Alan Greenspan, Fed chairman and master of scatterspeak, addressed again this week the dangers of the huge debt overhang and the federal deficits.
He spoke to the Group of 7 finance ministers Friday, yesterday, saying among other things, the current course of trade deficits is “a pernicious drift toward fiscal instability.” He wants a return to the “procedural restrains on the budget making process” that have been “violated with increasing frequency.”
"Federal operating deficits have cooked us good. The president and Congress did the wrong thing when they got rid of Clinton era tools, pay-go, for one. And Bush and his compliant Congress have thrown away not only fiscal responsibility, but moral responsibility."
[Oops, not quite his words. Forget the quotes.]
What Greenspan doesn’t say and never says is that he’s the one who is driving the bus. As the most powerful non-elected government official in any democracy anywhere, this Fed chairman has set the policies that have allowed us to get to this sorry state.
Emblematic of the Maestro’s competence, and perhaps comforting for those who now worry that he has some forecasting ability, is a speech of mid-2001:
“While the magnitudes of future federal unified budget surpluses are uncertain, they are highly likely to remain sizable for some time.” [emphasis added]
He went on in this speech to worry about what the government will do with its bountiful surplus, and he concluded it would be okay if Dubya’s tax cuts went through. This was support Bush needed.
We can’t even see that day in 2001 from here, the pile of federal debt has grown so big. If you think I'm taking him out of context, here's the speech.
Recently Greenspan worried about the financial health of Fannie Mae, the nation’s mortgage lender. Too much debt. The next day he cautioned about the huge burden we have left future generations: we’ve promised the baby boomers more than the economy can produce.
Where was he when this was going on? Pedal to the metal on interest rates. No restriction on the off-the-wall financing instruments like interest-only mortgages. This massive debt, both public and private, is his creation as much as anyone's. The economy can produce much more efficiently and at a higher level if the driver can see where he's going.
The surplus-debt whiplash is very similar to the historic high-historic low interest rate phenomenon. In the late 1990s Greenspan had promoted rates of interest to their highest levels in post-war history. By 2003 they were at their lowest. Four years.
The interest rate is his only tool. It’s amazing. He uses it to motivate the economy, to discourage stock speculation, to combat inflation, whatever. In the post-war period, the economy has always done best when interest rates were stable and the cost of money was predictable. Poeple can plan. Businesses can know what their costs are going to be. Since he’s been in office, Greenspan has ridden the interest rate like a pogo stick and done nothing with any other tool.
After he is replaced at the Fed next year by Ben Bernanke, Greenspan and his wife Andrea Mitchell may no longer be on the A-list in Washington society, but I’m sure he’ll show up in cap and gown from time to time to receive the plaudits of the children of Wall Street.
“Ah, Magoo, you’ve done it again!”