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MONETARY POLICY AND

THE STATE OF THE ECONOMY

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

FEBRUARY 17, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–4

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

ROBERT U. FOSTER, III, Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on: 

February 17, 2005 ............................................................................................ 1

Appendix: 

February 17, 2005 ............................................................................................ 51

WITNESS 

THURSDAY, FEBRUARY 17, 2005

Greenspan, Hon. Alan, Chairman, Board of Governors of The Federal Reserve 

System ................................................................................................................... 7

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 52

Baca, Hon. Joe .................................................................................................. 54

Gillmor, Hon. Paul E. ....................................................................................... 57

King, Hon. Peter T. .......................................................................................... 58

Greenspan, Hon. Alan ...................................................................................... 59

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Oxley, Hon. Michael G.: 

Written letter to Hon. Alan Greenspan, March 1, 2005 ................................ 71

Greenspan, Hon. Alan: 

Monetary Policy Report to the Congress ........................................................ 72

Written response to questions from Hon. Michael G. Oxley ................................ 101

Written response to questions from Hon. Wm. Lacy Clay ................................... 102

Written response to questions from Hon. Luis V. Gutierrez ................................ 106

Written response to questions from Hon. Barbara Lee ........................................ 108

Written response to questions from Hon. Deborah Pryce .................................... 111

(1)

MONETARY POLICY AND 

THE STATE OF THE ECONOMY 

Thursday, February 17, 2005

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to call, at 10:04 a.m., in Room 

2128, Rayburn House Office Building, Hon. Michael Oxley [chairman of the committee] presiding. 

Present: Representatives Oxley, Leach, Baker, Pryce, Castle, 

King, Lucas, Ney, Kelly, Paul, Gillmor, Ryun, Manzullo, Jones, 

Biggert, Shays, Miller of California, Tiberi, Kennedy, Feeney, 

Hensarling, Garrett, Barrett, Harris, Gerlach, Pearce, Neugebauer, 

Price, Fitzpatrick, Davis of Kentucky, McHenry, Frank, Kanjorski, 

Waters, Sanders, Maloney, Gutierrez, Velazquez, Watt, Ackerman, 

Carson, Sherman, Meeks, Lee, Moore of Kansas, Capuano, Ford, 

Hinojosa, Crowley, Clay, Israel, McCarthy, Baca, Matheson, Lynch, 

Miller of North Carolina, Scott, Davis of Alabama, Green, Cleaver, 

Bean, Wasserman Schultz, and Moore of Wisconsin. 

The CHAIRMAN. [Presiding.] The committee will come to order. 

We are indeed honored again to have Chairman Greenspan, 

Chairman of the Fed, testify before the committee. 

And I thank, Mr. Chairman, you in advance for your testimony 

and the time that you are going to spend with us today. 

Mr. Chairman, we all know that the economy is nearly completely recovered. We have had four strong quarters of GDP 

growth, and the total number of jobs, a little more than 130 million, is back to its peak from the winter of 2000-2001. 

Productivity remains impressive, and the market is strong, with 

the Dow looking as if it might touch the 11,000 mark again. 

Job creation remains robust, and the unemployment rate, at 5.2 

percent, is at the same level it stood at in 1997, before the unprecedented period in which it briefly went below 4 percent, a rate few 

imagine we will ever see again. 

So, Mr. Chairman, thanks to the twin injections of liquidity, the 

President’s tax cuts, and the Fed’s lowering of short-term interest 

rates, our American economy has once again shown itself to be resilient enough to withstand multiple shocks. 

Aside from our strong current position, there are continued challenges ahead that we will discuss today. Among them are the trade 

deficit, the budget deficit, and Social Security. 

Mr. Chairman, you are perhaps America’s most famous budget 

hawk. You favor lower taxes as long as they are offset by spending 

cuts. I am sure you welcome the President’s initiatives outlined in 

2

his budget and in the State of the Union speech. The President has 

laid out a cost-cutting program, and he has faced the Social Security problem head on. 

President Bush knows that the numbers don’t lie, and they are 

clearly on the side of a need to reform the system. 

Mr. Chairman, you led the commission that assisted in significant reform of Social Security under President Reagan in 1983, and 

I am certain all committee members await your views on this matter. We all know the facts, that in less than 15 years the system 

starts paying more out than it is paying in, and that if we don’t 

do something quickly the options will be higher taxes, benefit cuts, 

or some blend of the two. 

Chairman Greenspan, I stand in complete agreement with the 

President, and in important part the answer is personal accounts. 

From its creation, Social Security was never envisioned as the sole 

answer to an individual’s retirement needs, but as a supplement. 

However, now, two-thirds of its recipients rely on Social Security 

for at least half or more of their retirement income. That isn’t good 

for them, and it isn’t good for the country, in my view. 

Mr. Chairman, I believe President Roosevelt, who created the Social Security system, felt the same way. As the Wall Street Journal 

has pointed out, in a speech to Congress in 1935 FDR anticipated 

the need to move beyond the pay-as-you-go financing method. 

Chairman Greenspan, that is two presidents—the Democrat 

founder of Social Security and the Republican to whom it falls to 

save the Social Security system—in agreement on the issue of personal accounts. 

There will be some heavy lifting to get the system right, of 

course, and this committee will be in support. 

We have an obligation to America and to future generations to 

address this problem. 

So, Mr. Chairman, in the week that baseball reports for spring 

training, I think we should view this effort as the start of a new 

season as well, a season in which Congress will step up to the plate 

with intelligent, long-term reform of Social Security. 

We seek to extend the ownership society to all Americans, and 

let us broaden that concept of ownership to retirement. 

With that, I am pleased to yield to the Ranking Member, the 

gentleman from Massachusetts, Mr. Frank. 

Mr. FRANK. Thank you, Mr. Chairman. 

I am in somewhat less agreement with the President than you 

are, although I don’t wish to be totally in opposition. 

And I must say I look forward to supporting the President in his 

attack on bloated and inefficient and wasteful farm subsidies, and 

I am sure I will have strong support from these free market conservatives on the other side as we attempt to bring the free market 

principles to the largest sector of the American economy from 

which they have long been absent. 

With regard to Social Security, I do appreciate the Chairman 

making it very clear, as others have, that the question of private 

accounts and the question of the solvency of the system are, in fact, 

quite separate; that the President himself has acknowledged this. 

So, yes, there are questions about solvency. They are separate 

from private accounts. And I will return to them. 

3

But I want to talk about what I think is the overarching problem 

in the American economy today. And I want to congratulate the 

Chairman—there are some advantages to going second when the 

Chairman testifies, and one is that we don’t have to worry about 

poaching on his right to be the presenter of his own ideas. He testified yesterday in the Senate. 

So I am not reluctant to call attention to page five of his testimony today in the last couple of paragraphs. 

And I think what we have is a serious problem in America. 

The economy has begun again to grow, but it is growing in a way 

that is exacerbating inequality. We are getting, as the Chairman 

has noted—although there are some hopes this may improve in the 

future—fewer jobs for each additional unit of GDP. 

We have a failure of wages on the whole to rise proportionate to 

the economy. We have—although it isn’t commented on here, we 

have discussed it—the lack of health care and the falling away of 

health care for many people. 

Some have said, ‘‘Well, don’t worry about inequality; that is just 

a sign of pettiness. As long as everything is getting better, why do 

you worry about inequality?’’

And I want to call attention to the quite profound remarks of 

Chairman Greenspan on this subject when he talks about the problem that we now have where skilled workers’ wages, skilled in 

terms of this economy, are increasing and we have got a greater 

differential between people who are skilled and people who aren’t. 

As he says, ‘‘If the skill composition of our work force meshed 

fully with the needs of our increasingly complex capital stock, 

wage-skill differentials would be stable—for the past 20 years, the 

supply of skilled, particularly highly skilled workers has failed to 

keep up with the persistent rise in demand for such skills. Conversely, the demand for lesser skilled workers has declined.’’

And this is quite profound. 

‘‘In a democratic society,’’ you say, Mr. Chairman, ‘‘such a stark 

bifurcation of wealth and income trends among large segments of 

the population can fuel resentment and political polarization.’’

And I think you have pointed to a central problem, and you repudiate those who say don’t worry about it. And I think you are right 

to worry about it, but here is my concern. 

You then go on to say that one of the most important tasks for 

the social stability of this country, as well as our economic future—

because as you note, a badly polarized society is going to be one 

in which efforts to move forward toward economic rationality will 

be resisted sometimes when they shouldn’t be; a new rationality 

may creep in, an anger, a resistance to economic rationalization. 

And what you say is we need to increase the skills of lesser 

skilled people, reduce the excess of lesser skilled workers, expedite 

the acquisition of skills by all students both through formal education, by on-the-job training. 

I would add that it is also important, since we know this isn’t 

going to happen instantly, that we alleviate the negative effects of 

this while it happens. 

You are quite right to note that resentment will build up. 

4

With all the success we could expect in education and on-the-job 

training, years will ensue before we make a substantial dent in 

this. 

We have a couple of problems now. 

Public policy, particularly recently, has cut back in precisely 

those areas that alleviate the impact of inequality. We are doing 

less for those who get less. We are cutting back there. 

Similarly, our ability to go forward, the private sector will play 

a major role in on-the-job training and elsewhere. But no one expects people trying to make a profit to fund all of that. 

Some significant part of that is going to have to be funded publicly through education, through community colleges, through payment through on-the-job training. 

The problem we have is this. The Chairman said you are a very 

famous deficit hawk. You may be one of the few consistent deficit 

hawks left here in the capital because people’s deficit hawkishness 

does appear to ebb and flow according to the programs. 

If, however, we maintain the current situation in which we have 

a high priority on reducing the deficit and we continue in existence 

all of the tax cuts, then the inevitable consequence is very substantial reductions in public spending. 

With defense out of this loop, with homeland security out of this 

loop, all of the programs that either alleviate the consequences of 

inequality or help us reduce this skill disparity in the future are 

under the gun. 

And so I fear—this is a question I would address to you—how do 

we alleviate the effects of this inequality so that you reduce the 

negative feelings that you correctly point out are a result? And how 

do we increase our ability to get these skills to people; how do we 

improve education; how do we improve on-the-job training? 

Money is not the only answer. But no one, I think, would say 

that you can do something of that magnitude in this society without additional resources. 

And the dilemma is, if you are going to deal with deficit reduction entirely through reductions in domestic public spending, at the 

state and local level and at the federal level, I think you have a 

situation in which the situation which you quite eloquently decry 

will get worse rather than better. And that is a subject I hope to 

pursue. 

The CHAIRMAN. Gentleman’s time has expired. 

Now, recognize the chairwoman of the Domestic and International Monetary committee, the gentlelady from Ohio, Mrs. 

Pryce. 

Ms. PRYCE. Thanks, Chairman Oxley. 

Welcome, Chairman Greenspan, and thank you for taking the 

time to discuss with us your insights on monetary policy and many 

other things I am sure we will hear from you. 

I am especially happy to be returning to the committee for these 

very special opportunities. This will be an exciting and very busy 

year for us. As you know, the President has outlined an aggressive 

second-term agenda, which includes Social Security, tax and legal 

reform. 

5

Social Security is an issue that, if addressed today, could safeguard the future of millions of young people, and, if ignored, could 

become the biggest shortcoming of a generation. 

As you noted yesterday, the existing structure isn’t working, and 

I am sure that this committee will have plenty of questions on this 

issue, and I look forward to hearing your answers later in the 

morning. 

Last month, the Bureau of Labor Statistics released revised data 

showing gains of 2.7 million jobs for 20 straight months, with those 

gains beginning of June of 2003, which was 3 months earlier than 

previously estimated. 

My home state of Ohio, which has been hit hard by manufacturing job loss over the last 2 years, has recently seen an increase 

in workers returning to the job market, and Ohio is not alone in 

that recovery. The national unemployment rate ticked down 0.2 

percentage points in January, the lowest rate since September of 

2001. 

Mr. Chairman, reflection on the measured rise in inflation taken 

by FOMC and the role you had in it, I am particularly interested 

in hearing you address the role raising rates will have on manufacturing states like Ohio, where the manufacturing sector is a large 

part of the economy. 

Also, I would like to hear how you feel it will affect the housing 

market, which has been such a stable influence in the economy 

over the last several years. 

I appreciate, Mr. Chairman, your support and encouragement of 

deregulation and technological innovation. You have said before 

that continued movement on these fronts, along with maintenance 

of a rigorous and evolving education system, will drive our economy 

into the future. 

I am particularly interested to hear you speak in more length on 

the demands put on our education system. You have voiced concern 

in the past that while our fourth graders outperform their peers 

around the world in math and science, our eighth graders are 

about average, and our 12th graders rank near the bottom. 

How can this happen? 

I hope to discuss with you now and in the future possible reasons 

for this failure and how best we resolve our education system to 

graduate more skilled workers and how that will affect our economy. 

I am also concerned about the state of financial literacy among 

all Americans. 

I am concerned over the state of our nation’s savings rate, something I was glad to hear you address in yesterday’s hearing and I 

hope you discuss further today. 

