In the second part of his congressional testimony, Alan Greespan let fly a few zingers worth noting. Among the highlights: He claimed that there is little the government could do to discourage consumption and encourage savings; that the U.S. government had not borrowed any money form the Social Security “trust funds”; and that America’s current account deficit is not a problem (using current account deficits among the various U.S. states as an example of why there weren’t).
Like a kid in a candy shop I don’t know where to start in refuting these claims.
When addressing the need to increase savings Greenspan correctly pointed out that consumption must fall. Sadly, Greenspan claimed there was little that government could do, short of a “consumption tax” to curtail spending. Excuse me, but isn’t the Federal Reserve considered to be a part of our Government? Doesn’t Greenspan himself control short-term interest rates, the one thing that makes the most impact on consumer credit and the level of debt financed consumption? If Greenspan wanted to discourage consumption and encourage savings all he need do is significantly increase short-term interest rates. This would have the simultaneous effect of increasing the cost of consumption while increasing the rewards of savings. In fact, it is the ridiculously low rates of the Greenspan Fed that are the most responsible for the collapse in the savings rate. For Greenspan to criticize a situation which he himself created is the height of hypocrisy.
The main reason Greenspan has kept interest rates low it that he wants to keep people spending. His entire monetary policy has been designed to punish savings and encourage spending. What did he expect to happen when he dropped fed funds to 1.0%? Put simply, he wants people to spend because he wants to keep the bubble economy expanding. It seems that the chairman wants to have his economic cake and eat it too. American can not spend and save more at the same time. Greenspan needs to make up his mind which behavior he wants to promote.
In response to a direct question as to whether the Federal Government had borrowed any money form the Social Security “trust fund” Greenspan responded that it hadn’t. He then said that the trust funds had instead purchased government bonds. Excuse me, but that is a distinction without a difference. If the trust funds lent money to the Federal Government, then the Federal Government borrowed money from the trust funds!
Greenspan’s analogy to minimize the potential negatives of Americas enormous and growing current account deficit by comparing it to the deficits among the various states was ridiculous and completely irrelevant, and was simply designed to confuse the congress and the public. The various states share a common currency and pay taxes to a common federal government. That is not the same thing as debts owed to citizens of other sovereign nations, with different currencies. Deficits between states are no different than those between cities, counties, or even individuals. The problems only becomes national when they cross borders. For example if Maine has a surplus with Vermont, the nation as a whole is not harmed. Vermont’s liabilities are Main’s assets. From a national perspective the accounts are balanced. If the situation persists, over time the living standards in Maine will rise relative to those in Vermont, but from a national level, the over-all living standards of Americas are unaffected. I suppose from a global perspective, America’s liabilities are the rest of the world’s assets, but Greenspan was not asked to comment on the whole world, just America. The inevitable major decline in America’s standard of living that is sure to result from these imbalances should be of paramount concern to Greenspan, Congress, and the American public.
Perhaps the most memorable moment of the entire spectacle was Congressman Ron Paul quoting Greenspan to Greenspan, requiring the chairman to admit that his younger self was wrong. Unfortunately, Greenspan the younger was not wrong, just early. It seems only fitting that in a testimony fraught with contradictions, Greenspan’s greatest critic was in fact himself.