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Greenspan: US Can Avoid Dreaded Fiscal Cliff but Must Endure ‘Some Pain’

Friday, 29 June 2012 07:24 PM

The United States will likely steer itself away from a fiscal cliff, but it must endure "some pain" to do so, says former Federal Reserve Chairman Alan Greenspan.

At the end of this year, the Bush-era tax cuts and other tax holidays expire, while automatic spending cuts are set to kick in, a combination known as a fiscal cliff that could siphon billions out of the economy beginning next year and derail recovery.

The country will feel the pinch, as pain is unavoidable when taxes rise and spending is cut.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

But disaster will be averted.

"The one thing I think we have to recognize, starting from where we are at the moment, is there is no way to resolve this issue without some pain. There is no set of policies that can prevent the type of consequences of the imbalances we currently have," Greenspan tells CNBC.

"I think the fiscal cliff will be, essentially, kicked down the road like the can. And the reason basically is nobody wants all of a sudden all of those items to hit the economy at the time."

Congress must act to prevent it, and despite politically charged bickering and brinkmanship that often results when lawmakers spar over tax and spending issues, in the end, they do act.

Look to late 2008 as an example, when the Bush administration pushed through the Troubled Asset Relief Program, which bailed out the country's banking sector in wake of the Lehman Brothers collapse.

Stocks plunged when Congress originally rejected it, and lawmakers reconvened and passed the bailout.

"Hopefully we won't have to go through that again, but this will get resolved."

To steer the country away from the fiscal cliff, Congress is reportedly studying ways to delay the timing of the spending cuts, which will total $1.2 trillion over a decade, a big chunk of which will trim Defense Department spending.

Cuts were due to start in January of 2013 but may be postponed in March.

As part of an agreement to raise the debt ceiling in 2011, the government agreed to enact automatic budget cuts starting in January.

"It is being seriously considered as one of the options and there is no doubt about that,” says Steve Bell, senior director at the Economic Policy Project at the Bipartisan Policy Center, Bloomberg reports.

Lawmakers have alluded they were considering stopgap measures.

“It’s a matter of triage right now, trying to keep the patient alive,” says Texas Republican Senator John Cornyn, Bloomberg adds.

Cornyn says he would prefer addressing the automatic spending cuts this year.

“Sometimes Congress acts when there are no alternatives,” Cornyn says.

“I would be reluctant to leave aside all the incentives to reach decisions sooner rather than later.”

House Republicans pushed through a bill in May to avert defense spending cuts and want to pass a bill soon to extend the tax cuts, though both measures face uphill battles in the Democrat-controlled Senate.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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Friday, 29 June 2012 07:24 PM
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