We must grow our economy and not our government, and we 

must change the current system of Social Security to ensure its solvency for our children. 

Through fiscal discipline and by implementing policies that increase the rate of personal savings and retirement security, we can 

provide financial freedom to all Americans and allow them to take 

ownership over their families’ future and prosperity. 

I thank you, Mr. Chairman, for your appearance today. I look 

forward to your testimony. 

6

And with that, I yield back, Mr. Chairman. 

The CHAIRMAN. Thank the gentlelady. 

Before I recognize the Ranking Member of the subcommittee, I 

want to first recognize a good friend, former Ranking Member from 

the committee, John LaFalce. 

Good to have you back, John. And probably looks a little different 

on that side of the dais. 

The gentlelady from New York, Ms. Maloney. 

Mrs. MALONEY. Thank you. It is always a pleasure to welcome 

Chairman Greenspan. 

I look very much forward to your testimony on the economy and 

monetary policy, but I would also like to get your views on some 

broader issues regarding the sharp turn in economy policy from the 

late 1990s, when we eliminated the deficit and started to pay down 

the debt, to now, when once again we see deficits as far as the eye 

can see and mounting debt. 

The state of the economy at present deeply disturbs me. This administration has repeatedly set records for debts and deficits. In the 1990s, we were looking toward a budget surplus of $5.6 trillion over 10 years. Now we have a budget deficit of over $400 

billion, with no end in sight. We have raised the debt limit three 

times in this administration, and our debt now stands at well over 

$7 trillion, an unfortunate record. 

That means that $26,000 is owed by every man, woman and 

child in America, the highest it has ever been. 

Their newest record is an all-time high trade deficit for last year: nearly $618 billion. The debt and deficit policies of this administration place a severe burden on our economy because we are borrowing huge sums from foreign countries. Some of our allies are 

warning us that they are approaching the limit of their willingness 

to buy our debt. 

It has gotten to the point where some European bankers who 

were in Washington, D.C., last week were asking if the dollar will 

continue to be the reserve currency of the world. 

So I want to know, Mr. Greenspan, are you really comfortable 

with the policies of what I can only call the debt-and-deficit Republicans who are now running our economic policy? 

Chairman Greenspan, your testimony explains why the Federal 

Reserve is likely to continue what it calls its measured policy of interest rate increases, but I would hope that you would take a second look at this policy. I am concerned that we are not seeing the 

kind of robust job growth we would normally see in a strong economy. 

The Bush administration is proud of its job creation over the past 

20 months, but when you break it down, we are only gaining 

140,000 jobs per month, barely enough to keep pace with normal 

growth in the labor force. 

Most indicators of workers’ wages show that they are barely 

keeping up with inflation, and wages may actually be falling at the 

lower end of wage distribution. That hardly sounds like an economy that needs to be slowed by interest rate hikes. 

On the question of debt, I am sure you cannot be happy with 

what has happened to the federal budget deficit since 2001. And 

frankly, Mr. Chairman, you had something to do with that, when 

7

you gave the green light to the administration’s tax policies in 

2001. 

But you have repeatedly said that persistent budget deficits are 

toxic to the economy and that deficit reduction is one of the best 

strategies to have for raising national savings and boosting future 

standards of living. And I completely agree with you on that. 

That brings me to the administration’s proposal for phasing out 

Social Security by privatizing it. I know you share the President’s 

philosophy about privatized accounts, but you cannot share his 

budget arithmetic. 

Experts estimate that the creation of privatized accounts would add upwards of $4 trillion to $5 trillion to our national debt in the 

first 20 years alone. I believe that you told the Senate yesterday 

that the privatized accounts proposal would do absolutely nothing 

to address the solvency of Social Security and would do nothing to 

boost national savings, yet it adds new problems to our debt. 

I believe you also said that no one knows how financial markets 

would respond to all of that debt coming on the market. 

So I ask mainly what possible benefit could there be to plunging 

ahead with such a reckless policy when we already have a deficit 

and debt problem that is out of control? 

As always, I look forward to your testimony. 

The CHAIRMAN. The gentlelady’s time has expired. 

We now turn to the distinguished Chairman of the Federal Reserve. Chairman Greenspan, welcome back to the committee. And 

we appreciate your spending some time with us. And take as much 

time as you would like. 

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD 

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. GREENSPAN. Thank you very much, Mr. Chairman. I request 

that the full text of my remarks be included for the record. 

The CHAIRMAN. Without objection. 

Mr. GREENSPAN. Mr. Chairman and members of the committee, 

in the seven months since I last testified before this committee, the 

U.S. economic expansion has firmed; overall inflation has subsided 

and core inflation has remained low. 

Over the first half of 2004, the available information increasingly 

suggested that the economic expansion was becoming less fragile 

and that the risk of an undesirable decline in inflation had greatly 

diminished. Toward midyear, the Federal Reserve came to the 

judgment that the extraordinary degree of policy accommodation 

that had been in place since the middle of 2003 was no longer warranted and in the announcement released at the conclusion of our 

May meeting signaled that a firming of policy was likely. 

The Federal Open Market Committee began to raise the federal 

funds rate at its June meeting, and the announcement following 

that meeting indicated the need for further, albeit gradual, withdrawal of monetary policy stimulus. 

Around the same time, incoming data suggested a lull in activity 

as the economy absorbed the impact of higher energy prices. Much 

as had been expected, this soft patch proved to be short-lived. Accordingly, the Federal Reserve has followed the June policy move 

with similar actions at each meeting since then, including our most 

8

recent meeting earlier this month. The cumulative removal of policy accommodation to date has significantly raised measures of the 

real federal funds rate, but by most measures it remains fairly low. 

The evidence broadly supports the view that economic fundamentals have steadied. Consumer spending has been well maintained 

over recent months, buoyed by continued growth in disposable personal income, gains in net worth, and accommodative conditions in 

credit markets. Households have recorded a modest improvement 

in their financial position over this period, to the betterment of 

many indicators of credit quality. 

For their part, business executives apparently have become 

somewhat more optimistic in recent months. Capital spending and 

corporate borrowing have firmed noticeably, but some of the latter 

may have been directed to finance the recent backup in inventories. 

Mergers and acquisitions, though, have clearly perked up. 

Even in the current, much improved environment, however, some 

caution among business executives remains. Although capital investment has been advancing at a reasonably good pace, it has 

nonetheless lagged the exceptional rise in profits and internal cash 

flow. 

As opposed to the lingering hesitancy among business executives, 

participants in financial markets seem very confident about the future and, judging by the exceptionally low level of risk spreads in 

credit markets, quite willing to bear risk. 

This apparent disparity in sentiment between business people 

and market participants could reflect the heightened additional 

concerns of business executives about potential legal liabilities, 

rather than a fundamentally different assessment of macroeconomic risks. 

Turning to the outlook for costs and prices, productivity developments will likely play a key role. The growth of output per hour 

slowed over the past half year, giving a boost to unit labor costs 

after 2 years of declines. 

Going forward, the implications for inflation will be influenced by 

the extent and persistence of any slowdown in productivity. 

To date, with profit margins already high, competitive pressures 

have tended to limit the extent to which cost pressures have been 

reflected in higher prices. 

The inflation outlook will also be shaped by developments affecting the exchange rate of the dollar and oil prices. Although the dollar has been declining since early 2002, exporters to the United 

States apparently have held dollar prices relatively steady to preserve their market share, effectively choosing to absorb the decline 

in the dollar by accepting a reduction in their profit margins. 

However, the recent somewhat quickened pace of increases in 

U.S. import prices suggests that profit margins of exporters to the 

United States have contracted to the point where foreign shippers 

may exhibit only limited tolerance for additional reductions in margins should the dollar decline further. 

The sharp rise in oil prices over the past year has no doubt 

boosted firms’ costs and may have weighed on production, particularly given the sizable permanent component of oil price increases 

suggested by distant-horizon oil futures contracts. 

9

However, the share of total business expenses attributable to energy costs has declined appreciably over the past 30 years, which 

has helped to buffer profits and the economy more generally from 

the adverse effect of high oil and natural gas prices. 

All told, the economy seems to have entered 2005 expanding at 

a reasonably good pace, with inflation and inflation expectations 

well anchored. 

On the whole, financial markets appear to share this view. 

In particular, a broad array of financial indicators convey a pervasive sense of confidence among investors. 

Over the past two decades, the industrial world has fended off 

two severe stock market corrections, a major financial crisis in developing nations, corporate scandals, and of course, the tragedy of 

September 11, 2001. Yet overall economic activity experienced only 

modest difficulties. 

Thus, it is not altogether unexpected or irrational that participants in the world marketplace would project more of the same 

going forward. 

Yet history cautions that people experiencing long periods of relative stability are prone to excess. We must thus remain vigilant 

against complacency, especially since several important economic 

challenges confront policy-makers in the years ahead. 

Prominent among these challenges in the United States is the 

pressing need to maintain the flexibility of our economic and financial system. This will be essential if we are to address our current 

account deficit without significant disruption. 

Central to that adjustment must be an increase in net national 

saving. This serves to underscore the imperative to restore fiscal 

discipline. 

Beyond the near term, benefits promised to a burgeoning retirement-age population under mandatory entitlement programs, most 

notably Social Security and Medicare, threaten to strain the resources of the working-age population in the years ahead. 

Real progress on these issues will unavoidably entail many difficult choices. 

But the demographics are inexorable and call for action before 

the leading edge of baby boomer retirement becomes evident in 

2008. 

Another critical long-term economic challenge facing the United 

States is the need to ensure that our workforce is equipped with 

the requisite skills to compete effectively in an environment of 

rapid technological progress and global competition. 

But technology and, more recently, competition from abroad have 

grown to a point at which the demand for the least-skilled workers 

in the United States and other developed countries is diminishing, 

placing downward pressure on their wages. These workers will 

need to acquire the skills required to compete effectively for the 

new jobs that our economy will create. 

Although the long-term challenges confronting the United States 

economy are significant, I fully anticipate that they will ultimately 

be met and resolved. 

In recent decades, our nation has demonstrated remarkable resilience and flexibility when tested by events, and we have every reason to be confident that it will weather future challenges as well. 

10

For our part, the Federal Reserve will pursue its statutory objectives of price stability and maximum sustainable employment, the 

latter of which we have learned can best be achieved in the long 

run by maintaining price stability. 

This is the surest contribution that the Federal Reserve can 

make in fostering the economic prosperity and well being of our nation and its people. 

Mr. Chairman, thank you very much and I look forward to your 

questions. 

[The prepared statement of Hon. Alan Greenspan can be found 

on page 59 in the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. 

Let me begin with some questions, as you might guess, the issue 

du jour, Social Security and Social Security reform, and I think correctly put forward by the President. 

You have mentioned, for example, that the baby boomers really 

start drawing down on Social Security as early as 2008. So it does, 

I think, hopefully focus our attention on that very real fact and 

how we deal with it. 

This committee, of course, has been very interested in issues like 

capital formation, savings rates, interest rates, and the like, and 

you have been very helpful over the time that I have chaired this 

committee in leading us through some very difficult issues. 

One of the issues that I wanted to talk to you about today is the 

individual accounts and how they—not only how they would be 

structured, because I think our committee will have a serious interest in how that is accomplished—and secondly, what those individual accounts can do for the economy, and I would be interested 

in your comments. 

It seems to me that given an opportunity to create millions of 

worker capitalists in this country—to introduce a large segment of 

the population to issues like compound interest, dollar cost, averaging, building up ownership in one’s retirement—is a pretty exciting proposition. What kind of increase would we have, for example, 

in the pool of capital available to American companies to expand 

and modernize and be competitive in a global economy? 

I saw a study the other day that said if the average worker were 

to invest half of his account in a stock fund, index fund, and half 

in a bond index fund, that the creation of those bond index funds 

and those savings would double the amount of money in the current bond market, which I would assume based on what you have 

said in the past would have a significant positive impact on interest rates going forward. 

I just throw those out to you because too many times I think we 

get lost in the issue of Social Security, and it is an important issue, 

but also what the overall effect could be on our country, that is individual citizens, as well as the economy. 

And I will just turn you loose on that. 

Mr. GREENSPAN. Well, Mr. Chairman, I think the first thing that 

we have to focus upon is this extraordinary shift that is about to 

occur, starting in 2008, in which roughly 30 million people are 

going to leave the labor force over the next 25 years and enter into 

retirement. 

11

This creates a very significant slowing in the rate of economic 

growth. When the rate of growth of the working-age population relative to the total goes down—and even with productivity increasing 

at a reasonably good clip the rate of growth in GDP per capita 

must slow down. 

This is going to cause a confrontation in the marketplace between the desire on the part of retirees to maintain essentially 

what we call their replacement rate—namely, that a standard of 

living relative to the standard of living they enjoyed just prior to 

retirement will be maintained. 

If that is done, it will put significant pressure on the workingage-population economic growth, and so we have to find a way to 

get a larger pie to solve both sides of this. 

The advantage of having individual accounts is over a fairly 

broad spectrum, but the one that I think is most important actually 

relates to the issue which your Ranking Member mentioned before. 

