Greenspan says we now face 'the most extraordinary financial crisis ever seen'
Source: BI-ME , Author: BI-ME staff
Posted: Sun August 8, 2010 1:15 pm

INTERNATIONAL. Former US Federal Reserve Chairman Alan Greenspan is calling for the complete repeal of tax cuts made by the Bush administration, The New York Times reported Saturday.

Greenspan is raising eyebrows by calling for the rollback of all the so called Bush Tax Cuts he implicitely backed at the time, and by outdoing the White House's position on keeping tax rates steady for all but the wealthiest Americans, brushing aside the arguments that doing so could threaten the already shaky economic recovery.

Speaking in a phone interview with The New York Times, Greenspan said: “I’m in favor of tax cuts, but not with borrowed money”.

“Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about,” he added.

Greenspan, 84, warns that without drastic action to increase federal revenue and reduce the long-term growth in health care costs, bond investors could make a run on Treasury securities, driving up the nation’s borrowing costs and leading to another global economic crisis. 

 Greenspan says his approach has been consistent, supporting tax cuts when surpluses loomed, and endorsing revenue increases now that deficits are the leading worry. He also says his earlier endorsement of tax cuts was made with important caveats that were later ignored by policy makers and the public.

The tax cuts in 2001 were primarily needed to avoid the economic distortions caused by “surpluses as far as the eye could see,” he said.

“I was against deficits, but I was also equally against surpluses,” Greenspan said.

The former Fed Chairman also emphasizes that the tax cuts should have adhered to so-called pay-go rules, which require that tax cuts or new spending should not add to the federal deficit.

“Unfortunately, the surplus disabled pay-go because pay-go implied the existence of a deficit,”  Greenspan said. “When the deficit disappeared, the concept of pay-go became meaningless.”

“Unlike in World War II, when we knew that military spending and deficits would fall sharply, our current understanding of the future is extremely limited,” Greenspan said. “There’s an especially high level of uncertainty in forecasting Medicare.”

He said the country’s fiscal problems could not be solved by higher taxes alone. “We are going to have to confront a major surge in medical entitlement spending. Irrespective of what you say should be done on the tax side, you still have to cut some benefits on the expenditure side.”

IAsked by the The New York Times whether higher taxes in 2011 could choke off the nascent recovery,  Greenspan replied: “It is risky, but the choice of not doing it is far riskier. It is the difference between bad and worse, but in neither case do I think the evidence suggests that it would be the tipping point for the economy.”

In an interview on NBC's 'Meet the Press' earlier this month, Greenspan said: “We’re in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi-recession.”

Asked if another economic contraction, a so-called “double dip,” was possible, Greenspan said, “It is possible if home prices go down. Home prices, as best we can judge, have really flattened out in the last year.”

“The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long term unemployment -- that is pulling the economy apart,” Greenspan said.

Greenspan said he expects “we just stay where we are” with unemployment for the rest of the year.

“There’s nothing out there that I can see which will alter the trend or the level of unemployment,” he said.

Greenspan repeated his warning that fiscal deficits could push up long-term interest rates and threaten the recovery.

“At the moment, there is no sign of that, basically because the financial system is broke, and you cannot have inflation if the financial system is not working.”

In an interview last month on Bloomberg Television’s “Conversations with Judy Woodruff,” Greenspan said that tax cuts enacted under President George W. Bush should be allowed to expire at the end of the year.

Greenspan repeated this view on NBC, saying, “I’m very much in favor of tax cuts. But not with borrowed money.”

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