Federal Reserve Chairman Alan Greenspan said Tuesday that the Fed would not be "out of business" in terms of stimulating the economy even if it should push a key interest rate to zero.
Greenspan used his appearance before the Council on Foreign Relations to dispute worry expressed by some private economists that the Fed may be running out of ammunition to jump-start the lagging economic recovery.
The central bank two weeks ago cut its target for the federal funds rate, the interest that banks charge on overnight loans, by a bigger-than-expected half point to 1.25 percent, the lowest level in 41 years.
"The general view is that, as the Fed funds rate gets closer and closer to zero, that at zero we are out of business," Greenspan said. "That is not the case."
Greenspan said the Fed could buy other U.S. Treasury securities with varying terms of maturity to pump cash into the financial system and stimulate economic activity.
Greenspan recalled that from 1942 to 1951, the Fed bought 25-year Treasury bonds at a fixed interest rate of 2.5 percent as part of an agreement with the U.S. Treasury to keep borrowing costs low to support the war effort.
"We are very far from the Fed being restricted" in its ability to stimulate the economy, Greenspan said. His remarks were an expansion of comments he made last week before the congressional Joint Economic Committee.
Greenspan did not give a hint during his appearance whether the central bank will lower interest rates again, but private economists believe the Fed stands ready to cut rates further if needed to keep the economy from dipping back into recession.
Many analysts believe that economic growth in the final three months of this year may slow to an annual growth rate of 1 percent or less, reflecting cutbacks in consumer spending prompted by rising worries about job layoffs and a possible war with Iraq.
Greenspan said during the question and answer session that war worries were "a very large hurdle" impeding business plans to increase their investment spending. But he said once the country is past these uncertainties, the economy should rebound.
Greenspan also urged Japan and Germany to do more to deregulate their economies as a spur to global growth, saying the United States has led the way in this area.
"We have had 25 years of extraordinary deregulation in this country," he said.
Greenspan used his prepared remarks to urge, as he has before, that governments guard against a tendency to overregulate financial markets. He said the growth of new, innovative financial instruments played a major role in suppressing damage from the economic shocks that have hit the U.S. economy.
"Despite the draining impact of a loss of $8 trillion of stock market wealth, a sharp contraction in capital investment and, of course, the tragic events of Sept. 11, 2001, our economy is still growing," Greenspan said.
"Importantly, despite significant losses, no major U.S. financial institution has been driven to default," he said.
Greenspan gave credit for this development to a rapidly evolving financial system that has allowed lenders to become more diversified and borrowers to be far less dependent on a single market for financing.
As he did in a London speech in September, Greenspan praised the various elements of the evolving financial system, including the growth of derivatives, investments that are linked to an underlying asset such as a stock or bond or financial index.
Greenspan has warned Congress often over the years against overregulating the $111 trillion derivatives market. He repeated the caution Tuesday.
"The extent of government intervention in markets to control risk-taking beyond the commonly practiced control of systemic risk is, at the end of the day, a trade-off between economic growth with its associated potential instability and a more civil and less stressful way of life with a lower standard of living," Greenspan said.
Last April, the Senate rejected an attempt by Sen. Dianne Feinstein, D-Calif., to impose greater regulations on derivatives. She said her proposal would have closed a loophole that allowed energy giant Enron to buy and sell energy holdings last year largely in secret. The Houston company filed for bankruptcy last December.
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On the Net: Federal Reserve: http://www.federalreserve.gov Headline: Greenspan says Fed won't be `out of business' in stimulating economy if rates drop to zero Category: F Creation Date: 11/19/2002 16:32:30 Submit Date: 11/19/2002 16:35:04 By Line: By MARTIN CRUTSINGER Title: AP Economics Writer Object Name: GREENSPAN RISK, 1ST LD-WRITETHRU ID: f0238 Source: The Associated Press Credit: (AP) File Type: text/xml
Federal Reserve Chairman Alan Greenspan said Tuesday that financial innovations have helped the United States and the world absorb various shocks -- from the loss of $8 trillion in wealth in the U.S. stock market to the terrorist attacks and a number of high-profile corporate bankruptcies.
Greenspan cautioned governments to resist the temptation to over-regulate financial markets, saying new types of financial instruments have been a major reason the United States and the global economy have withstood the shocks of the past 2 1/2-years.
"Despite the draining impact of a loss of $8 trillion of stock market wealth, a sharp contraction in capital investment and, of course, the tragic events of Sept. 11, 2001, our economy is still growing," Greenspan told the Council on Foreign Relations.