These accounts, properly constructed and managed, will create, 

as you also point out, a sense of increased wealth on the part of 

the middle-and lower-income classes of this society, who have had 

to struggle with very little capital. 

And while they do have a claim against Social Security system 

in the future, as best as I can judge, they don’t feel as though it 

is personal wealth they way they would with personal accounts. 

And I think that is a quite important issue with respect to this. 

The major issue of personal accounts is essentially economic, in 

the sense that, confronted with the very large baby boom retirement and the economic difficulties associated with it, the structure 

of essentially a pay-as-you-go system, which is what our Social Security system is, which worked exceptionally well for almost 50, 60 

years, that system is not well suited to a period in which you do 

not any longer have significant overall population growth, and 

therefore a very high ratio of workers to retirees. 

And it is no longer the case, as existed in the earlier years, that 

life expectancy after age 65 was significant. We have been fortunate in that, for a number of reasons, our longevity has increased 

measurably. 

But it does suggest that if we are going to create the type of 

standard of living that we need in the future for everybody, we are 

going to need to build the capital stock, plant and equipment, because that is the only way we are going to significantly increase 

the rate of productivity growth which will be necessary to supply 

the real goods and services that the individuals who are retired at 

that point and the individuals who are activity working would 

sense their right in this economy. 

And if we are going to do that, we have to have a significant increase in national savings, because even though it doesn’t exactly 

tie one to one because there are other ways in which productivity 

rises, the central core of productivity increase is capital investment. 

And to have capital investment you need to have savings. 

Now, we in the United States have had a very low national or 

domestic savings rate and have been borrowing a good part of it 

from abroad to finance our existing capital investment. We are obviously not going to be able to do that indefinitely, which puts even 

more pressure on building up our domestic savings. 

12

And what this means is that whatever type of structure we have 

for retirement, it has to be fully funded. 

The OASI has $1.5 trillion in the trust fund at this stage. The 

required full funding is over $10 trillion. 

In short, we do not have the mechanisms built into our procedures for retirement and retirement income and pensions which 

are creating a degree of savings necessary to create the capital assets which are a precondition to get a rate of growth in productivity, given the slow growth in the labor force which we project 

going forward in order to create enough GDP for everybody. 

So my major concern is that the current model, which served us 

so well for so many decades, is not the type of model we would certainly construct from scratch, and we have to move in a different 

direction. 

And one of the reasons that I think we have to move toward a 

private individual account system is they, by their nature, tend to 

be significantly fully funded, even if they are defined contribution 

plans, because individuals know what they need for the future and 

they tend to put monies away adequately to create the incomes 

they will need in retirement. 

So I think this is an extraordinarily important problem that exists. And I won’t even go on to mention the fact that the Medicare 

shortfall, so far as the issue of where full funding lies, is several 

multiples in addition to what we confront in Social Security. 

The CHAIRMAN. Thank you, Mr. Chairman. 

I think the clocks are not working right. We will have to get 

a——

Mr. FRANK. Don’t fix them that quickly. Wait a few minutes. 

The CHAIRMAN. Gentleman from Massachusetts. 

Mr. FRANK. I am struck by your last point, Mr. Chairman, because the President has been talking, I think, in exaggerated terms 

about a crisis in Social Security, and I haven’t heard him talk 

about Medicare. And I welcome your assertion that the Medicare 

problem is, if I heard you correctly, several magnitudes greater. 

And it seems to me we are talking about an ideological agenda. 

When you put the Social Security issue up front and ignore the 

Medicare issue, I do not think you are simply following what economic necessity would dictate. 

On the question of capital formation, it is a question I would like 

to ask. We have this problem with the deficit. We have a problem 

of money being used up. 

One of the areas of federal spending growth that is obviously, 

perhaps, the fastest is in the military budget. Now, some of that 

is necessary, brought on us by outside enemies. I voted for the war 

in Afghanistan—not for the war in Iraq. But we have some problems here. 

On the other hand—and I cited my eagerness to support conservatives as we defend the administration’s effort to dismantle the 

bloated agricultural system—I also look forward to working alongside intellectually honest fiscal conservatives in supporting proposals to de-fund Cold War weapons that no longer have a major 

justification. The administration is going to be proposing, I am told, 

the reduction. 

13

Now, I don’t ask you to opine about whether or not the weapons 

are necessary, but I do solicit your opinion on the economic impact. 

To the extent that the Defense Department can identify expensive weapon systems that it believes are no longer of a high priority because they were originally designed with a different enemy 

in mind, a thermonuclear enemy, to the extent that we could reduce the spending there, what is the effect economically for the 

country? 

Mr. GREENSPAN. Well, it is obvious that hardware expenditures, 

especially the type that was fairly substantial over the post-World 

War II period, are a drain on the real resources of the economy. 

And clearly, to the extent that we can cut back in any part of 

the budget, dollar for dollar it reduces the deficit, increases national savings, and does, obviously, contribute to private capital investment—the very critical need which I think we have going forward. 

Mr. FRANK. Well, I appreciate that because when it comes to reductions in some of these weapons that the Pentagon will say are 

unnecessary, I anticipate that some who are in other contexts quite 

critical of government spending are going to sound like Harry Hopkins and Harold Ickes put together as they talk about the stimulative effect for the economy. 

Mr. GREENSPAN. I assume you mean Ickes Sr. 

Mr. FRANK. Harold Ickes Sr., yes. 

The Harold Ickes of your era, Mr. Chairman. 

[Laughter.] 

While I am on the subject, as I get into Social Security, one question of great interest to me, Mr. Chairman, and you are a distinguished economic authority. Had you been in the Congress in 1935, 

would you have voted for Social Security? 

Mr. GREENSPAN. I was pretty young at that time. 

Mr. FRANK. I understand, Mr. Chairman, but——

[Laughter.] 

I said, if you had been there, would you have? 

Mr. GREENSPAN. I cannot answer that question. 

Mr. FRANK. I didn’t think you would be able to, but I do think, 

frankly, look, we have an economic aspect here and an ideological 

one. And as we have acknowledged, the need to get to solvency has 

an economic impact. The question of private accounts has an ideological one. And many of us, frankly, would have no question: We 

would have voted for that. And I think that is relevant. 

Let me go to the question of, leaving aside the ideological questions, I do say, and I appreciate what you said about inequality. I 

do have to express skepticism that telling workers who are now losing their jobs because of various factors in the economy or whose 

real wages are not keeping up, telling them, ‘‘Do not despair, private accounts are coming, 15 or 20 years from now,’’ will be of less 

of a morale booster than I think you implied. 

But leaving aside the desirability, we do have the question of 

how you get there. You say in the monetary policy report, on page 

12, the entire governors say, ‘‘The recent sizable deficits in the unified budget mean the federal government, which had been contributing to the pool of national saving from 1997 through 2000 has 

been drawing on that pool since 2001,’’ and you have identified savVerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH
14

ings, the low savings rate, as a big problem. The single biggest factor in this appears to be the federal government. 

Net federal savings dropped from positive 2 percent of GDP in 

2000 to a level below negative 3 percent in 2003 and 2004. There 

has been a swing of 5 percent with regard to national savings, entirely attributable to the federal government. 

Here is the problem: clearly we are going to have to borrow to 

set up private accounts. The administration says it will cost $700 

billion or $800 billion in the next 9 years, but obviously that is not 

the end of it. The estimates from the Democrats on the Budget 

Committee is $4 trillion. 

The administration won’t say. Generally, when people won’t say 

it is because they don’t like what they would have to say. 

You told Senator Sarbanes yesterday I believe that if we had to 

borrow more than a trillion, that could be problematic. You said 

over a trillion is large. 

Mr. GREENSPAN. I was referring to the 10-year time frame. 

Mr. FRANK. Okay. 

Mr. GREENSPAN. That was the context. 

Mr. FRANK. Let me ask, has the Fed done any kind of costing out 

of what the cost of the borrowing will be in the period after the 10 

years? 

Mr. GREENSPAN. No, we haven’t. But remember that the critical 

issue here is how it affects national savings. 

Mr. FRANK. The market. 

Mr. GREENSPAN. If you move marketable securities from the U.S. 

government and thereby create a deficit into a private account, but 

you require that that account not be subject to withdrawal prior to 

retirement, you effectively insulate the issue of a change. 

Mr. FRANK. But as you said yesterday, that depends on the market’s perception. And I must say yesterday, as I read your questions——

Mr. GREENSPAN. That is correct. 

Mr. FRANK.——you were less assured yesterday. Did something 

happen overnight? 

Mr. GREENSPAN. No. I was about to get to that. 

Mr. FRANK. Okay. I don’t want the time to run out before you 

did. The clock seems miraculously to have got fixed after he got 

through. 

[Laughter.] 

Mr. GREENSPAN. As I said yesterday, we are not sure to what extent and how much the markets respond. I think that basically the 

question of moving to private accounts, personal accounts, individual accounts, whatever you want to call them, is necessary 

largely because I think the existing system——

Mr. FRANK. But you are off my point, Mr. Chairman. I understand that. You have said that. But I am asking you about the impact of the borrowing and the market. And yesterday——

Mr. GREENSPAN. To the extent—to the extent—that that affects 

national savings, and as I say——

Mr. FRANK. But it is a separate question. You, at least yesterday, 

said market perception was a problem, and you seemed to indicate 

that the——

15

Mr. GREENSPAN. Let me tell you why I am responding in the way 

I am: The unified budget is a mechanism which only partly reflects 

the impact of government activity on the economy. It is an exceptionally good one, and covers most issues. But when you are dealing with forced savings of any type, the evaluation is somewhat different. 

But to answer your question very specifically, to the extent that 

actual government borrowing tends to impact on interest rates and 

on the economy, which generally budget deficits do, then I do think 

we have to constrain them. 

Mr. FRANK. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from Ohio, Ms. Pryce. 

Ms. PRYCE. Thank you, Mr. Chairman. 

Social Security is the subject du jour, obviously. I will ask you 

a question on a different matter, but I also would like to allow you 

to complete your answer, if you had more to say, about the perception. 

I was very intrigued. In your testimony you talked about the perception of wealth, personal perception, then you just made reference to market perception. Is there more you would like to say 

in response to Mr. Frank? 

Mr. GREENSPAN. No. It is just that, as I indicated and the congressman quoted me, for the last 25 years we have had a consistent, ever-increasing concentration of income and wealth in this 

country. And as I said, that is not conducive to the democratic process or democratic society. 

It is crucial to our stability that people all have a stake in this 

system. And I don’t perceive that Social Security is conceived that 

way. It is very important for people to have a sense of ownership. 

In other countries, where shifts have been made, there is a lot of 

anecdotal indications that it made a difference in a lot of places. 

Now, I am not saying that the United States is like Chile, for example. It is not. But I think that it is an issue that goes beyond 

the sheer economics of it. 

But because we need to find a better vehicle for providing retirement benefits, and therefore have to move away from the pay-asyou-go structure, and I think essentially into certain private accounts or defined benefit programs or something, because we need 

the full funding, that it is far more likely that we will get the type 

of savings, and therefore the type of capital investment that we are 

going to need in order to meet the promises we have already made 

to the next generation of retirees going forward. 

Ms. PRYCE. All right. Thank you, Chairman. 

Now let me shift gears away from Social Security, because I am 

sure that that will be dominating the day. But I would like to ask 

your insights into the matter of the interchange and how that is 

going to be affecting control of monetary policy. 

I know that the Fed has an ongoing study and retail payments 

research project to estimate the number of transactions and the 

value to the retail system. 

But it is a very intriguing concept to me, and I would really like 

to hear your comments on it, how it affects your control of monetary policy, how it affects consumer prices and the economy, and 

16

if you believe that there is a privacy or identity theft peripheral 

issue to it. 

So I know that this is kind of off the subject du jour, but I would 

like to hear your insights. 

Mr. GREENSPAN. Well, one of the things which has been quite impressive is how the financial system has adjusted to the major increase in information technology and computer technology. And the 

payment system has gotten extraordinarily complex in all the various different areas. 

To be sure, we have had privacy questions emerge, and there has 

been a significant battle, I may say, between those who create new 

encryption programs and those who are trying to break them. 

I think at the end of the day that the mathematics of encryption 

are such and the technology is such that we ought to be able to create systems which will be exceptionally difficult to break. 

If we are going to get the benefits of the payment system or, as 

I commented yesterday, the extraordinary potential benefits of information technology in the health care area, we have to create security for privacy. And the only way to do that and still have the 

availability and use of these technologies is to find adequate 

encryption. 

I think that is something which continues to improve. In my 

judgment, at the end of the day, it is going to become very difficult 

as the technology gets more and more complex, actually to break 

some of these newer, very clever encryption systems. 

Ms. PRYCE. Would you like to comment at all on——

The CHAIRMAN. Gentlelady’s time has expired. 

We are going to try to stay as close to the 5-minute rule——

Ms. PRYCE. Thank you, sir. 

The CHAIRMAN.——because we have got so many members to ask 

questions. 

