Greenspan Sees Sluggish Economy Until Uncertainty Falls

Alan Greenspan, a former Federal Reserve chairman, said the U.S. economy will remain sluggish “until the uncertainty comes down” over issues such as tax rates.

Uncertainty is “large” and “you can see it not only in the corporate sector, but also in households,” Greenspan said today at the Securities Industry and Financial Markets Association annual meeting in New York. There’s a “tremendous deal of uncertainty on what the future tax rates are.”

The so-called fiscal cliff in the U.S., or the $607 billion of tax increases and federal spending cuts that will kick in automatically at the end of the year unless Congress acts, is inhibiting growth, Fed Chairman Ben S. Bernanke said. The Congressional Budget Office said in an Aug. 22 report that fiscal tightening of that magnitude could cause a recession.

Still, it will require “more” than just a budget deal to restore a faster pace of economic expansion, Greenspan said. It’s also important to address the issue of so-called too-big- to-fail financial institutions, he said.

The world’s largest economy expanded at a 1.3 percent pace from April through June after growing at a 2 percent rate in the first quarter. Economists predict gross domestic product will grow 1.8 percent in the third quarter and 1.9 percent in the fourth, according to the median of 82 estimates in a Bloomberg survey conducted Oct. 5-10.

In an interview on CNBC television today, Greenspan said he is “quite concerned” about the fiscal cliff and its potential impact on the U.S. economy.

“The amount of friction within our political system is not new,” Greenspan said. “What is different is they don’t talk to each other.”

“You have to compromise, not your principles, but the way you implement them,” according to the former Fed chairman.

Greenspan also said that he does not see “any closure” to the European debt crisis.

‘The only solution to the euro is essentially a political consolidation of the euro area,’’ he said. “I don’t believe that you can have essentially 17 welfare states where some central authority is controlling the fiscal affairs.”

Source: Bloomberg Businessweek