<DOC>
[108 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:22918.wais]
S. Hrg. 108-852
NOMINATION OF ALAN GREENSPAN
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
ON
the nomination of alan greenspan, of new york, to be chairman
of the board of governors of the federal reserve system
__________
JUNE 15, 2004
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Martin J. Gruenberg, Democratic Senior Counsel
Aaron D. Klein, Democratic Economist
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
?
C O N T E N T S
----------
TUESDAY, JUNE 15, 2004
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 2
Senator Bunning.............................................. 4
Senator Schumer.............................................. 5
Senator Crapo................................................ 5
Senator Bayh................................................. 6
Senator Dole................................................. 6
Senator Miller............................................... 7
Senator Hagel................................................ 7
Senator Stabenow............................................. 8
Senator Chafee............................................... 8
Senator Sununu............................................... 9
Senator Allard............................................... 9
Senator Reed................................................. 26
Senator Carper............................................... 28
Senator Corzine.............................................. 28
Senator Bennett.............................................. 31
NOMINEE
Alan Greenspan, of New York, to be Chairman of the Board of
Governors of the Federal Reserve System........................ 10
Biograhpical sketch of the nominee........................... 35
Response to written questions of:
Senator Sarbanes......................................... 48
Senator Carper and Senator Miller........................ 49
(iii)
NOMINATION OF ALAN GREENSPAN
OF NEW YORK, TO BE CHAIRMAN OF
THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
----------
TUESDAY, JUNE 15, 2004
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
This morning, we will consider the nomination of Alan
Greenspan to serve his fifth term as Chairman of the Federal
Reserve System. If confirmed, and we expect that will happen,
Chairman Greenspan will be only the second Federal Reserve
Governor to serve beyond his fourth term, equaling the record
held by the distinguished William McChesney Martin.
Chairman Greenspan, you have led the Federal Reserve System
since August 1987, a period of nearly 15 years. During that
time, the U.S. financial system has withstood a number of
significant challenges, including economic disruptions in
Mexico, Russia, and the currency crisis which engulfed much of
South Asia. Your tenure also includes the 1991 to 2001 economic
expansion, the longest in American history. This Committee has
benefited from your wisdom in crafting a number of significant
pieces of legislation, including the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, the Federal
Deposit Insurance Corporation Improvement Act of 1991, and most
recently, the Gramm-Leach-Bliley Act. I know that my colleagues
will further remark on your successful track record.
Chairman Greenspan, I would like to note your recent
remarks at the Federal Reserve Bank in Chicago on financial
literacy. In your speech, among other things, you noted that as
a young man, it was music that grabbed your interest and that
you visualized yourself someday playing with the likes of the
Glenn Miller Orchestra or becoming another Benny Goodman.
Obviously, your career path ultimately took another direction
and for that, Mr. Chairman, the United States and the world
financial markets I believe are grateful. The music world will
never know what it may have missed, but this Committee and this
Senator express our thanks for your extraordinary public
service.
Chairman Greenspan, we look forward to your testimony and
at the proper time I would get back to you on the oath.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman.
I join you in welcoming Chairman Greenspan back before the
Banking Committee this morning as we review his nomination to
another term as Chairman of the Board of Governors of the
Federal Reserve System.
Let me start by congratulating Chairman Greenspan on his
nomination to a fifth term as Chairman of the Federal Reserve
Board. If confirmed, as I fully expect he will be, Chairman
Greenspan would join William McChesney Martin, as you noted, as
the only Fed Chairman to be confirmed for five terms. In terms
of longevity of service, he is currently second only to
Chairman Martin.
Over the years, I have both agreed and disagreed with
Chairman Greenspan over the conduct of monetary and fiscal
policy. That is what a democracy is all about, and I understand
that. I believe the relationship Chairman Greenspan formed with
the then-Secretary of the Treasury Robert Rubin during the
1990's led to the conduct of fiscal and monetary policies which
complemented one another and which helped achieve high growth
and employment with low inflation and served the country well.
As I look back, I think with respect to monetary policy, my
sharpest disagreement with Chairman Greenspan was probably in
1994 when the Fed raised rates in a preemptive manner that I
thought was not warranted by inflationary pressures. In regard
to fiscal policy, my strongest disagreement with Chairman
Greenspan came in the beginning of 2001 when we were told that
the debt was being paid down at such a rapid rate that we had
to slow the trajectory otherwise we would pay it off too
quickly. That took the lid off the punch bowl as far as tax
cuts were concerned. Of course, now we are experiencing very
large deficits and they are projected well out into the future.
I do want to underscore the agreement I have had with the
Chairman and the Fed on issues of bank regulation, particularly
in regard to the need for vigorous holding company supervision,
and in maintaining the separation of banking and commerce.
Let me say though, Chairman Shelby and my colleagues, that
even when I found myself disagreeing with Chairman Greenspan, I
have always enjoyed our public exchanges. They have always been
focused on the substance of the issues. I found them thought-
provoking and informative. Chairman Greenspan has carried out
the responsibilities of his office with great skill and
dedication, and has sustained the tradition of outstanding
economic statesmanship provided by such former Fed chairmen as
Marriner Eccles, William McChesney Martin, Arthur Burns, and
Paul Volcker.
I would like to take a moment to commend Chairman Greenspan
for what I believe will be an important legacy of his
chairmanship of the Federal Reserve. That is the movement by
the Federal Open Market Committee of the Fed to be more open
and transparent in its conduct of monetary policy. That
movement began in November of 1993 when the Federal Reserve
decided to release all historic transcripts of meetings of the
FOMC, and the decision in January 1995 to release transcripts
of FOMC meetings going forward with a 5-year lag.
Perhaps most significantly, in February 1994 the Federal
Reserve decided that changes in monetary policy by the FOMC
would be accompanied by an immediate public announcement of the
change with an explanation of a reason for the change. Now that
was followed by the decision in January 2000 to release an
announcement after every meeting of the FOMC whether or not a
change in monetary policy was made, with a brief statement
assessing the balance of the risks. And most recently, they
have added the recorded votes of the individual members of the
FOMC on the conduct of monetary policy.
I also should mention that, in 2000, the Congress, with the
support of the Fed, amended the Federal Reserve Act to make the
Federal Reserve Chairman's Congressional testimony on the Semi-
Annual Monetary Policy report a statutory requirement. Until
then the testimony was customary but not required by law.
For those who have followed the conduct of monetary policy
by the FOMC over the years and advocated greater transparency
in its decisionmaking, these steps taken during Chairman
Greenspan's tenure were meaningful and significant changes
which have made the deliberations more transparent. I think it
has made the members of the FOMC more accountable for the
conduct of their responsibilities. Chairman Greenspan deserves
great deal of credit for these positive changes.
In fact it has been my perception that members of the FOMC,
both Governors of the Fed and the Federal Reserve Bank
Presidents have become more open in their public discussions of
the work of the FOMC and have made greater efforts to explain
their deliberations to the public. I believe the Fed has also
developed a greater appreciation of how important communication
to the public and to the markets is to the conduct of monetary
policy. I regard these as positive developments with lasting
consequences.
Finally, let me note, Mr. Chairman, that while this
nomination is for a 4-year term as Chairman, Chairman Greenspan
has to cease to serve as a governor in February of not next
year but the following year, 2006.
Chairman Greenspan. January 31, 2006.
Senator Sarbanes. We have the date exactly, January 31,
2006--because of the limitation on the length of term a
governor can--you can have one 14-year term, but you can have
part of a term and then all of a 14-year term, which is the
situation Chairman Greenspan would find himself in. At that
point he would, of course, have to leave the board. That would
help to get the chairmanship and the presidential elections
back on what I regard as a more preferable track, which would
be a new President would be able to appoint a chairman about a
year after he came into office. So you would have some removal
from the political process but not a total exception to it. I
think that is a better synchronization on which to have the
process work.
But again, I close by congratulating Chairman Greenspan on
this nomination to a fifth term as Chairman of the Federal
Reserve. I look forward, as always, to his testimony this
morning and, Mr. Chairman, I look forward to supporting you as
you move through this nomination process.
Chairman Shelby. Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman.
Chairman Greenspan, I appreciate your service to our
country, especially over the last 12 years, and I have no doubt
that you will be reconfirmed as Chairman to serve the last 2
years of your 14-year term. Many are afraid of what will happen
when your term expires in 2006. There is much fear and
trepidation. But both you and I remember that there was much
fear and trepidation when your predecessor, Paul Volcker, left.
But our economy survived, and when you step down and decide to
play tennis full-time, our economy will survive again.
I think it is obvious to everyone by now that I disagreed
with you many times on your monetary policy decisions. As you
know, I have already stated that I will not be able to support
your renomination. I am quite sure that I will be the only
Member this Committee not to support your renomination, and
that there is a good chance that I will be the only Member of
the U.S. Senate not to support your renomination. But that is
okay. This is a democracy. We both know what it is like to take
unpopular stands.
There have been many things you have done right in your
tenure as Chairman. Since January 2001, I think you have done a
pretty good job on monetary policy. I think that the Fed has
done a very good a job on working with our financial
institutions on combating terrorism. I also think that the Fed,
under your leadership, has done a good job about briefing
Congress on your antiterrorism activities and other initiatives
the Fed has undertaken. And you have let sunshine into the Fed.
Though I believe more can be done in that area.
But you know my problems, I have pointed them out to you on
many occasions. I do not think that you have always moved
aggressively enough to cut rates in the past, especially in
1992 and 2000, and I think you have involved yourself in many
things outside the Fed's charter. Believe me, I know that you
are asked to comment all the time on things that have nothing
to do with monetary policy or banking regulations. Quite often,
it is a Member of Congress asking those questions that have
nothing to do with your job. I just wish you would be more
respectful in declining to answer those type of questions.
Your words matter, Mr. Chairman. You know that. You know
what happens when you use the term ``irrational exuberance.''
You know what happens when you use the term ``wealth effect.''
And you know how violent and volatile the markets can be. You
knew that deleting the phrase, ``for a considerable period''
from the FOMC statement back in February, what it would do. I
am sure there are times that you wish your words did not matter
as much as they did. But people pay attention to what you say.
Sometimes that is very good. Sometimes that is very bad. The
job of the Fed is to set monetary policy. And I believe that
when the Fed strays from that into other areas that we get into
trouble.
I look forward to continuing working with you in the
future. And hopefully the good people of Kentucky will decide
to send me back here so we can work together for the last 2
years of your term. With monetary policy, I hope you will act
aggressively. You have over the last three-and-a-half years. I
would very much like to see you be the Chairman you have been
since January 2001, not the Chairman of the summer and fall of
2000. Remember, if our questions, even today, do not have
anything to do with your job, you do not have to answer them.
Thank you for time, Mr. Chairman.
Chairman Shelby. Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. I am pleased to
be here. As a New Yorker, I am particularly proud. New York has
made countless contributions to our Nation, and you are not the
least of them, Mr. Chairman, so thank you for the good work
that you do. Your longevity is testament to your excellence.
Markets and the Nation breathed a sigh of relief when you
agreed to serve another term, and with good reason. Your
integrity, your intelligence, and your ability to balance
prosperity and inflation, a very difficult thing to do, are
second to none. I, for one, am delighted that you are going to
serve another term and am enthusiastic about your renomination.
