Cautious Greenspan not ready to declare victory

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Alan Greenspan doesn’t think you’re about to go out and buy a whole bunch of stuff.

And that, he says, puts a damper on the economic recovery. Actually, the ever-cautious chairman of the Federal Reserve calls it “the anticipated recovery.”

He hasn’t declared victory yet.

In the chairman’s semiannual appearance before the House Financial Services Committee, Greenspan said the economy is firming, but an “array of influences unique to this business cycle” is preventing the economy from recovering rapidly:

  • Consumers have been spending through the recession, so there’s not much room to boost the economy with more consumer spending.
  • The rise in mortgage rates from their lows in November has slowed down the pace of cash-out refinancing transactions. “Drawing on home equity in this manner is a significant source of funding for consumption and home modernization,” he says. He notes that mortgage rates continue to be low by historic standards, “and should continue to underpin activity in this sector.”
  • Household wealth is down, largely because household debt is up. A lot of this change can be attributed to those cash-out refinancings and home-equity loans, which reduce a household’s wealth and increase its debt.
  • The wealthiest one-fifth of households, who tend to be the biggest spenders, have watched their investment portfolios drop in value as they piled up lots of debt. As a result, they now are slower to open their pocketbooks.

Greenspan credits consumers with keeping the economy from dropping further than it normally would in a recession. Now consumers are tapped out, he says. For a strong recovery to take hold, businesses will have to produce more, employ more people for more hours and buy more buildings, computers and machinery.

Greenspan’s remarks about consumer interest rates were brief and were confined to comments about mortgage rates. When a couple of representatives tried to get him to speculate on the direction of short-term and long-term interest rates, he demurred.

He did say that the recession could have been worse had the Fed not cut interest rates. It cut short-term rates 11 times in 2001, slashing the overnight lending rate from 6.5 percent at the beginning of the year to 1.75 percent at the end. That’s where the overnight rate stands now, and the Fed is not expected to change it when the rate-setting body meets March 19.

— Posted: Feb. 27, 2002