"Importantly, despite significant losses, no major U.S. financial institution has been driven to default," he said, adding that a similar observation could be made about financial institutions worldwide.
Greenspan said there had been a "marked increase over the past two or three decades in the ability of modern economies to absorb unanticipated shocks."
He credited a rapidly evolving financial system for this development, which has allowed lenders to become more diversified and borrowers to be far less dependent on a single market for financing.
As he did in a London speech in September, Greenspan praised the various elements of this evolving financial system, including the growth of derivatives, investments that are linked to an underlying asset such as a stock or bond or financial index.
"These increasingly complex financial instruments have especially contributed, particularly over the past couple of stressful years, to the development of a far more flexible, efficient and resilient financial system than existed just a quarter-century ago," Greenspan said.
Greenspan repeatedly has warned Congress over the years against over-regulating the $111 trillion derivatives market, a caution he repeated Tuesday.
"The extent of government intervention in markets to control risk-taking beyond the commonly practiced control of systemic risk is, at the end of the day, a tradeoff between economic growth with its associated potential instability and a more civil and less stressful way of life with a lower standard of living," Greenspan said.
Businesses use derivatives to guard against losses from unexpected market movements and wealthy investors who purchase them through high-risk hedge funds.
Last April, the Senate rejected an attempt by Sen. Dianne Feinstein, D-Calif., to impose greater regulations on derivatives. She said her proposal would have closed a loophole that allowed giant energy-trader Enron Corp. to buy and sell energy holdings last year largely in secret.
The Houston company filed for bankruptcy last December.
Greenspan noted that the Enron bankruptcy filing and similar huge defaults by a number of other corporate giants, from Global Crossing Ltd. to WorldCom Inc., occurred when the global telecommunications industry was experiencing a shakeout after having borrowed the equivalent of $1 trillion globally from 1998 to 2001.
"Prices of telecommunications stocks collapsed and many firms went bankrupt," Greenspan said. "In decades past, such a sequence would have been a recipe for creating severe distress in the wider financial system."
But this time around, because of the ability of banks to better manage credit risks, Greenspan said the shocks to the financial system had been minimized.
"Compared with decades past, banks now have significantly more capital with which to absorb shocks and they employ improved systems for managing credit risks," Greenspan said.
Greenspan used his appearance before the Council on Foreign Relations to dispute worry expressed by some private economists that the Fed may be running out of ammunition to jump-start the lagging economic recovery.
The central bank two weeks ago cut its target for the federal funds rate, the interest that banks charge on overnight loans, by a bigger-than-expected half point to 1.25 percent, the lowest level in 41 years.
"The general view is that, as the Fed funds rate gets closer and closer to zero, that at zero we are out of business," Greenspan said. "That is not the case."
Greenspan said the Fed could buy other U.S. Treasury securities with varying terms of maturity to pump cash into the financial system and stimulate economic activity.
Greenspan recalled that from 1942 to 1951, the Fed bought 25-year Treasury bonds at a fixed interest rate of 2.5 percent as part of an agreement with the U.S. Treasury to keep borrowing costs low to support the war effort.
"We are very far from the Fed being restricted" in its ability to stimulate the economy, Greenspan said. His remarks were an expansion of comments he made last week before the congressional Joint Economic Committee.
Greenspan did not give a hint during his appearance whether the central bank will lower interest rates again, but private economists believe the Fed stands ready to cut rates further if needed to keep the economy from dipping back into recession.
Many analysts believe that economic growth in the final three months of this year may slow to an annual growth rate of 1 percent or less, reflecting cutbacks in consumer spending prompted by rising worries about job layoffs and a possible war with Iraq.
Greenspan said during the question and answer session that war worries were "a very large hurdle" impeding business plans to increase their investment spending. But he said once the country is past these uncertainties, the economy should rebound.
Greenspan also urged Japan and Germany to do more to deregulate their economies as a spur to global growth, saying the United States has led the way in this area.
"We have had 25 years of extraordinary deregulation in this country," he said.
Greenspan used his prepared remarks to urge, as he has before, that governments guard against a tendency to overregulate financial markets. He said the growth of new, innovative financial instruments played a major role in suppressing damage from the economic shocks that have hit the U.S. economy.
"Despite the draining impact of a loss of $8 trillion of stock market wealth, a sharp contraction in capital investment and, of course, the tragic events of Sept. 11, 2001, our economy is still growing," Greenspan said.
