Greenspan backs tax cuts

"I did not say that I supported President Bush's tax cut"

By BBC News Online's North America Business Reporter, David Schepp

The head of the US central bank has reiterated his support of tax cuts in order to reduce budget surpluses, which he has said could weigh on the US economy.

Speaking in Chicago, Federal Reserve Chairman Alan Greenspan said the best way to reduce the budget surplus was to "phase-in" tax cuts to reduce the surplus.

"I'm far more convinced that when confronted with this type of situation you reduce taxes. You don't increase spending to reduce the surplus," he said, during an annual Federal Reserve conference on banking.

I'm far more convinced that when confronted with this type of situation you reduce taxes. You don't increase spending to reduce the surplus.

Alan Greenspan
Federal Reserve Chairman

Mr Greenspan said that while he backs tax cuts, he does not endorse President George W Bush's proposal, which now awaits the president's signature.

"I did not say that I supported President Bush's tax cut," Mr Greenspan said. "In fact, I was extraordinarily scrupulous through my written testimony and through a long question-and-answer period never to make that statement.

"And indeed, the only statement that I made was that a tax cut was desirable at that time, and I still do," he said.

Bank safety

Thursday's Chicago Fed meeting was held to discuss bank structure and the systems that have been established that provide a safety net for deposits and the complex US banking system.

Mr Greenspan said that while changes were needed to the safety infrastructure, alterations must be made carefully and deliberately.

Such programmes include insurance backed by the government that insures accounts for up to $100,000 in the event of bank failure.

Deposit insurance was implemented following the Great Depression when thousands of Americans lost their money when the banking system collapsed.

But Mr Greenspan warned, such policies have allowed investors and creditors to be lax about a bank's attitudes toward risks.

"With the safety net, lower interest rates and higher credit availability are accorded riskier borrowers, benefiting speculative and riskier ventures at the expense of sounder ones," Mr Greenspan said in his remarks.

Cautious recommendations

He was, however, cautious in his recommendations about how to alter the safety net.

"The long absence of a fire, or of an economic and financial conflagration, does not suggest that we should cancel the fire insurance policy or the safety net," he said.

He also noted that with bank mergers, of which the US has witnessed many in recent years, and consolidation of financial-services companies have further complicated the safety net.

The belief that the US government will guarantee all deposits and creditors "is a recipe for a vast misallocation of resources and increasingly intrusive supervision," he said.

Mr Greenspan did not comment on the current state of the US economy or fiscal policy.

He undoubtedly will breech that issue next week when the Federal Reserve holds its fourth meeting of the year of the Federal Open Market Committee on 15 May.

With the US economy showing further slowing, market watchers are hedging their bets over whether Federal Reserve governors will opt to lower interest rates by another half percent.

So far this year, the Fed has lowered interest rates by two full percentage points.