greenspan, fed governors warn on government spendi

Greenspan, Fed Governors Warn on Government Spending
Nov. 10 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan says the growing U.S. budget deficit could destabilize the economy. Fed Governor Susan Bies says Congress spends like it's dipping into a ``a cookie jar.'' St. Louis Fed President William Poole says Social Security is in jeopardy.

In the last two months, Greenspan and at least seven other Fed officials have warned lawmakers about tax and spending policies that have led to record budget and current account gaps.

As Greenspan, 78, in January begins his last year atop the central bank, the comments suggest Fed members are concerned his successor will have less room to guide an economic expansion should they have to raise interest rates to counter a plunging dollar or surge in spending. Fed policy makers are likely to raise the benchmark rate by a quarter point to 2 percent when they meet today in Washington, a Bloomberg News survey shows.

The policy making Open Market Committee began meeting at 9 a.m. Washington time, a Fed spokesman said. The committee's decision on interest rates is expected around 2:15 p.m.

``If you get to a point of fairly significant long-term structural budget deficits, it begins to impact on the level of long-term interest rates,'' Greenspan told the House Budget Committee on Sept. 8. That means the government must pay higher rates to borrow money, leading to even higher deficits, he said.

``If you get into that sort of debt maelstrom, it is a very difficult issue to get out of,'' he said.

Record Deficits

The Open Market Committee has already raised rates three times since June to restore its benchmark rate to a level that neither slows growth nor sparks inflation. All 89 economists surveyed by Bloomberg predicted Greenspan and the FOMC would increase the overnight rate again at today's meeting because a more-than-expected gain of 337,000 jobs in October signals the economy is starting to use up spare capacity.

Budget surpluses from 1998 to 2001 helped Greenspan orchestrate the longest economic expansion in U.S. history. When the boom ended in 2001, low inflation allowed the Fed to cut the benchmark rate to 1 percent, the lowest since 1958, limiting the recession to just eight months.

Then the surpluses evaporated. President George W. Bush, who will choose the next Fed chairman, won passage of $1.85 trillion in tax cuts and raised spending for wars in Iraq and Afghanistan. Defense spending rose 12.4 percent in fiscal 2004 to $437 billion, the Congressional Budget Office said.

The budget deficit widened to a record $413 billion in the fiscal year ended Sept. 30, with government spending rising 6.2 percent from the previous year. The deficit amounted to about 3.6 percent of the country's $11.8 trillion gross domestic product, the highest percentage since 1993.