The gentlelady from New York? 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Mr. Greenspan, the President is drumming up support for his 

plan by saying that by 2042, ‘‘the entire system will be bankrupt.’’

To the average person, bankrupt would mean that you would be 

totally out of money, that there would be no benefits at all. Yet, 

experts say that we will not touch the trust fund until 2018, and 

even though the trust fund will be used up by 2042, as the law envisioned, there will be plenty of money coming in from payroll 

taxes, enough to pay for three-quarters of the benefits. 

So to say that the entire system is bankrupt in 2042 is not true. 

It is misleading. Would you agree, yes or no, Mr. Greenspan? 

Mr. GREENSPAN. It is certainly true that the amounts of money, 

cash, that are available would, assuming that the 2042 is the more 

accurate than the 2052 which CBO is raising, but the point I think 

that is crucial here is that this is mainly the monies that the Congress is making available. 

And I must say, parenthetically, I think the probability were we 

in fact to run into zero trust fund at that point, that benefits would 

be cut, approaches zero, as indeed it did in 1983, the last time that 

happened. 

17

But that is not what the issue is. The issue is not whether or not 

we have the ability to make payments, but whether we have built 

up a sufficient trust fund——

Mrs. MALONEY. My question is not that. I question the statement 

that by 2042 the entire system will be bankrupt. It will not be 

bankrupt. I agree the trust fund will be gone, but there will still 

be the money coming in from the payroll taxes, enough to pay, by 

all accounts, three quarters of the benefits. 

Is that true or not? 

Mr. GREENSPAN. It is true in dollar terms, but I suspect it may 

not be true in real terms. 

And the reason I am saying that, if we cannot get full funding 

and the savings required to build up the capital stock in time for 

2042’s production of goods and services, yes, the individuals may 

have the cash, but the cash will not buy as much as they think it 

would be. 

The real problem has got to be real resources, and this issue of 

whether or not the OASI goes bankrupt or not bankrupt is an interesting legal and political question, but it really doesn’t get at the 

economics of the retirement of 30 million additional individuals. 

Mrs. MALONEY. That is true, but the point is in 2042, the entire 

system is not bankrupt. 

But I would like to get back to your statements in the Senate 

yesterday where you pointed out that the President’s plan does 

nothing to solve the solvency challenge of Social Security and it 

does nothing to improve national savings and it creates new debt 

that will have trouble being absorbed by the markets. 

So, in other words, the President’s plan doesn’t address the real 

problems and it creates new ones. The cost for transition has been 

estimated to be $4 trillion to $5 trillion over 20 years, and this is 

on top of the deficit and debt that we now have and do not seem 

to be able to control. 

We have the highest debt ever, over $7 trillion; the highest deficit ever, over $400 billion; the highest trade debt ever, over $600 

billion. 

And my question is, wouldn’t you say that for the immediate future, the deficit is more of a problem with our economy than Social 

Security is, particularly since we do not even have to touch it, the 

trust fund, or the principal until 2018? 

Mr. GREENSPAN. No, I think that the problem starts in 2008. 

And I don’t disagree with you about the size of some of the numbers, but remember a goodly part of that——

Mrs. MALONEY. Especially, Mr. Greenspan, when you said yesterday in the Senate that the increased debt of over $1 trillion in a 

10-year period would be too much for the markets to absorb. 

And so, when we have independent analysis and economists saying that it will be $4 trillion to $5 trillion over 20 years, doesn’t 

that cause a tremendous problem on top of the debt and deficits 

that we already have, yes or no? 

The CHAIRMAN. The gentlelady’s time has expired. 

The Chairman may answer yes or no or expand on that. 

Mr. GREENSPAN. All I would say is that when you are getting out 

that far, there will be lots of adjustments. 

18

It is important in the process of the adjustment that we be very 

careful not to increase the degree of excess inflationary liquidity in 

the economy, and adjustments will need to be made. 

Mrs. MALONEY. Thank you. 

The CHAIRMAN. The gentleman from Louisiana, Mr. Baker? 

Mr. BAKER. I thank the Chairman. 

And welcome the Chairman back again. It is certainly always a 

pleasure to hear your thoughts. 

I just want to speak briefly as to the concerns about the division 

that apparently will exist in our country going forward with those 

accumulating wealth and those without hopeful opportunity. 

I believe we have learned a great deal from some of our metropolitan woes across the country. As local governments look for ways 

to deal with infrastructure problems and meeting social need, they 

have raised taxes to confiscatory levels, and those with the ability 

have moved to the suburbs, taking their capital and assets with 

them, and the spiral downward is only escalated. 

I worry that in our rush to solve this problem that with additional federal government regulatory encroachment, with confiscatory tax rates being discussed, that those who have the ability 

simply will move offshore, taking their investments, their manufacturing, and their jobs elsewhere. 

And so, we have, indeed, to have a system where everyone has 

a stake and a potential to share in the potential outcomes if we are 

going to work our way through this very difficult financial thicket. 

I want to turn, however, to a subject which you and I have talked 

about over time, and it is not a new concern but one which has 

taken on significance in light of recent developments. 

Two years ago, in the fourth quarter of that year, Fannie Mae 

disclosed it had a significant problem with what it called its negative duration gap measurement in ceding their own internal risk 

measurement controls. 

The resulting action of the GSE in that instance was simply to 

go out and acquire additional mortgages to rebalance the portfolio. 

I likened it to being the owner of the Hindenburg and deciding 

to add on a new room. 

I have come to the conclusion in view of the GSE’s portfolio 

growth over the last several years that the rate of growth is indeed 

a concern, and I believe you have in past occasions expressed the 

possible view that maybe some balance between MBS held and 

overall portfolio structure might be something that the Congress 

should examine. 

I am wondering if you have, one, the concern about rate of 

growth. Two, is there a remedy in your mind that would be advisable for us to consider; would you go as far perhaps as establishing 

a cap? And four, whatever response you give will be very informative and helpful. 

As you know, we are in the midst now of constructing legislation 

on GSE reform, and I frankly would like to include a provision on 

growth constraints, but I want to make sure that from a financial 

policy perspective you believe it to be advisable. 

Mr. GREENSPAN. Congressman, I have been thinking, as you 

have, about the nature of this problem for the last several years. 

19

What concerns me is not what Fannie and Freddie have been 

doing in the securitization area, which they have been exceptionally effective as indeed their competitors as well, have created a 

very important element within the total financial system. 

And so, let me just stipulate that securitization is important and 

has to be maintained and expanded, if at all possible. 

But we have examined the purposes of the so-called huge build 

up in the portfolios that Fannie and Freddie are holding—and remember that it was very small 10 years ago. This is not something 

which is implicit in the whole securitization operation; it is an addon which occurs as best we can judge—and we have tried to think 

of all other possible purposes—very largely to create increased profits for these organizations. 

And the reason that occurs is they have, granted by the marketplace, a significant subsidy which enables them to sell their debentures significantly—at a significantly lower interest rate than their 

competition. And therefore, no matter what market-based types of 

issues they use that money to invest in, whether it is their own 

MBS, other MBS, or other assets, they get an extraordinarily large 

profit and they have been using that for a major expansion in earnings of those corporations. 

We have found no reasonable basis for that portfolio above very 

minimal needs. 

And what I would suggest is that for liquidity purposes they are 

able to hold U.S. treasury bills in whatever quantity they would 

choose, that they can’t exploit the subsidy with treasury bills, because there is no spread which gives them a rate of return. In turn, 

they should be limited to $100 billion, $200 billion—whatever the 

number might turn out to be in the size of their aggregate portfolios. 

And the reason I say that is there are certain purposes which I 

can see in the holding of mortgages which might be helpful in a 

number of different areas. But $900 billion for Fannie and somewhat less, obviously, for Freddie, I don’t see the purpose of it. 

And over time—I don’t believe that we should have legislation 

which essentially requires immediate divestiture, but over time, 

several years, that should be done because these institutions, if 

they continue to grow, continue to have the low capital that they 

have, continue to engage in the dynamic hedging of their portfolios, 

which they need to do for interest rate risk aversion, they potentially create ever growing potential systemic risks down the road. 

There is no risk now at the moment. It is the time, therefore, to 

act, to do something to fend off problems, which in my judgment 

seem almost inevitable as we look forward into the remainder of 

this decade. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Pennsylvania, Mr. Kanjorski? 

Mr. KANJORSKI. Mr. Chairman, over a number of years now, I 

have been looking forward to your addressing the committee. And 

I must say that I have always thought that you took a fiscally conservative position of responsibility for the government. And I have 

a few questions that I would like you to answer in terms of whether I was mistaken or not in that conclusion. 

20

One, am I not correct that 1983 you chaired the Social Security 

commission? 

Mr. GREENSPAN. I did. 

Mr. KANJORSKI. At that time, did you prepare and submit to the 

Congress your recommendations as to how to solve the problem 

that we are now facing, in the President’s word, as a crisis? 

Mr. GREENSPAN. The commission did, yes. 

Mr. KANJORSKI. And did you see the crisis coming, or did you see 

the problem, or your fix not solving this problem? 

Mr. GREENSPAN. No, we did. We recognized that starting in the 

year roughly 2010, which you must have realized was a quartercentury later, we perceived that there would be a significant buildup and indeed our mandate was to create over a 75-year period, 

through 2058, a set of receipts and potential benefits, a tax rate, 

which is now the 12.25 percent rate, which according to the actuaries of that time would have been enough to carry us through 

2058. We are still on track for that forecast. 

Mr. KANJORSKI. So you would conclude that—then why is the crisis today? What happened? 

Mr. GREENSPAN. The crisis today is largely——

Mr. KANJORSKI. You agree with the President, it is a crisis today. 

Mr. GREENSPAN. The word crisis depends on in what terms. We 

have a very serious problem with the existing structure is what I 

would stipulate. The terms of how you describe it are far less important than defining what it is. 

Mr. KANJORSKI. Okay. You also mentioned in your response, either to the Chairman or the Ranking Member, that as bad a problem as we have with Social Security, it pales in comparison to the 

immediate problem within the next 10 years of Medicare and Medicaid. 

Mr. GREENSPAN. It does. 

Mr. KANJORSKI. And I seem to remember that you came before 

the committee and I asked you a question of fiscal responsibility in 

July of 2003, because I was starting to get extremely worried about 

the administration’s policies, in every year asking for a tax cut. 

Now, am I mistaken in some way to misconstrue that the revenues received by the United States government overwhelmingly 

come from tax revenues? 

Mr. GREENSPAN. They do. 

Mr. KANJORSKI. And did you realize that when you were supporting the tax cuts of 2001, 2002 and 2003, that you were substantially reducing the revenues of the United States government 

in spite of the fact that you knew a major problem or crisis in Social Security exists, that a major problem or crisis in Medicare exists, and that a major problem in Medicaid exists, and you were 

supporting a policy to reduce the revenues of the United States. Is 

that correct? 

Mr. GREENSPAN. Not quite, because from September 2002 going 

forward, I strongly supported, and still do, the continuation of 

PAYGO. Remember, it was in September——

Mr. KANJORSKI. I understand PAYGO is a great concept on budgets, but it doesn’t have a hell of a lot to do with revenue. Taxes 

have to deal with revenue. Do you support——

21

Mr. GREENSPAN. But, Congressman, you are asking me—let me 

finish my sentence. I supported the tax cuts that I felt was a very 

important—and I still do—element in expanding the revenue base 

of this economy for growth. I stipulated that my support was in the 

context of a PAYGO rule, which I supported, which had been allowed to lapse at that point. 

So if I were voting, but I don’t vote, I would have voted to take 

other actions to offset that because I thought that that type of tax 

cut was important. 

Mr. KANJORSKI. Mr. Chairman, it is also this President’s policy 

to ask this Congress to make permanent the three previous tax 

cuts of his first 3 years in office, which will continue to reduce revenues of the United States ad infinitum. Do you support making 

permanent all the taxes that have been cut thus far, and make 

those permanent in nature? 

Mr. GREENSPAN. I can’t say all of them. I still support the partial 

elimination of the double taxation of dividends, but in the context 

of a full PAYGO system, which I trust the Congress will initiate. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from the first state? 

Mr. CASTLE. Thank you, Mr. Chairman. 

Chairman Greenspan, actually I have enjoyed the Social Security 

discussion a great deal. And I want to change subjects here a little 

bit and talk about one of the other two great problems, Medicare 

being one. But the other is Medicaid. I did a little research. And 

there are 50 million people on Medicaid, in some way or other, 

versus 47 million who are receiving Social Security right now. And 

their total cost, and as we all know it is part state, part federal, 

more federal than state, today is about $300 billion. I think we pay 

out about $471 billion in Social Security. 

So you are talking about a program which isn’t that much less 

in terms of its overall economic aspects and individual aspects than 

Social Security. 

But I have also learned that about two-thirds, actually more 

than two-thirds, about 69 percent of Medicaid doesn’t pay for the 

medical bills of the poor, but it pays for long-term care of the disabled and the seniors, the disabled being even more than the seniors. 

