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Greenspan: All is well ... maybe
In latest speech the Fed chief tried to hit a calming note. Still, he had some caveats.
March 11, 2005: 10:04 AM EST

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NEW YORK (CNN/Money) - Fed Chief Alan Greenspan mostly reassured us that our massive trade deficit will gradually correct over time without a big crash in the dollar. But he left us with a couple of big caveats in a speech last night in New York.

Basically Greenspan's argument is that our current account deficit -- the broadest measure of the trade gap -- has been pushed to an extreme and yes, foreign entities are holding lots and lots of U.S. dollars. But the U.S. economy is very flexible. So if governments don't screw things up by getting all protectionist, the dollar and interest rates and everything will gradually adjust so that it all moves back toward balance and we all live happily ever after.

Mr. G. realizes the fairy tale could have a not-so-happy ending.

Besides the risk of anti-free trade movement, he says we may be approaching as point where international investors with lots of dollars "will choose greater balance in their asset accumulation."

In other words, fewer dollars.

Greenspan is not worried about hurting debt-laden homeowners with rate increases because so many people have fixed rate mortgages that will remain in place for years, keeping payments steady, even as the Fed keeps moving. Nor is he worried about a housing bubble that could pop and cause a destabilizing drop in home prices because on the whole housing prices "have rarely fallen and certainly not by very much."

To be sure Greenspan has plenty of worries. The nation's very low savings rate combined with a very high debt load will be a problem if incomes suddenly fall -- in other words if we were to head recession.

He is also worried about the federal budget deficit, which he points out again will start rising more when baby boomers begin to retire in droves in 2008. And, while he thinks market forces will force the trade deficit to correct there aren't any big market forces to force the White House and the Congress to get the nation's fiscal house in order.

In the question and answer session following his speech and before folks at the Council on Foreign Relations dug into their salads, Greenspan did say he's a bit more encouraged about making progress on the budget deficit because more people seem to be getting worried about it. "We're beginning to see a movement from budget policy tranquility to real serious debate," he said.

Will this all reassure the traders and hedge funds and big institutions that are wondering if the dollar has finally bottomed or if it has further to decline? That remains to be seen.

The big question raised by Greenspan is whether or not the huge current account deficit that built up during his years at the Fed adjusts its way gently back into balance or tumbles abruptly. And by the time we know the answer Mr. G. will be long gone from the Fed and history will be judging his vision.

More HaysWire? Click here ...

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-- Kathleen Hays is economics correspondent for CNN and contributes to Lou Dobbs Tonight.  Top of page

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