I would just make one point in disagreement, and that is,
it seems to mean that as I think your role in the bully pulpit
is a good role. I must respectfully disagree with my colleague.
I think we have few people who look out for the long-term
health of the Nation. If the Federal Reserve Chairman does not
do that, who will?
But in those pronouncements, my one concern here is that
your voice against too much spending that creates deficits
seems to be a lot stronger than your voice against tax cuts
that threaten the deficit. I hope that in your next term you
will strengthen your voice against unbalanced tax cuts that
threaten the viability of our recovery through overwhelmingly
large deficits.
Having said that, my view is you have been an A-plus
chairman and I am glad you will continue to be.
Chairman Shelby. Senator Crapo.
STATEMENT OF SENATOR MICHAEL CRAPO
Senator Crapo. Thank you very much, Mr. Chairman.
Chairman Greenspan, I welcome you back. I am one of those
who will be supporting your confirmation. I appreciate the
visit that we had when we discussed your confirmation. And
frankly, I appreciate your strong leadership in the country.
There are a number of issues on which your voice has helped
people to gain the confidence to take very important steps we
needed to take. I am sure you do not appreciate it, but you are
always going to get pulled into this tax cut fight. I
appreciate the voice you have had in that tax cut debate with
regard to the question of whether we should focus on spending.
I think we all agree with your strong comments about not
spending ourselves into deficit. Those of us up here on the
Hill will probably continue to debate forever the question of
whether tax relief is helpful and stimulative to the economy,
or whether it is harmful, and the circumstances in which it
should be utilized and which it should not be.
But I frankly just wanted to let you know that you have
taken some shots here today from different perspectives. You
are used to taking those shots, but you are universally
recognized as one of those who has made a difference in America
and I appreciate your service. Thank you.
Chairman Shelby. Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Mr. Chairman, welcome. I must remark upon the
differences among our institutions of governance. Your 17 years
as head of the Fed rank you second in the history of our
republic, and yet I look around the Senate and you would be a
relative newcomer in this institution, or at least it seems to
me that way. But I compliment you on your years of devotion to
our country and your capable service and would only add--I am
going to save most of my remarks for our question period. But I
would only add that I think the only potential stumbling block
to your reconfirmation is the victory margin I would anticipate
and the professional jealousy that might engender in some of us
up here.
So, I thank you for your service and look forward to its
continuation.
Chairman Shelby. Senator Dole.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Thank you, Mr. Chairman.
Today, I certainly want to lend my voice in strong support
of the renomination of Alan Greenspan. Senators on both sides
of the aisle have long admired the wisdom, the leadership, the
integrity of Alan Greenspan since he first took office under
President Reagan in 1987.
He has repeatedly demonstrated that a cool head and keen
understanding of the markets can lessen the dangers when events
panic the markets and capital crisis ensues. While it may seem
obvious today, Chairman Greenspan has repeatedly had to remind
us all that the fundamentals of the U.S. economy remain strong.
Within 2 months of assuming the chairmanship of the Board of
Governors, Alan Greenspan reassured investors and brought the
necessary liquidity into the market when a panic caused the
loss of more than 23 percent of the stock market value in
October 1987. Then again, Chairman Greenspan demonstrated his
considerable skills in the 1987-1988 global financial crisis
when, with considerable finesse and three rate cuts, he was
able to avert problem after problem as the world markets
panicked. It is for these reasons, and many more, that I have
full confidence in Chairman Greenspan's ability to continue as
the head of the Federal Reserve System.
While many would expect an economist to simply see the
numbers before him, Chairman Greenspan is also keenly aware of
the people most affected by the numbers he analyzes. For
example, he understands the growing wage difference between
skilled and unskilled labor, and for that reason he has been a
strong advocate for the continuing education of our workforce.
I share Chairman Greenspan's admiration for the excellent
work of our community colleges, which is so important to North
Carolina as we strive to retrain displaced workers due to
enormous job losses in manufacturing. I am proud to be working
with my colleagues Senators Enzi and Alexander to write
legislation which provides additional assistance to our
community colleges and other institutions of higher learning
for training and retraining students in high-growth job
markets. We are currently working on this bill with the Senate
HELP Committee and I look forward to its introduction later
this year.
In the past year, we have witnessed an economy that
continues to grow stronger. Over 1.1 million jobs have been
added since last August, with 8 consecutive months of gains.
The Nation's unemployment rate is 5.6 percent, below the
average of the 1970's, the 1980's, and the 1990's. Economic
growth over the last three quarters has been the fastest in 20
years. American companies are reporting record productivity
with growth between the years 2000 and 2003 at the fastest 3-
year rate in half a century. All of this is thanks to both the
excellent efforts of Chairman Greenspan and tax relief that
clearly works.
I look forward to the swift consideration of Chairman
Greenspan's nomination and its quick passage by the full
Senate.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Miller.
STATEMENT OF SENATOR ZELL MILLER
Senator Miller. Thank you, Mr. Chairman.
Mr. Chairman, thank you for your years of service to this
country. Thank you for being willing to continue to serve and
work in the arena; not always the quietest and most comfortable
place to work. But your wisdom and your integrity are
especially needed today. Thank you for your willingness to
serve and thank you for your long and distinguished career.
Chairman Shelby. Senator Hagel.
STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Mr. Chairman, thank you. I too welcome
Chairman Greenspan and I strongly support his leadership and
his renomination. I do that, Mr. Chairman, because I think
Chairman Greenspan has been one of the most effective leaders
in monetary policy that we have had in this country, during
some very difficult and challenging times. He has provided
steady, common sense, and strong leadership. I have
particularly appreciated his wider lens view of these issues,
understanding that the fabric is a weave of many dynamics:
trade, monetary and fiscal policy, foreign policy, and
geopolitical issues. He has done that extremely well and I
think has presented his case in that wider lens context which
has been helpful to this country and to the world.
Mr. Chairman, thank you.
Chairman Shelby. Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman.
I also would begin by welcoming Chairman Greenspan. I
appreciate your leadership, your service to the country over
the past 16 years, and I am proud to support your efforts and
willingness to continue to do that.
Chairman Greenspan has clearly steered monetary policy for
our country through good times and bad, as colleagues have
indicated today on the Committee. He has seen difficult
recessions and boom times, and he has been an outspoken voice
for question and reason when we have needed it.
For example, he warned us, when many did not want to hear
it, that the dot.com boom period could be fueled in part by
irrational exuberance, and the subsequent correction in the
market proved him right. Exponential growth in many market
stock portfolios was indeed not based on sound market pricing.
Chairman Greenspan has also not been afraid to aggressively
fight off inflationary pressures when he thought the economy
was overheating. During my time in the House and the Senate, I
have appreciated his willingness to warn policymakers about the
danger of out-of-control deficits. I believe that we should be
more responsible about both how we spend money and how we
approach our revenue needs and our tax policy.
I had the opportunity to visit with Chairman Greenspan a
few weeks ago and we discussed many important issues. I
reiterated my concern to him at the current difficult economic
environment with the Federal deficit is simply not sustainable
or responsible. We are going to have to rethink our current
fiscal policies if we are going to honor our promise to the
baby-boom generation as they retire. I am glad that as we
consider how to take care of our aging population, Chairman
Greenspan has been willing to repeat his support for budget
triggers.
Chairman Greenspan and I also recently discussed the
important issue of financial literacy, and the Federal
Financial Literacy Commission that I worked with Senator
Sarbanes, Enzi, and Chairman Shelby to set up. I know of the
Chairman's personal commitment to financial literacy, which I
appreciate. Financial literacy creates more efficient markets.
It also helps people to make financial decisions that are in
their personal best interests, and I am glad that we have a
Federal Reserve Chairman who believes financial literacy should
be a priority.
Chairman Shelby, thank you for calling today's important
nomination hearing. I intend to support Chairman Greenspan's
nomination to another term. And, again, I thank you for your
service, Mr. Greenspan.
Chairman Shelby. Senator Chafee.
STATEMENT OF SENATOR LINCOLN D. CHAFEE
Senator Chafee. Thank you, Mr. Chairman, and
congratulations on your nomination for a fifth term. You are
one of the few in this town that has served under Presidents of
both political parties. I particularly want to salute the work
you did prior to coming to the Federal Reserve in the early
1980's on the Social Security Commission. Successful at raising
the age of eligibility on a slow glide path from 65 to 67;
something we have not been able to do on Medicare. So
congratulations.
Chairman Shelby. Senator Sununu.
STATEMENT OF SENATOR JOHN E. SUNUNU
Senator Sununu. Thank you, Mr. Chairman.
Mr. Greenspan, my staff was hoping that I would ask you
upon which piece of U.S. currency you would most like to see
your portrait, but I pointed out to them that your modesty and
sense of fairness would preclude you from singling out one
denomination over another.
[Laughter.]
So instead I simply want to welcome your testimony, of
course, and your appearance here, but ask that in your
testimony and any written submissions to the Committee you
focus on those areas that I think are most pertinent to the
Fed, areas of capital market regulation, and banking
regulation, and monetary policy. As I look through the issues
that we dealt with this year, just this session of Congress,
whether it is regulatory issues or legislative issues, market
structure, mutual fund regulation, terrorism risk insurance,
the structure of public boards and their liability, hedge fund
regulation, GSE legislation, all of these issues I think have
the potential to really change the structure of our capital
markets, their operation, their efficiency, and public
confidence in the capital markets.
I would very much like to see, whether it is a
resubmission, a restatement, or clarification of the guiding
principles that you believe should shape both regulation and
legislation in these areas affecting the efficiency of the
capital markets and public confidence in the capital markets,
because most of the issues that I just mentioned are not going
to go away at the end of this year. We are going to be taking
them up again next year, and I think any perspective that you
can provide to us to help guide and shape our views as
policymakers would be welcome. Thank you very much.
Chairman Shelby. Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, again I would like to thank
you for holding this hearing on the renomination of Dr.
Greenspan to be the Chairman of the Board of Governors of the
Federal Reserve System. I look forward to his testimony and the
opportunity to have the Chairman come before this Committee and
share his expertise on economic issues and factors that are
driving and hindering economic growth.
Today, I want to extend my appreciation for his unfettered
commitment to analyzing and interpreting the peaks and valleys
of our U.S. economy. His contribution to this country has been
exemplified by his constant vigilance to the factors that play
such an influential role in the direction and success of our
economic system. Dr. Greenspan has served on the Board of
Governors of the Federal Reserve System since August 1987 and
as Chairman of the Board of Governors since June 2000. He has
witnessed, obviously, a great deal of uncertainty and change in
those years as the heightened impact on our economy of
technological advances, competition, and robust productivity
have become evident.
Accordingly, Dr. Greenspan and the other members of the
Board of Governors have altered the framework in which they
analyze the economic system so that they may gain a more
accurate depiction of what the economy looks like and how
better to formulate monetary policy in light of those changes.
Dr. Greenspan, I appreciate your commitment to this
Committee and to this country, and look forward to supporting
your nomination for a fifth term as Chairman of the Federal
Reserve Board.
Thank you, Mr. Chairman.