You indicated earlier in your testimony that I think it was 30 

million people over the next 25 years are going to retire. We know 

that a percentage of those people at some point become impoverished, either intentionally or unintentionally, and they go into the 

long-term Medicaid program, which costs upwards of $25,000-plus 

per year. 

I don’t have the growth rate this year; I didn’t have a chance to 

get that. But the growth rate of Medicaid expenditures is tremendous. 

The President and Secretary Leavitt have indicated that they 

would like to have flexibility, and maybe there is an assumption 

because they proposed it before that the President has at least 

some sort of cap on how much would go into Medicaid if the governors would accept flexibility. 

22

The governors rejected that 2 years ago, out of hand. They don’t 

seem to be much more receptive to it this year. They have a meeting in a couple weeks and I suppose they will take it up again. 

But to me, this is just a tremendous economic problem in terms 

of the issues that you worry about in this country and in terms of 

where we are going with effect to economic security and balancing 

our budgets. And it is something that frankly I don’t think is discussed enough. If you could, I would love to have you allay my concerns. If you can’t, any suggestions you have along these lines or 

even disagreement with what I just indicated of how great a problem it is, I would encourage speaking about as well. 

Mr. GREENSPAN. Well, Congressman, I would say it is part of the 

broad medical cost problem that is burgeoning in this country. 

As I said in the Senate yesterday, I think an important initiative 

is now under way which is an endeavor to try to get the total medical system fairly quickly into the full information system, meaning 

that we not only digitalize the whole administrative structure of 

medical practice, which would have, undoubtedly, a significant cost 

improvement, but also to, assuming we can get the technology involved in broad information on all patients’ history and the various 

different problems each individual has being made accessible to the 

appropriate parties with encryption. 

What we know at this stage is that there are very diverse procedures involved across the country for various ailments, and the outcomes are quite different. And if you get a fully computerized and 

knowledgeable system, we will have the capability, and the medical 

profession will——

Mr. CASTLE. I don’t mean to interrupt you, but my concern is in 

the long-term care and the care for the disabled as much as it is 

in just medical—because I agree with you completely in terms of 

what you are saying, but I have a little trouble understanding exactly how that is going to make a great difference in the costs. 

Mr. GREENSPAN. I was about to get to that. The issue is we are 

going to eventually get to a clinical best practice, and it involves 

the whole sets of procedures that are involved, which is going to 

be quite different, in my judgment, from what is done today. And 

I think we are going to have to build up, as quickly as we can, the 

technology because I don’t see how we can make major long-term 

structural decisions on Medicare of which the issue that you are 

raising, Congressman, is a critical one because I am fearful if we 

freeze in a ‘‘solution,’’ in quotes, to all of these problems, and we 

find that this clinical practice is changing fairly dramatically, we 

are going to find as we have frozen in the system which won’t 

work. 

So I can’t answer your question specifically, but I will tell you 

that there is not only that problem, but a long series of other problems, which is manifested in a huge potential expenditure outlook 

going forward with not only Medicare, but Medicaid, and I must 

say with medical expenditures generally. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from California, Ms. Waters? 

Ms. WATERS. Thank you very much. 

Thank you very much for being here today, Chairman Greenspan. I have wanted to center all of my questions on Social SecuVerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH
23

rity, and I do have one. But I cannot help but raise another question, based on some of the answers you have given already. 

As I have sat here, and we have all been reminded of the deficit 

that we have, the debt that this country is involved with, the trade 

deficit, the problems Medicaid and Medicare. I would think that 

you as a fiscal conservative would be sounding the alarm. But you 

just really shook me up when you stuck to your support for tax 

cuts. 

Now, given that you are defending your position on tax cuts in 

light of all of these problems, what evidence is there that the revenue base of the country has expanded because of these tax cuts? 

Mr. GREENSPAN. Let me just say that the evidence does indicate 

that the economy was significantly supported by the tax cuts in 

their initial form. But that, of course, has nothing to do with tax 

cuts going forward in any material way. 

Ms. WATERS. What is the evidence? 

Mr. GREENSPAN. The evidence is that the economy has stabilized 

fairly significantly, and the size of the so-called recession of 2001 

was the mildest in the post-World War II period. And there is no 

question that tax cuts had a role in that. 

Ms. WATERS. Did those tax cuts have anything to do with job creation? Or do we have an expanding economy without job creation? 

Mr. GREENSPAN. The point at issue is that you don’t have jobs 

unless the economy is expanding. 

Ms. WATERS. I understand there is a contradiction in the economy now, and that the jobs have not been created because of these 

tax cuts. 

Mr. GREENSPAN. I find no evidence that that is the case. 

Let me just respond to the substance of your question. 

Ms. WATERS. Yes. 

Mr. GREENSPAN. I am not in favor of tax cuts without the issue 

of a PAYGO. In other words, I argued a year ago that my support 

for the tax cuts is in the context of a PAYGO rule. And looking out 

beyond, say, 2008, the problems we have with the budget deficit 

are huge. And therefore we need very significant changes to come 

to grips with those issues. 

So I am not saying that we have no problems. Our problems, in 

my judgment——

Ms. WATERS. No, I understand that, Mr. Greenspan. But if you 

are saying that tax cuts are okay as long as you understand 

PAYGO—you got to pay as you go—then that certainly has not 

happened with this administration. As a matter of fact, the debt 

has increased, the borrowing has increased since the tax cuts. So 

you must be very unhappy. 

Mr. GREENSPAN. I am telling you that I have always supported 

PAYGO. I think it has been a mistake to allow PAYGO to lapse. 

I support PAYGO for both the tax side and the spending side. And 

I trust that the Congress will reinstitute it——

Ms. WATERS. Okay. 

Mr. GREENSPAN.—as expeditiously as possible. 

Ms. WATERS. Well, good. And let me just go to my Social Security 

question. 

This administration is redefining Social Security as we know it. 

They say it is a crisis, and they have got young people all riled up 

24

in this country about the fact that it won’t be there for them. And 

the President has rolled out with the personal accounts aspect of 

this Social Security redefinition. 

What does personal accounts have to do with the solvency of the 

Social Security system? Could you please explain that to us in very 

simple, factual language, excluding any speculation, and help us to 

understand how privatization is going to make the system solvent? 

Mr. GREENSPAN. The issue is one not of the President’s actual 

program affecting the long-term shortfall in the OASI trust fund. 

It does not. I have said that before, I said it yesterday. 

Ms. WATERS. I am sorry, I can’t hear you. 

Mr. GREENSPAN. I said it does not. 

Ms. WATERS. The private accounts do not? 

Mr. GREENSPAN. Not in and of themselves. 

What I am saying is that what we need to do is create a system 

which the existing system is unable to do; namely, build up a sufficient full funding in a reserve system. 

That can only apparently be done by moving to the private sector, because we have been utterly unable in the pay-as-you-go system to create the necessary savings to finance the capital investment that we are going to need for the future to create the goods 

and services that retirees are going to need. 

The CHAIRMAN. Gentlelady’s time has expired. 

The gentleman from Texas, Mr. Paul? 

Dr. PAUL. Thank you, Mr. Chairman. 

Mr. Greenspan, yesterday you were quoted as saying it was imperative that the Congress restore fiscal discipline. And of course 

you have made that point, I think, very often over the years. 

I have tried my best to vote accordingly, but sometimes I find 

myself in a lonely category. 

I have found that we have a group here that is quite willing to 

vote for deficits for domestic programs. Then we have another 

group that is quite willing to spend for militarism abroad. Then we 

have another group that likes both. 

So if you look around for people who are willing to cut in both 

areas, it is pretty hard to come by. 

But you in the past, in answer to some of my questions, have answered that you believe that central bankers have come around to 

getting paper money to act, in many ways, just like gold, and 

therefore there was less of an imperative for a gold standard. 

I haven’t yet been convinced of that. Take, for instance, the current account deficit. You know, under the gold standard there are 

a lot of self-adjustments, and we certainly wouldn’t have the exchange rate distortions between the renminbi and the dollar under 

a gold standard. 

So I think there are a lot of shortcomings under the paper standard with the current account deficit. 

Also, although the argument is made that CPI reflects that there 

is little or no inflation, if you look at the price of bonds or if you 

look at the cost of medicine, if you look at the cost of energy, there 

is a lot of price inflation out there. 

And also, if you look at the cost of houses, which are skyrocketing, which then is reflected in tax increases, the consumer is 

25

still suffering from a lot of price inflation that we in many ways 

in Washington try to deny. 

But I think in an effort to discipline the Congress, that the Federal Reserve would have a role to play as well because in many 

ways the Federal Reserve accommodates the spending because you 

are capable of buying bonds. And when you buy our debt that we 

create, you do it with credit out of thin air. 

So it is that facility of the monetary system that literally encourages or actually tells the Congress they don’t need to be disciplined 

because there is always this fallback that we don’t have to worry, 

the money is out there, money which would not be available, obviously, under a gold standard. 

I would like to quote from a famous economist that sort of defends my position. He says, regarding almost the hysterical antagonism toward the gold standard, ‘‘It is one issue which unites statists of all persuasions. Government deficit spending under a gold 

standard is severely limited. 

‘‘The abandonment of the gold standard made it possible for the 

welcome statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in 

the form of government bonds.’’

Further stating, ‘‘In the absence of the gold standard, there is no 

way to protect savings from confiscation through inflation. Deficit 

spending is simply a scheme for the confiscation of wealth. Gold 

stands in the way of this insidious process. It stands as a protector 

of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.’’

And, of course, I am sure you recognize those words because this 

is your argument. 

Mr. GREENSPAN. I do. 

Dr. PAUL. And I would say that isn’t it time that, if we ever get 

concern about our deficit spending and we consider it a real imperative, why shouldn’t we talk about serious monetary reform? 

Do you think that the gold standard would limit spending here 

in the Congress? 

Mr. GREENSPAN. First of all, that was written 40 years ago, and 

I was mistaken in part. I expected things that didn’t happen. And, 

nonetheless, my general view toward the type of gold standard effect remains to this day. My forecast of what was going to happen 

subsequent to that period has proved, fortunately, wrong. 

And as I have said to you in the past, we have tried to manage 

the Federal Reserve over the years, really since October 1979—because, remember, up to that point we were in some very serious inflationary trouble. Since then I think we have been remarkably 

successful, in my judgment. 

The CHAIRMAN. Gentleman’s time has expired. 

Mr. GREENSPAN. And while I still think that the gold standard 

served us very considerably during the 19th century, and mimicking much of what the gold standard does is what we do today, 

I think in that context so far we have maintained a stable monetary system. And I do not think that you could claim that the central bank is facilitating the expansion of expenditures in this country. 

The CHAIRMAN. Gentleman from Vermont, Mr. Sanders? 

26

Mr. SANDERS. Thank you, Mr. Chairman. 

And nice to see you again, Mr. Greenspan. 

I am not going to waste a whole lot of time talking about the socalled crisis in Social Security because there is not a crisis. Depending on the studies that you look at, Social Security is solvent 

for either 37 years or 47 years. With minor modifications like doing 

away with the cap for wealthy people so they could contribute more 

into the system, it will be good for 50 or 60 years. So I don’t think 

we have to waste a lot of time on that particular crisis. 

Let us talk about some real crises facing the American people 

today. The health care system is clearly disintegrating. We are the 

only country in the industrialized world without a national health 

care program. We pay the highest prices in the world for prescription drugs. We have children sleeping out on the streets of America 

today. 

We don’t give our veterans the benefits that we promise them. 

Our middle class in general is in a state of collapse, with millions 

of workers working longer hours for lower wages. There has been 

an increase in poverty. The gap between the rich and the poor is 

growing wider, and the richest 1 percent own more wealth than the 

bottom 90 percent. 

Now, Mr. Greenspan, representing the CEOs of America and the 

wealthiest people of America, you consistently come in here every 

year and you tell us how great the economy is doing, and you tell 

us how great unfettered free trade is. So that is the crisis I want 

to talk about. Talk about unfettered free trade that you have been 

supporting for years. We now have a record-breaking trade deficit of $618 billion. We have a trade deficit with China alone of $160 billion, which has 

gone up by 30 percent in the last year. There are economists who 

tell us that trade deficit is going to go up and up and up. People 

who go Christmas shopping understand that when they walk into 

a store virtually everything on their shelves is made in China now. 

You have the heads of large information technology companies in 

America who basically are telling us, ‘‘Hey, we ain’t going to have 

information technology in America, no long white collar jobs, because in 10 or 20 years China is going to be the information technology center of the world.’’

Economists tell us we have lost millions of decent-paying jobs. 

We have lost 16 percent of our manufacturing sector in the last 4 

years alone, and we are going to lose more and more white collar 

jobs to China. And yet year after year people like you come here, 

‘‘Oh, unfettered free trade, it is just great.’’

Question, Mr. Greenspan: After record-breaking trade deficits, 

the loss of blue collar jobs, the beginning hemorrhaging of white 

collar information technology jobs, the understanding that if we 

don’t change things China is going to be the economic superpower 

of this world in the next 15 or so years, have you rethought your 

views on unfettered free trade? 

