its financial security; the right won't give up tax cuts that it sold on false pretenses. The only question now is when foreign investors, who have financed our deficits so far, will decide to pull the plug.
E-mail: [email protected]
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May 27, 2005
Running Out of Bubbles
By PAUL KRUGMAN
Remember the stock market bubble? With everything that's happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.
I've never fully accepted that view. But looking at the housing market, I'm starting to reconsider.
In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."
As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.
Now the question is what can replace the housing bubble.
Nobody thought the economy could rely forever on home buying and refinancing. But the hope was that by the time the housing boom petered out, it would no longer be needed.
But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we'd be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.
That's why it's so ominous to see signs that America's housing market, like the stock market at the end of the last decade, is approaching the final, feverish stages of a speculative bubble.
Some analysts still insist that housing prices aren't out of line. But someone will always come up with reasons why seemingly absurd asset prices make sense. Remember "Dow 36,000"? Robert Shiller, who argued against such rationalizations and correctly called the stock bubble in his book "Irrational Exuberance," has added an ominous analysis of the housing market to the new edition, and says the housing bubble "may be the biggest bubble in U.S. history"
In parts of the country there's a speculative fever among people who shouldn't be speculators that seems all too familiar from past bubbles - the shoeshine boys with stock tips in the 1920's, the beer-and-pizza joints showing CNBC, not ESPN, on their TV sets in the 1990's.
Even Alan Greenspan now admits that we have "characteristics of bubbles" in the housing market, but only "in certain areas." And it's true that the craziest scenes are concentrated in a few regions, like coastal Florida and California.
But these aren't tiny regions; they're big and wealthy, so that the national housing market as a whole looks pretty bubbly. Many home purchases are speculative; the National Association of Realtors estimates that 23 percent of the homes sold last year were bought for investment, not to live in. According to Business Week, 31 percent of new mortgages are interest only, a sign that people are stretching to their financial limits.
The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble.
So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?
Mr. Roach believes that the Fed's apparent success after 2001 was an illusion, that it simply piled up trouble for the future. I hope he's wrong. But the Fed does seem to be running out of bubbles.
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August 29, 2005
Greenspan and the Bubble
By PAUL KRUGMAN
Most of what Alan Greenspan said at last week's conference in his honor made very good sense. But his words of wisdom come too late. He's like a man who suggests leaving the barn door ajar, and then - after the horse is gone - delivers a lecture on the importance of keeping your animals properly locked up.
Regular readers know that I have never forgiven the Federal Reserve chairman for his role in creating today's budget deficit. In 2001 Mr. Greenspan, a stern fiscal taskmaster during the Clinton years, gave decisive support to the Bush administration's irresponsible tax cuts, urging Congress to reduce the federal government's revenue so that it wouldn't pay off its debt too quickly.
Since then, federal debt has soared. But as far as I can tell, Mr. Greenspan has never admitted that he gave Congress bad advice. He has, however, gone back to lecturing us about the evils of deficits.
Now, it seems, he's playing a similar game with regard to the housing bubble.
At the conference, Mr. Greenspan didn't say in plain English that house prices are way out of line. But he never says things in plain English.
What he did say, after emphasizing the recent economic importance of rising house prices, was that "this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent." And he warned that "history has not dealt kindly with the aftermath of protracted periods of low-risk premiums." I believe that translates as "Beware the bursting bubble."
But as recently as last October Mr. Greenspan dismissed talk of a housing bubble: "While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely."
Wait, it gets worse. These days Mr. Greenspan expresses concern about the financial risks created by "the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages." But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."
If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.
How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.
One way or another, the economy will eventually eliminate both imbalances. But if the process doesn't go smoothly - if, in particular, the housing bubble bursts before the trade deficit shrinks - we're going to have an economic slowdown, and possibly a recession. In fact, a growing number of economists are using the "R" word for 2006.
And here's where Mr. Greenspan is still saying foolish things. In his closing remarks he suggested that "an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit." Translation, I think: the end of the housing bubble will automatically cure the trade deficit, too.
Sorry, but no. A housing slowdown will lead to the loss of many jobs in construction and service industries but won't have much direct effect on the trade deficit. So those jobs won't be replaced by new jobs elsewhere until and unless something else, like a plunge in the value of the dollar, makes U.S. goods more compe ive on world markets, leading to higher exports and lower imports.
So there's a rough ride ahead for the U.S. economy. And it's partly Mr. Greenspan's fault.
Spending's been out of control for 50 years...where's Greenspan been?
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