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Alan Greenspan's most successful ruse has to been to make his speeches so dull that they mask the monumental gamble he is taking with the U.S. economy. But the Fed chairman's testimony before Congress on Wednesday clearly indicates that he believes he has won that gamble.
A growing number of Fed critics have complained that, when faced with the prospect of economic slowdown, Greenspan slashes interest rates, leading to a massive extension of easy credit. The extra debt may keep the economy afloat for a while, as it has since the crash of the
economy and the Sept. 11, 2001, attacks.
But it does much more harm in the long run by preventing necessary restructuring of the economy, driving down saving, inhibiting future spending and endangering the long-term health of the banking system. This column has made this charge against Greenspan on numerous occasions. Raising doubts about the effects of easy money is hardly a wing-nut obsession. Two central banks -- the Bank of England and the Reserve Bank of Australia -- recently have mentioned credit growth when explaining why they have hiked interest rates.
But one line in Greenspan's testimony Wednesday shows that he is unfazed by the soaring debt levels of the U.S. He said: "All told, our accommodative monetary policy stance to date does not seem to have generated excessive volumes of liquidity or credit."
Greenspan was pushed to provide actual numbers to support his case. In fact, he couldn't talk about debt in the economy without mentioning some pretty hairy numbers. "Home mortgage debt increased about 13% last year," he noted. "The growth of nonfederal debt, at 7.75%, was relatively brisk in 2003," Greenspan added.
So where was the good news on the debt front? Well, Greenspan is encouraged that "the low level of interest rates and large volumes of mortgage refinancing activity helped reduce households' debt service and financial-obligation ratios a bit." He must be referring to the Fed yardstick that measures households' payments on financial obligations as a percentage of disposable income. Yes, it came down "a bit" in 2003 -- to 18.09% in the third quarter of last year, from 2002's high point of 18.29%. But above 18%, it is still at historically high levels.