Former Federal Reserve Chairman Alan Greenspan said deficit spending by the federal government hasn’t been as effective at stimulating the economy as expected. 
  
 “I’m not saying the stimulus is not working, I’m saying it’s working far less than anyone anticipated,” Greenspan said today at the Council on Foreign Relations in New York. 
  
 Greenspan said the “most effective” stimulus would be an increase in stock prices rather than more government spending. He also said he favors raising taxes to curb the federal budget deficit, joining the debate in Congress over whether to extend reductions enacted under President George W. Bush. 
  
 “We have to find a way to settle down the extent of activism that is currently going on and allow this economy to heal,” Greenspan said. “We would be far better off to allow the normal market forces to operate.” 
  
 Taxes and spending are dominating the congressional agenda less than two months before elections that will determine control of the House and Senate. President Barack Obama is defending his economic policies against criticism from Republicans, who argue they haven’t been effective and have widened a budget deficit that reached a record $1.42 trillion in 2009. 
  
 Obama last week proposed a package of $180 billion in business tax breaks and infrastructure spending to boost the economy. That would come on top of the $814 billion stimulus measure enacted last year. 
  
 Extending Tax Cuts 
  
 Obama also wants to extend Bush-era tax cuts for individuals who make less than $200,000 a year and couples earning less than $250,000 while repealing them for those who earn more. Republicans want to extend cuts for all taxpayers. 
  
 Greenspan said raising taxes in a weak economy isn’t an ideal option. 
  
 “There are risks, but our choice is not between good and bad, it’s between terrible and worse,” he said. “Unless we come to grips with the deficit quickly we’re fooling ourselves as to how much time we have.” 
  
 A relapse into a recession is unlikely, said Greenspan, 84, who was chairman of the central bank from 1987 to 2006 and didn’t comment on monetary policy in today’s remarks. 
  
 “What we have going for us is that the tinder for a double dip is not readily available,” he said. Still, he repeated his warning that if housing prices drop, “all bets are off.” 
  
 Unemployment Rate 
  
 The economy grew at a 1.6 percent annual rate in the second quarter, hampered by an unemployment rate that has stayed above 9 percent all year. The unemployment rate rose to 9.6 percent in August from 9.5 percent in July. 
  
 Greenspan cited the level of excess reserves in the banking system as evidence of the uncertainty that’s restraining recovery. As of Sept. 9, U.S. banks have $1.01 trillion in excess reserves. 
  
 “There is a heavy weight of uncertainty on the system such that we are not getting the impact of a trillion dollars already on the books into the marketplace,” he said, describing the situation as a “liquidity trap.” 
  
 “Our financial institutions are still partially disabled and will continue to be disabled until we restore a level of capital in the system that enables the average lender to a depository institution to feel secure,” he said. 
  
 Capital requirements proposed by the Basel Committee on Banking Supervision earlier this week are a move in the right direction, he said. 
  
 “The nature of the regulations that were promulgated by the Basel committee made sense to me,” he said. 
  
 As Fed chairman in 2001, Greenspan supported the first round of tax cuts under Bush. At the time, the federal government operated with a surplus, and Greenspan told Congress he didn’t think the cuts would lead to a deficit. 
  
 To contact the reporters for this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; ||||| The former head of the Federal Reserve said fiscal stimulus efforts have fallen far short of expectations, and the government now needs to get out of the way and allow businesses and markets to power the recovery. 
  
 “We have to find a way to simmer down the extent of activism that is going on” with government stimulus spending “and allow the economy to heal” itself, former Fed Chairman Alan Greenspan told a gathering held at the Council on Foreign Relations in New York on Wednesday. 
  
 Bloomberg News Former Fed Chairman Alan Greenspan 
  
 At this point, “we’d probably be better off doing less than more” because “you’d be far better off to allow the normal market forces to operate here,” Greenspan said. That’s largely because stimulus spending is not proving as effective as many had hoped. “To the extent the evidence suggests very large deficits concurrently crowd out capital investment, there is a debit to the stimulus program that is somewhere between a third and a half of what the gross stimulus is,” he said. 
  
 Greenspan was Fed chairman from 1987 to 2006, and was succeeded by current central bank chief Ben Bernanke. Greenspan’s tenure at the Fed was defined by his opposition to government regulation and his confidence that markets would discipline themselves. 
  
 To many, the financial crisis was largely born of that ideology, and to some degree, Greenspan has himself said he overestimated the market’s willingness to understand and price for risk. Greenspan has also been widely accused of running an overly easy monetary policy during the early years of the last decade, in turn providing the fuel that powered the housing bubble, the rupturing of which drove the worst recession in generations. 
  
 Greenspan’s comments came in response to moderator and audience questions, and were accordingly wide-ranging. The former central banker noted that gold, the price of which has been surging, still represents the “ultimate means of payment.” What is happening in that market “is a signal there is a problem with respect to currency markets.” He reckons the problem is not a large one, but the jump in gold prices could be “the canary in the coal mine to keep an eye on.” 
  
 Greenspan, while worried about the outlook and what is happening with the housing market, said when it comes to a double-dip recession, “the probability of that is going down.” Given all the ground the economy has lost, “the tinder for a double-dip is not readily available,” although he added if housing goes down “all bets are off.” 
  
 Greenspan said that the U.S. needs to do something now to deal with budget deficits and it must do something very soon. He explained his anxiety is so high that “I’m coming out in the first time in my memory” in support of higher taxes in addition to reduced spending, including allowing the so-called Bush tax cuts to expire. 
  
 “Our choice is not between good and bad; it’s between terrible and worse,” Greenspan said. The nation has “a level of commitment … which I don’t think we can psychically meet,” absent huge changes in how the government finances itself. |||||

Write a summary.
– Alan Greenspan says stimulus spending isn't perking up the economy as much as hoped—and that at this point, it's better to let businesses and the markets handle the recovery, the Wall Street Journal reports. “We’d probably be better off doing less than more” because “you’d be far better off to allow the normal market forces to operate here,” Greenspan told a panel at the Council on Foreign Relations. “I’m not saying the stimulus is not working, I’m saying it’s working far less than anyone anticipated,” Greenspan said, as quoted by Bloomberg. “We have to find a way to settle down the extent of activism that is currently going on.” The former Fed chief also came down in favor of raising taxes to curb the deficit in his wide-ranging discussion. For more news on the stimulus, click here.