Chairman Shelby. Chairman Greenspan, I ask now that you
stand and take the oath. Would you raise your right hand?
Do you swear that the testimony that you are about to give
is the truth, the whole truth, and nothing but the truth, so
help you God?
Chairman Greenspan. I do.
Chairman Shelby. Do you agree to appear and testify before
any duly-constituted committee of the Senate?
Chairman Greenspan. Mr. Chairman, I do.
Chairman Shelby. Chairman Greenspan, we welcome you to the
Committee. You may proceed as you wish.
STATEMENT OF ALAN GREENSPAN, OF NEW YORK,
TO BE CHAIRMAN OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Chairman Greenspan. First I want to express my gratitude to
President Bush for his confidence in me, and to you, Mr.
Chairman, and Members of the Committee, for expeditiously
holding this hearing on my renomination for a fifth term as
Chairman of the Board of Governors of the Federal Reserve
System. The Federal Reserve has had a close and productive
relation with this Committee over the years. If you and your
Senate colleagues afford me the opportunity, I look forward to
working with you in advancing our shared goal of strengthening
the firm foundation upon which the American people have built a
prosperous economy and a sound and efficient financial system.
The performance of the U.S. economy has been most
impressive in recent years in the face of staggering shocks
that in years past would almost surely have been destabilizing.
Economic policies directed at increasing market flexibility
have played a major role in that solid performance. Those
policies, aided by major technological advances, fostered a
globalization which unleashed powerful new forces of
competition, and an acceleration of productivity, which at
least for a time has held down cost pressures.
We, at the Federal Reserve, gradually came to recognize
these structural changes and accordingly altered our
understanding of the key parameters of the economic system and
our policy stance. But while we lived through them, there was
much uncertainty about the evolving structure of the economy
and about the influence of monetary policy.
The Federal Reserve's experiences over the past two decades
make it clear that such uncertainty is not just a pervasive
feature of the monetary policy landscape; it is the defining
characteristic of that landscape. As a consequence, the conduct
of monetary policy in the United States has come to involve, at
its core, crucial elements of risk management. This conceptual
framework emphasizes understanding the many sources of risk and
uncertainty that policymakers face, quantifying those risks
when possible, and assessing the costs associated with each of
the risks.
This framework entails devising, in light of those risks, a
strategy for policy directed at maximizing the probabilities of
achieving, over time, our goals of price stability and the
maximum sustainable economic growth that we associate with it.
In designing strategies to meet our policy objectives, we have
drawn on the work of analysts, both inside and outside the Fed,
who over the past half century have devoted much effort to
improving our understanding of the economy and its monetary
transmission mechanism. A critical result has been the
identification of key relationships that, taken together,
provide a useful approximation of our economy's dynamics. Such
an approximation underlies the statistical models that we at
the Federal Reserve employ to assess the likely influence of
our policy decisions.
However, despite extensive efforts to capture and quantify
what we perceive as the key macroeconomic relationships, our
knowledge about many of the important linkages are far from
complete and, in all likelihood, will always remain so. Every
economic model, no matter how detailed or how well-designed,
conceptually and empirically, is a vastly simplified
representation of the world that we experience with all its
intricacies on a day-by-day basis. Policymakers have needed to
reach beyond models to broader, though less mathematically
precise, hypotheses about how the world works.
A central bank needs to consider not only the most likely
future path for the economy, but also the distribution of
possible outcomes around that path. The decisionmakers then
need to reach a judgment about the probabilities, costs, and
benefits of the various possible outcomes under alternative
choices for policy.
As the transcripts of the Federal Open Market Committee
meetings attest, faced with these abundant challenges, we find
the making of monetary policy to be an especially humbling
activity. In hindsight, the paths of inflation, real output,
employment, productivity, stock prices, and exchange rates may
seem to have been preordained, but no such insight existed as
we experienced these
developments at the time.
Yet, during the past quarter-century, policymakers managed
to defuse dangerous inflationary forces and to deal with the
consequences of a stock market crash, a large asset price
bubble, and a series of liquidity crises. These developments
did not divert us from the pursuit and eventual achievement of
price stability and the greater economic stability that goes
with it.
Going forward we must remain prepared to deal with a wide
range of events. Particularly notable in this regard is the
fortunately low, but still deeply disturbing, possibility of
another significant terrorist attack in the United States. Our
economy was able to absorb the shock of the attacks of
September 11 and to recover, though remnants of the effects
remain. We, at the Federal Reserve, learned a good deal from
that tragic episode with respect to the impact of policy and,
of no less importance, the functioning under stress of the
sophisticated payment system that supports our economy. Our
efforts to further bolster the operational effectiveness of the
Federal Reserve and the strength of the financial
infrastructure continue today.
Each generation of policymakers has had to grapple with a
changing portfolio of problems. So while we importantly draw on
the experiences of our predecessors, we can be sure that we
will confront different problems in the future.
The Federal Reserve has been fortunate to have worked in a
particularly favorable structural and political environment
over the past quarter-century. But we trust that monetary
policy has contributed meaningfully to the impressive
performance in our economy in those year. I have been
extraordinarily privileged to serve my country at the Federal
Reserve during most of these years and would be honored if the
Senate saw fit to enable me to continue this service.
Thank you very much, Mr. Chairman.
Chairman Shelby. Thank you, Chairman Greenspan.
Chairman Greenspan, this morning the Commerce Department
reported that the business inventories climbed 0.5 percent in
April to $1.212 trillion, a record high and the eighth straight
monthly increase. What do these increases tell us about any
potential inflationary pressures?
Chairman Greenspan. At the moment not too much, Mr.
Chairman. The reason is that even though, as you point out,
inventories have risen to record high levels, as a ratio to
sales or production they are close to, and probably are at,
record lows. Indeed, there is a very significant path of
inventory reduction over the last couple of decades, the so-
called just-in-time inventory process. So, I would perceive
that that is going to continue on, but there is no evidence at
this stage that I can unearth that suggests to me that recent
inventory patterns are contributing either to inflation or
deflation.
Chairman Shelby. Mr. Chairman, what can we expect, in your
judgment, in terms of job growth in light of these heavy
inventory numbers? Is there any correlation there at all?
Chairman Greenspan. Strangely enough, I would reverse it
and say that the fact that inventories in a general context of
the level of sales being quite low leads me to conclude, indeed
to those purchasing managers who try to evaluate the inventory
position of their customers, that the next change in inventory
policy, at least for the short-run, is probably going to be
some element of either accumulation or at least, at a minimum,
a temporary stabilization of the inventory-sales ratios before
the long-term trend continues.
What that suggests is that even flattening out of
inventory-sales ratios creates a significant increase in the
rate of increase in inventories during any particular period.
And since inventory accumulation adds to final demand to get
production and employment, I would presume that, if anything,
the inventory picture today is probably more likely to be
helpful in expanding employment than in contracting it.
Chairman Shelby. The Federal Open Market Committee, you
referenced that a minute ago, will be meeting at the end of
this month. It is widely anticipated that the Federal Open
Market Committee will move to increase short-term interest
rates. You have noted any upward movement will be, your word
``measured'' although you also noted that, ``the FOMC is
prepared to do what is required'' to maintain price stability,
which is important to everybody. In other words, to pursue a
more aggressive interest-rate strategy there.
What factors will you be looking at between now and the end
of this month to determine whether or not a measured or an
aggressive response is necessary?
Chairman Greenspan. Mr. Chairman, as I said in the remarks
which you are quoting from, our best judgment is that the
economy is growing in a solid fashion. To be sure, underlying
unit costs, having gone down for quite a long period, have now
started to turn up modestly. But our general view is that
inflationary pressures are not likely to be a serious concern
in the period ahead.
Therefore, we concluded in our policy statements that the
removal of an increasingly unnecessary degree of accommodation
in monetary policy is very likely to be measured over the
quarters ahead. But clearly, this is our general view of the
outlook and forecasts are subject to error. If our judgment as
to how the economy is going to evolve and how inflation is
going to evolve turns out to be mistaken we will change,
because our fundamental goal is, as you point out, to maintain
price stability over the longer-run as a means of creating
maximum sustainable growth.
Chairman Shelby. Do you believe that the economy will
continue each month to add a significant number of jobs as we
have seen in recent months?
Chairman Greenspan. So far the pace of economic activity,
and a slightly lessened pace of productivity increase compared
to what it had been, numerically creates job growth, if I may
put it in those terms. We see nothing in the immediate outlook
to suggest any major change in the path of employment growth
going forward.
Chairman Shelby. Thank you.
Senator Sarbanes.
Senator Sarbanes. Thank you very much, Chairman Shelby.
Chairman Greenspan, the economy has now 1.9 million fewer
private-sector jobs than it had when the recession began 38
months ago in March 2001. Now in every other recession since
World War II, the economy has recovered all of the private-
sector jobs that had been lost by this point in the cycle;
generally well before this point. In fact when compared to a
typical recovery, our economy has 5 million fewer private-
sector jobs at this point in the recovery period than under a
typical recovery.
Let me just show you this chart to make this point. The red
line is the average of nine recessions since World War II in
terms of the recovery of private-sector jobs. This dark line
here is what has happened in this recovery. The thing that is
interesting is that it started off and they pretty well tracked
the same course going down. But then in previous recessions we
got an upswing and we came back up here, then we pass the point
of--now we are getting net gain in jobs. But this time we
stayed down here on this trajectory so there is a gap here of 5
million private-sector jobs short of a typical recovery.
I find obviously that is a matter of great concern. What is
your explanation for that? These are the amount of months. So
we are out here now. We are at 37, 38 months out here in the
period and we have not come back up. We are not even back up to
recovering. We are still 1.9 million short, and we are 5
million short of--when you compare it with the average of the
nine recessions since World War II. What is your explanation
for that or your theory on that?
Chairman Greenspan. Senator, I think there are two
explanations. First, and most important, is the extraordinary
increase in the rate of productivity growth, which has been
very unusual for a period of economic weakness such as
prevailed since the peak of economic activity in the year 2000.
Productivity growth has never, in my recollection, grown
anywhere near as rapidly as it has grown during the period of
comparable weakness that has been experienced in the last
several years.
What this means is that even though demand picked up, that
increasing efficiencies have enabled businesses to meet that
demand without hiring new people. This has been a fairly
pronounced and significant trend over a large number of
quarters.
Second, the size of the upswing that you show in your
chart is, in many respects, a function of the size of the
downswing that preceded it. The fact that we have had a very
shallow recession most recently, indeed, the shallowest
recession that has occurred in the post-World War II period,
means that even if the productivity gains were not there, or
let us put it more exactly, with the same average of the nine
recessions that you are pointing out on your chart, we would
still have had a lag in employment, largely because there is
not enough of a bounceback that ordinarily occurs out of a
shallow recession as one which is far more deep. Indeed, I
recall, for example, the 1975 recession most vividly when we
had an extremely sharp decline. That was the spring of 1975.
And by the first quarter of 1976 the economic growth rate was
almost 10 percent at an annual rate and employment had come
back very substantially.
This is the other extreme that we are looking at today.
Senator Sarbanes. On that second point, the job loss pretty
well parallels. I think the GDP drop was shallower in
comparison with previous recessions.
