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Greenspan Vows to Be Independent
Fed Candidate Says He'd Resist Outside Pressures

By Hobart Rowan
Washington Post Staff Writer
Wednesday, July 22, 1987

Economist Alan Greenspan, President Reagan's nominee to be the new chairman of the Federal Reserve Board, assured the Senate Banking Committee yesterday that he would firmly reject any pressure from the chief executive or Congress intended to influence his monetary policy decisions.

When Greenspan was asked at his confirmation hearing by Sen. Donald Riegle (D-Mich.) if he could pursue a tight-money policy even though the Reagan administration might oppose it, Greenspan responded:

"Certainly! If the Senate confirms me {to succeed Paul Volcker}, I will take an oath of office. And I take that oath seriously. It's just not credible to me that I would be advocating actions other than those I thought relevant to the situation.

"It's conceivable that my advice may turn out to be wrong, my actions may turn out to be be wrong, but that certainly would not be on the basis of politics rather than economics."

The question of Greenspan's ability to resist political pressure from the White House had been raised by Senate Banking Committee Chairman William Proxmire (D-Wis.) and others because of his close ties to Republican administrations.

Yesterday, after 3 1/2 hours of testimony that probed Greenspan's views on fiscal, monetary, budget, tax and debt issues, he seemed to satisfy the committee with his assurances that he could -- as Proxmire put it -- say "nix" to both the president and Congress.

Greenspan, currently chairman of Townsend-Greenspan Co., added at another point that although he philosophically is opposed to the antitrust laws, he would have no problem in putting aside "personal preferences" and apply the law as necessary.

"It's more important that the laws be adhered to rather than my personal {belief} that a law may be right or wrong," Greenspan said.

Proxmire predicted at the end of the hearing that Greenspan would be "overwhelmingly" confirmed, although the senator said that he may decide to vote against him.

Moreover, Proxmire said, "you will be moving onto a board of clones," all seven members having been appointed by Reagan.

Greenspan said he viewed the Fed's primary role as "achieving steady, maximum economic growth ... {without} letting the inflation genie out of the bottle." He volunteered that Volcker's policies had been "essentially on target", and expressed a determination to "follow {in his} footsteps."

In an exchange with Riegle, Greenspan declared that the critical problem facing the administration and the Fed "is how to manage our way out of our dual deficits -- budget and trade."

Noting that the Congressional Budget Office has projected a reversal of the current downward trend in the budget deficit, Greenspan warned: "If we have a higher fiscal deficit in 1988 and 1989 than in 1987, that would be a very dangerous signal. If the deficit gets out of control again, we will be in a very serious financial bind."

But Greenspan warned against relying on a tax increase to reduce the deficit, as proposed by many Democrats.

He told Sen. Phil Gramm (R-Tex.) that he supported Gramm's effort to restore the automatic spending cut provision of the Gramm-Rudman-Hollings law, expected to come up in the Senate today. Greenspan said he had had some reservations about the impact of the automatic procedure on economic policy, but "as a practical matter it does some good."

He also predicted that the nation is on the verge of a significant decline in the trade deficit, in dollar as well as volume terms, without a further fall in dollar exchange rates.

Exchange rates, he said, "have run into an area of stability, with little evidence of a significant change."

Greenspan -- who just a few months ago had indicated he thought the dollar should drop to a level of 120 to 130 yen (presently it is around 150 yen) to encourage a reduction in the trade deficit -- said yesterday that he didn't know what the impact would be on the economy if the dollar actually fell that much.

"I don't know the answer to that," he said. "I hope we don't get down there, and I don't see why we will."

In an extended exchange with Riegle, one of the Senate sponsors of tough legislation aimed at America's trading partners, Greenspan said that because of the fall in the dollar to its present level, foreign manufacturers and their distributors here would soon be forced to mark up their selling prices. And this will give American producers a competitive advantage.

He indicated he thought any inflationary pressures arising from this trend will be manageable.

In a colloquy with Proxmire, Greenspan refused to repeat, with as much precision, a prediction he had made as a private forecaster in March that there would be a domestic recession before 1990.

He explained that "when you make a forecast for a private client, they need a single number."

But he acknowledged that the economy is sluggish, and "we know that there is a recession out there some time later... . It's not on the horizon now, but our horizon is rarely more than a year."

Greenspan ducked a question from Sen. Timothy E. Wirth (D-Colo.) on what techniques he would follow to cope with a downturn when it does happen, protesting that "all recessions are different, and require different responses... ."

He added that the best way to deal with recessions is to head them off with proper policy decisions three to four years ahead of time.

Apart from Proxmire's expression of concern over his poor forecasting record, the most specific additional criticism came from Riegle, who unsuccessfully pressed Greenspan to label America's international debtor status as an extremely dangerous problem.

Greenspan refused to agree with Riegle's prediction that the growth of the international debt presages higher interest rates. The chairman-designate instead warned that hasty solutions designed to cut the debt might turn out to be worse than the original problem.

He argued that America's plunge into debtor status showed only that the world is changing, and becoming increasingly integrated.

Greenspan said that on confirmation, he would give up all his private financial relationships, and that his personal assets would be placed in two blind trusts. In addition, he said that he would recuse himself from Fed business dealing with past business associates or clients. Included among such clients is Sears, Roebuck & Co., which he advised on financial deregulation matters.

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