Alan Greenspan: Stimulus hurt recovery

WASHINGTON (CNNMoney.com) -- Massive government intervention to save the economy is to blame for the lagging recovery, Former Federal Reserve Chairman Alan Greenspan said Tuesday.

Greenspan argued for less government intervention to get the recovery rolling and businesses investing in equipment and plants.

"What we need to do now is to calm down; let things move by themselves," he said at a forum at the Council of Foreign Relations. "And indeed the rate of activism has decreased significantly and the ratio of capital flow has inched back up."

Some economists blame Greenspan, who served as Fed chair from 1987 to 2006, for keeping interest rates too low for too long and for failing to sound the alarm that Wall Street was over-leveraged and running wild.

But with Republicans in control of the House, Greenspan's views are starting to gain an audience again. Many Republicans share his opinion that intervention has created uncertainty and deterred private sector investing.

Greenspan targeted deficits created by the $787 billion 2009 Recovery Act as the main culprit behind the current sputtering recovery.

Why are deficits to blame?

Greenspan said the Treasury Department's borrowing "crowds out" companies from finding similarly low interest rates to borrow funds for capital investments on equipment and plants.

At the same time, he acknowledged that America's biggest and most-trusted companies aren't having trouble finding good interest rates. But smaller companies, he said, are struggling.

"Microsoft is not being crowded out," Greenspan said. "It's those who find an 8% or 9% interest rate, which are required of junk bonds and small businesses, which is too high."

He said he estimates that government borrowing is effectively reducing long-term capital investment by one fifth.

His concern over deficits is why Greenspan argued last year for the expiration of the Bush-era tax breaks he once championed.

But Greenspan goes further in his criticism of government intervention, also blaming housing programs for having delayed and prolonged foreclosures. He said such efforts have created uncertainty about when the housing market will hit rock bottom, at which point speculators can rush in and start buying up houses.

"Speculators are essential to the process of stability and recovery," he wrote recently in a column published in International Finance.