Greenspan warns against bank caution

Fed chief: 'Banks should not tighten loan standards too far'

The chairman of the US Federal Reserve Alan Greenspan says the weakening economy has led to more problem loans for banks - but that should not be used as an excuse to tighten lending rules.

Such policies contribute to increased economic instability

Alan Greenspan

Some banks were making it harder for companies to get new loans, Mr Greenspan said, even when those loans would be sound and profitable.

And that was bad for economic stability and the banks' shareholders.

"Such policies are demonstrably not in the best interests of banks' shareholders or the economy," Mr Greenspan said.

"They lead to an unnecessary degree of cyclical volatility in earnings.

"More importantly, such policies contribute to increased economic instability."

An end in sight?

Mr Greenspan's words, to the Senate Banking Committee, come as the latest set of economic indicators suggest the US economy is poised for recovery.

The latest readings suggest the US economy may be poised for some recovery

Ken Goldstein, economist

But the upturn may be longer in coming than previously thought.

The New York-based Conference Board said its Index of Leading Economic Indicators, edged up by 0.5% last month to 109.3 after moving up 0.1% in April.

Analysts were expecting a 0.3% increase.

Ken Goldstein, an economist for the Conference Board said that, while the index predicted the economic slowdown early last year, business activity is starting to improve.

"The latest readings suggest the US economy may be poised for some recovery," Mr Goldstein said.

Productivity

Mr Greenspan also told the Senate Banking committee that he saw nothing in recent economic data to suggest any weaker long-term trend in worker productivity.

"In my judgment I do not think we are down that far," Mr Greenspan said in response to questions.

"I don't see any fundamental long-term changes."

Rising worker productivity in recent years has helped keep US inflation in check by letting firms produce more goods without adding to wage costs.

Recent dips in worker productivity have led some economists to fear that past gains could have been cyclical in nature, meaning inflation, which has been subdued, could become more of a concern.

That in turn could limit the Fed's options as it attempts to boost growth in the slowing US economy.

Global economic trends

Mr Greenspan told the committee The US must be "sensitive" to global economic trends due to a strong synchronization among economies throughout the world.

We should try to make it easier for people to find good jobs by giving them the education and training they need to succeed

President Bush

The Fed chairman said one nation's economic conditions tend to trickle into the economies of that country's trading partners.

That "leads us to be obviously quite sensitive to what we see going on abroad," Mr Greenspan said.

Economic models, however, do not capture the degree of synchronization among world economies, he added.

Bush pushes education

In a separate development, Mr Greenspan joined President Bush on Wednesday to stress the importance of education to future US prosperity.

Speaking at a 21st Century Workforce Summit, Mr Bush said : "Our responsibilities are clear; we should try to make it easier for people to find good jobs by giving them the education and training they need to succeed.

"Second, we should help them keep good jobs, and encourage employers to do more for their workers.

"And third, we owe them a chance to build a nest egg that will help them maintain a high standard of living in their retirement years."

Mr Greenspan told the audience of business leaders and trade unionists that "learning will increasingly need to be a lifelong activity."