Chairman Greenspan. Excuse me, what is the first date? Is
that March 2001? I believe productivity was increasing fairly
significantly at that point.
Senator Sarbanes. Let me ask you this question in view of
that answer. The long-term unemployed workers has not
substantially improved over these last several months even
though we are getting some job growth. There are 1.8 million
long-term unemployed workers who constitute 22 percent of all
unemployed workers today. That percentage has remained elevated
above 20 percent for the past 20 months, the longest such
streak with respect to a recovery. The average duration of
unemployment today remains 20 weeks and 80,000 workers lost
their benefits in April.
It seems to me that this chart and what we are discussing
here--and let us accept the hypothesis about productivity, but
that still leaves us with the fact that workers have lost their
jobs and we are not creating jobs and they are not getting back
to work. Yet the unemployment insurance system is geared to
expire after 26 weeks unless you make extensions. It seems to
me that poses a real problem for us, because workers run out of
their benefits. The labor market has not strengthened
sufficiently that they can move back into jobs. It seems to me
to cry out for an extension of unemployment insurance benefits,
which of course, we have done in the past. In fact, we have
done it in the past in a more responsive way than I think we
are doing it in this recession, even though we have this added
factor that you have just detailed which has inhibited job
growth.
What is your view on temporarily extending unemployment
insurance further?
Chairman Greenspan. Senator, I have testified before that I
thought that the extraordinarily high degree of exhaustions out
of the unemployment insurance fund, which indeed is a
reflection of the point you are making, namely, the fairly
significantly longer average duration of unemployment in this
period, creates a problem because, as I pointed out previously,
these people in this type of labor market have lost their jobs
through no fault of their own. And we have constructed an
unemployment insurance system which is closely geared to the
issue of trying to take care of those who lose their jobs from
no fault of their own, and to a concern many people who
construct such programs that a fairly generous unemployment
insurance program will tend to create unemployment, as indeed
the evidence does suggest.
I think our system is very well-balanced and that is the
reason why I have argued in the most recent past that under
these conditions it is presumably appropriate to extend
employment insurance.
But I would say that given the increase in job growth that
is in process, and my suspicion, although I do not have the
evidence, that exhaustions most recently are beginning to fall
away, should you go ahead with the extension of unemployment
insurance I think you will find that a short-term extension
will probably serve your concerns with respect to the
exhaustees.
Senator Sarbanes. The extension we are talking about is 13
weeks, which is not a very lengthy period under the
circumstances.
Chairman Greenspan. I agree with that.
Senator Sarbanes. Thank you, Mr. Chairman.
Chairman Shelby. Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
You have ventured into some unusual places again. Thank
you. Would you agree or disagree with this statement, a recent
statement that has been made, that ``this economy is the worst
economy since the Great Depression?''
Chairman Greenspan. Senator Bunning, I would strongly
disagree with that statement.
Senator Bunning. Thank you.
Have the high energy prices acted as a brake on the
economy? In the absence of the high cost of energy, do you
believe the Fed would have already been forced to raise the
discount rate?
Chairman Greenspan. I am not sure the energy changes that
have occurred, while important and having fairly broad impacts
on the world economy and the United States, are a material
factor in monetary policy at this point. They could become a
problem.
I do not think we are there yet, but we are watching the
situation, obviously, fairly closely because the cost of energy
is a very important element in the underlying cost structure of
American business, but also extraordinarily important amongst
our trading partners. Because imports as a share of our economy
and exports are very large relative to where they were a decade
ago, and obviously even earlier, our interaction with the
international economy is increasingly important to our
prosperity. Therefore, anything which undermines the world
economy, and very high oil prices would do that, would be a
concern to us, and indirectly, should it impact on our economy,
would therefore affect monetary policy. But it is the impact on
our economy, not the energy prices changes themselves, which
would induce us to respond.
Senator Bunning. Mr. Chairman, if energy per barrel cost
would escalate beyond $42 a barrel and maintain that cost over
a year, or 2 years, would that not directly impact our economy?
Chairman Greenspan. It would certainly have some impact.
The question I think at issue, which we do not know the answer
to, Senator, is how significant the impact would be. It is the
answer to that question which essentially would determine how
monetary policy would or would not respond.
Senator Bunning. The Chairman of the Committee asked you
about inflation and evidence of inflation in the economy. I
always ask you the question when you come, besides energy costs
and energy prices, are there other factors, like commodity
prices and things, that are indicating to the Fed that we do
have an escalation of inflation in the economy?
Chairman Greenspan. Senator, I think the issue which would
concern us most is the slowdown in the extraordinarily rapid
rate of productivity, which I mentioned before. Because average
hourly compensation has been edging up in recent months, the
effect of the combination of a decline in the rate of increase
of productivity growth and the slightly quickening pace of wage
increase has caused unit labor costs, which had been going down
for quite a number of quarters, to have turned up in most
recent quarters. On a consolidated basis, that accounts for
more than two-thirds of the costs of nonfarm, American
business. While at the moment those increases are still modest,
it is there where our central focus is likely to be because it
is such a large part of the total cost area.
But certainly, as you point out, commodity costs, prices of
imported goods, capital costs, interest costs, and the like,
all have impact on the underlying cost structure. It is
essentially the package of costs which we focus on most
closely, and on our ability to try to forecast in the direction
in which they were going. In that regard, we spend a good deal
of time trying to make judgments about what is the trend of
average hourly earnings, what causes it to change, for example,
the underlying depreciation cost is another item. It is in that
pattern that we try to focus on the whole structure of prices
and costs and profitability in making judgments as to whether
individual price changes are significant and are expressing an
underlying trend. It is the underlying trend which monetary
policy endeavors to address.
Senator Bunning. Thank you very much.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman. And I thank you,
Chairman Greenspan, for your good work. My concern is the
deficits. It is interesting that when we get new economic news,
the stock market does not go up, but goes down sometimes in the
last few months. And even if we have a very strong recovery in
the next several months, my worry is about longevity because of
the large deficits that we have.
Given the fact that the deficits are at large levels, we
can debate how they compare historically. It is high,
historically, some people say higher than in other times, some
people say, well, about the same or a little less, but they are
high or certainly higher than you thought or anyone thought
they would be in 2001.
Do you think we should make the tax cuts that were
temporarily extended in the last tax bill permanent, as the
President is seeking to do?
Chairman Greenspan. Senator, let me answer that in two
parts. First, I have always been strongly supportive of the
elimination of the double taxation of dividends largely because
I have always considered it a type of tax which probably
impeded capital expansion and economic growth as a consequence.
So, I was very strongly supportive and remained supportive of
those types of tax cuts, including marginal tax-rate cuts.
Second, I also have been consistently supportive of maintaining
PAYGO and discretionary caps on spending, and I was very much
concerned in September 2002, when the fairly effective caps and
PAYGO were allowed to lapse.
I would hope that the Congress will put them back in place
as they were before. And, in that context, obviously, I am
stipulating that, because the individual tax cuts which I found
very important would lapse, they would, under the rubric which
I am discussing, be required to go through a PAYGO evaluation
in order to be passed.
Senator Schumer. And as you know, we are debating this
right now in the budget resolution, and there are many who want
PAYGO for spending, but not for tax cuts. And my question to
you is twofold: One, should PAYGO be enacted for both spending
and for tax cuts; and, two, if Congress should fail to enact
PAYGO legislation in this budget resolution, so we would be
faced with the choice of making the tax cuts permanent without
offsets in spending or in other taxes, would you be for making
those permanent?
Chairman Greenspan. Let me just say this. I believe that
the legislation, which was in place prior to September 2002, in
my judgment, was the correctly balanced legislation. As I have
often stated, I think the real problem over the longer-term is
constraining spending because I think there is a bias in the
way our system functions. But I think, looking at the issue
from the point of view of fiscal policy, a symmetry is required
in the way one looks at that.
So, I am not willing to acknowledge the fact that PAYGO
would not be put back in place.
Senator Schumer. Right. But if it was not? Because I will
tell you the odds, and there are some people sitting around
this room who are under big pressure not to do it. If it was
not, would you--and this is an important question because of
what was mentioned--if we did not enact PAYGO, the way we had
it in 2002 on the tax side, should Congress enact permanent tax
cuts without offsets on either the spending or tax side?
Because that will increase the deficit even further if we do
that.
Chairman Greenspan. I am aware of that. I am reluctant to
answer that question largely because I do not want to get
involved into the details of negotiations beyond the positions
that I have taken. There are lots of hypothetical questions
which----
Senator Sarbanes. Some of us think you have already
answered it by your answer on the PAYGO question.
Chairman Greenspan. Well, the Senator presumes otherwise.
Senator Schumer. Yes. I just think this is an important
issue, and your words are very important. They get interpreted
in many different ways, and I am looking for as clear an answer
as possible. I think I can read the same thing that Senator
Sarbanes did, but there are going to be many who say, no, that
is not the case. And if we end up at the end of this
Congressional session with a further increase in the deficit, I
think that will bode real trouble for the recovery. I guess you
would agree with that.
Chairman Greenspan. I actually am somewhat less concerned
about the short-term budget deficit because I think, given what
appears to be a fairly solid recovery, which seems to have legs
to it, revenues are going to be reasonably good over the next
fiscal year, and I think that that will contain the deficit.
However, there is no way to look at the longer-term trends of
our fiscal system without concluding that we will run into
fairly serious difficulty in the next decade, say, 2011 and
forward, as the very large numbers of baby-boom retirees leave
the labor force and join retirement.
The numbers I find very disturbing, and while I appreciate
that that is seemingly a number of years off, it is not far
enough into the future to say we can handle it at another time.
The time for addressing the size of the commitments made for
the next generation of retirees, relative to the economic
resources we are likely to have to finance them, I find
deficient and disturbing.
Senator Schumer. I thank you, Mr. Chairman. My time has
expired. I would just note that a lot of these permanent tax
cuts would take effect in that 2010, 2011, 2012 timeframe when
the crunch will occur.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Dole.
Senator Dole. I would like to follow-up, Chairman
Greenspan, on the response to Senator Bunning, when you spoke
about wage growth. Let me ask about the reports of the
stagnation of wages. In past years, we witnessed strong
productivity growth, but that has not resulted in a real
increase in wages. My question is do you believe that is a
trend that will be corrected in the short-term or do you see
that as something that will continue?
Chairman Greenspan. Senator, I think it is in the process
of changing. If you would just look back from an accounting
point of view, the very significant increase in productivity
from, say, the first quarter of 2003 to the first quarter of
2004 is reflected wholly--almost wholly--in rising profit
margins. In other words, very little spilled over into real
wage increases.
Now, the evidence suggests that is beginning to turn, as it
always does in this regard, meaning that profit margins are now
flattening out or are likely to flatten out, and the catch-up
invariably is in real wages. This is a very typical pattern,
where productivity gains are first picked up in rising profits
and then, essentially, in part, are given back in the way of
real wages because of competitive pressures that invariably
occur when profit margins are large. In other words, companies
try to increase production in a sense to harvest those profits,
and by so doing, they bid up the wage structure. That seems to
be occurring at this particular stage, although as I pointed
out to Senator Bunning, not at a pace which, in our judgment,
looks to be moving unit labor costs to an inflationary plateau.
