Even with signs of economic turnaround, credit squeeze lingers, Greenspan says.

WASHINGTON -- Banks are continuing to show a stubborn reluctance to make loans despite signs of economic recovery, Federal Reserve Board Chairman Alan Greenspan said yesterday.

Noting that the "underlying values" of banking institutions have shown improvement as investors have pumped new capital into the industry, "we still are confronted with a significant element of a credit crunch," Mr. Greenspan told the House Banking Committee.

"We are spending an inordinate amount of time" trying to find ways to get banks to make new loans, added Mr. Greenspan, who on Monday was nominated for a second four-year term at the Fed's helm.

Prior to noting the continued intransigence of the credit crunch, Mr. Greenspan reiterated that he believes the economy is showing signs of a recovery.

"The evidence does suggest the economy has bottomed and has started out of the recession," Mr. Greenspan said. But, he added, it is "difficult to determine" the strength or depth of the recovery.

Mr. Greenspan declined several invitations from banking panel members to discuss the economy at greater length, including questions of whether lower interest rates would help the federal government's efforts to resurrect the savings and loan industry.

He said discussion of the appropriate level of interest rates would be "premature," but added he will speak in more detail about the economy next week when he presents the Fed's semiannual monetary policy report to Congress.

Though Mr. Greenspan declined to discuss interest rates, Treasury Undersecretary David Mulford yesterday called for lower global interest rates, an issue Treasury Secretary Nicholas Brady has championed.

Mr. Mulford, in a briefing for reporters on next week's economic summit, said lower rates -- accompanied by liberalized trade, fiscal restraint, and general structural changes in the economies of the major industrialized nations -- would help bring about a period of sustained economic growth internationally.

In other developments yesterday, Mr. Brady told the House Banking Committee that the Resolution Trust Corp. will need as much as $80 billion to complete the task of closing the nation's insolvent thrifts.

Mr. Brady's call for more money drew catcalls from some panel members. Committee Chairman Henry B. Gonzalez, D-Tex., noted that an additional $80 billion will bring to $160 billion the amount of funds dedicated to the Resolution Trust, the agency established in 1989 to dismantle ailing thrifts. "And the end is not in sight," Rep. Gonzalez said.

Rep. Gonzalez also noted that Resolution Trust is seeking another $100 billion in working capital, money the regulating agency is using to buy and hold the assets of failed thrifts before they are sold off to the private sector. Theoretically, working capital outlays will be recovered dollar for dollar when the assets are sold.

Rep. Gonzalez noted, however, that Resolution Trust is already taking heavy losses on its portfolio. "The losses in working capital will grow tremendously after all the better assets are sold and only the dregs are left," he said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER