Greenspan: High deficits could spark bond crisis

WASHINGTON Sun Nov 14, 2010 1:16pm EST

Alan Greenspan, former chairman of the Federal Reserve, testifies before the Financial Crisis Inquiry Commission hearing on Capitol Hill in Washington April 7, 2010. REUTERS/Kevin Lamarque

Alan Greenspan, former chairman of the Federal Reserve, testifies before the Financial Crisis Inquiry Commission hearing on Capitol Hill in Washington April 7, 2010.

Credit: Reuters/Kevin Lamarque

WASHINGTON (Reuters) - The United States must move to rein in its massive budget deficits or it faces the risk of a bond market crisis, former Federal Reserve Chairman Alan Greenspan said on Sunday.

"We've got to resolve this issue before it gets forced upon us," Greenspan said of the ballooning U.S. debt levels.

He spoke as a panel, chaired by former White House chief of staff Erskine Bowles and former Senator Alan Simpson, is due to deliver a report on debt and deficits by December 1.

A draft report made public last week offered a series of politically tough tax and spending choices that would seek to reduce the debt by $4 trillion by 2020.

The suggestions received a lukewarm reception from some politicians and outright condemnation by others, including House of Representatives Speaker Nancy Pelosi, who pronounced the ideas "simply unacceptable."

Greenspan, who spoke on NBC's "Meet the Press," said he believed "something equivalent" to what Bowles and Simpson recommended would eventually be approved by Congress.

"The only question is, is it before or after a bond market crisis? Because there's no alternative," he said.

He said the deficit, which hit $1.3 trillion this year, may begin to frighten the bond market, which could undermine the recovery and push the economy back into recession.

"The big, serious problem is whether or not the outlook for the longer-term deficit spooks the bond market to a point where long-term interest and mortgage rates move up very sharply," said Greenspan. "If that happens, that will cause the double dip."

Greenspan caused a stir last week when he said in a Financial Times column that Washington was pursuing a policy of weakening the dollar, prompting Treasury Secretary Timothy Geithner to insist that the United States would never deliberately weaken its currency.

(Reporting by Caren Bohan and Richard Cowan)

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