But I think that the sharp decline in the share of national
income going to compensation of employees over this most recent
period is now in the process of turning and is likely, through
the next year or two, to go back to its normal level after this
adjustment. It is not a long-term trend.
Senator Dole. I have read recent reports stating that real
disposable income is rising, up 11 percent since December 2000.
In fact, Americans' real disposable income is at its highest
level ever, I believe, and some have said that, well, this is
because a lot of the new jobs that are being created are in
industries that are paying higher-than-average amounts. Others
have said it is due to the tax relief, putting more money in
the pockets of Americans.
I would be interested in what you attribute this rise to,
this impressive rise in disposable income, and is this a trend
that you believe is going to continue?
Chairman Greenspan. It is very difficult to tell whether,
in fact, the rise is attributable to differential gains within
the wage and salary area. You can look at it in two ways. Let
us go back to wages and salaries, from the beginning.
If wages and salaries are growing per hour, as they are
now, is it pretty broad-based? And the answer appears to be,
yes, but we are not sure for the following reasons. It is
certainly the case that the rise in wages that would have
occurred, if the industry structure had frozen, is about
exactly the wage rise we have actually perceived which suggests
that the increases are across all industries. What we do not
know, however, is that within industries, whether the trend of
highly skilled versus lesser skilled is continuing to open up.
My suspicion is that when we finally get the data, which
are quite delayed in this respect, we are going to find that.
But it is not an issue of industry, because we have those data,
and there is no evidence, at least in the last 4 months, when
the significant increase in disposable income has occurred,
there is no evidence that it is the industry mix that is doing
it. In other words, it looks that the gains are across the
board in industry.
With respect to the tax cut, that was very significant last
year. It is a lesser issue this year. Most of the rise in
income is that the economy is beginning to move, and as I
indicated before, profit margins are no longer taking the
lion's share of the big increase.
Senator Dole. Mr. Chairman, my time has expired, but I have
a number of other questions that I would like to submit for the
record, if I could.
Chairman Shelby. You may do that.
Senator Dole. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you.
Senator Sarbanes. Mr. Chairman, could I be very clear on
one thing, on the answer to this question? As I understand it,
real disposable income could rise very substantially on the
basis of tax cuts at the top end of the scale because that
would bring very large increases in disposable income. That
figure alone does not show what is happening to ordinary
workers. Would that not be the case?
Chairman Greenspan. I think that is correct. But I am
saying that in the last 4 months of increase, it is basically
the underlying economy which is moving the real wage rate.
Senator Sarbanes. But before that.
Chairman Greenspan. Before that, a significant part of the
increase in disposable income was the result of tax cuts.
Chairman Shelby. Senator Bayh.
Senator Bayh. Mr. Chairman, I appreciated your focus in
your statement about the importance of risk management and the
inherent difficulty, ambiguity, ``unknowability'' of many of
the forces that we must anticipate or contend with. You listed
several things that have helped to reduce the level of systemic
risk with which we have to contend. And then you said, going
forward, we must remain prepared to deal with a wide range of
events, and you specifically mentioned terrorism. I would like
to ask you what other events you are concerned about or that we
need to prepare for.
Chairman Greenspan. We, at the Fed Reserve, as a general
rule, obviously try to make an evaluation of where we think the
most probable trend of events is going and construct our
preliminary policy programs with respect to that path. But we
also try to consider a whole series of alternates. I do not
want to list them because one sounds scarier than the next. And
even though the probabilities are very low, I am always
hesitant to mention something.
Senator Bayh. Let me suggest a couple then. I am not asking
you to tell us what, if anything, keeps you up at night. I hope
you sleep soundly, but a couple of things.
There was a headline today, I am sure you saw, about the
current figures in the balance of trade and the fact that the
recent figures were not good, although there is some debate
about whether they overstate the situation, in fact. What about
the risk of some event triggering, rather than an orderly, a
disorderly fluctuation in our currency?
Chairman Greenspan. That is obviously one of the issues
which we have focused on. We have done a number of studies of
how developed countries have handled very large current account
deficits, which is the larger version of the trade deficit. And
what we have concluded is that international financial markets
are sufficiently flexible to allow the inevitable adjustment of
those outsized deficits to gradually lower in such a way which
is not disruptive to economic activity.
We have done a great deal of work in trying to evaluate how
the current one is going to change. You cannot know, for
certain, but what is reasonably clear, at least in my mind, is
that if we maintain a high degree of flexibility in our economy
and in the international economy, which indeed we have today,
then market forces will gradually adjust the imbalances, but we
cannot tell at this stage or in advance whether it is relative
prices in various economies, whether it is the exchange rate,
whether it is the relative different growths in various
economies which will do it. But what these various studies of
developed countries suggest is that those adjustments will, in
some form or another, take place.
Senator Bayh. A high degree of flexibility, Mr. Chairman,
you said is a key to trying to deal with the unanticipated
event? Is it not true that our twin deficits reduce our margin
for error, reduce some of the flexibility that we have?
Chairman Greenspan. Well, the flexibility is mainly
institutional. In other words, for example, we have very
flexible financial markets which adjust very quickly, and we
have extraordinarily broad labor markets which are quite
flexible as well, better than in most of the rest of the world.
So, yes, indeed, the budget deficit and the current account
deficit are problems, but I am saying there is a difference.
The current account deficit is largely going to be adjusted one
way or the other by market forces. The Federal budget deficit
will be adjusted partly by market forces----
Senator Bayh. Policy decisions.
Chairman Greenspan. --but mainly policy.
Senator Bayh. Before my time expires, Mr. Chairman, let me
mention one of the risks that is popularly thrown out there,
and we have asked you about it before, and you have responded,
but things have changed some since your last response, and that
is with regard to housing and the fact that housing prices have
outstripped the growth incomes over the last several years.
Now, the effect of that was ameliorated by the lower
interest rates, which enabled people to afford these higher
prices. Interest rates may now be in the process of adjusting
some. And your response previously had been that immigration
and that land scarcity would help to sustain these higher
prices.
Are you concerned about housing prices at this point and
perhaps the effect that that will have on consumer spending if
prices prove not to be justified at current levels?
Chairman Greenspan. It is certainly the case, as you point
out, Senator, that prices have been moving up faster than they
had been. But remember that because productivity growth in
residential construction has historically been moving more
slowly than the average over the longer-run, largely because
there is a good deal of custom house building--in other words,
we would like our own idiosyncratic house--this means you
cannot have mass production such as you can have in the general
area of manufacturing, mainly. So that there is a gradual long-
term updrift in the price of homes relative to the price of
everything else, but to be sure, there has been a faster pace
today, but not enough, in our judgment, to raise major
concerns.
It could become a problem if it were to accelerate further.
We see little evidence that that is likely to happen, largely
because we perceive that the very strong expansion in new and
existing home sales is now flattening out, and the really quite
unexpected boom in home sales over recent years is unlikely to
be continued. Our forecast is generally flat in aggregate
volumes. Where house prices go, I am not sure, but I would be
quite surprised if they showed continued acceleration on the
upside.
Senator Bayh. Thank you, Mr. Chairman.
Chairman Shelby. Senator Chafee.
Senator Chafee. Thank you, Mr. Chairman.
Chairman Greenspan, you were hopeful that with the
improving economy, the added revenues would help address the
deficit, but there are also some unknowns, particularly on the
prescription drug benefit, what exactly that is going to cost
and also what we are going to have to invest in stabilizing
Iraq and the region there. If the deficits do continue to grow,
I know there are some concerned that could produce a sharp
devaluation of the U.S. dollar, something that did happen in
1985, which would, in turn, undercut European exports, and that
would affect European economies.
Is that of a concern to you?
Chairman Greenspan. Senator, it is an issue which a number
of people have raised, and obviously we have looked at it. And
there is very little evidence, at this particular stage, that
the size of the Federal budget deficit and the point, or
indirectly, relating to the fairly significant amount of our
Government issuances to finance that deficit, which would be
purchased by foreign central banks and, indeed, by others.
We look at it fairly closely. The markets seem to be
adjusting remarkably well, and a good part of those securities
which are purchased by foreign central banks are shorter term.
So that there is no real basic concern that a lot of people
have argued in favor of, namely, that a major endeavor to
disgorge those holdings could have a destabilizing effect back
here. We do not think so.
In other words, we think, as I pointed out earlier, that
the degree of flexibility in our financial system is sufficient
to absorb very considerable amounts of change. Remember that
our financing system is huge relative to the rest of the world,
and the demand to hold U.S. dollars by foreigners is a very
high propensity which continues irrespective of these deficits
which we are looking at.
So could it become a problem in the future? It could, but
there is no evidence of which I am aware which suggests any
such problems are on the horizon.
Senator Chafee. Last year, I believe we sold $208 billion
of Treasury securities just to Japan, China, and other Asian
countries, $208 billion just last year. But you are saying that
is short term and not of concern?
Chairman Greenspan. Well, $200 billion is not a small
number, obviously. It is a big number. And as I think the
Treasury pointed out the other day, that of marketable
securities foreigners own somewhat more than half, currently.
I think that if it were a significant problem, we would be
seeing the forward edge of the problem already, but we do not.
There is an unquenchable demand to hold claims against American
residents largely because they are presumed to be safe, and
they are presumed to have significantly higher rates of return
adjusted for risk in most other areas in the world.
Senator Chafee. I have heard some people rail against the
fact that it is not in our best interests to have the Chinese
buying our T-bonds, and that is all the fault of the deficit.
If we did not have this deficit, the Chinese would not be
buying our T-bonds. I guess that is the point I am making.
Chairman Shelby. Thank you, Senator Chafee.
Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman.
Chairman Greenspan, we have talked a little bit about PAYGO
today. I am a very big supporter of PAYGO, both in terms of tax
policy and spending policy. But when you were in my office a
couple of weeks ago, we talked about another way of trying to
keep that balance, which is a budget trigger. And as you know,
Senator Bayh, Senator Snowe, and I, and others proposed back
during the original debate on tax cuts earlier that we should
have a trigger that covered both spending and tax cuts. And I
believe we would not be where we are now if we had, in fact,
been able to put that into place.
Could you speak about your support for the notion of a
trigger on these kinds of major tax and spending policies?
Chairman Greenspan. Senator, 20, 30 years ago, certainly 50
years ago, nobody was concerned about long-term budget problems
in the United States because we never had commitments that
lasted very long. Our Social Security system, for example, was
relatively small at that point. The commitments in the military
were sometimes for 3 to 5 years on some weapons system, but we
never had any ability nor need to worry about what the budget
deficit would look like 5, 8, or 10 years in the future, and we
always had the capacity to adjust as time went on.
As entitlements, specifically retirement entitlements, have
grown to an ever-larger proportion of our budget, our ability
and our necessity to have a sense of where fiscal balances will
be 10 years from now have all of a sudden become a very crucial
issue for determining what current fiscal policy should be.
