WASHINGTON -- Sketching a grim picture of the nation's financial affairs, Federal Reserve Chairman Alan Greenspan said yesterday that he was prepared to cut interest rates yet again to try to revive a moribund economy.
Mr. Greenspan, in his most pessimistic public comments to date, blamed the protracted recession on an enfeebled banking system and massive private debt, telling members of the House Ways and Means Committee that an anxiously anticipated recovery had been deferred and that the U.S. economy could sink deeper into its morass.
"The upturn in business activity that began earlier this year clearly has faltered," Mr. Greenspan said. "It is apparent that the economy is struggling and that there have been some strong forces working against moderate cyclical revival."
Although such observations have become the stuff of conventional wisdom, they carried a special force from Mr. Greenspan, who has earned a reputation as the economy's head cheerleader. The chairman's apparent change of heart reflects a similar conversion taking place at the White House, where President Bush and his aides have abandoned a "hands-off" attitude toward the economy.
In an effort to stimulate consumer spending and, by extension, the economy as a whole, administration officials have been considering one-time tax rebates this spring of $200 to $300 per wage earner, or adding $1,500 to taxpayers' income-tax exemptions. They are among several possible options to be included in an anti-recession initiative Mr. Bush had promised to announce in next month's State of the Union address.
Under the rebate proposal, a taxpayer would be entitled to a refund of a certain proportion of his earned income. The benefit an individual would receive from increasing the personal exemption, which stands at $2,150 for the 1991 tax year, would depend on his tax bracket.
Mr. Greenspan deflected questions about the tax rebate plan during his appearance before the House panel, although when asked whether he considered it sound policy to increase the federal budget deficit by $30 billion next year -- the price tag put on the rebate proposal -- he responded with a quick "No."
But he did suggest that the Fed might contribute its own short-term shot of economic adrenalin -- in the form of lower interest rates -- if necessary. Since the recession officially began in July 1990, the Federal Reserve has moved 14 times to reduce short-term interest rates. Many analysts believe that the Fed will embark on another round of rate cuts within the next two weeks.
"Obviously, we are looking at the situation very closely, and should further action be required [to lower interest rates], you can expect us to do so," Mr. Greenspan said.
By Mr. Greenspan's reckoning, the economy's problems stem from the last decade's huge buildup of debt both by consumers and by corporate America. A recovery fluttered aloft in the spring, only to convulse during the summer as both businesses and consumers, worried about the future, used income to reduce old debts -- a responsible initiative, no doubt, but not one that would supercharge an economy.
"The bottom line . . . is that the national balance sheet has been severely stretched," Mr. Greenspan said. "These events do not necessarily mean that a prolonged period of economic weakness is inevitable, but they do mean that policy-makers must consider these unusual forces when shaping their response to the current situation."
Mr. Greenspan's testimony came at the end of a series of hearings held by the ways and means panel as lawmakers search for their own responses to the economic malaise.
The chairman gave a limited endorsement to tax cuts to help individuals and corporations reduce their debt burdens, and he put in another plug for a reduction in the tax imposed on capital gains income -- long a favorite of Mr. Bush and his fellow Republicans. But he reiterated his opposition to granting any package of tax cuts that might worsen the federal budget deficit.
"Congress should approach with great caution any proposal that would expand the structural budget deficit," Mr. Greenspan said.
That view was backed by other conservative Republicans.
"You will kill more jobs than you created with that tax cut," said Newt Gingrich, R-Ga. "What you need are permanent tax changes that increase jobs."