Greenspan Warns of Higher Interest Costs

A failure by Congress to reach a balanced-budget agreement could lead to a “sharp increase” in the cost of mortgages and other interest rates, Federal Reserve Chairman Alan Greenspan said Monday.

“I think the reaction could be quite negative” in the financial markets, Greenspan said at a Senate Banking Committee hearing.

For months, Republicans have been making the argument that failure to work out a budget deal could hurt the financial markets, and ultimately raise the cost of borrowing for consumers. Greenspan’s comments, made in response to questions by Sen. Pete V. Domenici (R-N.M.), chairman of the Senate Budget Committee, served to further bolster the GOP’s arguments.

Greenspan said expectations of a balanced-budget agreement had lifted the financial markets in the past year, playing a major role in a two percentage point decline in long-term interest rates.

That progress could be reversed if the budget talks fail, he warned, which could lead to a “sharp increase in long-term rates.” Noting the rapid growth of some entitlement programs such as Social Security and Medicare, which exceed the growth of the tax base, Greenspan said the programs “must be reined in” as part of a balanced-budget agreement.