09/19 21:11
Greenspan Tells Congress Don't Rush
Economic Stimulus (Update3)
By Rob Wells
Washington, Sept. 19 (Bloomberg) -- Federal Reserve Board Chairman
Alan Greenspan told congressional leaders to get more information before
deciding what steps to take to stimulate the U.S. economy, House Majority
Leader Dick Armey said.
Greenspan met at the Capitol with Armey and other leaders of both
parties to discuss ways to spur confidence and economic growth after last
week's terror attacks. Also present were White House economist Larry
Lindsey and former Treasury Secretary Robert Rubin, now chairman of
Citigroup Inc.'s executive committee.
The leaders talked about cutting the capital gains tax, speeding tax cuts
enacted earlier this year, reducing taxes on business earnings, Armey
said. Airlines are likely to get a financial boost from Congress this week,
he said.
The destruction of New York's World Trade Center and a plane crash into
the Pentagon were ``a shock to our economy and we're going to
respond,'' Bush said before meeting at the White House with Senate
leaders Tom Daschle and Trent Lott and House leaders Dennis Hastert
and Richard Gephardt.
U.S. stocks fell for the third day after markets opened following a four-day
shutdown. Even before Sept. 11, the economy was close to recession,
with growth at a 0.2 percent annual rate in the second quarter and
companies such as Ford Motor Co. and Gateway Inc. cutting jobs, sending
unemployment to a four-year high of 4.9 percent.
Bush expressed confidence the economy will rebound.
``The strength of the American economy has always been our
entrepreneurial spirit and our workers,'' he said. He will address a joint
session of Congress at 9 p.m. Thursday.
``I think we are committed to be patient, to work with this president and this
administration to see this thing through,'' House Democratic leader
Gephardt said after meeting with Bush.
`Better Assessment'
Asked what Greenspan's advice was, Armey said, ``We need to get a
better assessment of the overall impact'' of the attacks.
The leaders and economists discussed giving President Bush enhanced
trade promotion authority and energy legislation that he has requested.
Asked if there was agreement on the need to pass an economic stimulus
package, Armey said, ``I think there's a very good chance that will be one,
but it will take a lot of sorting out.''
Lott and Hastert were pushing for a cut in the capital gains tax rate before
the attacks. Rubin, who served under President Bill Clinton, and
Democratic lawmakers such as Representatives Charles Rangel and John
LaFalce of New York, oppose it.
``I don't think it will contribute in any positive way to investment,'' Rubin
said in an interview with NBC television. Policy makers need to focus on
consumption, he said, and a capital gains cut now ``would probably cause
people to be more ready to sell stocks, and that clearly is undesirable.''
Companies tied to the airline industry are already feeling effects of the
attack. Boeing Co. said it may fire as many as 30,000 workers by the end
of next year because the terrorist attacks threaten to dry up orders for
new airplanes. Most airlines have already cut their schedules 20 percent,
and the industry is forecasting as many as 100,000 layoffs.
Actions Taken
Some regulatory action has been taken, including the relaxation of tax
filing deadlines. On Monday, Federal Reserve policymakers lowered their
benchmark rate target a half percentage point to improve investor and
consumer confidence. The Fed reduced its target rate on overnight loans
between banks to 3 percent, the lowest since February 1994.
The Fed has lent record amounts to banks through the so- called discount
window, where banks borrow short-term to meet cash flow needs. The day
after the attacks, the Fed lent a record $45.62 billion through the discount
window.
This activity leads some analysts to question wonder whether Congress
could go overboard with too much assistance, overheating the economy
and sparking inflation.
``There's so much fiscal and monetary stimulus in the pipeline that the
bond market is starting to worry,'' said Greg Valliere, analyst with Schwab
Washington Research Group.
Wait and See
Kevin Flanagan, fixed income strategist at Morgan Stanley Dean Witter &
Co., said it might be best to wait and see what kind of impact earlier
actions will have on economy before taking new actions. ``It's difficult to
envision how much more is really necessary at this point,'' he said.
U.S. Treasury bonds declined for a third day as investors guessed that
increased government spending will force cancellation of debt buyback
plans.
Other economists said whether Congress helps or hurts the economy
depends upon the type of stimulus proposed.
``The key is not the quantity of fiscal on stimulus. The key is the quality of
it,'' said Andrew Laperriere, an analyst at International Strategy and
Investment Group Inc. He said he'd encourage Congress to pursue tax
cuts and regulatory changes that stimulate savings, investment and
long-term growth.
Restoring confidence goes beyond economic issues.
Robert Doll, chief investment officer of Merrill Lynch Investment Mangers
which directs investments of more than $525 billion, said confidence may
rise when the public has a clear sense of how the U.S. will respond
militarily to the attacks. ``Military action can make the difference,'' Doll
said.
During the 1991 Persian Gulf War, consumer and investor confidence
returned after the U.S. started to fight back, he said.
Monetary policy operates with a lag effect on the economy, he said, so
``we have yet to see the effects'' of what Greenspan and the Fed have
done.
U.S. spending, such as a $40 billion emergency package signed by Bush
on Tuesday and ``untold billion yet to be decided'' will do more to
stimulate the economy, he said.
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