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‘We have a very distorted economy,’ Greenspan says

Bob Moon Aug 2, 2010

‘We have a very distorted economy,’ Greenspan says

Bob Moon Aug 2, 2010


Kai Ryssdal: I might have mentioned this before, but for a while during the depths of the financial crisis, we had a cliche wall set up in our offices. Phrases that we tried real hard not to use. Right up at the top was “from Wall Street to Main Street,” thanks to the rampant overuse of that phrase in all the stories about the disconnect between banking and the real economy.

Two years later on, the disconnect is still there. Over the weekend, former Fed chairman Alan Greenspan took note of how uneven — or even one-sided — the recovery’s been. In fact, Greenspan says there are “fundamentally two separate economies right now:: Banks, big companies and Americans at the top of the income curve are doing just fine — but for the rest, Greenspan said, the recovery seems to be in a pause.

Here’s our senior business correspondent Bob Moon.

Bob Moon: It’s about as plain spoken as the former Fed boss has ever been:

Alan Greenspan: Our problem, basically, is that we have a very distorted economy.

Alan Greenspan told NBC’s Meet the Press it’s high-income Americans who are doing most of the spending these days; big banks are, as he put it, “doing much better,” and large corporations are “in excellent shape.”

Greenspan: The rest of the economy, small business, small banks and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at.

And all those federal spending programs that were supposed to fix things? University of Maryland economist Peter Morici says they haven’t done much.

Peter Morici: Most of the rescue money went to the large New York banks; it recapitalized them. While the smaller banks remain burdened by toxic assets, and they’re the folks who make loans to small to medium size businesses. They can’t get credit, so they can’t expand and put people to work.

Morici says the big banks have been willing to lend — mostly to companies doing business abroad.

Morici: With demand growing very rapidly in Asia, thanks to their undervalued currencies, they expand there and make big profits.

But wages here at home have been stagnant for decades — as far back as the 1970s. Diane Swonk is chief economist at Mesirow Financial. She says that’s about the time policy makers lost the focus on retraining American workers, in favor a less costly shortcut: Just let everybody borrow more.

Diane Swonk: We found it more politically expedient to use a very advanced financial system to fill the gap in wages by giving people access to credit, perhaps when they couldn’t even service the debt.

Swonk says it’s all come home to roost in this split recovery.

Swonk: We’ve seen enormous political backlash, and there is no comfort for anyone who’s wealthy, if they’ve got to deal with a pretty big class warfare, at the political level, via taxes or anything else.

She says it’s yet another after effect of the meltdown that’s likely to linger for a long time.

I’m Bob Moon for Marketplace.

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