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Businessweek Archives

Greenspan Should Lean On The Banks



The last time yields on 30-year bonds were below the bank prime rate, the Federal Reserve was tightening credit to fight inflation. Today, with long bonds flirting with 53 4% and the prime at 6%, the big economic problem is lack of demand, not too much. Oil prices are falling, gold has cracked, soybeans are down, and Prime Minister Morihiro Hosokawa is talking about a possible double-dip recession for Japan. Clearly, growth is weak, and the U.S. economy needs a swift kick.

It's time for Fed Chairman Alan Greenspan to exercise a little moral suasion to get the banks to push both commercial and consumer lending rates down--way down. Bank profits have hit record highs for the past two quarters. Yet, banks have kept their lending rates far above market rates and have put their money instead into safe purchases of Treasuries.

True, the Fed's latest survey of bank lending officers showed that some of them are more willing to lend. And the Federal Deposit Insurance Corp.'s research shows an increase in the loans on banks' books in the second quarter. But commercial and industrial loans are still $10.5 billion lower than they were a year ago.

Bankers aren't likely to bring lending rates down without urging from the regulators. Policymakers are starting to tell some banks they don't need reserves quite so high, but more aggressive action is needed. The Fed itself can provide an example by cutting the fed funds rate, which hasn't been lowered for over a year. Then, the chairman can start working the phones.

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