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Monday, October 5, 2009 5:07 PM
moneynews.com
By: Marc Davis
Tighter credit and higher taxes are the only ways to fix our still struggling and debt-ridden economy, former Federal Reserve Chairman Alan Greenspan tells Bloomberg News.
"The presumption that we're going to be able to resolve this without significant increases in taxes is unrealistic," he said.
Greenspan also foresees Congress enacting some form of consumption tax to help reduce the deficit.
Along with higher taxes and tightening credit, the Fed will also have to remove money from the financial system to forestall inflation, which looms ominously in the wake of America's ever-increasing debt, according to Greenspan.
Although Greenspan forecast economic growth at a 3 percent to 4 percent annual rate in the coming two quarters, he said the economy will slow again in 2010 with equity prices going flat after a stock market surge.
"The Fed has done a splendid job," Greenspan said. But the enormous size of the Fed's balance sheet "is not sustainable," he said.
A more reasonable balance would be "something just north of $1 trillion."
But the former Fed chair is worried.
"My concern is that legislation or other actions on the part of Congress may prevent (a balance sheet reduction). Unless we sterilize or unwind the big monetary base we've built up, two, three years out inflation really begins to take hold."
While Greenspan urges higher taxes, economists Robert J. Barro and Charles J. Redlick, writing recently in The Wall Street Journal, cite evidence that tax cuts encourage economic growth.
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