Fed chief stresses prudent banking Greenspan says nothing on rates

By Melissa Allison Tribune staff reporter May 11, 2001 Federal Reserve Chairman Alan Greenspan warned Thursday that Americans should be careful where they put their money, because the government will not necessarily bail them out.

Even the biggest banks, if they are imprudently managed, could go under, he cautioned. And although deposits up to $100,000 are insured, extra deposits and other credit to banks are not government guaranteed.

There should be "a presumption that uninsured claimants are at risk," Greenspan told several hundred bankers, bank specialists and regulators at the Federal Reserve Bank of Chicago's annual conference on bank structure and competition.

Speaking five days before the next meeting of Fed policymakers, Greenspan did not address the topics of interest rates or general economic issues, except to reiterate his support of a tax cut. "I did not say I supported President Bush's tax cut," he said in answer to a question from the audience. "I thought a tax cut was desirable at that time, and I still do."

Greenspan's remarks focused on the familiar theme of bank risk, meant to instill what he considers a healthy wariness in bank customers. But some listeners were skeptical of Greenspan's warnings.

"There's a difference between what the Fed says and what the Fed does," said Robert Litan, director of the economic studies program at the Brookings Institution and a speaker at the conference.

The government regularly steps in when banks are in trouble. It has rescued small banks and many household names, such as Continental Illinois National Bank & Trust Co. of Chicago and the Bank of New England.

These previous bailouts are why Greenspan and other bank regulators feel they must instill doubts about their willingness to continue rescuing wrecked banks, Litan said.

The warnings are meant to keep bank investors and creditors wary enough that they push banks to be careful about loans and other lines of business.

"It becomes obligatory for them to make these public speeches," Litan said.

Indeed, Federal Reserve Gov. Laurence Meyer echoed Greenspan's concerns Thursday in his own speech at the conference.

Bank supervisors should "make sure no bank is too big to fail in these senses: that stockholders can lose all, that existing management can be replaced, that uninsured creditors can suffer losses, and that the institution can be wound down and possibly sold," Meyer said.

Bert Ely, a longtime bank consultant from Alexandria, Va., who attended the conference, said he considers the Fed's warnings hypocritical and potentially destabilizing to the banking system.

"In a crunch time, the regulators ride to the rescue," Ely said. "The notion of depositor discipline is way oversold. They ought to ask the regulators to do their jobs" in monitoring banks' activities more carefully.

He said it is careless for the Fed to shoot off warnings about banks being allowed to fail. If bank creditors become spooked by such talk, they could cause a banking catastrophe by withdrawing their funds.

"The idea of keeping creditors of the largest banks a little on edge is potentially destabilizing," Ely said

http://www.chicago.tribune.com/business/businessnews/article/0,2669,SAV-0105110172,FF.html

-- Martin Thompson (mthom1927@aol.com), May 11, 2001

Answers

Gee, aren't people already a bit wary? Aren't individual savings already in the red? Isn't chopping interest rates supposed to make borrowing more attractive? What are all the hard working folks gonna do with all the filthy loot they can expect from all the tax savings and the increased money supply you've been pumping out.

BTW Al, you should also have warned the folks about those accounts "insured" up to $100,000. There's only about 10 cents on the dollar in the kitty. Remember the S&L fiasco? Good time for tomato cans and the old mattress!

-- Warren Ketler (wrkttl@earthlink.net), May 11, 2001.

What a frivolous balancing act. Old Al is trying to scare the banks into prudence at the same time he is inflating the money spigot with all his recent interest rate cuts.

Oh, well, many say he a magician. It will be most interesting to see if he can pull this off.

-- Billiver (billiver@aol.com), May 11, 2001.

This is the biggest pile of tripe I've read. The Federal Reserve lecturing us on sound money.

-- David Williams (DAVIDWILL@prodigy.net), May 11, 2001.