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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: DuckTapeSunroof who wrote (45926)	9/15/2010 1:16:57 PM
From: TimF	2 Recommendations Read Replies (1) \| Respond to of 71588

Greenspan calls for tax hike Tim Fowler calls for spending reductions, avoiding any tax hike, and in the long run much lower tax rates.

To: DuckTapeSunroof who wrote (45926)	9/16/2010 1:08:29 PM
From: Peter Dierks	1 Recommendation Read Replies (1) \| Respond to of 71588

Wrong On Taxes, Right On Crowding Posted 09/15/2010 07:07 PM ET Economy: Alan Greenspan gets it wrong on taxes, but he has a point when he says the government can't keep gobbling up the nation's credit. He sees "very grave problems ahead" from the deficit. So do we. The former Fed chairman has been drawing attention for taking a hard line against the Bush tax cuts. Let them all expire, he says, and he means every last one of them, for the middle class as well as the rich. Congress isn't jumping to follow his advice, and politics aside, Greenspan's idea should be a non-starter on purely economic grounds. With the private sector struggling to grow and create jobs, a massive new raid on private wealth is the last thing it needs. But Greenspan's diagnosis is on target even if his prescription is not. As he explained this week at the Council on Foreign Relations in New York, government spending fed by massive federal borrowing is a threat, not a help, to the economy. He said the Democrats' 2009 stimulus bill probably reduced private investment by one-third to a half of the $787 billion in authorized spending. In other words, far from stimulating the private sector, the bill further depressed it. "We have to find a way to simmer down the extent of activism that is currently going on and allow this economy to heal," he said, adding, "That is a very minority view in this country." But he may be wrong about that, especially if more people get a clue about the dangers of crowding out. The term "crowding out" will be familiar to people who've followed debates about federal deficits over the past few decades. Deficit hawks would now and then wield the term to warn that government borrowing would raise interest rates and make borrowing more expensive for businesses and consumers. But that never seemed to happen. Rates fell sharply despite the big deficits of the Reagan years. Deficits under George W. Bush, almost as large in GDP terms as those of the '80s, also seemed to have no effect on rates. It seemed that cheap money and expansive federal spending could coexist just fine. Now we have deficits bigger than any seen since World War II, and interest rates are as low as they've been since maybe the Great Depression. So why worry? The answer to that question is the same one that should have been given to millions of overstretched homeowners lured by teaser rates: This lunch looks free, but the tab will come sooner or later. The Federal Reserve and the banks have engineered a money machine that works exactly as a big-spending government would want. The Fed pumps reserves into the banks and keeps interest rates so low that the banks can pay almost nothing to take deposits. Banks then lend the Treasury what it needs, at very low rates, to fund the deficit spending. It's not just banks doing this; the whole world is eager to fund America's federal debt because most other investments look so risky. But this lending is especially profitable for banks because their own cost of funds is so low. If you can borrow at 1% or less and lend at 3% to a sure-thing borrower, you've got it made. What could go wrong? Two things, one of which is happening as we speak. When the U.S. government is everyone's default choice for investing, there's not much left for the private sector. It doesn't matter that rates are low. Business is still being crowded out. In part this is because businesses don't want to borrow right now. They lack confidence in the economy and see the government out to get them, so they hunker down and stash their cash where it is safe, in places like — you guessed it — Treasuries. So score another one for the government. But this can't go on forever. Whether or not the economy bounces back, the federal debt will continue to soar. Meanwhile, the Fed's money surge — in effect, a monetizing of the federal debt — will eventually lead to inflation. Long-term rates will rise first, then the Fed and other central banks will have to jack up short-term rates to cool things down. Amid all this, the federal government will be trying to refinance trillions of dollars in debt that once looked oh so cheap. Greece went down this road. America could too. investors.com