Greenspan Hints Lower Rates Hinge on Cutting Deficit : Economy: The Fed’s chairman indicates that any reduction would come only if the White House and Congress reach an accord that is credible and enforceable.

Federal Reserve Board Chairman Alan Greenspan indicated Thursday that the nation’s central bank would move to lower interest rates if White House and congressional negotiators reach a credible accord on reducing the federal budget deficit.

In testimony before the House Banking Committee, Greenspan said that if a budget agreement is completed, “I would assume the Federal Reserve--in light of those types of conditions--would be moving toward ease (lower rates) to accommodate those types of changes in the marketplace.”

But he added that any such plan must be credible and enforceable and one that “the markets perceive is real.”

Greenspan’s remarks--the farthest he has gone in hinting that the Fed would ease its money and credit policies if budget negotiators agree on a deficit-reduction plan--sent the dollar plunging on currency markets, in anticipation of lower interest rates.

Treasury bonds, which have been hurt by inflation worries, closed mixed.

The Fed chairman has said many times that interest rates are likely to fall on their own if Congress and the Administration cut the budget deficit, but Thursday’s testimony was his first hint that the Fed would be moving actively to help push them lower.

Greenspan’s remarks were expected to provide a further incentive to White House and congressional negotiators, who are reported to be near an accord on how to slash the budget deficit. Although hopes for an agreement this week have ebbed, both sides still are optimistic.

Greenspan devoted most of his remarks Thursday to growing worries about the nation’s financial system. He warned that the banking industry is becoming increasingly fragile and that pressures “would intensify if real estate market conditions were to worsen.”

Echoing warnings by other federal regulators earlier this week, he said the federal insurance fund designed to protect bank depositors in case of failure likely will remain under stress for some time.

Greenspan’s statement to the Banking Committee came amid rising worries that commercial banks might be following the savings and loan industry toward a new financial debacle.

At issue is the health of the insurance fund that members of the public rely on to protect their bank deposits.

New studies have raised questions about the adequacy of the $13-billion fund, particularly in the case of an economic downturn that could cause substantial failures of already-shaky banks.

“The fundamental problems with our current deposit insurance program are clearly understood and are, I believe, subject to little debate,” Greenspan said.

While describing the problem as serious, Greenspan also sought to contrast commercial banks’ problems with the plight of the thrift industry. Chances that a banking crisis would be as costly as the ills that have ravaged savings and loan institutions “are very significantly lower,” he said.

Both the General Accounting Office and the Congressional Budget Office have warned that bank failures could overwhelm the insurance fund in the next few years, leaving the public facing a costly new bailout.

On Tuesday, the GAO reported that 35 large banks were in danger of failing within a year, posing a potential loss of up to $6.3 billion from the fund.

And on Wednesday, the CBO predicted that 600 to 700 commercial banks could fail over the next 3 1/2 years, even if the economy escapes a downturn. That would represent an insurance liability of more than $20 billion.

Startled by the worrisome reports, members of Congress have begun introducing legislation to stave off a financial imbroglio reminiscent of the savings and loan crisis, and their fears were evident Thursday.

“I don’t think the taxpayers will let us stand back and repeat the entire savings and loan crisis,” Rep. Gerald D. Kleczka (D-Wis.) told the Fed chairman.

But Greenspan cautioned legislators against seeking a quick fix to the complicated problem. Without spelling out the details, he said banks should be required to maintain more capital relative to their assets.

Such an increase in capital--the funds contributed by an institution’s owners--would strengthen banks by providing a cushion against financial troubles.

Greenspan also acknowledged that banks might have to pay higher insurance premiums--currently set at 12 cents for every $100 insured--while cautioning that such rate hikes should not be too steep or they could harm banks. Premiums are scheduled to rise to 19.5 cents per $100 in January.

Responding to proposals that the $100,000 insurance limit be lowered, Greenspan said Fed officials agree that a significant transition period would be required in order to avoid major disruption to banks. “Reform is required. So is caution,” he said.

While weakness in the overall economy adds an uncertain element to the outlook for deposit insurance, Congress can help the situation by reaching an accord on the federal budget deficit, Greenspan said.

“The most important thing that can be done for real estate at this stage is a budget agreement,” he said.