Alan Greenspan has been surprisingly quiet on the issue of the Budget Deficit, since it began ballooning in the past two years. He has said fairly little about it, and a search of the Federal Reserve's website (Federalreserve.org) will show no official testimony over the past year that mentions the federal debt. Alan Greenspan has mentioned SARS, the demographic crises, the War on Iraq, and everything besides the Price of Tea in China. Yet the National Debt, which has gained a trillion dollars and can hardly be payed back without inflation, draconian taxation and cutting of budgets, or a fantastic economic expansion seems to get little mention.

On Febuary 24th, 2004, Greenspan testified in front of the Senate committee on Housing, Urban Affairs and Banking and said that the debt being incurred by Freddie Mac and Fannie Mae are cause for concern. Freddie Mac and Fannie Mae are both Government Sponsored Enterprises, institutions established by the government, but currently public corporations. Although the government does not explicitly back up their debt, many people consider that if they were to ever undergo a financial crises, the government would step in and bail them out.

Alan Greenspan's job is not specifically to tell corporations how to run their affairs. For him to make comments on how they should structure their debt system is only slightly less strange than for him to tell Microsoft how much cash on hand they should have, or for that matter, to tell Jim Bob that he shouldn't buy a new forklift until business down at the scrapyard picks up. Yet Alan Greenspan made a point of pointing out that Fannie Mae and Freddie Mac have financial structures that may be a little unstable.

Alan Greenspan is not universally loved, but few people would debate the subtleness of his approach. He is also well aware of how much attention people pay to his pronouncements. His choice of words can make the stock market jump up or down. Alan Greenspan knows that if he said: "At the current rate the federal government is running up the deficit, in another few years there won't be money left to borrow, and the government will hardly be able to pay off its own interest, leading to either the government either defaulting on a loan or having to print more money. " or words to that effect, they would become a self-fulfilling prophecy, and the market would panic.

Alan Greenspan, it seems, has chosen to target Fannie Mae and Freddie Mac, two organizations which together have a debt of around 3 trillion dollars. Although the Federal Government has no express legal obligation to back up these organizations, it is considered that because of the social value these organizations provide, the government would normally back them up if they reached a crisis.

Currently, the government does not have the financial resources to bail them out if they needed to. With the federal debt approaching 7.1 trillion dollars, the government can not take in any new debts.

The United States' stable economic system rests on a tripod: the stability of the government's financial structure, since the government has not defaulted on a debt in its history; the stability of the private and semi-private organizations; and the actual ability to produce of the American people. One of these legs is no longer functioning, and Chairman Greenspan has decided to point this out by stating that if another one of those legs is knocked out, the government will not be able to take up the weight.

This is one possible interpretation of Mr. Greenspan's statements.


I wrote this, went to sleep, and woke up to find that Greenspan had given more testimony, to a different committee, on the budget deficit, and social security; and additionally, another Governor had given testimony on the link between the budget and trade deficits. I don't know how much this changes my analysis. It is interesting to note that Greenspan focuses on modifications to the Social Security system in the long run, and states that in the short run the situation will be alleviated by revenue growth and the levelling off of defense spending. The plot thickens.

Sources:
Greenspans testimony: http://www.federalreserve.gov/boarddocs/testimony/2004/20040224/default.htm
A somewhat outdated retort by Fannie Mae of claims that it is unstable, showing its debt load: http://www.fanniemae.com/global/pdf/media/issues/archive/2001/010101.pdf
Another older report showing the total debt owed by Fannie Mae and Freddie Mac: http://www.gsereport.com/SSS/GSEDebtOurNationalLiability.pdf
The US National Debt Clock: http://www.brillig.com/debt_clock/

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