Mr. GREENSPAN. All I can say to you, Congressman, is that in 

spite of the forecasts of the economists that you are citing, of which 

I can find a whole slew who will report exactly the opposite, we 

have nonetheless created the highest standard of living of the 

major industrial economy in this world. 

27

Mr. SANDERS. Really? 

Mr. GREENSPAN. We have. 

Mr. SANDERS. Really? 

Mr. GREENSPAN. That is what the facts are. 

The question of increasing globalization, for which the trade deficit is a symptom, is something we should be pleased about, not 

concerned about, because a considerable amount of our real wealth 

creation, our real income creation for a broad spectrum of our society, even including the problem which I happen to agree with on 

the issue of undesirable increase in wealth concentration, we still 

have the most prosperous nation in the world. 

Mr. SANDERS. Mr. Greenspan, are you telling us that we should 

see as a positive thing a record-breaking $618 billion trade deficit 

and the loss of 3 million manufacturing jobs in the last 4 years? 

That is a positive thing? 

Mr. GREENSPAN. Our unemployment rate is 5.2 percent. 

Mr. SANDERS. But the new jobs that are being created are lowwage jobs with minimal benefits, and we are losing our good-paying 

jobs. 

Mr. GREENSPAN. That is not factually correct, Congressman. 

Mr. SANDERS. Really? 

Mr. GREENSPAN. I am sorry. That is not what the facts are. 

Mr. SANDERS. Well, you tell—you know, maybe, Mr. Greenspan, 

one of the problems we have is you talk to CEOs, I talk to working 

people. And what working people tell me is they are losing goodpaying jobs, parents are worried about the fact they are sending 

their kids to college now for information technology jobs; those jobs 

are going to China. You are telling me we are creating good-paying 

jobs with good benefits? 

Mr. GREENSPAN. I am telling you——

Mr. SANDERS. I don’t believe that. 

Mr. GREENSPAN.——that I don’t listen to the anecdotal stuff by 

itself; I look at the statistics. And the statistics tell us that we are 

getting job expansion fairly much across the board——

Mr. SANDERS. You are not worried about the loss of 3 million 

manufacturing jobs——

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from Illinios, Ms. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Welcome, Mr. Chairman. I wanted to switch gears and go to a 

subject that hasn’t been talked about, and that is Basel II. I know 

that the Federal Reserve has been closely involved in the process 

of crafting the new Basel accord, and that the final agreement was 

issued last summer. 

However, the implementation has not taken place in this country. And there is still some outstanding concerns about the accord 

and its impact on the competitiveness of banks that are not required or not capable of complying with the agreement. 

What is the Federal Reserve doing to ensure that the banks that 

are not required to comply with the accord are not put at a disadvantage via the banks that are required to comply? 

Mr. GREENSPAN. Well, Congresswoman, remember that there is 

still a long way to go before we get actual implementation of Basel 

II. We are doing a considerable amount of research to determine 

28

various areas where certain parts of our banking system may turn 

out to be competitively disadvantaged, inappropriately. 

And as a consequence of that, where it is desirable and purposeful and studies show that, after a considerable amount of forward 

analysis on the competitive position, we will make adjustments as 

we proceed, as necessary. 

Mrs. BIGGERT. Well, I know that there hasn’t been any significant change to the operational risk. 

Mr. GREENSPAN. Well, the operational risk issue is one in which 

we are stipulating that individual banks make their own judgments about what the risks are. That operational risks exist is a 

critical issue. They do exist. 

Mrs. BIGGERT. What about the liability? I think that our U.S. 

tort law or liability laws are significantly more onerous than those 

in the E.U. or in Asia. 

Mr. GREENSPAN. You are quite right. To the extent that our tort 

laws are more onerous than others, it is an objective increased risk. 

In other words, our purpose is to appropriately manage risk. And 

if in our society we choose to construct a certain type of tort system 

which has positive values, or we wouldn’t have it. It also has negative values. And the negative values is that it does increase certain 

types of bank risk. And I think we have to recognize that fact. It 

is a fact. We can’t believe it doesn’t exist; we can’t do it. 

Mrs. BIGGERT. In order to assess the regulatory capital for a 

global bank, regulators in multiple countries will need to agree on 

the methodology and assumptions for the models that are going to 

be used to calculate the capital cover in subsidiaries. What is the 

Federal Reserve’s position on the relative roles of the home and the 

host supervisors in implementing the new capital framework? 

Mr. GREENSPAN. There is actually a committee in Basel, a subcommittee of the Basel Committee on Supervision and Regulation, 

which is trying to coordinate this very critical issue. From our 

point of view, for example, because of the extraordinary complexity 

of a lot of stuff, we are going to have to depend, in many cases, 

on the supervisory actions on the part of home regulators. That 

doesn’t mean that we don’t operate in it. 

But what we are trying to do is to make the transition as smooth 

as possible, so that who has authority, the host regulator or the 

home regulator, is clearly defined and that it is done so in a way 

which implements the particular Basel II regulations most effectively. 

Mrs. BIGGERT. And then let me just thank you for the work that 

you have done on financial literacy. I know that you have appeared 

before the commission and the Federal Reserve is working on that. 

We formed a caucus in the House to really address financial literacy and to get out the word on that, too. Representative Hinojosa 

and I have just started this. And I think we all need to work together to make sure that our young people and adults are going to 

be able to live a successful life, without financial ruin. 

Mr. GREENSPAN. That is a very important endeavor. 

Mrs. BIGGERT. Thank you. 

The CHAIRMAN. The gentlelady’s time has expired. 

And let me commend the gentlelady from Illinois and the gentleman from Texas on their work toward that caucus. It is exVerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH
29

tremely important, in financial literacy, and I know the Chairman 

appreciates that as well. 

The gentlemen from Illinois, Mr. Gutierrez? 

Mr. GUTIERREZ. Thank you very much. 

Welcome, Chairman Greenspan. 

Tuesday’s New York Times indicated that one of the most important factors in maintaining the solvency of the Social Security system is the number of immigrants who are allowed to enter the 

country legally. 

An immigration report authored by a former INS official under 

President Bush and based on an analysis of data provided by the 

Social Security Administration concludes that if legal immigration 

rises by one-third over the next 75 years, the result will be a 10 

percent reduction in the Social Security deficit. 

However if the number of immigrants declines by one-third, the 

retirement system shortfall will worsen by the same 10 percent. 

The immigration report found that at the present pace new workers entering the United States, that is the pace of new immigrants 

legally entering our workforce, will contribute $611 billion in 2005 

dollars over the next 75 years. 

Chairman Greenspan, according to these data, doesn’t it make 

sense that we should reform our immigration system to allow for 

a regulated, legal flow of workers to come here, build jobs, improve 

our economy, and strengthen Social Security, so that we can keep 

the promise we make to our seniors? 

And I say that also, but I would like you to think about it in 

terms of the George Bush Department of Labor says that we will 

create over the next decade 6 million new low-wage, low-skill, very 

little training needed for jobs. Over the next 10 years we are going 

to create these jobs according to that. 

And given the fact we have eight, nine, 10, depending on who 

you want to listen to, undocumented workers—workers, I mean 

people who are actually working in our economy, do you not think 

it would be appropriate that we take a look at our immigration policy vis-a-vis our economy and specifically our Social Security issue 

that we presently are addressing? 

Mr. GREENSPAN. Congressman, as I have said before, I am always supportive of expanding our immigration policies. I think that 

immigration has been very important to the success of this country, 

and I fully support it. 

I am not sure I would want to give the reason that we are creating immigration to support our Social Security system. I think 

we ought to do it on the grounds that it is good for the country, 

but not because it helps the Social Security fund, because that then 

suggests that we find other means to solve the Social Security 

problem, that we shouldn’t be expanding immigration. And I would 

not support that. 

So I would say I support the general issue of increased immigration, but I hope we don’t do it for that particular reason. 

Mr. GUTIERREZ. And that isn’t why. And so I share that with 

you, Chairman. 

Unfortunately, the Congress is not made up of such enlightened 

435 people such as yourself. Would it be, I would not have to ask 

30

this question, we could just look at. The fact is that we have a Social Security problem. We know that they enter. 

And I guess my question to you is I want to reach that goal that 

you and I share, that is that immigrants are good for this country. 

They are good economically, they are good for the United States, 

and all of the other reasons. I want to reach that goal. Therefore, 

I have to change the immigration policy of this nation. 

In order to change the immigration policy of this nation, because 

not everyone shares our perspective on immigrants, I have to find 

new reasons. 

So I guess my question to you is, just so that I can say that even 

the Chairman Greenspan indicates, is it not true that we would 

add money to our Social Security, given their young age, and would 

that not help the solvency of Social Security, understanding that 

that should not be our principal reason for doing it? 

Mr. GREENSPAN. You are asking a statistical question. Your 

numbers, as best I can judge, are accurate. 

Mr. GUTIERREZ. Thank you. 

Secondly, Congresswoman Kelly and I passed legislation designed to prevent bank examiners from taking a job with a bank 

they oversaw immediately following that supervision. We did that 

in the last session. 

During our consideration of that legislation, the Office of Government Ethics brought to our attention that most of the criminal conflict of interest statutes, 18 USC Sections 203, 205, 207 and 209, 

that cover all federal employees, do not in fact apply to employees 

of the Federal Reserve Banks. 

For example, 207 prohibits senior employees from representing a 

foreign government for 1 year after leaving the U.S. government or 

representing any party on whose matter they substantially and 

personally participated in while at their government post. Violation 

of the statute carries criminal penalties for every federal government employee, including employees of the Federal Reserve Board, 

but not employees of the Federal Reserve Banks. 

I think this is a loophole that should be closed and bring the employees of the FRB Banks under the same laws that apply to every 

other government employee. Would you agree? 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. GUTIERREZ. He can answer the question. 

Mr. GREENSPAN. I will have to—remember that the supervisory 

authority of the Federal Reserve Banks comes from the Federal Reserve Board. In other words, we at the board have authority under 

law. 

But let me respond to your question a little bit more fully in 

writing, because I have to go back and look at the statute to be 

sure I can respond appropriately. 

Mr. GUTIERREZ. That is fair. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett? 

Mr. GARRETT. Good morning, or almost afternoon. And I appreciate the opportunity to address some questions to you. 

And the issue of Social Security obviously has been pretty well 

exhausted, I would assume. And I tried to think before I came out 

31

here, is there any other question on Social Security that you have 

not been asked today or previously while you were on the Hill. 

Maybe I should put it that way: Is there any question that no 

one has asked you yet with regard to Social Security that I can go 

back and say I got the last question on Social Security? 

Mr. GREENSPAN. Congressman, I am sure there is, but I can’t 

think of it. 

Mr. GARRETT. Then I feel good, that we are on the same—at least 

on that aspect we are on the same level. 

The question with regard to GSEs was brought a little earlier 

ago by the Chairman. And just three quick areas that if you could 

touch on. 

You began to touch on the aspect, as far as the problems, as far 

as the almost trillion dollars in outstanding debt, and you basically 

focused your talk at that point as far as the regulatory aspect and 

the need for caps and the regulation aspect of it. 

Could you, first of all, maybe just elaborate a little bit on the aspect of if we do nothing on that area what the impact is on the 

overall market and the economy? 

Mr. GREENSPAN. You mean if we do nothing in the GSE areas? 

Mr. GARRETT. Yes, right. 

Mr. GREENSPAN. The GSEs have a subsidy granted, not by law, 

but by the marketplace, which therefore gives them unlimited access to capital below the normal competitive rates. 

And that therefore, given no limits on what they can put in their 

portfolios, they can, by merely their initiative, create an ever larger 

increasing portfolio, which given the low levels of capital, means 

they have to engage in very significant dynamic hedging to hedge 

interest rate risks. 

If you get large enough in that type of context and something 

goes wrong, then we have a very serious problem because the existing conservatorship does not create the funds which would be needed to keep the institutions growing in the event of default, which 

is what the conservatorship is supposed to be and we have no obvious stabilizing force within the marketplace. 

So I think that going forward, enabling these institutions to increase in size, and they will once the crisis in their judgment 

passes. They stopped increasing temporarily. 

We are placing the total financial system of the future at a substantial risk. Fortunately, at this stage, the risk is, the best I can 

judge, virtually negligible. I don’t believe that will be the case if we 

continue to expand in this system. 

Mr. GARRETT. That raises the side question then, as you allude 

to, that, I guess the way I am thinking about it is potentially in 

the area for the housing market maybe we are—that proverbial 

bubble that is out there, that they say could someday be down the 

road that eventually collapses. Could you just touch on that as far 

as how that would impact on it and where we are going as far as 

the slight increases that we see in interest rates? Are we getting 

to that proverbial bubble then, that is potentially out there in the 

housing market? 

Mr. GREENSPAN. I think we are running into certain problems in 

certain localized areas. We do have characteristics of bubbles in 

certain areas but not, as best I can judge, nationwide. 

32

And I don’t expect that we will run into anything resembling a 

collapsing bubble. I do believe that it is conceivable that we will get 

some reduction in overall prices, as we have had in the past, but 

that is not a particular problem. 

