Greenspan: Treasury 'Crowding Out' Private Investors

Friday, 03 Dec 2010 08:11 AM

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Former Federal Reserve Chairman Alan Greenspan says the economy  is on an upswing, in part thanks to recovering stock prices, but that the government is “crowding out” any chance for growth by reducing cash available to companies for new plants and hiring.

He said that he “suspects” that fixed-investment spending is at the lowest point since the Great Depression, while liquid assets — cash held by companies and individuals — is rising.

“Approximately a third of the decline in capital investment as a share of cash flow is directly attributable to the crowding out by the U.S. Treasury,” borrowing the savings of Americans ahead of all other borrowers, Greenspan told CNBC in an interview.

“Those numbers are significant,” Greenspan said. The same is happening in the United Kingdom, but “so far, it’s most dominant in the United States.”

The economy is “still close to the bottom,” Greenspan said, making the case that it will take a recovery in construction to really push the economy higher.

Greenspan criticized the recently passed Dodd-Frank financial-reform bill, making the case that uncertainty due to the onslaught of new bureaucracy is weighing down the normal pace of recovery.

The bill has 250 rule-makings, Greenspan said. “We used to do five or 10 a year and used to think that was a big deal,” said the former Fed chairman.

He also made the surprising argument that stock prices are a very good indicator of health in the larger economy.

Normally, pundits argue that Wall Street is disconnected from Main Street, and that the ups and downs of the market don't necessarily affect — or even reflect — underlying economic health.

Far from it, argues Greenspan.

“I think we are underestimating, and continue to underestimate, how important equity prices are, not only for shareholders, but for the economy as a whole,” Greenspan said.

“Because the market value of equity is essentially the backup for financing your liabilities,” the banks became highly liquid despite the crisis, he said.

“I can’t prove it, but I suspect that nearly all the TARP repayment is capital gains.”

As for the stock-market rally of late, Greenspan is convinced that stocks are a value right now, considering how cheap they are in relation to the amount of cash companies hold and the prospects for continued recovery, despite regulation, the deficit, and Treasury overcrowding.

“There’s a real upward momentum here,” Greenspan said.

President Barack Obama’s deficit commission plan to cut U.S. debt by $3.8 trillion is close to rejection, Bloomberg News reports.

Five members of the commission from both political parties oppose the plan. That puts the 18-member body below the 14-vote threshold for approval and forwarding to Congress.

The recommendations “paint a big red target on rural America,” Senator Max Baucus, a Montana Democrat and chairman of the Finance Committee, said in a statement.

Baucus criticized specifically an increase the gas tax, which he said “would hurt folks in rural states like Montana where we often have to travel long distances.”

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