Uncertainty now represents the biggest problem plaguing the economy, says former Federal Reserve Chairman Alan Greenspan.
While the Fed’s massive easing program has stabilized much of the economy, “the issue goes beyond that, because, even though we have very major expansion of the balance sheets, it has not essentially spilled over in lending by commercial banks into the usual pattern that one sees when reserves go up,” he told CNN’s “GPS” program.
So why aren’t banks lending more?
“The first and most important issue to recognize in the United States — and it’s a problem to an extent in other countries as well — is that the level of uncertainty about the very long-term future is far greater than at any time I particularly remember,” Greenspan said.
And one political argument is that “the extent of government intervention has been so horrendous that businesses cannot basically decide what to do about the future,” Greenspan said.
For example, two years ago the percentage of business cash flow that was invested in any form of capital asset was at the lowest level since 1938, he says.
“It’s improved somewhat [since then], but it is still extraordinarily low. And what we’re observing there is with all this money coming in, all the profit, the cash flow, it cannot find adequate investments.”
Asked for his assessment of Fed Chair-nominee Janet Yellen, Greenspan had plenty of compliments.
“Janet Yellen is an excellent economist, very intelligent,” he said. “She knows exactly what is going on. I’ve worked with her for years. I learned a lot from her.”
Yellen will handle Fed policy “as well as anyone I can think of can handle it,” Greenspan said.
“But there’s a different type of problem that’s going to be occurring. None of us has handled this before,” he added in reference to how to engineer an exit rom the Fed’s unprecedented stimulus program.
“She’s as qualified as anyone I know to deal with it, and sufficiently knowledgeable with that extraordinary staff at the Federal Reserve to handle it,” he said.
Meanwhile, a Bloomberg survey of 35 economists after Friday’s strong jobs report showed that 34 percent believe the Fed will announce a beginning of the tapering of its quantitative easing policy at its policy meeting Dec. 17-18. A slightly larger percentage — 40 percent — expect a move in March.
“Clearly the economy is performing far better than the FOMC [Federal Open Market Committee] expected, and there’s no reason not to get started with tapering,” James Smith, chief economist at Parsec Financial Management, told Bloomberg. He expects a December tapering.