Remember that there is a very significant buffer in home equity 

at this stage because with most of mortgages being of conforming 

type with a 20 percent down payment, and even when it is less, 

prices since the homes were bought have gone up on average very 

considerably, so we have a fairly large buffer against price declines 

and therefore difficulties which would emerge with homeowners. 

Mr. GARRETT. The bubble is about to burst as soon as I buy my 

house down here in the Washington, D.C., area. I assume it is 

going to—that is when the market price will start going down 

again. 

But going back to the GSEs. Assuming we take some action with 

regard to the regulatory nature of them, along the lines that have 

been suggested, is there some other method that we could also be 

looking into, a more efficient way to finance mortgages back into 

the private sector, to open up the private sector to allow them to 

have a more, if you will, competitive on a same playing field, that 

they can compete with the GSEs and open up that market so that 

they—if we are not just purely through the regulatory climate, we 

are actually allowing them to bring down that effect as well. 

Mr. GREENSPAN. I think part of the issue is that the GSEs, as 

I understand it, essentially define what the issue constitutes conforming loans is. And indeed with their subsidy, they had very significant capability of competitive advantage. 

It ought to, in my judgment at least, be made clear within a regulatory structure, which you are about to set up, I trust, that some 

definition of what constitutes conforming and non-conforming is 

made fairly clear and an awareness of the fact that we have a viable, a burgeoning market in securitization in non-conforming loans, 

so that there is a lot of potential competition out there, all of which 

would be very helpful, in my judgment, to maintain what is really 

quite a world-class mortgage market in this country. 

Mr. GARRETT. Thank you very much. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from New York, Mr. Ackerman? 

Mr. ACKERMAN. Thank you very much, Mr. Chairman. 

Mr. Chairman, I think I learned today that you are basically 

unflappable. 

I would like to learn a little bit about what you are advising us 

on the tax cuts. You said that you were in favor of making the tax 

cuts permanent as long as the Congress invokes the pay-as-you-go 

or PAYGO rule. Is that——

Mr. GREENSPAN. That is correct, Congressman. 

Mr. ACKERMAN. That means, as I understand it, that we have to 

have spending cuts in the amount of the tax cuts. Isn’t that what 

means? 

Mr. GREENSPAN. Spending cuts or increases in other taxes. 

Mr. ACKERMAN. So you would make the tax cuts permanent only 

if we have increases in taxes or spending cuts. 

33

Mr. GREENSPAN. I am basically saying that all such measures in 

my judgment should pass through the prism of PAYGO. In other 

words, we have very serious——

Mr. ACKERMAN. But we have to have cuts to make up for the loss 

in revenue. 

Mr. GREENSPAN. I think so. If we look forward into the post-2008 

era, we have to make some very major changes to constrain uncontrollable increases in the unified budget deficit. So I think that 

there are going to have to be extraordinary actions on the part of 

this Congress. 

Mr. ACKERMAN. I am sorry. That is a pretty big test. So you are 

saying that if we the Congress don’t make the offsetting expenditure cuts, that you would not be in favor of making the tax cuts 

permanent? 

Mr. GREENSPAN. Well, I am not in the position to make that 

judgment. I am just merely stipulating that I think that specifically 

the tax cuts in reference to the elimination of the partial double 

taxation of dividends is important to economic growth, and I am 

basically saying that that is something we should do. But the overriding consideration is to make certain that our deficits don’t run 

away because that will destabilize the whole system. 

Mr. ACKERMAN. So things have to balance is what you are saying. 

Mr. GREENSPAN. Correct. 

Mr. FRANK. Will the gentleman yield? 

Mr. ACKERMAN. If I can just finish my thought, Mr. Chairman. 

So if things have to balance, that means in order to make the 

tax cuts permanent, we have to cut things such as agriculture and 

CDBG and other things, and then find other taxes to increase in 

order to offset the tax cuts that we made permanent otherwise 

things wouldn’t balance. I don’t know where else you would come 

up with balances. You have to increase other things and decrease 

other things and come up——

Mr. GREENSPAN. That is correct. No, that is what PAYGO is supposed to do. 

Mr. ACKERMAN. So, Chairman Greenspan, it is safe for me to say, 

opposes making the President’s proposed tax cuts permanent unless they go along with increases in other taxes and cutting expenditures that we now have in other programs. 

Mr. GREENSPAN. I am not in the position to say yes or no to anybody’s proposal. I merely just——

Mr. ACKERMAN. Okay. I will take out the specifics in agriculture 

and CDBG. 

Mr. GREENSPAN. I am basically stipulating that I think that, one, 

those tax cuts should go forward, and that we should make the 

changes similar to the changes you are suggesting. 

Mr. ACKERMAN. Okay. I just want to understand this clearly. 

Chairman Greenspan is saying that he opposes making the President’s proposed tax cuts permanent——

Mr. GREENSPAN. Congressman, I think I have spoken for myself 

in this regard. Your choice of words——

Mr. ACKERMAN. Yes, but I am trying to—I am speaking for myself, and I don’t—I am trying to understand this. 

34

Mr. GREENSPAN. No, I am trying to say that I am making two 

propositions here. 

Mr. ACKERMAN. I understand you don’t want to say you are opposed to anything the President has said. So maybe I should 

phrase it differently so you don’t have to say it that way. 

Mr. GREENSPAN. No, I don’t want to say I am opposed, because 

I am not. I want very much for both the tax cuts—that tax cut to 

be in place and the PAYGO changes to be made. I don’t know how 

else to say it. 

Mr. ACKERMAN. In order for that tax cut to comply with PAYGO, 

the changes to be made have to be one or the other or a combination of other taxes or reducing expenditures. Otherwise that doesn’t 

comply with PAYGO, and Chairman Greenspan would not support 

unless it complies with PAYGO, which is what you said at the beginning. 

Mr. GREENSPAN. That is what I said, yes. 

The CHAIRMAN. Gentleman’s time has expired. 

Mr. ACKERMAN. Thank you very much. 

The CHAIRMAN. Gentlelady from New York, Ms. Kelly? 

Mrs. KELLY. Thank you, Mr. Chairman. 

Chairman Greenspan, after 9/11 this committee passed the Terrorism Risk Insurance Act to backstop our insurance industry and 

allow business development to move forward in this country. 

For an administrative cost of only $31 million a year, TRIA has 

provided hundreds of billions of dollars worth of new jobs and investment in our country. 

Unfortunately, real estate investment in this country could eventually come to a halt if TRIA is not reauthorized. 

This Congress must act or TRIA will expire, forcing millions of 

Americans to choose between not doing business or losing insurance coverage against terrorism. 

Either way, our economy would suffer and terrorism would win 

a big psychological battle without even firing a shot. 

Some members of this House say that TRIA is unnecessary and 

believe that, without evidence, that private reinsurance is available 

to cover policies against terrorism. 

I asked you a question about that, and in my response to that 

question I have a letter that you wrote to me on September 16th, 

2004, and I quote from that letter: 

‘‘Even with TRIA, reinsurance appears to be virtually nonexistent for catastrophic damages from nuclear, biological, chemical 

and radiologic attacks. These examples suggest that while there 

would be likely some coverage available in the absence of TRIA, the 

private market for terrorism insurance would still be quite limited.’’

And I am quoting from your letter. Do you have conclusive evidence that a robust private market for terrorism reinsurance exists 

in this country separated from TRIA at this time? 

Mr. GREENSPAN. Not to my knowledge, Congresswoman. 

This is a very difficult issue, because remember that private markets work exceptionally efficiently in a civilized society in which domestic violence or violence coming from abroad is not a central factor. 

35

You cannot have a voluntary market system and the creation of 

markets, especially insurance markets, in a society subject to unanticipated violence. And as a consequence, there are certain types of 

costs, which is what we have the Defense Department protecting 

us from, which we essentially choose to socialize. 

The less of that we have, the better off our society is. There are, 

nonetheless, regrettable instances in which markets do not work. 

And while I think you can get some semblance of terrorism insurance, I have not been persuaded that this market works terribly 

well. 

Although I will tell you, numbers of economists and people whom 

I respect highly, don’t agree with what I just told you. They think 

the markets can be made to work. I have yet to be convinced. 

Mrs. KELLY. The GAO also released a report last year indicating 

that a functioning market for terrorism insurance would not exist 

if TRIA were allowed to expire. 

You further stated to me in this letter that if an efficient pricing 

mechanism for terrorism risk did not exist—and I am quoting you 

here—‘‘some level of federal involvement in terrorism insurance 

may continue to be warranted.’’

Without a functioning private market for terrorism insurance in 

the absence of TRIA, do you think government can replace market 

signals as an arbiter of terrorism insurance prices? 

Mr. GREENSPAN. I don’t think so. 

Mrs. KELLY. Thank you, sir. 

Yield back. 

Ms. PRYCE. [Presiding.] Recognize Mel Watt. 

Mr. WATT. Thank you, Madam Chair. 

Secretary Greenspan, I am over here, in case you are looking for 

me. 

Mr. GREENSPAN. I was. Good to see you, Congressman. 

Mr. WATT. Good to see you. 

I am going to try to understate this because if I said it as aggressively as I feel it, I suspect I would insult you and some other people. So I am just going to make a one-sentence statement about it, 

and then I am going to move on and ask you a question about 

something else, not designed to evoke a response. 

I would have to say that when I hear you, when I hear the President use as a major justification for this Social Security reform 

plan that he is trying to look out for black folk, and when I hear 

you use as a major justification for private accounts that you are 

somehow trying to look out for poor people, it makes me nauseous. 

I am going to leave that alone and move on. If I said it—if I 

dwelled on that, I would probably throw up. 

I am moving on, Secretary Greenspan, because I don’t—I mean, 

I have no interest in getting into a public dispute. I won’t be able 

to restrain myself on that issue. So the best thing I can do on it 

is move on. 

Let me ask a question. You made reference to full funding of So- cial Security requiring $10 trillion. And I believe you said that 

there is $1.5 trillion or will be at some point in the trust account. 

Mr. GREENSPAN. There is as of now, as best I—roughly that. 

Mr. WATT. Okay. Am I clear that the reason there is only $1.5 

trillion in the trust account is that substantial amounts have been 

36

borrowed from the trust account and that, in addition to the $1.5 

trillion that is there a substantial amount of notes that are due? 

Mr. GREENSPAN. No, actually the $1.5 trillion is actually a cumulative difference between receipts, namely, the Social Security 

taxes, plus interest, minus the cumulative dividend. So it is actually real savings. 

Mr. WATT. I am asking you whether there are substantial 

amounts due from bonds, government-backed securities, into the 

Social Security trust fund in addition to the $1.5 trillion. That is 

the question I am asking. 

Mr. GREENSPAN. There are no additional assets. Is that what you 

are referring to? 

Mr. WATT. Well, does the federal government owe the trust fund 

any money? 

Mr. GREENSPAN. Not to my knowledge. 

Mr. WATT. So that is just a myth. Has the federal government 

borrowed money out of the Social Security trust fund? 

Mr. GREENSPAN. Well, remember that what is involved here is 

that the——

Mr. WATT. I think that would require either a yes or no answer. 

Has the federal government borrowed money from the Social Security trust fund or hasn’t it? 

Mr. GREENSPAN. No. 

Mr. WATT. Okay. All right. Then explain why that is not the 

case. 

Mr. GREENSPAN. Basically, what the Social Security trust fund 

does is it invests in U.S. treasury issues. 

I think the question you are raising is a different issue as to 

whether in fact that particular fund is segregated and allowed to 

actually increase national savings. 

Mr. WATT. No, I am not asking that question at all, Mr. Green- span. I am asking, does the $1.5 trillion include the amount that 

the trust has invested in government-backed securities? 

Mr. GREENSPAN. That is it. It is $1.5 trillion in U.S. treasury special notes. 

Mr. WATT. Okay. All right. Well, that was the only question I 

was trying to get to. 

What——

Ms. PRYCE. The gentleman’s time has just expired. 

Mr. WATT. Thank you. 

Ms. PRYCE. The gentleman from Kentucky, Mr. Davis? 

Mr. DAVIS OF KENTUCKY. Thank you, Madam Chair. 

Chairman Greenspan, I appreciated very much your remarks 

this morning on the importance of greatly increasing our national 

productivity over the long term. 

I spent my professional life in the manufacturing sector. Many 

of the members on the committee, in fact, represent districts that 

depend on competitive manufacturing and a global economy to sustain our communities. 

I was wondering if you could make a comment, from a strategic 

perspective. You have seen in your distinguished career a great ebb 

and flow in our international competitiveness, changes in adaptation that we have had to make in various regions of the country 

to compete, especially with Asia. 

37

I was wondering if you would share with us the points that you 

feel are most important from a strategic policy standpoint to assure 

that we have strong, competitive, and adaptive manufacturing in 

the future. 

Mr. GREENSPAN. Congressman, I think that one of the key aspects of the American economy is its increasing integration into a 

global system. Barriers to cross-border trade are coming down all 

over the place. 

The issue of communications has shrunk the distance that is involved. I should say communication plus transportation has shrunk 

the distance between peoples around the globe. 

