Greenspan takes pessimistic view of economy Fed chairman blames problems on tight credit

October 29, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- Federal Reserve Chairman Alan Greenspan provided yesterday an unusually harsh description of business conditions, calling growth "stillborn" and credit conditions "utterly unprecedented."

"The economy is moving forward, but in the face of 50 mile-an-hour head winds," Mr. Greenspan added, abandoning the optimistic tone adopted in July when he asserted the recession ended.

Robert Brusca, an economist at Nikko Securities in New York, characterized the Fed Chairman's choice of words as "amazing. It just reinforces the impression he is disturbed" about the economy.

Other Fed watchers were similarly jarred by Mr. Greenspan's statements, made in Rhode Island, a state suffering through the collapse of a privately insured banking system and a particularly severe recession.

"It's more candid than we have seen in the past," said Kim Rupert, an economist at MMS International, a California-based firm focusing on the Fed.

Concern about an economic recovery has emerged as a key issue in Washington, with polls suggesting layoffs and bankruptcies are major concerns among voters and the administration receiving low grades for its domestic policy. On Sunday, Treasury Secretary Nicholas F. Brady took the unusual step of giving his own prediction of moderate growth in third-quarter gross national product prior to today's official announcement.

In view of the administration's sudden interest in a resurgent economy, Mr. Greenspan's comments were interpreted by some economists as a way to pass responsibility elsewhere. The Fed chairman attributed much of the economy's difficulties to tight credit, specifically that stemming from the unwillingness of banks to lend. That condition would be beyond the Fed's power to control using its standard mechanisms: increased money supply and lower short-term interest rates.

While the diagnosis is common, the Fed previously had attributed weak loan demand as much to reluctant borrowers as to hesitant lenders. Several economists suggested that Mr. Greenspan's position was particularly odd given the Fed's past efforts to encourage banks to keep higher levels of capital and to resist speculative loans.

"It's not the role of the central banker to blame prudence," said Brian Fabbri, chief economist at Midland Montagu. "It sounds far-fetched to come from the chairman of Fed."

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