Because our ability to forecast 10 years out is very
marginal, at best, I have always believed that we have to make
the best judgment we can, but also put in place some mechanism
in which, if our path of budget balance, whether surplus or
deficit, goes significantly off-track that we have fiscal
mechanisms to get us back on track. That is essentially what a
trigger is. It is a vehicle which stipulates that if a
particular program is not doing what it was projected to do,
then certain adjustments would occur automatically or certain
adjustments would require that the Congress revisit the
program.
There are lots of different triggers. But the main concept
is to recognize that we no longer have year-by-year budget-
making as the process of fiscal policy. We are in a wholly
different world, and part of that world, in my judgment,
requires triggers because our capacity to forecast is so
limited as we get out that far.
Senator Stabenow. Thank you. I could not agree with you
more, and I am hopeful, as we go forward, that we will have the
opportunity to debate again and hopefully put in place some
kind of a trigger.
One other question, Mr. Chairman, that is particularly
important to my home State of Michigan. I am extremely
concerned about currency manipulation and how it is effectively
creating an artificial tax on U.S. goods exported abroad and
giving the Chinese and the Japanese an unfair advantage when
they ship goods into our country. We know this is happening.
The Chinese pegging of their currency to the dollar
prevents an appropriate float of their currency, and the
Japanese have been very aggressive and willing to intervene in
currency markets when they feel that it is warranted, to their
advantage.
I have raised this issue with Treasury Secretary Snow in
the past. The Administration, up to this point, has not been
willing to take concrete steps to end the currency tax. I am
wondering, Mr. Chairman, do you agree that currency
manipulation is going on and is it having a detrimental impact
on U.S. goods, in particular, in the manufacturing sector,
which hits my State so heavily?
Chairman Greenspan. Senator, first, the Japanese ceased
their intervention in the yen-dollar market a while back, and
they have not been involved since mid-March. In mid-March, they
announced that intervention had ceased and that is indeed the
fact.
Senator Stabenow. And I would just say that we hope that
they will not return to that policy.
Chairman Greenspan. I think one issue here is that it is
not to the advantage of foreign central banks to accumulate
very large amounts of foreign currency after a certain point
because it creates domestic problems of monetary stability. The
issue is most relevant in this regard to China because they are
acutely aware of the fact that their stabilization of the
renminbi versus the dollar has required very large
accumulations of dollar assets on the balance sheet of the
People's Bank of China, the central bank, and this creates
problems that are obviously exaggerating the difficulties they
are currently having with respect to underlying inflationary
pressures and boom conditions, which they are endeavoring and,
apparently successfully, beginning to constrain.
I think that over the longer-run it will become very
apparent, as indeed it is increasingly becoming apparent, to
the Chinese financial authorities that intervention of the type
that they had been doing has not been helpful to them. So, I
think in their own interest that is going to change, and I
think that issue that you are concerned about will go away.
Senator Stabenow. Mr. Chairman, I hope you are correct,
because in the short-run, certainly in my State, we are seeing
what I believe to be unfair incentives on the exporting of
American jobs. So, I am hopeful that you are accurate and
correct on that.
Chairman Shelby. Senator Sununu.
Senator Sununu. Thank you, Mr. Chairman.
I have a number of areas of capital market regulation that
I mentioned in my opening statement, and I will probably submit
a list, hopefully not too long of a list, for the record. But,
Mr. Greenspan, I did want to ask you about a couple of items,
one of which you have addressed before, one which you may have
not.
First, we have had a series of hearings and discussion here
in the Committee about market structure and market structure
reform, and I would be curious to hear your assessment of what
the impact on cost of capital, access of capital, or the
efficiency of the capital markets would be of a modification or
an elimination of the trade-through rule.
Chairman Greenspan. Senator, which rule?
Senator Sununu. The trade-through rule on the New York
Stock Exchange.
Chairman Greenspan. This is a highly complex issue which,
as you know, is being debated up in New York, and it is a
problem concerning trading procedures on the New York Stock
Exchange and the large institutional investors who are
endeavoring to get the best type of execution they can get.
I have, as you pointed out, stayed out of this, largely
because of rare good judgment on my part.
[Laughter.]
And I think I will probably endeavor to maintain that
position.
I do think it is a very interesting issue. I am not certain
that it is not being properly handled in the debate, and I
think the right issues are on the table and the people who are
involved I trust will come to the most reasonable solution.
Senator Sununu. Well, that is not a great deal of
consolation to me, for a number of reasons, not least of all,
you know, we have spent an hour here talking about PAYGO and
housing prices and a whole list of Jim Bunning's pet peeves.
[Laughter.]
And this is obviously an issue that does, I think, have a
direct impact on issues of capital market stability and access
to capital and cost of capital and underlying economic
performance.
Chairman Greenspan. Let me cut through it. I will be very
straightforward in this respect. I do not think that we at the
Fed know as much as the participants involved in the
negotiations to have a firm opinion which we think should
override those of the Exchange and some of the major players on
the Exchange. We are in contact with them. I have spoken to
both sides at considerable length, and I am learning something
from them, but I do not think that I have--and I am not sure my
colleagues have--a great deal to present with respect to this
issue.
I would say that our real problem is we know where we would
like it to all come out, namely, in a system which is stable,
and has efficient execution. I am not sure we at the Fed know
how to get there. If we did, I probably would find a way to
communicate that to the parties involved.
Senator Sununu. This is not by design, but that does
provide a nice segue to my second and final question, which is
about hedge fund regulations. You have spoken out against
further regulation of hedge funds in the past. There are
obviously some proposed rules and modification to existing
regulation that have been put on the table. Has your thinking
on this issue changed in any way substantively over the last 6
or 12 months?
Chairman Greenspan. It has not, Senator. Let me just repeat
why I think it is so important that these types of
organizations are left free to supply the extent of liquidity
that they are, in fact, supplying to our financial markets. I
have made a special point in my prepared remarks and in earlier
questions that the degree of flexibility in our economy has
been instrumental in enabling us to absorb the shocks which
have been so extraordinary in recent years. And one of the most
flexible parts of our system is financial and our ability to
absorb financial shocks.
If you start to inhibit the number of types of unregulated
participants in the financial market from taking the types of
risks and supplying the liquidity, I am fearful that we will
remove some of the flexibility that we have in our overall
system. I am certainly of the opinion that should hedge funds
accept capital from retail investors, they should go under the
same regulations as a mutual fund. But so long as their sources
of equity funds are professional or large investors with net
worths, say, exceeding $1 million or more, I see no purpose in
regulation, and I see very significant potential loss in doing
so.
Senator Sununu. Thank you very much, Mr. Chairman. I see
the time has expired, and I appreciate your patience.
Chairman Shelby. Senator Reed.
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman. And,
Chairman Greenspan, welcome.
You spoke earlier with great insights about productivity
growth and its impact on the economy, but one of the things
that is interesting and, indeed, troubling is that even with
this rapid growth in productivity, we have not seen a rapid
growth in labor compensation to the extent we have seen in
other periods of expanding productivity, which leads me to the
conclusion that the expansion is now driven more by debt than
by income. People are buying things not from increased wages in
their paycheck but credit cards, which is not sustainable over
a longer period of time.
And I suspect there are some structural reasons for this,
or let me just pose the question: Why is labor compensation not
keeping up? Why is this expansion, as a result, a result of
debt and credit cards rather than wages being devoted to
consumption?
Chairman Greenspan. First of all, I think that as I
indicated to Senator Dole, a very substantial part of the
increase over the last year in productivity has ended up in
increasing profit margins. But that seems to have come to an
end as margins have gone from a very low level to a very high
level and, historically, they have stabilized at this point.
And there is evidence that that is occurring.
This will mean that productivity growth will feed into a
fairly pronounced up-trend in real wages, and indeed, there is
evidence that that is already in the process of occurring.
The amount of income that is now moving into consumer
markets is becoming an ever important factor in consumption,
and even though it is the case that credit card debt has moved
up significantly, it is not large enough to be a serious
concern, and indeed, the delinquencies and the defaults are not
particularly large relative to what one ordinarily expects in
that type of business. And, indeed, delinquencies generally
have been exceptionally low across the board in the consumer
area, especially, for example, in mortgage and in home equity
loans.
So, I am not actually concerned at this point that we are
looking at a really serious consumer debt problem, especially
when one of the major factors in the growth of mortgage debt.
In fact, 10 percent of the level of mortgage debt occurs: As a
consequence of the fairly significant increase in the ratio of
households who are homeowners, because if we had the 64-percent
homeownership ratio that we had 10 years ago rather than the
current 68, 69 percent, we would not have had a very
significant number of renters buying homes, which has had two
effects: One, it obviously increases the asset side of their
balance sheet by the value of the home, but two, it increases
almost to the same extent the liability side, which is mortgage
debt. And as a consequence of that, what you have is a very
significant part of the population which have gone from renter
to homeowner, and in the process have statistically increased
the amount of household debt, mortgage debt in this case, very
substantially. But I would never argue that the renters by
becoming homeowners had their financial situation significantly
deteriorated.
So part of this ratio of debt-to-income is not evidence of
deterioration in household finances. It is the case, however,
that if we continue to get very significant increases in the
ratio of household debt-to-income, the debt service charges
obviously will be going up. And there is a conceivable point
out there which I would consider worrisome. I just do not think
that we are anywhere near there yet, and I doubt if we will get
there.
Senator Reed. Mr. Chairman, you suggest that the wages are
improving a bit, yet in May, according to the Labor Department,
real wages fell by about 0.4 percent. And according to the
Economic Policy Institute, over the past year hourly wages are
up about 2.2 percent, just about the rate of inflation.
Part of my question was the notion that there might be
structural reasons here, the outsourcing of jobs, the threat of
outsourcing putting pressure on the ability of employees to ask
for money, decline of labor union participation, fewer and
fewer workers are organized, they have, therefore, less ability
to negotiate.
Are any of these factors structural factors that will
mitigate increases in wages going forward?
Chairman Greenspan. I do not think that they are related to
the average increase in wages. They are a problem on the
distribution of wages. As I have pointed out many times in
recent months, we are seeing, and probably are continuing to
see even to this day, a continuing opening up of the wage
spread between highly skilled and lesser skilled workers; and
that this is in my judgment largely an educational problem that
is confronting us, which I think has to be addressed. But the
consequence is that the real wage below the median has been
flat to declining, whereas in the upper quartile it has been
rising. And that is largely reflected in skill differentials,
but on average, what we are observing is now a fairly across-
the-board increase industry-by-industry, as I indicated to
Senator Dole, but I suspect that within industries, we are
getting this more skilled/lesser skilled spread continuing.
So in that sense, it is a problem caused basically by our
skill mix not keeping up with the technology that our capital
stock requires. I guess that is a structural problem. But it is
one that can be and must be addressed because I think that it
is creating an increasing concentration of incomes in this
country. And for a democratic society, that is not a very
desirable thing to allow to happen.
Senator Reed. Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
Senator Carper. Chairman Shelby----
Chairman Shelby. Senator Carper, if I could go vote, and I
do not know how long the Majority Leader will indulge us here,
but if you will go ahead and if no one comes back, then Senator
Corzine. Will that be okay?
Senator Carper. Yes, sir.
