Greenspan Discusses US Borrowing Capacity in WSJ Op-Ed Piece

In an Op-Ed piece for the Wall Street Journal, former Federal Reserve Chairman Alan Greenspan warns that the perception of a large U.S. borrowing capacity may be misleading.

The federal debt has jumped to $8.6 trillion from $5.5 trillion in the past 18 months, but that has not translated to signals of inflation which would push the Fed to raise the historically low interest rates that have been in place to stabilize the U.S. economy.

“The very large contraction of private financing demand freed private saving to finance the explosion of federal debt. Although our financial institutions have recovered perceptibly and returned to a degree of solvency, banks, pending a significant increase in capital, remain reluctant to lend,” Greenspan wrote.

He sees market signals that could cause harm to the economy in the future, including what the borrowing leeway the government has reaming for financing it’s financing. Following the collapse of Lehman Brothers in September 2008, the federal debt to the public rose from 38 percent of the gross domestic product to 59 percent.

Greenspan said that even though the Treasury has the ability to control rates and print money at will, it is not fee from the risks surrounding interest rates.

“If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities,” he wrote.

Greenspan did add that the severity of the pending crisis, along with the uncertainties in Europe, have set the government up to respond.

“That response needs to recognize that the range of error of long-term U.S. budget forecasts (especially of Medicare) is, in historic perspective, exceptionally wide. Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis. Our policy focus must therefore err significantly on the side of restraint.”