With a shortage of treasury securities there would have been even more demand for GSE debt, MBS, CDS insured debt, and anything that could be painted AAA. We would have had a much bigger bubble with much bigger losses and even more deflation and bailouts. Add even bigger bubble losses if housing investment had been exempt of even higher tax rates.

The national debt only crowds out money going into the housing bubble, commodity bubble, and whatever the next bubble will be. Greenspan was right to worry about insufficient public debt.

I'm afraid you don't understand. There was never a chance to pay off the national debt. The temporary net surplus to which you refer is, in the few times it has happened since WWII, always a leading indicator of a recession, which is invariably met with and cancelled out by increased deficit spending. You're probably thinking of the absurd extrapolations used by CBO types who drew outyear lines that showed a surplus big enough to make a dent in the trillions of dollars of debt. They were wrong. Indeed, most government attempts to forecast anything since 2000 have not only been wrong, but wildly wrong. So don't lose any sleep over what might of been because it was never in the cards to start with.

For an economist not to know the amount of debt, private and public is a measure of the amount of money in circulation is incompetence bordering on criminality. The only way the Fed has of controlling the money supply (flexible currency) is by lending. In early 90’s, the Federal Reserve Bank Of Kansas City’s Economic Review set the tone with the discussion of the relationship between personal taxes, borrowing, government spending, and the standard of living. They wrote the definitive stand on the Board’s fiscal philosophy. They recommended that taxes remain high and interest rates low because except for a limited amount of infrastructure, the government sector does nothing to grow the economy. “All economic growth comes from the private sector.” It was a bad mistake. The people who pay taxes are PRODUCTIVE. We tax income, capital gains, and profits, all measures of productivity, not wealth. I would much rather trust the people making the money to spend it wisely, than a bunch of crooked bankers, corporate hacks, and outright criminals borrowing it. At that time, I recommended that the government “borrow” all the growth of the money supply and to control inflation we use taxes. When the economy is booming, we increase taxes (and reduce borrowing) and when we want to stimulate the economy we cut taxes and increase borrowing, growing the money supply. The Federal Reserve would become a part of the Treasury (controlling tax rates to control inflation not interest rates) and the member banks would be made independent (like credit unions). Milton Friedman had some sort of a similar suggestion though I don’t remember what it was. Be that as it may, we were both laughed at. This was after Reagan blew a $600 billion bubble in the savings and loan debacle, Clinton then blew a $1.6 trillion dollar tech stock bubble, Bush’s bubble is probably (to early to even guess but its big) greater than $10 trillion, how big will Obama’s be? The moral question to ask is, “Given that debt is a natural consequence of the Federal Reserve System, who should hold that debt?” For the government to hold it all makes it a liability on all holders of currency, foreign and domestic. For the private sector to hold it leads to the bubbles, defaults, and financial disasters we are experiencing. What people will invest in with the cost of money at 6% is a lot different to what they will invest in at 2%.

depends on your definition of "huge." if by huge you mean something you and about 50 other budget wonks would celebrate, then sure. but if by huge you mean something that would make a difference in the lives of ordinary people, then i'd say no.

But, But, But, Greenspan said we had to have deficits so the bond traders would have something to trade.

Otherwise, they might have had to go out and do something productive.