Chairman Shelby. Thank you.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Mr. Chairman, just a real quick question,
and I will ask for a very brief response because I still have
not voted either. But I want to ask this question. We are
probably going to take up legislation on class action reform
later this month, something that a number of us have pushed
hard for for the last several years. And there will be a number
of amendments offered to our class action bill. Some will be
germane; some will be nongermane. One of the nongermane
amendments that is likely to be offered to the bill is one
dealing with an increase in the minimum wage, which you may
recall has not been raised I think since 1997 at the Federal
level. And I would appreciate it if you just take a minute or
two and give us some things that we might want to keep in mind
as we address that issue. I think there is a good likelihood
that it will be raised, probably phased in over several years,
I think it should be, but some things that we should keep in
mind as we approach this decision.
Chairman Greenspan. I am the wrong person to ask, Senator,
because I am one of probably a few people whom you talk to who
does not think the minimum wage is a good idea to begin with.
And the reason is I think it destroys jobs. I think it prevents
people who are of the lesser skill and are trying to work their
way up the ladder of skill, from working because they cannot
earn the minimum wage. I think that is a mistake.
This is a very large and big debatable issue, and I think
you are aware of both sides of the issue. So, I just want you
to know I have nothing to suggest at this stage because I am
not one of those who considers it a desirable policy.
Senator Carper. Well, that was certainly a brief answer--
not the one I expected, but a brief one. Thank you very much.
Senator Corzine.
STATEMENT OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Senator Carper. It seems like
we have control over here on the other side of the aisle for a
change.
[Laughter.]
Maybe it is only temporary.
Let me recommend that I put a statement in the record. I
apologize for not being here for your opening statement, Mr.
Chairman.
In that statement, I give testimony to your tenure and
efforts in leading us in one of the most important roles in our
Nation, and I think our economy and our country is a lot better
off because of your service, and I congratulate you on your
nomination and I expect that I will be voting in the
affirmative.
That said, I have some concerns that a number of my
colleagues--I was watching some of the questions and responses.
Many of these come down to definition of statistics. We seem to
focus on macro statistics and GDP growth, and we talk about
averages as opposed to means and distributions. I am
particularly pleased to hear you talk about the differential
that it is occurring between highly skilled and low-skilled
workers. But it does cover a lot of impact for middle-class
America, in particular. We hear and will hear, I suspect,
during the campaign about the middle-class squeeze. And it has
some merit. I think it actually ties to this underlying issue
that you have identified, skilled versus lower-skilled workers.
Do you consider an auto worker at a Ford Motor plant in my
home State who loses a job after 20 years a low-skill worker?
Chairman Greenspan. I think it is relative to the demands
of the job structure itself. I would put it this way: The
requirements for the level of skills increase year on year
because, as we get ever more sophisticated capital stock, the
skills that are required to staff that structure are going up,
on average. And if a certain person, say, 20 years ago had a
specific skill which at that point in time was a highly skilled
job, but did not change at all over a 20-year period, it is
conceivable that in today's environment that could be
considered a medium- or even a lower-skill job, which is the
reason why I have argued the necessity for continuing education
throughout one's life. You cannot stop. We have to have means
by which skills are continuously upgraded.
So the answer is, yes, it is possible that somebody who was
high-skilled in an earlier period, did not lose any of those
skills, could in a later context be designated as medium- or
low-skilled.
Senator Corzine. It might even be the pace at which they
picked up those skills. They may even have trained themselves
for an advancing economy, but not stayed with the pace.
I think that there is concern--I certainly have concern
about the erosion of the industrial base in the context of
this. And I think you see that in these low-real-wage
increases, whether it is 2.2 percent or other measurements that
show jobs lost versus the job that replaces it for those
individuals being sharply lower. And I think that has ended up
undermining the broad health that is covered by the term
``averages.'' I do not know whether the number is 400 times or
500 times that corporate executives are receiving relative to
lowest wage earners. There are different surveys and different
statistics. But, quite obviously, if those numbers are very
high and they are added together with those workers who are in
these newly defined low-skill wages, we can have averages that
are moving up and, in fact, broad swaths of our society are not
where they are. I think this is one of the most important
issues for us to debate. It does get to the long-term issue of
education and retraining, which gets to the second element that
I would like to talk about. That gets to having the ability for
society to have the resources to be able to invest in education
to help create that skill set as we go forward, whether it is
investing in community colleges or it is investing in Pell
grants that allow for many of those people who come from low-
skill families to access higher education.
We have a serious budget problem in the country, and we are
about to impose on ourselves or at least some think we are
about to impose on ourselves PAYGO rules that work against
spending but do not work against taxes. And I heard your
response to Senator Schumer that you do not like answering
hypotheticals. But this does not seem like a hypothetical. We
have proposals on the table that would suggest that we must
have PAYGO rules apply to spending and not with regard to
making permanent tax cuts.
How are we going to be able to deal with these most
important broad social issues that I think you have talked
about, high-skill, low-skill workers, and still deal with what
I think is appropriately identified? You said we are okay. You
can live with current deficits maybe in the immediate horizon,
but you talked about 2011. How can we do that when all of these
permanent tax cuts come at a later time and we still have great
social needs in this country?
Chairman Greenspan. Senator, I have indicated earlier in
this testimony that I think because of the longer-term
structural problems that are emerging in our budgets, we need
new tools in order to make certain that we appropriately
allocate our resources in a manner through the Federal budget
in a way which we cannot do today. I have cited three sets of
rules which I believe will be very helpful--I assume they may
even be sufficient--which are a symmetrical PAYGO rule,
discretionary caps, and triggers on both spending and on taxes.
I think that it was a mistake to allow the fairly effective
PAYGO rules, in place in September 2002, to expire. And in my
judgment it would be very wise to take that structure which
existed back then and reenact it.
Senator Corzine. If the logical extension of that is
dealing with the permanent tax cuts, then that is the logical
extension.
Chairman Greenspan. That is for the Congress to decide.
Senator Corzine. But I am taking the logical extension.
Chairman Greenspan. Okay, fine.
Senator Corzine. You do believe, though--and I just
reiterate--that we have a very serious structural fiscal
problem in the out-years as we evolve.
Chairman Greenspan. I do. As I have said on numerous
occasions, Senator, I am most concerned because of our
inability specifically to make a judgment of what resources
will be required for Medicare in the next decade and beyond.
Given the very large increase in retirees, because of the
uncertainty, I think we have to be quite cautious because I am
fearful we are on the edge of the possibility--I do not know
what the probability is, but the possibility-- that we are
making promises in real terms to the next generation that we
may not be able to fulfill.
Senator Corzine. Just one quick follow-up, and then I will
have used up more than my fair share of time. Was it by choice
that you left out Social Security when you said that our future
obligations that we are laying down are ones that--you have
primarily focused--you did focus on Medicare as opposed to
Social Security, and then we just saw a recent CBO analysis
that makes us feel at least somewhat more comfortable with----
Chairman Greenspan. Social Security is a defined benefit
program. There are ranges over which long-term estimates can
occur, but relative to Medicare, they are extremely narrow.
As CBO indicates, as the Social Security trustees indicate,
Social Security is currently long-term unstable and requires
adjustments. The adjustments, however, are far clearer and the
size of the problem is far easier to get our hands on because
it is a defined benefit program than is the case with Medicare.
So there are lots of ways of solving Social Security, and we
are not doing any of them, I must say, because every time
somebody raises a way to do it, that is unacceptable.
Social Security is far less of a problem than is Medicare.
Medicare is the one that has the very large uncertainties
associated with it. But even in the CBO report that came out
yesterday, it has a range of probabilities for what the Social
Security outlook is over the next 100 years, and it is a very
wide range.
Senator Corzine. Of course.
Chairman Greenspan. But it still----
Senator Corzine. A soluble problem.
Chairman Greenspan. Yes, exactly.
Senator Corzine. Thank you.
Thank you, Mr. Chairman.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. [Presiding.] Thank you very much.
Chairman Greenspan, I will be mercifully brief so you can
get to lunch and the rest of us will as well. You said in your
response to Senator Corzine that we cannot wait and we should
be working on this long-term structural problem now. I felt we
should be working on it when I came to Congress 10 years ago,
and, unfortunately, we have not been able to do that.
I think we have a cautionary tale for us in what is
happening in Europe. Is it not true that their problems are
substantially greater than ours with respect to these two,
retirement pay and medical for the aged?
Chairman Greenspan. I think that certainly the demographics
in Europe are far more formidable a barrier to fiscal balance
than in the United States. It varies by country, obviously. It
is not the same everywhere. But I would say, in general, their
problems are more difficult than ours, as you point out.
Senator Bennett. Yes, that is my concern. One overall
question--and, by the way, being unable to be here for an
opening statement, let me just for the record thank you for
your splendid service to the country, not only in your tenure
as Chairman of the Federal Reserve but also your previous
service in a variety of preparatory assignments. It is not
everyone who is willing to give as much time to public service
as you have, give as large a percentage of one's life to public
service as you have. And the Nation should be very grateful,
and expressions of appreciation are never too many. So let me
add mine to those that you have received and make the record
clear that I will vote for you with enthusiasm but, more
importantly, with gratitude for the work that you have done.
Chairman Greenspan. Thank you very much, Senator.
Senator Bennett. Isn't it true--well, that is not the way
to start it. That is the way lawyers start. I am not a lawyer.
It is my conviction that the next President, whoever he may
be, will enter office at a time of extremely strong economic
growth and very robust--it will be almost too late speaking of
it in terms of a recovery, because I think it will happen
throughout all of 2004. I would like your reflections on that,
if I am overly optimistic or if you think there are some soft
spots we should worry about. But as I look forward, whoever the
next President might be, he will be fortunate enough to take
office at a time of extremely strong economic performance.
Chairman Greenspan. I think that is right, Senator. The
reason I hesitate is that forecasting even 6 months out is
slightly precarious. But as I indicated in a presentation I
made last week, there is something about this recovery which
does not have underlying destabilizing momentum, in other
words, of going too fast. And the way we know that is that,
despite the fact that capital investment has been rising fairly
appreciably, it has fallen behind the very significant rise in
cashflow. And it is very rare in a recovery that you will find
that capital investment at this stage of the recovery is not
running well ahead of cashflow and that borrowing requirements
accordingly are very significant.
That is not the case today. The corporate bond markets are
very slow. Indeed, in the month of May, the last time we had
data, actual net bond issuance--that is, gross issuance minus
retirements--was negative. So that is yet another shoe to drop
in the expansion, if I may put it that way, which is an
increasing sense of confidence in the business community to
start moving up capital investment to still higher levels. And
that is the reason why I think that this particular recovery
has some momentum in it and does not look to be short-lived.
Obviously, numbers of things can happen adversely, the oil
price or any of a number of destabilizing events. But right now
I tend to be fairly much in the same camp that you are with
respect to the outlook.
Senator Bennett. Thank you very much.
Thank you, Mr. Chairman.
Chairman Shelby. Mr. Chairman, I have a number of questions
for the record, but I will submit those for the record, a
couple of things, and maybe we can go into the early
afternoon--get out of here, in other words.
