WASHINGTON -- When the Senate Banking Committee put Federal Reserve Chairman Alan Greenspan on the hot seat Tuesday, the banking industry ended up taking some of the heat.
With the fall elections looming, and lawmakers eager to lay blame for the sluggish economy, they targeted both Mr. Greenspan's monetary policy and bank's lending -- or alleged failure to lend.
Bank Policies Assailed
Sen. Paul Sarbanes, D-Md., said banks still are not making loans to Main Street businesses. And Sen. Jim Sasser, D-Tenn., charged that banks are taking advantage of low interest rates to invest in risk-free Treasury securities rather than make loans.
Mr. Greenspan, delivering his semiannual economic report to Congress, replied that the drop in short-term rates was "a necessary policy response to restore the viability of the commercial banking system" and has resulted in "a major improvement" in the industry.
Mr. Greenspan also defended the spread between the low interest rates banks are paying for deposits and the charges on loans. Deposit rates are low "because [banks] don't want money's and the yields on loans are needed to improve their capital position, he said.
But Sen. Sasser said, "In effect, the taxpayers are bailing out banks from the loans of the 1980s."
Sen. Sasser, chairman of the Senate Budget Committee as well as a banking committee member, said the Fed should jawbone banks to step up lending.
Sen. Donald W. Riegle, Jr., chairman of the banking panel, said Mr. Greenspan should encourage banks to begin lending to minority communities in particular.
"A lot of African-Americans can't get loans," Sen. Riegle said. "If you would talk about it, make a speech or two, I think you would see some of those loans being made."
The Michigan Democrat told Mr. Greenspan he didn't fully appreciate the suffering the central bank had created by loosening its grip too slowly on the supply of money.
"I'm very disappointed in your statement today," Sen. Riegle said after the Fed chairman complete his prepared testimony. "I don't see you saying anything to people in trouble except, 'Hang on.' You've said that before, and the people in this country don't have any confidence any more in what is said."
Sen. Sasser told Mr. Greenspan that the central bank had focused too much attention on inflation-fighting.
"The real problem is that the Fed and the administration don't seem to have a problem in fighting inflation, but you do have a problem with getting growth," Sen. Sasser said.
One Republican on the committee - Sen. Alfonse M. D'Amato of New York - agreed, telling Mr. Greenspan that the Fed has been "too timid" in reducing rates only after a new bout of bad economic news.
"You sit in ivory towers and don't believe the little businessmen when they tell you they can't get loans," Sen. D'Amato said.
Mr. Greenspan told the committee that the economy is growing, though not quickly enough to keep the politically sensitive unemployment rate from rising.
"While the growth is subnormal, it is growth, and it is growing at a consistent rate," he said, adding that he expects economic activity to continue to increase.
Slack Demand Cited
Referring to the banking industry, Mr. Greenspan said there were indications that higher capital requirements have inhibited lending. "But there is evidence that the general demand for loans is quite low," he added.
The Fed chairman said he hoped the central bank could move quickly to phase out regulation of the leverage ratio of tangible capital to assets, a step he said would also have the effect of increasing credit availability.