"Importantly, despite significant losses, no major U.S. financial institution has been driven to default," he said.
Greenspan gave credit for this development to a rapidly evolving financial system that has allowed lenders to become more diversified and borrowers to be far less dependent on a single market for financing.
As he did in a London speech in September, Greenspan praised the various elements of the evolving financial system, including the growth of derivatives, investments that are linked to an underlying asset such as a stock or bond or financial index.
Greenspan has warned Congress often over the years against overregulating the $111 trillion derivatives market. He repeated the caution Tuesday.
"The extent of government intervention in markets to control risk-taking beyond the commonly practiced control of systemic risk is, at the end of the day, a trade-off between economic growth with its associated potential instability and a more civil and less stressful way of life with a lower standard of living," Greenspan said.
Last April, the Senate rejected an attempt by Sen. Dianne Feinstein, D-Calif., to impose greater regulations on derivatives. She said her proposal would have closed a loophole that allowed energy giant Enron to buy and sell energy holdings last year largely in secret. The Houston company filed for bankruptcy last December.
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On the Net: Federal Reserve: http://www.federalreserve.gov Headline: Greenspan says Fed won't be `out of business' in stimulating economy if rates drop to zero Category: F Creation Date: 11/19/2002 16:32:30 Submit Date: 11/19/2002 16:35:04 By Line: By MARTIN CRUTSINGER Title: AP Economics Writer Object Name: GREENSPAN RISK, 1ST LD-WRITETHRU ID: f0238 Source: The Associated Press Credit: (AP) File Type: text/xml
Federal Reserve Chairman Alan Greenspan said Tuesday that financial innovations have helped the United States and the world absorb various shocks -- from the loss of $8 trillion in wealth in the U.S. stock market to the terrorist attacks and a number of high-profile corporate bankruptcies.
Greenspan cautioned governments to resist the temptation to over-regulate financial markets, saying new types of financial instruments have been a major reason the United States and the global economy have withstood the shocks of the past 2 1/2-years.
"Despite the draining impact of a loss of $8 trillion of stock market wealth, a sharp contraction in capital investment and, of course, the tragic events of Sept. 11, 2001, our economy is still growing," Greenspan told the Council on Foreign Relations.
"Importantly, despite significant losses, no major U.S. financial institution has been driven to default," he said, adding that a similar observation could be made about financial institutions worldwide.
Greenspan said there had been a "marked increase over the past two or three decades in the ability of modern economies to absorb unanticipated shocks."
He credited a rapidly evolving financial system for this development, which has allowed lenders to become more diversified and borrowers to be far less dependent on a single market for financing.
As he did in a London speech in September, Greenspan praised the various elements of this evolving financial system, including the growth of derivatives, investments that are linked to an underlying asset such as a stock or bond or financial index.
"These increasingly complex financial instruments have especially contributed, particularly over the past couple of stressful years, to the development of a far more flexible, efficient and resilient financial system than existed just a quarter-century ago," Greenspan said.
Greenspan repeatedly has warned Congress over the years against over-regulating the $111 trillion derivatives market, a caution he repeated Tuesday.
"The extent of government intervention in markets to control risk-taking beyond the commonly practiced control of systemic risk is, at the end of the day, a tradeoff between economic growth with its associated potential instability and a more civil and less stressful way of life with a lower standard of living," Greenspan said.
Businesses use derivatives to guard against losses from unexpected market movements and wealthy investors who purchase them through high-risk hedge funds.
Last April, the Senate rejected an attempt by Sen. Dianne Feinstein, D-Calif., to impose greater regulations on derivatives. She said her proposal would have closed a loophole that allowed giant energy-trader Enron Corp. to buy and sell energy holdings last year largely in secret.
The Houston company filed for bankruptcy last December.
Greenspan noted that the Enron bankruptcy filing and similar huge defaults by a number of other corporate giants, from Global Crossing Ltd. to WorldCom Inc., occurred when the global telecommunications industry was experiencing a shakeout after having borrowed the equivalent of $1 trillion globally from 1998 to 2001.
"Prices of telecommunications stocks collapsed and many firms went bankrupt," Greenspan said. "In decades past, such a sequence would have been a recipe for creating severe distress in the wider financial system."
But this time around, because of the ability of banks to better manage credit risks, Greenspan said the shocks to the financial system had been minimized.
"Compared with decades past, banks now have significantly more capital with which to absorb shocks and they employ improved systems for managing credit risks," Greenspan said.