In October 2008, former Federal Reserve Chairman Alan Greenspan famously admitted during testimony before Congress that he was wrong about regulation of the U.S. financial system. Asked by Henry Waxman (D-CA) if "your ideology was not right, it was not working?" a humbled Greenspan lamented:
"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."
In Senate testimony Thursday, Greenspan strongly endorsed the deeply flawed Conrad-Gregg proposal to create a deficit commission, warning that the need to curb the American budget deficits "is more urgent than at any time in our history."
In testimony prepared for delivery before the Senate Homeland Security Committee, Greenspan warned that the United States faces the threat of an unprecedented "fiscal crisis" because of record red ink.
Of course, when it really mattered, when he could have made a difference, Alan Greenspan gave George W. Bush a green light for red ink as far as the eye can see.
When he took office on January 20, 2001, President Bush inherited both a balanced budget and a CBO-projected 10-year surplus of $5.6 trillion from Bill Clinton. But just five days later on January 25, 2001, Chairman Greenspan gave Bush and his Republican allies the air cover they needed to proceed with the $1.4 trillion tax cut package passed later that year. Greenspan testified to the Senate Budget Committee that "having a tax cut in place may, in fact, do noticeable good." As CNN noted at the time, "the Fed chairman's backing of tax cuts as economically sound likely will provide a boost to the new administration's proposals."
As Paul Krugman documented in 2004, the message behind Greenspan's talk of "pre-emptive smoothing of the glide path to zero federal debt" was unmistakable. "Translation: Go ahead and cut taxes."
And to be sure, the Maestro's refrain of tax cuts and Social Security privatization were music to Republican ears:
All through the Clinton years, Greenspan preached the virtues of fiscal restraint, and he did not change his views when the budget deficits of the 80's and early 90's vanished. Just six months before his 2001 testimony, Greenspan saw no problem with large projected budget surpluses. "The Congress and the administration," he said in July 2000, "have wisely avoided steps that would materially reduce these budget surpluses. Continued fiscal discipline will contribute to maintaining robust expansion of the American economy in the future." But then a Republican entered the White House, brandishing a tax-cut proposal -- and Greenspan suddenly developed an elaborate theory of why it was necessary to reduce those surpluses, after all.
Any doubts that Greenspan holds George Bush to different standards than he held Bill Clinton were dispelled in the years that followed. He didn't call for a reconsideration of the 2001 tax cut when the budget surplus evaporated. He didn't even offer strong objections to a second major round of tax cuts in 2003, when the budget was already deep in deficit.
And as turned out, of course, that Bush administration's endless deficits were made worse by the wars in Iraq and Afghanistan, the unfunded Medicare prescription drug benefit, the Bush recession starting in December 2007 and finally, the Wall Street bailouts of 2008. After Ronald Reagan tripled the national debt during the 1980's George W. Bush doubled it again during the Oughts.
The devastation wrought by the Bush tax cuts endorsed by Alan Greenspan is far from over. According to an analysis by the Center on Budget and Policy Priorities (CBPP), between 2001 and 2007 the Bush tax cuts accounted for almost half of the federal budget deficits. And as CBPP detailed in an eye-opening report released this week, the carnage will continue if the Bush tax cuts (see chart above) are, as Greenspan long ago called for, made permanent:
Some critics charge that the new policies pursued by President Obama and the 111th Congress generated the huge federal budget deficits that the nation now faces. In fact, the tax cuts enacted under President George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years (see Figure 1).
The deficit for fiscal 2009 was $1.4 trillion and, at an estimated 10 percent of Gross Domestic Product (GDP), was the largest deficit relative to the size of the economy since the end of World War II. Under current policies, deficits will likely exceed $1 trillion in 2010 and 2011 and remain near that figure thereafter.
The events and policies that have pushed deficits to astronomical levels in the near term, however, were largely outside the new Administration's control. If not for the tax cuts enacted during the Presidency of George W. Bush that Congress did not pay for, the cost of the wars in Iraq and Afghanistan that began during that period, and the effects of the worst economic slump since the Great Depression (including the cost of steps necessary to combat it), we would not be facing these huge deficits in the near term.
In March 2005, an unrepentant Chairman Greenspan defended his past support of the dangerous Bush tax cuts even as the ocean of red ink washed over the U.S. Treasury. When Senator Hillary Clinton took him to task by rightly noting, "your testimony helped blow the lid off the lock boxes when it came to the size of the tax cut, the extent of the tax cut," a nonchalant Greenspan simply responded:
"I look back and I would say to you, if confronted with the same evidence we had back then, I would recommend exactly what I recommended then. It turns out we were all wrong."
As it turns out, Alan Greenspan was wrong - disastrously wrong - and not for the first time or the last.
In the 1980's, then consultant Greenspan reaped huge fees working for Charles Keating's Lincoln Savings and Loan, an institution later at the heart of the S&L debacle. "'Of course I'm embarrassed by my failure to foresee what eventually transpired," he said later. I was wrong about Lincoln. I was wrong about what they would ultimately do and the problems they would ultimately create.''
Following last year's implosion of Wall Street and the bursting of the American real estate market, the New York Times, Time and a host of others pointed the finger at Greenspan. While Greenspan told Henry Waxman in October 2008 that he was "shocked" by the subprime crisis, many had been warning since 2004 about the "the strangest bit of advice ever to be proffered by an American central banker."
Now, Alan Greenspan dhas belatedly ecided to contradict Dick Cheney's mantra that "Reagan proved deficits don't matter." Hopefully this time, no one will be listening to Greenspan. After all, he's been cataclysmically wrong three times now.
Three strikes and you're out.
(For more background on the Republican leaders now denouncing the mountain of debt they produced for America, see "Born Again Deficit Virgins.")