Taxes must rise while fiscal stimulus needs to be wound down in order to reduce the U.S. budget deficit and allow private investment to expand, said former Chairman of the Federal Reserve Alan Greenspan on Wednesday.
"I am in favor for the first time in my memory of raising taxes," Greenspan told an audience at the Council on Foreign Relations in New York
He warned that the deficit, swollen by massive stimulus spending, was crowding out capital investment. We "must find a way to simmer down fiscal activism and allow the economy to heal," he said, adding that that stimulus spending had been far less successful than anticipated.
Bush era tax cuts are set to expire at the end of this year. President Obama says he wants to cap taxes on middle and lower income households but allow taxes rates to revert to higher levels for the wealthy.
The issue is key in the forthcoming mid-term elections in November, with the Republicans pushing for tax cuts to remain in place across the board, claiming that higher rates on the wealthy would hamper the recovery.
Greenspan said that the chances the U.S. economy would slide back into recession were receding but warned that "all bets were off" is house prices started to fall further due to high levels of unsold inventory.
Greenspan, who was the head of the Federal Reserve for almost 19 years until he retired in 2006, said new rules to impose capital increases on banks were unlikely to cause a credit crunch as bank rushed to raise capital as some have suggested.
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