Alan Greenspan: U.S. May Default, Blames President Obama

Former Fed chief Alan Greenspan critiques Obama and predicts the effects of a U.S. debt default.

Add former Federal Reserve chairman Alan Greenspan to the growing roster of critics who say President Obama isn’t providing leadership in the life-and-death debate over raising the debt ceiling.

Predicting that congressional Republicans and Democrats are too far apart and too entrenched in their positions to compromise by the Aug. 2 deadline and prevent a U.S. government default, Greenspan told a Friday lunch crowd at the Aspen Ideas Festival: “What you need, essentially, is somebody out front taking hold, and the only one who can do that legally is the president of the United States.”

“Do you think he’s done that so far?” asked Greenspan’s interviewer, Aspen Institute president Walter Isaacson.

“Not really,” Greenspan replied. “I think the whole expectation is that somebody’s going to blink. I’m not sure that’s the case.”

Greenspan—whose audience included former senator Alan Simpson of the Simpson-Bowles deficit reduction commission, former Bush economic adviser Al Hubbard, and former Disney chairman Michael Eisner—also urged that income taxes return to the higher rates of the Clinton era, not just for people earning $250,000 and above, but for everybody; suggested the embattled euro is not a viable currency and that the Greek government will ultimately default; predicted that China will eventually face high inflation and other difficulties that will slow its economic growth; and elaborated on his assessment that Obama’s nearly trillion-dollar stimulus package has failed.

Regarding the partisan trash-talking taking place in Washington over the debt ceiling, Greenspan laid out a grim scenario of what is likely to happen when the two sides can’t agree.

“This is a hard-wired event,” Greenspan said about the August deadline, noting that the government has only a couple of days’ wiggle room. “On the open of business on the day when we are locked into no borrowing,” he went on, “the question as to who and how [the funds] are distributed has got to be judged by somebody. The trouble with that is that it’s a political hot potato.”

Noting that the government currently takes in 60 cents in revenue for every dollar it spends, Greenspan predicted that Treasury Secretary Timothy Geithner will be forced to choose between servicing the nation’s loan obligations and making Social Security, Medicare, and Medicaid payments to retirees and poor people, to say nothing of funding the military.

“No secretary of the treasury ... can allow the federal debt payments to lapse,” Greenspan said. “Medicaid and Social Security and defense ... will be up for question—which is prioritized and to which extent—and there will be a horrendous set of arrears. There will be a lot of bankruptcies.”

Rising from his chair, Simpson seconded Greenspan’s doomsday prophecy.

“That day we will have robbed the last piggy bank, drawn the last crumb out from somewhere under the bed,” Simpson told the crowd. “This is going to be greatest game of chicken you’ve ever seen.”

Simpson predicted that everyone in America—which he described as “a milk cow with 310 million tits,” in which citizens are benefiting from government largesse—will be adversely affected. “Everybody in America will have skin in the game, and the fun and games will be over in the next six months to a year.”

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Regarding reports that Geithner is likely to resign after the debt-limit issue is resolved one way or another, Simpson floated his deficit-reduction commission partner, former Clinton chief of staff Erskine Bowles, as the next treasury secretary—a suggestion warmly endorsed by ex-Bush economist Hubbard.

The 85-year-old Greenspan—whose pronouncements are still greeted with an awed hush reserved for oracles, more than five years after he left the Fed—claimed there’s no evidence that the Obama administration’s hundreds of billions in emergency spending or Fed chairman Ben Bernanke’s loose monetary policies have helped the economy recover.

“When the government tries to make it painless, the worse it gets,” Greenspan said. “Go back and take a look at the forecasts at the beginning of the administration. They have been consistently significantly overestimating the growth in the economy despite the fact that every textbook type of suggestion for what you do has been employed ... It’s failing and it will continue to fail ... There is another option out there. It’s called ‘doing nothing.’ ”

Asked if the euro is a bad idea, Greenspan said, “I’m afraid so.” He noted that requiring a single currency for more than a dozen diverse countries with different economic imperatives and different languages is bound to fail, in part because it allows economically weaker countries—like Greece—to enjoy a parasitic relationship with the healthier host body.

Isaacson asked Greenspan if he sees any way out of the euro crisis that will save Greece from defaulting.

“The only way I can see to avoid a Greek default,” Greenspan said, “is for an ultimate consolidation of the now 17 countries [that use the euro] into a single political union”—an outcome, he conceded, that is highly unlikely.