Crank or frank?

26 February 2004 By Rob Cox Follow @rob1cox

The Fed chairman s latest audience with Congress will go down as one of his least upbeat for lawmakers, the White House and workforce. But during an election year, that only proves the value of his judgments. His warnings about risks to the US economy are right on.

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Federal Reserve Chairman Alan Greenspan warned that drastic costcutting measures must be considered to balance the rising US budget deficit, including reductions in social security benefits and an extension of the official retirement age.

In a hearing with the budget committee in the House of Representatives, he suggested rolling back the Bush administration's tax cuts would derail the economic recovery. Greenspan's comments provoked sharp reactions from politicians, particularly contenders for the Democratic presidential nomination.

Greenspan's remarks followed others on Tuesday in which he called for curbs on lending and greater regulation of government sponsored entities Fannie Mae and Freddie Mac.

Greenspan said the economy is off to a strong start in 2004, and prospects for sustaining the expansion in the period ahead are good. But he injected a note of caution, saying this favorable shortterm outlook for the U.S. economy, however, is playing out against a backdrop of growing concern about the prospects for the federal budget. As you are well aware, after having run surpluses for a brief period around the turn of the decade, the federal budget has reverted to deficit.

"The unified deficit swelled to $375bn in fiscal 2003 and appears to be continuing to widen in the current fiscal year," he said. "If current policies remain in place, the budget will stay in deficit for some time.

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