Greenspan Warns Senate Not to Use Fed's Reserves

Federal Reserve Board Chairman Alan Greenspan cautioned lawmakers Friday against dipping into the central bank's $3.7 billion reserve, saying the fund is not a windfall that can be spent without consequences.

"These are taxpayer funds," Mr. Greenspan told the Senate Banking Committee.

The chairman's comments came just a day after the House Banking Committee voted to use $3 billion from the reserve fund to help pay off the Financing Corp. bonds floated in the 1980s to bail out the thrift industry. About $100 million a year from the reserves would be used annually to reduce the banks' Fico interest payment.

Mr. Greenspan said the Fed needs the reserve - which consists primarily of U.S. government securities - to maintain confidence in the country's currency. Also, he said the funds do not increase the real deficit, because the Fed refunds all but $240 million in annual interest payments to the Treasury.

"This is not a slush fund," Mr. Greenspan said. "It is not something complex. It is simply a decision, acquiesced by Treasury, to keep funds with us."

Mr. Greenspan's comments on the reserve fund were echoed by Senate Banking Chairman Alfonse D'Amato, who castigated his House colleagues for voting to spend the reserve even though they have said they don't want to use taxpayer funds to recapitalize the thrift fund.

"You can't have it both ways," Sen. D'Amato said. "That $3.7 billion is taxpayer money."

The reserve fund has been under fire since early July when the General Accounting Office issued a scathing report on the Fed's spending habits. The Fed doesn't need the fund for emergencies, the GAO said. Rather, it could require member banks to buy more central bank stock whenever it needs more funds.

The GAO report also charged that the Fed increased spending 50% from 1988 to 1994, while inflation jumped only 25%. Also, it said central bank employment grew 4% over the six years, while federal government employment dropped 2%.

Comptroller General Charles A. Bowsher, who heads the GAO, told the Senate committee that the Fed could reduce its staff substantially by privatizing some payment system operations and relying more on outside auditors to conduct bank examinations.

"This is a way to get fewer people on the Fed payroll," he said, noting that Germany and Canada rely more heavily on the private sector for these two functions.

Mr. Bowsher said every dollar the Fed saves directly benefits the taxpayers because the central bank returns all of its profits to the Treasury.

The GAO report prompted Sens. Byron Dorgan and Harry Reid, both Democrats, to introduce legislation Friday that would require Congress to approve Fed spending on banking and payment-system operations.

Mr. Greenspan defended the central bank's spending habits, saying it runs one of the "tightest ships" in the government.

"The Federal Reserve effectively contained its costs despite a significant expansion in its mandated responsibilities," he said.

The Fed chairman also objected to many of the GAO's comparisons. Fed spending rose at the same level as non-defense-related governmental spending, he said. Also, employment at the government's executive agencies rose higher during those six years than the Fed's staffing levels, he said.

Mr. Greenspan did sound a conciliatory note. The Fed will review its practice of allowing the reserve banks to set health insurance, travel, and procurement policies to see if a centralized process could save money.

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