Time for Greenspan to be replaced by Robert Rubin........Don't Tighten Credit: Greenspan
Peter Morton
The Financial Post
Thursday, June 21
Alan Greenspan, chairman of the U.S. Federal Reserve, yesterday called on U.S. banks not to tighten credit during the economic slump, even though their asset quality is starting to deteriorate.
To do so could hamper the recovery across the business sector, he warned. Mr. Greenspan urged the banks to stick with borrowers who have been good customers when the economy was strong and not reject them now.
The Fed chief told Congress U.S. banks were seeing an increase in non-performing loans, especially in the retail, manufacturing, health care and telecommunications industries, as well as California utility companies.
"Many of the traditional quantitative and qualitative indicators suggest that bank asset quality is deteriorating and that supervisors need to be more sensitive to problems at individual banks, both currently and in the months ahead," Mr. Greenspan told the Senate Banking Committee. "Such policies are demonstrably not in the best interests of banks' shareholders or the economy."
Banks tend to tighten credit during tough times, a move that could slow any economic recovery as many companies would be unable to borrow, Mr. Greenspan warned in some of his strongest language yet on the issue.
"Such policies are demonstrably not in the best interests of banks' shareholders or the economy," he said.
"They lead to an unnecessary degree of cyclical volatility in earnings -- more importantly, such policies contribute to increased economic instability."
On the plus side, Mr. Greenspan said U.S. banks are in better shape than they might have been because they tightened lending practices following the Asian economic crisis and a later economic collapse in Russia.
"We are fortunate that our banking system entered this period of weak economic performance in a strong position," he told the senators.
About 50% of U.S. banks are tightening standards for commercial and industrial loans, down from more than 60% in the first quarter of this year, according to the Fed.
"This is a sea change -- or at least the beginning of one," he added. "Formal risk management systems are designed to reduce the potential for the unintended acceptance of risk and hence should reduce the pro-cyclical behaviour that has characterized banking history."
But Mr. Greenspan refused to offer any hints as to whether he would cut interest rates again next week when U.S. central bank governors meet to compare notes about the state of the economy in the United States.
Stock markets and economists expect Mr. Greenspan to slash at least 25 basis points off the key Fed funds rate, making it the sixth cut since January. The Fed rate is 4%, down from 6.5% when the U.S. economy began to slide. "The latest readings suggest the U.S. economy may be poised for some recovery."
Despite increasing layoffs, which number about 400,000 a week, Mr. Greenspan said he has yet to see signs that consumer spending is slowing considerably. Consumer spending is the driver behind two-thirds of the U.S. economy and has been credited with keeping the economy from slumping even further.
Sooner or later, Mr. Greenspan said, the layoffs have "got to be a factor in determining the propensity of people to spend money," especially now that debt payments equal 14% of a U.S. consumer's income -- the highest in 15 years -- and the U.S. savings rate has fallen to minus 0.7%.
His comments come as an important forecasting gauge showed that in May the U.S. economy had its biggest increase in nearly 1 1/2 years.
The New York Conference Board said its leading indicators rose 0.5% in May, surprising economists, who had expected a 0.2% increase. The index, which fell 0.1% in April, notched up the third increase in the past six months.
"The latest readings suggest the U.S. economy may be poised for some recovery," said Ken Goldstein, a Conference Board economist. |
