Post by bot on May 22, 2004 22:53:44 GMT -5
Federal deficit alarm sounded
Greenspan says nation's economic stability at stake
www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/05/07/BUGQ06HANV1.DTL
Edmund L. Andrews, New York Times
Friday, May 7, 2004
Washington -- Federal Reserve Chairman Alan Greenspan warned Thursday that the rising federal deficit might be the biggest threat to the nation's long-term economic stability.
In a speech that ranged from Americans' household debt to the nation's huge foreign debt, Greenspan said that most financial imbalances may be reduced smoothly through the effect of normal market forces. "But that is certainly not the case for our yawning fiscal deficit," he told a conference at the Federal Reserve Bank of Chicago. "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces."
Greenspan refrained from directly criticizing either President Bush or Congress, and he made no reference to the bitter battles under way in Congress over making Bush's tax cuts permanent.
But his comments suggested growing alarm about the budget deficit, which is likely to run more than $400 billion this year and is widely expected to remain high even though tax revenues are rising because of faster economic growth.
The central bank's prolonged policy of very low interest rates has fueled a surge in consumer borrowing over the last several years -- most of it in the form of bigger home mortgages and home equity loans, but some in the form of higher credit card debt.
Greenspan said much of the added consumer debt has gone hand-in-hand with a rise in home- ownership to a record level of 69 percent. "It can scarcely be argued that the substitutions of debt service for rent materially impaired the financial state of the new homeowner," he said. The federal budget deficit, by contrast, is the one big area of American borrowing that is outside the central bank's control.
Both kinds of borrowing helped push the nation's current account deficit -- America's indebtedness to the rest of the world -- to a record of more than $500 billion last year. In recent months, Greenspan has repeatedly urged Congress to reinstate "pay as you go" rules for federal budgets, under which tax cuts and new spending programs would have to be financed with tax increases or spending reductions in other areas.
Bush and most Republicans in Congress are adamantly opposed to applying any such requirements to tax cuts because such a move would derail Bush's goal of permanently extending the tax cuts of 2001 and 2003.
But Greenspan stayed out of that argument on Thursday, perhaps because he is reluctant to be drawn into the pitched and partisan battle over that issue in Congress.
Democrats have sought to make the soaring deficits a campaign issue. Senate Democratic Leader Tom Daschle said he hopes "Greenspan's urgent warnings serve as a wake-up call" for Republicans in the White House and Congress.
"The administration's reckless fiscal policy has driven our economy to the edge of a cliff," Daschle, D-S.D., said in a statement. "Unless we get back on the right track soon, these record deficits could undercut growth and job creation for decades to come."
Greenspan noted that the federal deficit, estimated by the Bush administration to reach a record $521 billion this year, will amount to 4.25 percent of the total economy. Just four years ago there was a record surplus.
While noting that "a free lunch has still to be invented," the Fed's chairman said globalization and technological innovation have made it much easier for the United States to attract a major share of the world's savings without dire consequences.
The changes, he said, have created "a paradigm somewhat different from that which fit much of our earlier post-World War II experience."
Staunchly defending free trade and brushing aside political anger over outsourcing jobs to foreign countries, Greenspan said that expanded trade would make it easier rather than harder for the United States to reduce its foreign borrowing.
As he has before, Greenspan warned political leaders against erecting trade barriers to shield American companies from foreign competition. "Protectionism, some signs of which have recently emerged, could significantly erode global flexibility and, hence, undermine the global adjustment process," he said.
Though Greenspan said his outlook for the next year or two has "materially brightened,'' he was gloomier about the long-term outlook, which he described as "opaque."
The Associated Press contributed to this report.
Greenspan says nation's economic stability at stake
www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/05/07/BUGQ06HANV1.DTL
Edmund L. Andrews, New York Times
Friday, May 7, 2004
Washington -- Federal Reserve Chairman Alan Greenspan warned Thursday that the rising federal deficit might be the biggest threat to the nation's long-term economic stability.
In a speech that ranged from Americans' household debt to the nation's huge foreign debt, Greenspan said that most financial imbalances may be reduced smoothly through the effect of normal market forces. "But that is certainly not the case for our yawning fiscal deficit," he told a conference at the Federal Reserve Bank of Chicago. "Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces."
Greenspan refrained from directly criticizing either President Bush or Congress, and he made no reference to the bitter battles under way in Congress over making Bush's tax cuts permanent.
But his comments suggested growing alarm about the budget deficit, which is likely to run more than $400 billion this year and is widely expected to remain high even though tax revenues are rising because of faster economic growth.
The central bank's prolonged policy of very low interest rates has fueled a surge in consumer borrowing over the last several years -- most of it in the form of bigger home mortgages and home equity loans, but some in the form of higher credit card debt.
Greenspan said much of the added consumer debt has gone hand-in-hand with a rise in home- ownership to a record level of 69 percent. "It can scarcely be argued that the substitutions of debt service for rent materially impaired the financial state of the new homeowner," he said. The federal budget deficit, by contrast, is the one big area of American borrowing that is outside the central bank's control.
Both kinds of borrowing helped push the nation's current account deficit -- America's indebtedness to the rest of the world -- to a record of more than $500 billion last year. In recent months, Greenspan has repeatedly urged Congress to reinstate "pay as you go" rules for federal budgets, under which tax cuts and new spending programs would have to be financed with tax increases or spending reductions in other areas.
Bush and most Republicans in Congress are adamantly opposed to applying any such requirements to tax cuts because such a move would derail Bush's goal of permanently extending the tax cuts of 2001 and 2003.
But Greenspan stayed out of that argument on Thursday, perhaps because he is reluctant to be drawn into the pitched and partisan battle over that issue in Congress.
Democrats have sought to make the soaring deficits a campaign issue. Senate Democratic Leader Tom Daschle said he hopes "Greenspan's urgent warnings serve as a wake-up call" for Republicans in the White House and Congress.
"The administration's reckless fiscal policy has driven our economy to the edge of a cliff," Daschle, D-S.D., said in a statement. "Unless we get back on the right track soon, these record deficits could undercut growth and job creation for decades to come."
Greenspan noted that the federal deficit, estimated by the Bush administration to reach a record $521 billion this year, will amount to 4.25 percent of the total economy. Just four years ago there was a record surplus.
While noting that "a free lunch has still to be invented," the Fed's chairman said globalization and technological innovation have made it much easier for the United States to attract a major share of the world's savings without dire consequences.
The changes, he said, have created "a paradigm somewhat different from that which fit much of our earlier post-World War II experience."
Staunchly defending free trade and brushing aside political anger over outsourcing jobs to foreign countries, Greenspan said that expanded trade would make it easier rather than harder for the United States to reduce its foreign borrowing.
As he has before, Greenspan warned political leaders against erecting trade barriers to shield American companies from foreign competition. "Protectionism, some signs of which have recently emerged, could significantly erode global flexibility and, hence, undermine the global adjustment process," he said.
Though Greenspan said his outlook for the next year or two has "materially brightened,'' he was gloomier about the long-term outlook, which he described as "opaque."
The Associated Press contributed to this report.