Greenspan Is Back, Baby.

greenspan.jpgFormer Federal Reserve Chair Alan Greenspan apparently misses being the wisest economic manager, like, ever, and despite recent setbacks -- the 2008 financial crisis and his admission that maybe he shouldn't have been such a doctrinaire libertarian -- he's back with an absurd column in the Wall Street Journal arguing that, you guessed it, we need to STOP BORROWING MONEY. Here are my favorite parts:

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

I am also filled with regret when economic statistics do not behave according to my preset ideological narrative.

The current federal debt explosion is being driven by an inability to stem new spending initiatives.

Actually, much of our current borrowing is driven by three things: the economic downturn, Bush-era tax cuts, and the wars in Iraq and Afghanistan:

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Without those factors, our deficit could easily be managed.

Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.

Because we live in a world that requires us to choose one policy option instead of combining several to create a politically acceptable bargain. That bargain should include tax increases and tax reform, and possibly exciting new taxes like the VAT. (I used the word "tax" three times in that last sentence because I know it makes Greenspan uncomfortable.)

Fortunately, the very severity of the pending crisis and growing analogies to Greece set the stage for a serious response.

Keep in mind that up to this point, Greenspan has not bothered to describe the severity of this pending crisis; he's just pointed out that the interest-rate spread he's tracking is negative -- a supposed canary in the coal mine. Of course, he doesn't cite an instance of this spread warning of any previous crisis. The only historical example Greenspan references is the period of interest-rate increases after Fed Chairman Paul Volcker raised rates to combat stagflation. So, the lesson there is that interest rates go up when Fed Chair raises interest rates?

Greenspan had also not even mentioned the word "Greece" prior to his concluding sentence. However, a scenario he hasn't established plus the fact that he's heard some maniacs compare the U.S. to Greece means we need a serious response, which, as we established earlier, is choosing one extreme policy option rather than crafting a measured package of fixes. This man is a danger to sound economic policy.

And now that I've gotten that out my system, who's excited for U.S.A. - Slovenia - (Vuvuzela)?

-- Tim Fernholz

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