Federal Reserve Board Chairman Alan Greenspan warned Congress Tuesday that consumers are disguising financial problems by paying off one credit card with another.
"They go from paying on time to bankruptcy," Mr. Greenspan testified. "People go off the cliff without any warning they are in trouble."
Bankers must use technology for a real-time check on a consumer's outstanding debt, he said in his semi-annual report on the country's economic condition.
"That way it won't be possible for people to play games by borrowing from one card to pay off another," Mr. Greenspan said. "It's not a serious issue but it could be."
The central banker also said lenders have recently tightened credit standards.
"But these actions are a modest correction after a market swing toward ease and should not constrain the availability of funds to creditworthy borrowers," according to Mr. Greenspan.
Mr. Greenspan also said he expects consumer spending to remain strong in 1996, owing in part to lower interest rates. "Low rates increase the affordability of housing for consumers and foster investment in productive plants and equipment by businesses," he said.
Addressing House Banking's domestic and international monetary policy subcommittee, Mr. Greenspan said the economy is on track for sustained growth.
"The years ahead should see further progress against inflation and the eventual achievement of price stability," he told lawmakers.
Real domestic product should grow between 2% and 2.25%, while unemployment rates should remain steady and inflation should not rise above 3%, he said.
The Fed had a difficult time judging the economy in December and January, according to Mr. Greenspan. The government shutdown delayed scores of economic reports and harsh weather disrupted normal consumer spending patterns, he said.
Still, he said initial claims for unemployment insurance and a survey of purchasing managers convinced the Fed that the economy had slowed. Also, he said bond traders had lowered their inflation expectations. This meant that real rates were actually higher after accounting for inflation, he said.
"Some Federal Open Market Committee members were concerned about the risks of prolonged sluggishness," he said. "Consequently, the committee decided in December that a further reduction in the funds rate was warranted."
Lower rates sent stock prices rising, he said. That has affected "an ever wider segment of households" as mutual fund values have grown.
Mr. Greenspan also praised efforts to reduce the budget deficit, but he said lawmakers need to do more. "As I have emphasized many times, lower budget deficits are the surest and most direct way to increase national savings," he said. "Higher national savings would help to reduce real interest rates further."