Greenspan: ‘Markets Will Crater’ if We Can’t Resolve Fiscal Cliff

Friday, 16 Nov 2012 07:53 PM

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Markets will tank if lawmakers fail to agree on a way to steer the country away from the fast-approaching fiscal cliff, said former Federal Reserve Chairman Alan Greenspan.

At the end of this year, the Bush-era tax cuts and other benefits are due to expire at the very same time automatic cuts to government spending outlined during the 2011 debt ceiling deal are set to kick in.

The so-called fiscal cliff could siphon over $600 billion out of the economy next year alone.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The nonpartisan Congressional Budget Office estimates failure on the part of Congress to avoid cliff could contract the economy by 0.5 percent next year

“The markets are very shaky,” Greenspan told Bloomberg Television. “The markets will crater if we run into any evidence that we can’t solve this problem.”

A compromise that avoids recession could still slow growth next year as taxes may rise for some Americans while public spending could be cut to a degree as well.

That's fine, Greenspan said, as slower growth or even a brief downturn is preferable to a messy and avoidable contraction.

"A large increase in taxes is required to fund what currently, on the books, is going to cause a recession, but I think that if we can get away with that as the only cost to this whole problem I think that's a pretty good deal," Greenspan said.

“If we get out of this with a moderate recession, I would say the price is very cheap. The presumption that we’re going to solve this problem without pain, I think, is grossly inappropriate.”

Democratic and Republican lawmakers met with President Barack Obama recently to discuss ways to avoid going over the fiscal cliff.

Leaders from both sides expressed optimism they can put political differences aside and work to steer the economy away from disaster.

"I believe we can do this and avert the fiscal cliff," Republican House Speaker John Boehner told reporters after the meeting with President Barack Obama, CNBC reported.

Democratic Senate Majority Leader Harry Reid echoed those sentiments.
"We feel we understand what the problem is," Reid said, CNBC added.

"And I feel very good about what we were able to talk about in there."
Market participants applauded the conciliatory comments from Boehner and Reid.

Uncertainty alone has been agonizing, as not only are investors unsure if policymakers can save the day, they still don't know what they are going to be paying in taxes next year until a compromise is reached.

"Any tidbit of hope on the fiscal cliff front would lead to a positive response,” said Walter "Bucky" Hellwig of BB&T Wealth Management in Birmingham, Alabama, Bloomberg reported.

“That’s been the driving force in the market. Because of the oversold condition of the market, any good news is going to cause a pop. Conversely, anything that’s viewed as negative in the negotiations is going to cause a downward move.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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