During the president's first term in office, Greenspan gave Bush a free hand in running up the largest deficit in U.S. financial history. From the point of view of "New Age" or "Prozac" Republicans raised up on the new (un-orthodoxy) that federal deficits and Niagaras of red-ink spending didn't matter, and that low taxes and endless growth would take care of everything, he was the dream sugar-daddy. Now, suddenly, the indulgent papa is saying "No." And he is about to find what softie-permissive parents have always found when dealing with wild teenagers they spoiled too long in their formative years: His admonitions won't make a blind bit of difference.
In political terms, Greenspan's comments Wednesday came at a particularly sensitive time for the president. Bush remains committed to his ambitious plan to reform and partially privatize Social Security, a scheme that is generally expected to add between $2 trillion and $4 trillion to the federal deficit over the coming decades if it goes through essentially unchanged.
So far, Democrats in Congress have been standing uncharacteristically tough and united in opposing the scheme and some key Republicans have been wavering uneasily over it, despite an enormous and almost unprecedented lobbying effort that has included all the resources of the religious right, the U.S. Chamber of Commerce and even the National Rifle Association. Yet as the New York Times reported Thursday, the public remains apparently uninfluenced by the White House-directed media blitz on the issue and, if anything, appears to be hardening against it.
Greenspan's warning will sow further fear and doubt among the faint hearts in the president's corner and can only further charge up congressional Democrats and their allies in the American Association of Retired Persons and other groups vowed to oppose the plan.
Worst yet, it sends a signal that prime interest rates may well start to rise soon, and financial sources in the construction sector have told UPI that they believe this may damp down the powerful boom in housing that has been one of the U.S. economy's few strong growth areas over the past few years.
That boom was driven more than anything else by Greenspan's acquiescence with the White House in holding down interest rates to abnormally low figures. For most of the president's first term, they remained as low, or almost as low, as they had been in the closing years of the Eisenhower administration in the late 1950s. And this remained the case even while the federal accumulated total debt soared from the $3.4 trillion Bush inherited from his predecessor President Bill Clinton to a whopping $4.3 trillion -- an increase of almost one third in only four years. It was the fastest and largest such growth in the federal debt in all of U.S. history.
That means the U.S. government is more dependent than it has ever been before on attracting foreign investment and foreign central banks to hold U.S. Treasury Bonds, yet the interest rates to attract this money are uncompetitive and unattractive. They are increasingly out of touch with reality. And there have been signs that some central banks such as Thailand's and South Korea's have been cautiously moving out of dollars and T-bonds into other currencies, especially the euro, the main currency of most major European Union nations,.
With almost no recognition even on the financial pages of the U.S. press, Saudi Arabia, since the passing of the Patriot Act and amid its leaders' increasing fears over the future direction of U.S. policy in the Middle East, has quietly moved almost all its vast holdings out of the United States, mainly to Europe. Over the past three years. At the very minimum, this marks a shift in $100 billion out of the U.S, economy. Some estimates put the figure as high as $600 billion. It is no coincidence that during the same period of time, the dollar depreciated by 40 percent against the euro.
The president's plan to push through legislation to make his monumental first term tax cuts permanent will add to these ominous international financial pressures. The Congressional Budget Office has calculated that would add another $1.8 trillion to the federal debt over the next decade.
How long can it go on? The president, the White House, his handpicked Treasury officials and even more carefully vetted Council of Economic Advisers have blithely assumed that it could go on forever, and there is no sign that their confidence -- or blind faith -- has yet been in the least dented by events.
Up to now, Greenspan has agreed with them. Like Andrew Mellon, the secretary of the treasury of three Republican presidents in succession through the boom times of the Roaring Twenties, he has remained silent or unaware up to this point of the gathering storm over Wall Street and the U.S economy.
Yet finally, the old fiscally permissive parent has woken from his long slumber. The timing of his comments suggests that he is especially alarmed about Republican plans to include provisions in the coming budget resolutions expected next week that would allow the Senate to approve making the Bush tax cuts permanent with a simple majority of only 51 votes.
Current Senate rules require a two-thirds majority for approving the tax cuts. The Democrats can easily block the move if a two-thirds majority is required, but they haven't a prayer of doing so if all the GOP needs is 51 out of 100 Senate votes instead of 67. The Dems only have 44 senators compared to 55 for the Republicans. Jim Jeffords of Vermont is an independent.
But Greenspan's measured words will hardly prevail against the engrained habits of mind and passionately held faith of administration officials and Republican congressmen alike that what has worked -- or, at least, appears to have worked -- for them for so long can and must be changed now.
Greenspan on Wednesday warned of "stagnation" if the soaring federal debt and the rising interest rates it must inevitably bring in its wake is not harnessed, and harnessed soon. Had he preached that Gospel over the past four years, and more passionately and clearly than he is so far doing, it might have had some impact on the president and his fellow decision-makers. But it sure won't now. And we will be exceptionally lucky if the stagnation that Greenspan predicted is all that we will get.