Tags: Greenspan | Fear | US | Recovery

Greenspan: Fear Killing US Economic Recovery

Friday, 07 Oct 2011 01:41 PM

Former Federal Reserve Chairman Alan Greenspan says fear is killing the U.S. economic recovery.

"Although rising moderately this year, U.S. fixed capital investment has fallen far short of the level that history suggests should have occurred given the recent dramatic surge in corporate profitability," Greenspan writes in the Financial Times.

"Combined with a collapse of long-term illiquid investments by households, they have frustrated economic recovery."
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"These shortfalls, the result of widespread private-sector anxiety over America’s future, have defused much, if not most, of the impact of the (Obama) administration’s fiscal stimulus."

American households, notes Greenspan, have shifted their cash flows from illiquid real estate and consumer durables to paying down mortgages and consumer debt. Commercial banks are exhibiting a similar reduced tolerance towards risk on partially illiquid lending.

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Alan Greenspan
(Getty Images photo)
"A trillion dollars of excess reserves remains parked, largely immobile, at Federal Reserve banks yielding only 25 basis points with little evidence of banks seeking higher returns through increased lending," says Greenspan.

Moreover, Greenspan says, it is going to take years to address the unprecedented complexity of final rulemaking required in the massive Dodd-Frank bill, leading to even greater economic inhibition and anxiety.

"This is bound to have a significant impact on economic growth," Greenspan says. "Business planners must now confront a much wider set of scenarios that could affect the profitability of contemplated long-term commitments. This wider set, of necessity, increases risk premiums on illiquid assets."

Bloomberg reports that Senator Richard Shelby, the senior Republican on the Senate Banking Committee, has introduced legislation to require more cost-benefit analysis from financial regulators implementing the Dodd-Frank Act.

The bill would bar financial regulators from finalizing rules if the costs are found to outweigh benefits and require each agency to develop plans to modify, eliminate or streamline existing regulations.

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Former Federal Reserve Chairman Alan Greenspan says fear is killing the U.S. economic recovery. Although rising moderately this year, U.S. fixed capital investment has fallen far short of the level that history suggests should have occurred given the recent dramatic surge...
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Friday, 07 Oct 2011 01:41 PM
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