Greenspan Optimistic in Wake of War

Federal Reserve Chairman Alan Greenspan, in a cautiously upbeat assessment, said Wednesday that the end of the Persian Gulf War had removed a “troublesome uncertainty” overhanging the U.S. economy.

“Certainly, the successful end to the hostilities in the Gulf has removed a troublesome uncertainty and should provide some lift to consumer and business confidence,” Greenspan said in testimony prepared for the House Ways and Means Committee.

Although he said the economy was still shrinking, he noted that the current recession may in fact prove milder than most others in the past 40 years.

Driving Iraq from Kuwait after only 100 hours of ground fighting kept the cost of the Gulf War to the U.S.-led coalition far lower than many had anticipated.

White House Budget Director Richard Darman said Tuesday that he expected the war to cost the United States $15 billion, the same amount included in the Administration’s budget. Foreign contributions have cut the final bill from about $70 billion, he said.

Greenspan said the short conflict ensures a minimal impact on government spending and tax policy--good news for those who feared a lengthy war would require higher taxes that would inhibit recovery from recession.

But he added that banks have clamped down on lending, robbing the economy of money needed for growth, which is a persistent problem and may require additional action.

“Other factors that we noted earlier--concerns about credit availability and problems in real estate markets--continue to restrain activity and to weigh importantly on business thinking,” Greenspan said.

The secondary effects of rising unemployment and cuts in income were still running their course through the economy, he said, but lower energy prices--and a potential boost in confidence brought by the end of the war--should “be laying the groundwork for some firming in consumer spending in coming months.”

Greenspan also said reconstruction in the Middle East after the war would likely boost U.S. exports significantly.

The Fed chairman said he sees no sign that the current recession that began late last year is severe--in fact it may be milder than most downturns.

“On balance, when these positive forces are weighed with the negative, the scales appear to tip slightly in favor of suggesting that the current downturn might well prove milder than most of the recessions in the past 40 years.”