Middle Class Retreat from Stocks, Bonds Could Threaten Economy, Lindsey Says
Davies, Stephen A., American Banker
WASHINGTON -- Wall Street worries over a big slump in stock and bond markets have received a subtle nod of endorsement from Federal Reserve Board Governor Lawrence Lindsey.
In a speech to financial analysts in Baltimore last week, Mr. Lindsey warned that the flood of money that households have been pouring into financial markets is subsiding.
Mr. Lindsay also told the analysts that middle-income, middle-aged households are still strapped because they have drawn down their savings to record-low levels while continuing to borrow to finance purchases of cars, furniture, and other expensive items.
In the process, he cautioned, households have been reducing their bank deposits and holdings of other liquid financial assets in favor of pension and insurance funds that are more difficult, and costlier, to tap in a cash pinch.
"In sum, I believe that the household sector poses one of the most serious risks to the continuation of this recovery," Mr. Lindsey said.
Households are not as well off as they were during the 1980s, he said, and any shock to the economy from higher taxes, higher energy prices, or a burst of inflation "could cause significant difficulties for what is already a challenging situation."
In an interview, Mr. Lindsey said he did not want to make too much of his Baltimore comments, noting that money continues to flow into the markets from banks and other institutional investors. He continues to expect economic growth of around 3% this year, which would be the kind of solid expansion most forecasters expect.
But there is no mistaking the underlying note of concern in the speech, which the Fed governor wrote and researched himself.
Mr. Lindsey said his research revealed that households made net investments in all types of securities of $154 billion last year, a decline from $229 billion in 1992. …