Greenspan: Raise Taxes, U.S. Caught in a Liquidity Trap
Bloomberg:
Greenspan Says Fiscal Stimulus Has Been Less Effective Than Anticipated
Former Federal Reserve Chairman Alan Greenspan said deficit spending by the federal government hasn’t been as effective at stimulating the economy as expected.
“I’m not saying the stimulus is not working, I’m saying it’s working far less than anyone anticipated,” Greenspan said today at the Council on Foreign Relations in New York.
Greenspan said the “most effective” stimulus would be an increase in stock prices rather than more government spending. He also said he favors raising taxes to curb the federal budget deficit...
Greenspan said raising taxes in a weak economy isn’t an ideal option.
“There are risks, but our choice is not between good and bad, it’s between terrible and worse,” he said. “Unless we come to grips with the deficit quickly we’re fooling ourselves as to how much time we have.”
A relapse into a recession is unlikely, said Greenspan, 84, who was chairman of the central bank from 1987 to 2006 and didn’t comment on monetary policy in today’s remarks.
“What we have going for us is that the tinder for a double dip is not readily available,” he said. Still, he repeated his warning that if housing prices drop, “all bets are off" ...
“There is a heavy weight of uncertainty on the system such that we are not getting the impact of a trillion dollars already on the books into the marketplace,” he said, describing the situation as a “liquidity trap.”
“Our financial institutions are still partially disabled and will continue to be disabled until we restore a level of capital in the system that enables the average lender to a depository institution to feel secure,” he said.
Capital requirements proposed by the Basel Committee on Banking Supervision earlier this week are a move in the right direction, he said...