Alan Greenspan blames financial regulation and the increase in the deficit as the reasons behind the timid recovery.Sound familiar? It’s what every corporate executive who shows up on CNBC says.
Greenspan argues in the Financial Times that the Dodd-Frank legislation, with all its complexity, is going to stymie business decision-making and, therefore, growth.
It is going to take years to address the unprecedented complexity of final rule making required in the massive Dodd-Frank bill. The inevitable uncertainty engendered will inhibit financial innovation and intermediation, and render the rules that will govern a future financial marketplace disturbingly conjectural. This is bound to have a significant impact on economic growth.
The size of the U.S. deficit is actually having a quantifiable impact on business investment as well, according to Greenspan.
Fixed capital investment as a share of cash flow over the past four decades has been significantly (negatively) correlated with the ratio of the federal deficit to GDP, with the deficit ratio leading the fixed investment share by nine months.* This would imply that the federal deficit as a percentage of GDP since September 2008 (cyclically adjusted to remove the effect of a weaker economy), accounted for as much as a third of the $325bn shortfall in business capital investment since early 2009.
Of course, Greenspan is under-emphasising the impact of consumer deleveraging (he notes this early on, but it doesn’t seem to be his main point).
Businesses may not see the need to invest if that don’t see the U.S. consumer intending to buy for several years as they clean up their personal balance sheets. The fear Greenspan mentions might be a fear of debt that will keep consumers off credit and inhibit growth for sometime.