Tags: Greenspan | Fed | taper | QE

Greenspan: QE Tapering Needs to 'Get Moving' Regardless of Economic Recovery

Image: Greenspan: QE Tapering Needs to 'Get Moving' Regardless of Economic Recovery

Friday, 07 Jun 2013 10:42 AM

By Glenn J. Kalinoski

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The Federal Reserve must taper its program of purchasing $85 billion in assets each month whether or not the U.S. economy is strong enough to handle it, former Fed Chairman Alan Greenspan asserts.

"I think we've got to do it, even if we don't think it [the economy] is strong enough," he told CNBC.

"The sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve — which everyone agrees is excessive — the better. The issue is not only a question of when we taper down, but when do we turn? And I think that the markets may not give us all of the leeway we would like to do that," Greenspan said.

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

"There is a general presumption that we can wait indefinitely and make judgments on when we're going to move. I'm not sure the market will allow us to do that."

While some say stocks will take a hit if the Fed starts ending its quantitative easing program, Greenspan doesn't see it that way.

"The most important positive for us at the moment is the fact that equity premiums are so high, which means the downside on stock prices is quite limited," he explained.

"If we could get stock prices to rise, which they will if this thing stabilizes, then you get a lot of asset-growth effect on the economy. And one of the things that I think we underestimate is how important asset prices are in determining the levels of the overall economic activity.

However, the pace at which the Fed will taper will affect the market.

"If we do move too rapidly on the Fed action, it will really shock the market. I think gradual is adequate, but I think we have to get moving."

Greenspan explained that a necessary condition for a major economic and financial move is that nobody expects it to happen.

"The vast majority of people, for example, are bullish and committed and have no more purchasing power to buy stocks. That's a sure sign that while everyone thinks the future is terrific, it won't be," he stated.

"This is what's worrying me about the bond market. There's a general concern here that I don't think people are aware of ... that we are still well below the level where we normally ought to be at this stage. And the consequence of that is that when the bond market begins to move, we may not be able to control it as well as we'd like to."

JPMorgan Chase CEO Jamie Dimon believes the markets will remain "scary and volatile" until the Fed ends its massive bond-purchasing program.

"It's a different world when central banks are managing interest rates," Dimon said at the Fortune Global Forum. "Until it gets back to normal, it's going to be scary and volatile."

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

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