Former Fed Chairman Alan Greenspan believes that S&P’s 64% spike since March, which made Americans richer by restoring $5.4 trillion to U.S. equities, is reducing the need for a second government stimulus.
Bloomberg: “The stimulus is only a third spent, and its order of magnitude is not large enough to compare with the strength and power of the remarkable global equity increase that’s occurred since early March,” Greenspan said in a telephone interview yesterday from Washington. “Capital gains have proved a far greater stimulus than one can attribute to the $787 billion program that has been only partially spent.”
According to Mr. Greenspan, increasing spending beyond the $11.6 trillion already pledged may also be unnecessary at this point because higher stocks will help boost profits and make loans easier to come by.
“When stock prices go up, the market value of common stock or of equity in banks and other financial institutions rises,” he said. “And the market value of liabilities is importantly affected by the size of the equity market value cushion on banks’ balance sheets.”
A Fed report released on Dec. 10, showed net worth for U.S. households increased to an estimated $53.4 trillion in the third quarter. The $2.7 trillion rebound in net worth comes as stock prices have rallied this year.
Separately: In testimony before the Senate Homeland Security Committee on Thursday, Mr. Greenspan warned that the U.S. faces the threat of an unprecedented “fiscal crisis” of historic dimensions because of a ballooning $12 trillion national debt.
Greenspan called a proposal by Dem. Senator Kent Conrad and Rep. Senator Judd Gregg for the creation of a national entitlement reform panel — a bipartisan task force on deficit reduction — “an excellent idea.”
Reuters: “I trust any such taskforce will address the very thorny issue of the asymmetrical consequences of too much or too little fiscal restraint,” Greenspan said.