Mr. Chairman, you have previously testified before this
Committee about your concerns on the unrestrained growth of
debt by the GSE's. With the current rise of long-term interest
rates and the possibility of the Federal Reserve raising short-
term rates within the year, the housing market has seen a
dramatic fall in mortgage refinancing. What effect, if any,
would a potential slowdown of the housing market and asset-
backed securities industry have on the current health of
Freddie Mac and Fannie Mae? Does that concern you at all?
Chairman Greenspan. No, that doesn't, in the sense that I
have no problem with the way they manage their structure, both
their portfolio and the securitization parts of their business.
I think it is rather well done. They do a fairly impressive
job.
My concern is the issue which I raised before this
Committee previously namely, the subsidy. The size of the
subsidy is debatable, but I am sure there is one. The subsidy
creates the problem of expanding assets, mortgage assets--or,
indeed, any set of assets--in a way which could become
destabilizing if it continues on very much beyond where they
are, because they have become very large financial
institutions, and because of the subsidy, they do not have the
automatic market adjustment forces constraining their growth.
Now, to be sure, they have slowed their rate of growth
fairly recently, and I trust that is the beginning of a
conscious trend to slow things down. But if you have a subsidy,
the initiation of which is wholly up to you--remember, this is
not a subsidy that the Congress has given them. It is the
market's perception that in the event of a serious problem, the
U.S. Government will bail them out and that, therefore, the
debentures should sell close to U.S. Treasuries. But there is
no limit to how far that debt can expand because it is up to
the companies, Fannie and Freddie, to determine how much. That
is what concerns me.
Chairman Shelby. Mr. Chairman, I do not have the exact
figures before me now, but if you put Freddie Mac and Fannie
Mae's debt together, they are way up there. They are
approaching the public debt of the country, are they not?
Chairman Greenspan. Indeed they are.
Chairman Shelby. And that has to be----
Chairman Greenspan. And in certain of the measures, they
exceed it.
Chairman Shelby. Yes. Thank you.
Mr. Chairman, under your tenure at the Fed, what particular
changes have been made in the system as an institution that you
think were the most significant?
Chairman Greenspan. You mean changes in the Federal Reserve
System?
Chairman Shelby. Yes, sir, while you have been there. As
you reflect back.
Chairman Greenspan. Yes. It is a very interesting question
because you tend not to think in those terms. You are usually
thinking above what have we done recently.
I think that our technique of evaluating how the economy is
functioning and our ability to understand how markets are
operating and, most specifically, how we interface with the
rest of the world are new initiatives in the last decade or so,
in fact, being driven by the world economy, essentially.
In response, we have built up technical capabilities that
enable us to evaluate these things far better than I think we
were able to earlier on.
Technology has created a major improvement in the payment
system in the United States and, indeed, in the world, and our
interface with that payment system and our oversight of it has
increased very significantly. And looking back at the overall
efficiency of the American financial system and the extent
where we, at the Fed, have been helpful along the way I think
has been very important from our point of view.
Then as Senator Sarbanes indicated very early on, we have
also found that we interface with the markets better as we
disclose more. There are limits to how far we can go. If we
were to televise our FOMC meetings, I think we would find that
disclosure became absolute, but our efficiency would not. So we
have to trade off the ability of knowing how best we can manage
our deliberations to fulfill the Congress' mandate, and I think
we are gradually moving in that direction. I think we have a
way to go. We are not there yet. But we have come a good way on
the issue of getting optimum transparency.
Chairman Shelby. What particular reforms or measures are
you interested in achieving during your fifth term as Chairman?
If you are at liberty to talk about it now. Maybe you are not.
What would you like to do?
Chairman Greenspan. The major focus that we are involved
with is, as I have indicated earlier, the elimination of the
increasingly unnecessary level of accommodation in monetary
policy in order to restore financial balance in a manner which
essentially leaves the American economy and financial system in
a degree of stability. We seem to be on track, but as we duffer
golfers like to say, it is not a gimme putt.
Chairman Shelby. Sure. Mr. Chairman, we appreciate your
patience here today, your appearance. We will move your
nomination as expeditiously as possible, you can be assured.
Thank you very much.
Chairman Greenspan. I thank you very much, Mr. Chairman.
Chairman Shelby. This hearing is adjourned.
[Whereupon, at 1:16 p.m., the hearing was adjourned.]
[Prepared statement, biographical sketch of the nominee,
response to written questions, and additional material supplied
for the record follows:]
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RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES
FROM ALAN GREENSPAN
Q.1. The Federal Reserve recently issued for public comment
proposed regulatory revisions to address concerns about bounced
check protection programs. Rather than specify disclosures as
required for all other extensions of credit by the Truth-in-
Lending Act (TILA) and Regulation Z, the Board instead proposes
to make changes to Regulation DD which implements the Truth-in-
Savings Act. It is my understanding that the Board has referred
to bounce protection loans as credit. In your letter to me
explaining your reasons, you stated you exempted these programs
from TILA, despite the fact that they are credit. The Board's
action appears inconsistent with statutory requirements for
exempting credit transactions from TILA coverage. Section 105
of TILA appears to require the Board to go through an analysis
before exempting credit transactions from coverage. Please
explain why the Board did not undertake the evaluation outlined
in subsections (a) and (f) of Section 105 before issuing
proposed regulations that implicitly exempt such bounced
transactions from TILA.
A.1. In recent years, some institutions have begun to market
courtesy overdraft protection by disclosing the dollar limit
that consumers may be allowed to overdraw their account if it
is in good standing. Under these programs, when an institution
pays an overdraft, a fee is imposed and the consumer is
informed that the overdraft must be covered within a specified
period, typically 5 to 30 days. You have asked for an
explanation of how such transactions are exempt from Truth-in-
Lending Act (TILA) coverage if they constitute credit.
The Board's Regulation Z, which was originally issued in
1969, has never covered overdrafts on a deposit account when
the institution has not previously agreed, in writing, to pay
such items. Accordingly, banks' historical payment of
overdrafts on an ad hoc basis has been exempt from TILA's
coverage, while traditional overdraft lines of credit, which
are generally subject to a written agreement, have been covered
under TILA.
Regulation Z applies only to a consumer credit transaction
that is subject to a finance charge, or is payable by written
agreement in more than four installments. In adopting
Regulation Z in 1969, the Board determined that fees imposed by
a financial institution for paying items that overdraw an
account should not be deemed ``finance charges,'' unless the
payment of such items and the imposition of the charge were
previously agreed upon in writing. The Board's determination
that such fees should not be disclosed as ``finance charges''
under TILA is consistent with the Board's general rulemaking
authority under Section 105 of the statute. The Board's
classification of overdraft fees under Regulation Z was
designed to facilitate depository institutions' ability to
accommodate consumers on an ad hoc basis.
Although some depository institutions market courtesy
overdraft protection as a feature of their deposit accounts,
these institutions generally reserve the right to exercise
discretion and to not pay any particular overdraft. Because
there is no written credit agreement to cover overdrafts, the
fees imposed are excluded from the finance charge that would be
disclosed under Regulation Z (see 12 CFR Sec. 226.4(c)(3)).
Institutions' overdraft protection programs generally do not
provide for repayment in installments. Accordingly, these
overdraft protection programs typically are not covered by
Regulation Z.
On May 28, the Board issued for public comment proposed
revisions to Regulation DD, which implements the Truth-in-
Savings Act, to address concerns about disclosures for
overdrawn accounts generally and, in particular, concerns about
overdraft protection services. The proposed improvements in the
disclosures provided to consumers under the Truth-in-Savings
Act are intended to aid consumers in understanding the costs
associated with overdrawing their accounts, and promote better
account management. The Board's issuance of proposed revisions
to Regulation DD did not entail any determination to issue an
exemption under Section 105 of TILA. The proposal does
recognize, however, that fees imposed in connection with
overdraft protection services that do not involve written
agreements have never been considered finance charges, and thus
have never been subject to disclosure under Regulation Z.
Accordingly, the Board's proposal under Regulation DD
represents a decision not to amend Regulation Z to cover these
transactions, although the Board also expressly noted that
further consideration of the need for such coverage may be
appropriate if concerns about these programs persist.
RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER AND SENATOR
MILLER FROM ALAN GREENSPAN
Q.1. Chairman Greenspan, you last appeared before the Senate
Banking Committee on April 20 to discuss the ``Condition of the
Banking Industry.'' During that hearing you entered into a
discussion with Senator Carper regarding the dual banking
system and you said . . . ``The dual banking system is a very
unusual competitive structure for regulation, and it has served
us well, and I am concerned that however we develop issues in
the years ahead, that we be careful to be certain that we
maintain the appropriate balance of regulation between State
and Federal agencies.''
It has also been reported to us that you have recently said
that you believe that there is an imbalance in the dual
chartering system right now particularly for larger multistate
operators. This issue is a concern for several institutions in
our States as well as our State banking commissioners.
Do you think there is an imbalance between the charters
currently? Can you clarify for us what your concern is? What
should be done?
A.1. Under our ``dual'' banking system, banks may elect to be
chartered by either the States or the Federal Government
(acting through the Office of the Comptroller of the Currency).
Congress historically has sought to maintain a competitive dual
banking system, that is one in which both national and State-
chartered banks may compete effectively. Over time, a healthy
dual banking system promotes diversity, flexibility, and
inventiveness in the banking system. For these reasons, the
Board has long supported the dual banking system and efforts to
ensure the viability of both the State bank and national bank
charters.
For many years, there has been a rough equilibrium in the
banking system between State-chartered and nationally chartered
institutions as measured by both the percentage of banks that
are State chartered and the percentage of banking assets
controlled by State-chartered banks. As reflected in Table A,
the percentage of insured commercial banks that are State-
chartered fluctuated only slightly between 1992 and 2003,
rising from 69 percent in 1992 to 74 percent in 2003. Moreover,
the percentage of banking assets held by State-chartered banks
also remained relatively constant over this time period.
Recently, a number of State-chartered banks have converted,
or have announced their intention to convert, to a national
charter. As a result, the percentage of banking assets held by
all State-chartered banks is forecast to decline from 44
percent to 33 percent and the percentage of banking assets held
by State member banks, which are directly supervised by the
Federal Reserve, would decline from 25 percent to approximately
15 percent.
Although this projected shift in assets controlled by State
banks is significant and larger than seen in some time, it is
too early to tell whether it reflects a temporary anomaly or an
underlying imbalance between State and Federal charters that
should be of concern to the Congress. Regarding the
implications of these changes for supervision, the Federal
Reserve has adapted and refined its supervisory programs and
practices regarding bank and financial holding companies in
response to changes in the financial industry and the statutory
requirements established by the Congress. The Board believes
that the Federal Reserve should continue to play a meaningful
role in the supervision of banking organizations to assist in
fulfilling its broader responsibilities for conducting monetary
policy and managing and containing risk within the financial
system.
At this point, we do not believe that the recent
developments have hampered the Federal Reserve's ability to
maintain a ``hands-on'' role in the supervision of large
banking organizations through our role as umbrella or
consolidated supervisor of bank holding companies, financial
holding companies, and the U.S. operations of foreign banks.
Looking ahead, if these developments adversely affect the
Federal Reserve's window into the banking system over time, the
Board will bring the matter to the attention of the Congress to
ensure that it retains the authority and access necessary to
carry out the full range of its central bank responsibilities.
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