The United States may need to tighten credit and raise taxes to get the economy out of the worst recession since the 1930s, says former Fed Chairman Alan Greenspan.
The budget deficit for 2009 should widen to $1.6 trillion, according to government data, while the Federal Reserve has doubled its balance sheet to $2.2 trillion in a year.
It will take tighter credit and tax hikes to cover those deficit-producing spending increases.
“The presumption that we’re going to be able to resolve this without significant increases in taxes is unrealistic,” Greenspan told Bloomberg.
Greenspan said the Fed under the leadership of Ben Bernanke “has done a splendid job,” yet the balance sheet must come down to somewhere around $1 trillion.
“My concern is that legislation or other actions on the part of Congress may prevent” the Fed from withdrawing the stimulus, says Greenspan.
“Unless we sterilize or unwind the big monetary base we’ve built up, two, three years out inflation really begins to take hold.”
Some, such as Paul Volcker, himself also a former Fed chairman, are suggesting taxes on carbon or implementing a value-added tax — the latter being a tax that attaches itself to goods along production lines — will be needed to offset government spending.
“My tax philosophy would be if we can't deal with our expenditure loan with the present tax system, we've got to think about changing the tax?system,” Volcker told Dow Jones Newswires.
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