Greenspan says recession will be 'longest and deepest' since '30s
The maestro was wrong.
Eight months after he predicted the worst was over and the threat of recession receding, former Federal Reserve chairman Alan Greenspan said the current global recession will "surely be the longest and deepest" since the 1930s.
And, in comments to the Financial Times, he said he backed bank nationalization: "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," he said. "I understand that once in a hundred years this is what you do." Nationalizations would "allow the government to transfer toxic assets to a bad bank without the problem of how to price them."
The lifelong free marketer, who ran the Federal Reserve from 1987 to 2006, has been rethinking his assumptions about how financial markets work best since the U.S. economic crisis deepened sharply last year; he now sees a much larger role for government regulation.
"I see no alternative to a set of heightened federal regulatory rules for banks and other financial institutions," Greenspan said in a Tuesday evening speech to the Economic Club of New York, Reuters reported. He said he was "deeply dismayed" to realize in mid-2007 that the premise that firms were enlightened enough to monitor their own risks had "failed."
But he held out little hope that the brand-new $787 billion stimulus bill signed into law Tuesday by President Obama would stanch the economy's bleeding, saying it won't produce long-term effects until the financial system is repaired.
"We need to assure that the repair of our financial system precedes the onset of major fiscal stimulus," Greenspan said. "Unless we are successful at that, in my judgment, the positive impact of a fiscal stimulus will peter out after its scheduled completion."
Nobel Prize-winning economist and former World Bank chief economist Joseph Stiglitz has in part faulted Greenspan for the current crisis, saying he made serious mistakes by supporting every tax cut introduced by former President George W. Bush.
"His first [mistake] was to support all the tax cuts...they didn't stimulate the economy very much," Stiglitz said last year. "This task was then transferred more towards monetary policy, though then (Greenspan) created a flood of credits with low interest rates."
But perhaps more ominous than Greenspan's reference Tuesday to the Great Depression was his comment about the limits of ballooning American debt, which President Obama has also worried about. The various stimulus and bailout measures passed on Capitol Hill during the last five months have been funded primarily through the sale of U.S. Treasury bonds.
"Much of the fiscal deficit is being funded by foreigners who see U.S. government debt as the ultimate safe haven in all this turbulence," Greenspan said. "The long American history of honoring our obligations, dating back to Alexander Hamilton, remains a powerful attraction to foreign investors. But there is obviously a limit to the expansion of U.S. federal debt."
Although the 82-year-old may be worried about his government's credit line, he hasn't lost all his faith in free markets: "We need not rush to reform," he said. "Private markets are imposing far greater restraint at the moment than would any of the current sets of new regulatory proposals."
With wire reports.
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