Greenspan says Fed preparing for terror strike possibility

WASHINGTON -- Federal Reserve chairman Alan Green-span said Tuesday the central bank is standing ready to deal with potential threats to the economy including the "fortunately low but still deeply disturbing possibility" of a new terrorist attack.

The comments, which came at Greenspan's confirmation hearing for a fifth term as Fed chairman, followed a recent warning by Attorney General John Ashcroft that the terrorist network al-Qaida was "90 percent" ready to attack the United States.

Greenspan told the Senate Banking Committee that the U.S. economy was able to emerge relatively unscathed from the Sept. 11, 2001, attacks, which forced Wall Street to close temporarily and led the central bank to flood the banking system with massive amounts of money to make sure that all U.S. financial institutions had the resources to meet withdrawal demands.

"We at the Federal Reserve learned a good deal from that tragic episode," Greenspan said.

Continuing effortsHe said that the Fed was continuing its efforts to bolster its operational capabilities and the banking system's payments systems to withstand another attack.

Private economists widely believe Fed officials will begin raising interest rates at their next meeting on June 29 and 30, pushing the federal funds rate from a 46-year low of 1 percent up by the first of what are expected to be a series of quarter-point increases.

Despite the impending rate increases, something that politicians often rail against, members of the Banking Committee widely predicted a quick confirmation for Greenspan, who was first nominated as Fed chairman in 1987 by President Ronald Reagan and has gone on to serve under four presidents.

While the nomination for a fifth term as Fed chairman would cover four years until 2008, Greenspan's 14-year term as a Fed board member will end on Jan. 31, 2006, and friends of Greenspan, 78, say he has told them he does not plan to serve beyond that date.

The 2006 retirement date was acknowledged during Greenspan's confirmation hearing by Sen. Paul Sarbanes, D-Md., who said that would allow whoever is elected president next November the chance to name a new Fed chairman early in his term.

Greenspan told the committee he did not want to enumerate other potential threats that might keep him awake at night. "I don't want to go list them because they sound -- one sounds scarier than the next ... even though the probabilities are very low," he said.

Sen. Evan Bayh, D-Ind., pressed Greenspan to say whether he believed the country's record trade deficits and the need to finance those deficits by borrowing from foreigners represented a threat, especially if foreigners suddenly decided to cash out their dollar-denominated assets, triggering a sharp drop in the stock and bond markets and a plunge in the value of the dollar.

Greenspan said the bulging trade deficit was "obviously one of the issues which we are focused on," but he said he continued to believe that international financial markets were sufficiently flexible to allow for a gradual adjustment of the U.S. trade deficit in a way that will not harm the U.S. economy.

Greenspan rejected the idea that the country could be facing a "housing bubble" with the rapid rise in home prices in recent years that could suddenly collapse, saying he believed price increases would moderate as sales slow in coming months.

As he has done in the past, Greenspan once again urged Congress to take action to deal with the looming budget problems that will occur in the government's biggest benefit programs, Social Security and Medicare, with the impending retirement of the baby boom generation.

Greenspan, who in the past has suggested trimming retirement benefits for the baby boomers through such methods as lowering annual cost of living adjustments, said that unless something is done, "we will run into fairly serious difficulty in the next decade, say 2011 and forward."

Greenspan also repeated his call for Congress to restore pay-as-you-go budget rules that expired in 2002. Those rules require that any tax cuts or increases in benefit payments be paid for by cutting other government programs or raising other taxes.

The Bush administration supports restrictions on future spending increases but opposes limits on tax cuts, which would make it harder to make the president's 2001 and 2003 tax reductions permanent.