Greenspan Sees Threat U.S. Congress Will Hamper Fed

By Timothy R. Homan

Sept. 16 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said he’s worried that lawmakers will hamper U.S. central bank efforts to rein in its monetary stimulus, and that inflation might “swamp” the bond market.

“It’s the politics in the United States that worries me, whether the Congress will basically feel comfortable” with the Fed withdrawing its stimulus, Greenspan said in a broadcast to Tokyo clients of Deutsche Bank Securities Inc. today. He later said that “if inflation rears its head, it will swamp long-term markets,” referring to bonds.

With U.S. unemployment running at a quarter-century high, the Fed may face resistance from lawmakers as it tries to promote price stability by raising its benchmark interest rate from near zero. The jobless rate reached 9.7 percent last month and employers have cut almost 7 million jobs, the biggest drop in any recession since World War II.

The former Fed chief, who counts Deutsche Bank among his clients, also warned that the U.S. must rein in its “very dangerous” level of debt, citing the threat of increased issuance of Treasuries undermining the dollar.

Greenspan last month estimated the recovery began with a 2.5 percent growth rate in the third quarter. His focus today on a political threat to the rebound comes more than a decade after he pressed former President Bill Clinton to trim fiscal plans to bring down borrowing costs. He “urged Clinton in no uncertain terms to make deficit reduction the priority,” Clinton Labor Secretary Robert Reichlater wrote.

Taleb’s Worry

Greenspan’s debt comment echoed concerns expressed by Nassim Taleb, the New York University professor who wrote “The Black Swan: The Impact of the Highly Improbable,” published about three months before the start of the financial crisis.

“This is what I’m worried about,” Taleb told a group of business people in Toronto this week, citing the U.S. having three times the debt, relative to gross domestic product, as in the 1980s. “No one has the guts to say let’s bite the bullet.”

Greenspan, speaking via videoconference from Washington, indicated that successor Ben S. Bernanke and his fellow Fed policy makers have until next year before inflation will present a danger.

“We’ve got worldwide disinflation in train and it will continue for a short while,” he said. “Our model says that by the early months of next year the rate of inflation will fall below 1 percent on an annual rate” before increasing.

Consumer Prices

American consumer prices fell 1.7 percent in August from a year earlier, according to the median forecast in a Bloomberg News survey of economists before the Labor Department reports the figure today. Prices fell 2.1 percent in July, the most since Harry S. Truman was president in 1950. Investors use the figures to gauge inflation, which erodes bonds’ fixed returns.

Treasuries and the dollar were little changed in Asian trading. Benchmark 10-year Treasury notes yielded 3.44 percent at 2 p.m. in Tokyo, according to data compiled by Bloomberg. They averaged 3.15 percent so far in 2009, compared with 4.16 percent the past five years. The dollar was at $1.4673 per euro, compared with its record low of $1.6038 reached in July 2008.

Greenspan said that if there were a significant issuance of Treasury securities that increased the national debt, “there would be of necessity downward pressure on the dollar.” At the same time, he said, “you can’t say that without saying what the counterparty currency would be.”

‘Very Dangerous’

Greenspan said one threat to Treasuries is the “very dangerous” level of U.S. national debt. “We’ve got to confront that issue immediately,” he said.

The nonpartisan Congressional Budget Office said last month that deficits between 2010 and 2019 will total $7.1 trillion. Those shortfalls, which are financed with borrowed money that’s tacked onto the national debt, would drive the debt up to 68 percent of the nation’s economy by 2019, from the current 54 percent, CBO said.

“The next six months seem reasonably easy to anticipate: no inflation, good economic growth,” Greenspan said. “Things are turning and it looks good for the near term.”

Greenspan said last month the U.S. economy could resume growth with a 2.5 percent expansion in the current quarter, while adding there was still a risk of a “second wave down.”

Growth Outlook

Economists surveyed by Bloomberg News this month put the odds of a double-dip recession in the next 12 months at 25 percent, up from 20 percent in August. The economy will expand at a 2.9 percent annual rate in July through September, according to the median of 61 estimates in the survey taken Sept. 3 to Sept. 10.

“This recession will not be over until home prices stabilize at a minimum,” Greenspan said. “The evidence suggests that we’re getting there, finally.”

Home prices in 20 U.S. cities fell in June at a slower pace than forecast, a sign that the real-estate crisis is dissipating. The S&P/Case-Shiller home-price index advanced 2.9 percent in the second quarter from the previous three months, the first increase since 2006 and the biggest in almost four years, according to an Aug. 25 report.

Bernanke yesterday said the worst U.S. recession since the 1930s has probably ended. At the same time, he warned that growth may not be strong enough to immediately reduce the unemployment rate.

Bernanke’s Call

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said at the Brookings Institution in Washington, responding to questions after a speech.

The remarks were the Fed chief’s most explicit yet that the contraction that began in December 2007 is over. They echoed comments this week by San Francisco Fed President Janet Yellen and followed a report yesterday showing retail sales rose last month by the most in three years, adding to evidence of a recovery.

Greenspan also weighed in on the debate over a regulator of risks across the financial system as Congress prepares the biggest overhaul of U.S. financial regulations since the 1930s, when the Fed was reorganized. The U.S. Treasury has proposed giving the Fed greater authority over the capital, liquidity, and risk-management standards of the largest financial firms.

Congressional leaders haven’t supported that proposal and are considering giving broader authority to a council of regulators.

“I’m not in favor of a systemic-risk regulator because I don’t think it’s feasible,” Greenspan said. “I think we have to recognize that there are limits to what we can do.”

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net