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Greenspan Says Failure to Pass Deficit Plan Would be ‘Grave Mistake’ With AM-Budget,Bjt

October 3, 1990

WASHINGTON (AP) _ Federal Reserve Chairman Alan Greenspan bestowed his endorsement on the $500 billion deficit-reduction package Wednesday, telling Congress that failure to approve the agreement would be a ″grave mistake″ with serious consequences for an already weakened U.S. economy.

Greenspan’s views were considered crucial to chances for success by a Bush administration that is hoping the Fed will support the pact by lowering interest rates.

Greenspan did not specifically promise to lower interest rates but he replied with an emphatic ″most certainly″ when asked whether he believed an enacted budget agreement would exert downward pressure on rates.

″The budget summit has crafted what appears to be a credible, enforceable reduction in the budget deficit stretching over a number of years,″ Greenspan said in reading a statement at a congressional hearing.

″If enacted, the budget package should reduce the drain of the federal deficit on our national savings, lessen pressures in credit markets and enhance investment and the long-run growth potential of the United States,″ he said.

Congressional and administration negotiators reached agreement over the weekend on a package of spending cuts and tax increases aimed at lowering the deficit by $500 billion over five years through a combination of tax increases and spending cuts.

While many in Congress have expressed unhappiness over various components, Greenspan said he believed the negotiators had ″unearthed the maximum cut in the deficit feasible at this time, with about the only mix possible, given the political context.″

He said that rejection of the package would significantly dim prospects for coming to grips with the ″corrosive effects of budget deficits″ on the economy and would also make already-jittery financial markets even more worried.

″Failure to enact the agreement would, in my estimation, be a grave mistake,″ Greenspan said.

″I am fearful that failure to enact the agreement would produce an adverse reaction in financial markets that could undercut our economy - already significantly weakened by the shock of the Middle East crisis and problems in our financial system,″ he added.

Greenspan’s comments came at a House Government Operations subcommittee hearing on deposit insurance reform. In a series of questions, he sought to allay concerns expressed by Republican members of the subcommittee.

Some of the most vocal critics of the deficit-cutting plan have been House Republicans and the administration sees winning their support as crucial to the ultimate success of the package.

President Bush said Wednesday that Congress would be ″courting disaster″ by failing to ratify the agreement but the White House conceded that it did not yet have enough votes for passage in the House.

In his congressional appearance, Greenspan agreed that the economic assumptions underlying the deficit accord might be ″on the edge of being unrealistic″ and the full $500 billion in deficit cuts were not likely to come about.

But he said that the package was a credible step in lowering federal borrowing demands, which he termed a serious threat to economic growth.

The budget package also received the endorsement Wednesday of Greenspan’s predecessor as Fed chairman, Paul Volcker.

Volcker, on Capitol Hill to testify before another committee, said that failure to pass the plan would be a ″very bad signal.″

Greenspan for months has stressed the need to enact a deficit-reduction plan viewed as credible by financial markets. He has said that once such a plan was approved, the Fed would do its part by lowering interest rates to offset the negative effects on the economy from lower government spending and higher taxes.

Since the agreement was announced Sunday, interest rates for long-term bonds, a key factor determining mortgage rates, have fallen slightly as investors have given at least a modest vote of approval to the package.

Federal Reserve policy-makers held a key meeting Tuesday to map strategy for coming weeks.

Many analysts believe the Fed officials voted during their closed-door meeting to lower short-term interest rates and put the rate cuts into effect if congressional work is completed on the deficit package later this month.

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