Former US Federal Reserve chairman Alan Greenspan said the US may be doing too little to repair its financial system and promote an economic recovery.
US President Barack Obama on Tuesday signed into law a US$787 billion economic stimulus package of tax cuts and increased spending. He has also pledged to use the bulk of the roughly US$315 billion left in the bank bailout fund approved by Congress last October to revive the battered financial industry.
“The amount of money in both these pots may not be enough to solve the problem,” Greenspan said in an interview before a speech on Tuesday to the Economic Club of New York.
The comments highlight the difficulties Obama faces in fighting the steepest recession in a generation. The economy contracted at an annual pace of 3.8 percent in the fourth quarter of last year, the most since 1982.
In the speech, the former Fed chairman said: “What we are currently going through is a once-in-a-century type of event. It will pass.”
Greenspan, who now heads his own Washington-based consulting firm, warned that the positive impact of the stimulus package on the economy would peter out if the US failed to fix its financial system.
“Given the Japanese experience of the 1990s, we need to assure that the repair of the financial system precedes the onset of any major fiscal stimulus,” he said.
The Obama administration last week laid out a multipronged plan to aid the banks, drawing on the remaining money in the US$700 billion Troubled Asset Relief Program (TARP). Greenspan said that wouldn’t be enough.
“To stabilize the banking system and restore normal lending, additional TARP funds will be required,” he said.
The 82-year-old economist also stressed the importance of halting the decline in house prices that is battering banks.
“Until we can stabilize the asset side of bank balance sheets, this crisis will not come to a close,” he said.
Home prices in 20 US cities fell 18.2 percent in November from a year earlier, the fastest drop on record, the S&P/Case-Shiller index showed.
“Unfortunately, the prospect of stable home prices remains many months in the future,” Greenspan said in his speech. “Many forecasters project a decline in home prices of 10 percent or more from current levels.”
Greenspan estimated the collapse in housing, coupled with the steep drop in global equity prices, had wiped out more than US$40 trillion of wealth, equivalent to two-thirds of last year’s global GDP.
Responding to questions after the speech, Greenspan blamed insufficient regulatory oversight in part for failing to recognize the degree of risk that was accumulating in the banking system.
“The regulatory structures, especially internationally, were way behind the curve,” he said.
Greenspan said he was skeptical that officials can adopt a policy that prevents asset bubbles from forming without harming other parts of the economy.
To help resolve the banking system’s problems, financial institutions may need higher capital reserves to help restore them to health, he said.