And what we are finding is, in the same context that say 150 

years ago, we gradually in this country developed—went from local 

markets to national markets—is that we are going from national 

markets now to global markets. And we are exceptionally competitive in that regard in the sense that of all the industrial nations 

in the world, few have gained from globalization as much as we. 

The reason for that is we have an exceptionally flexible economic 

system. We have had bipartisan deregulation since the 1970s of a 

whole series of different industries. The information technology has 

created an incredible capability to develop new financial instruments and to develop basically the types of things which enable a 

system to adjust around the world. 

And I think the major focus that we have to maintain is, one, to 

keep that degree of resilience and flexibility, which means eschew 

issues of protectionism, regulation, and anything which rigidifies 

the market’s adjustments process which has served us so well in 

the last decade or so. 

Mr. DAVIS OF KENTUCKY. Just as a follow-on, how would you adjust current trade policy to continue to strengthen international exports in manufacturing? 

Mr. GREENSPAN. I think that we do that by essentially being 

competitive, in that we develop skills that create goods and services 

which customers and the rest of the world want. And we have 

tended to do that. 

The issue of the very large trade and current account deficits we 

have developed or created is largely because globalization has increased. We used to have, and indeed still have, very significant 

balance of payments deficits between states in this country. In and 

of itself, it is not a problem in that if it is done in a market system 

they self adjust, as ours do all the time. We don’t know what our 

current account balances are between say, New Mexico and Arizona, or any of the states. 

There have been occasions when there have probably been severe 

imbalances. But they correct, and they correct basically because we 

have a flexible system which enables markets to adjust. 

Mr. DAVIS OF KENTUCKY. Thank you, Chairman Greenspan. 

I yield back my time. 

Ms. PRYCE. All right. 

The Chair would like to put members on notice that there is 

going to be a series of votes at about 12:30 that should last about 

an hour. So anyone who cares to keep their questioning short so 

more of us can have at the Chairman, that would be great. But beVerDate 0ct 09 2002 15:55 Jul 06, 2005 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 G:\DOCS\22160.TXT FIN1 PsN: MICAH
38

cause the votes will last about an hour, we will adjourn the hearing 

at the time the votes are called. 

And the chair now recognizes Mr. Meeks. 

Mr. MEEKS. Thank you. 

Thank you, Mr. Chair. I am really somewhat puzzled from some 

of the answers that I have heard today. Let me just see if I can 

clear up my own mind. 

The first question that I have is, I know the President has described it as a crisis, et cetera, but I don’t think I have ever heard 

what your opinion is. The question on Social Security is it or is it 

not, in your opinion, a crisis? 

Mr. GREENSPAN. It depends on the——

Mr. MEEKS. Yes or no. Is it a crisis or is it not? 

Mr. GREENSPAN. Let me be very specific. You have not heard me 

use that word this morning. 

Mr. MEEKS. That is correct, and that is what I am trying to find 

out from you whether in your opinion——

Mr. GREENSPAN. I did not use it——

Mr. MEEKS.——it is or is not a crisis. 

Mr. GREENSPAN. I did not use it yesterday in the Senate. I consider the problem a very serious one, one that has to be addressed, 

in my judgment, quite soon, and certainly to be in place well before 

the 2008 leading edge of the baby boom generation retiring. 

Mr. MEEKS. So I take that to say, as we sit here today, not 2008, 

but as we sit here in 2005, that it is not a crisis. It could be a crisis. It may sometime in the future, but as we sit here today, it is 

not a crisis in your humble opinion? 

Mr. GREENSPAN. Well, I don’t use the word ‘‘crisis’’ because I 

think the same—defining what it is very specifically describes what 

it is. I think it is a very serious issue. It depends on the way you 

use the word crisis. I have not chosen to use that word. Others 

might. 

Mr. MEEKS. What about Medicare? Is that a crisis? 

Mr. GREENSPAN. It is a very serious problem. I mean, again, it 

has got the same characteristics. And I would not use the word crisis because I don’t think that that properly identifies what the nature of the problem is. 

Crisis to me usually refers to something which is going to happen 

tomorrow or is on the edge of going into a very serious change. 

That is not going to happen in either Social Security or Medicare 

over the next several years. 

Mr. MEEKS. I don’t want to get into this privatization stuff either, but let me—Social Security. But let me ask another question 

then. You know, it seems as though that some say, and I have 

heard you say, and I believe I heard you say it today, that you believe in these private accounts, that that is a good thing, the private accounts. 

Mr. GREENSPAN. I do. 

Mr. MEEKS. Okay. 

And I have also—I think I heard you say, in reference to Mr. Watt’s, one of his questions, that the $1.5 trillion, et cetera, we 

have not taken it out; the feds haven’t borrowed the money. Is that 

correct? 

Mr. GREENSPAN. That is correct. 

39

Mr. MEEKS. All right. 

Now, so therefore, when you talk about this solvency problem, it 

is talking about, in the end, the money that is coming in is not 

going to be sufficient, but the privacy accounts, allegedly, you are 

supposed to get a better return on your money as a result, so that 

is supposed to help. Is that correct, when you have these privacy 

accounts? 

Mr. GREENSPAN. I have not stipulated that increased rates of return are a significant issue in this debate. What I think, it is a 

question of what type of facility more easily facilitates the type of 

full funding of these types of programs that we need if we are going 

to get the savings to create the investment which is going to create 

the goods and services. 

This is not a financial question. This has got to do with, how do 

we create an adequate amount of real resources for the retirees and 

the working-age population in 25 years. 

Mr. MEEKS. My question then, and then I will just try to yield 

so more of my colleagues have a chance to ask a question, if the 

securities market—and I guess people are making it up to be so 

great—why don’t we then, would you recommend, why don’t we invest a portion of the trust fund in the market itself and eliminate 

the individual risk? Why do you have to put the individual at risk? 

Why don’t we just put the money in the trust fund in and eliminate 

the individual risk? 

Mr. GREENSPAN. I am sorry, you mean have the Social Security 

trust fund invest in——

Mr. MEEKS. In securities. 

Mr. GREENSPAN. You could do that, but that still doesn’t give it— you still need $10 trillion, not $1.5 trillion. That doesn’t solve the 

funding problem. 

Mr. MEEKS. So basically the proposal that I am hearing from the 

President then, I think we all agree, has nothing to do with the solvency problem, because if you invest the money in these private accounts on an individual basis, it is the same as if you were to have 

done it within the trust fund, and you don’t resolve the solvency 

problem. So the crises that claims, or the problem that you claim 

will not go away based upon these private accounts. Is that correct? 

Mr. GREENSPAN. The issue is not a solvency question, it is getting adequate amount of savings in the trust fund to finance investment. It is a full funding problem, not a solvency problem. 

Ms. PRYCE. The gentleman’s time has expired. 

The gentleman from Georgia, Mr. Price, is recognized for 5 minutes. 

Mr. PRICE. Thank you, Madam Chair. I appreciate that. 

It is an honor to be a part of this committee, and it is indeed a 

privilege to personally witness your wisdom. And I commend you 

for your dexterity and your persistence in your answers to many 

of the questions that have come to you today. 

I have a comment and then a couple of questions. 

I am so pleased to hear you in your written testimony and in 

your spoken testimony identify 2008 as the pivotal date as it relates to the Social Security issue, for two ones. 

One, as you appropriately identified, that is when the baby 

boomers begin to retire. 

40

The second reason that I believe that needs to be pointed out, 

and that is that on the wonderful graph of the incoming money as 

it relates to FICA and when we begin to dip, that is the top of that 

crest. And then we begin to go down where there is money going 

out than coming in. So I commend you for that. 

And I don’t care whether you call it a crisis or a near crisis or 

a looming crisis, as President Clinton called it in 1998, a rose is 

a rose is a rose. I think the important issue is that you said clearly, 

‘‘There is a call for action before the leading edge of the baby boomer retirement becomes evident in 2008,’’ and that is within 3 years. 

My question relates to our savings rate as a nation. And it is my 

understanding that the household savings rate is low as it relates 

to our history as a nation, and also as it relates to other industrialized nations. 

And so I would ask you what your thoughts are on anything that 

we might do in terms of policy that would positively and significantly affect our savings rate as a nation. 

Mr. GREENSPAN. It is one of the most difficult problems government has had, Congressman, in trying to address this particular 

question. And the reason is that it is not just a question, as we 

tend to do, create vehicles to save, such as 401(k)s or IRAs or the 

like, because what we really have to do is to get people to consume 

less of their income, because that is what savings is. If you don’t 

consume less of your income and you are building up a 401(k), it 

is essentially saying that you just drew the funds from other forms 

of savings and you did not increase your aggregate amount of savings. 

So the issue really gets down to the question of how do you increase income relative to consumption. And that is not very easy 

for government to address per se. What we can do is find measures 

which will augment the growth rate in the economy, create incentives for growth and the like. 

But unless you impose some things such as a consumption tax, 

which economists have argued for, which I suspect has very little 

support in the Congress, it is difficult to see how you come to grips 

directly with that issue. 

I might add that the consumption tax issue arose essentially because there does not seem to be any other way to directly get at 

this issue. My suspicion is that the 1 percent savings rate, which 

is what it has been for the last year, is probably going to be the 

low point, and we will start to rise from here. But that has been 

my expectation for a number of years, and I can’t honestly wish to 

guarantee it, because it is a very tricky issue to forecast. 

The bottom line, Congressman, is I really can’t suggest anything 

which is significant, practical and usable to address this subject 

and just hope it cures itself, sooner rather than later. 

Mr. PRICE. I appreciate your response, and I am so pleased to 

hear you talk about the consumption tax, because, as you identified, you have got to have increased income in order—relative to 

consumption. If the money never gets to your back pocket, it isn’t 

income. 

So if I heard you correctly, I understood you to say that, if we 

were to be able to move to a consumption tax, to a national retail 

sales tax, that that would in fact have a byproduct of increasing 

41

national savings as you increase the amount of money in individual’s pocket. 

Mr. GREENSPAN. I would certainly think so, because what you 

are doing is you are taxing consumption, not income, and as a consequence, as people like to say, if you tax it, you will get less of 

it. And I think that is probably right. 

Mr. PRICE. Thank you, Mr. Chairman. 

I yield back. 

Ms. PRYCE. Mr. Moore of Kansas? 

Mr. MOORE OF KANSAS. Thank you, Madam Chair. 

Mr. Chairman, when you talked about the $1.5 trillion in the socalled Social Security trust fund, I think you used the words, ‘‘special security notes,’’ or words to that effect. So the fact is, we don’t 

have $1.5 trillion in the fund itself, we have special security notes, 

correct? 

Mr. GREENSPAN. That is correct. The point I am making is, you 

do have $1.5 trillion of cumulative savings in the national—in 

other words, it is contributed cumulative, $1.5 trillion, to savings 

which is part of national savings. 

Mr. MOORE OF KANSAS. All right. Is this a marketable special 

note or fund? 

Mr. GREENSPAN. No, it is not. It is not marketable. And it gets 

converted to a marketable security when Treasury needs to raise 

funds to pay benefits. 

Mr. MOORE OF KANSAS. So at some point this is an obligation, 

and the full faith and credit of the United States government’s behind this, and at some point in the future funds will have to be 

raised to redeem that, correct? 

Mr. GREENSPAN. That is correct. 

Mr. MOORE OF KANSAS. Okay. I think there is a lot of maybe 

misinformation or lack of information in the general public about 

what actually Social Security is. It is a partial retirement fund, as 

well as a survivors benefit and a disability benefit. Is that correct, 

sir? 

Mr. GREENSPAN. OASI is separate from the disability fund, but 

the answer is, you are quite correct. 

Mr. MOORE OF KANSAS. But I think there is misinformation and 

again lack of information about the fact that about a third, or 30 

percent of funds that are paid out to Social Security recipients go 

for survivors and disability and not just retirement or old age. Is 

that also your understanding? 

Mr. GREENSPAN. That is correct. There are disability payments 

implicit in the OASI fund which relate to disabled children or survivors——

Mr. MOORE OF KANSAS. Right. 

Mr. GREENSPAN. But there is also, of course, an additional fund, 

which is the disability insurance fund, which is for disability solely. 

Mr. MOORE OF KANSAS. And I have heard your statements, Mr. 

Chairman, about the President’s proposal for partial private accounts, and you have said generally you support those. And I am 

a little confused, because I heard you say that—I think, correct me 

if I am wrong, I think that I read that you said that if we had to 

borrow $2 trillion you wouldn’t be supportive of something like 

42

that; if we had to borrow $1 trillion, you might support that. Is 

that correct, sir? 

Mr. GREENSPAN. I said that because of the difficulty of making 

judgments as to how markets would behave when you are moving 

funds out of the U.S. treasury into a private account, even though 

it is forced savings—meaning, you can’t do anything with it—and 

from a technical point you have not changed the national savings 

rate, have not changed the balance of supply and demand of securities, and have not therefore presumably affected the price level of 

bonds, there is still the issue of how that is perceived by the marketplace, which is not all that easy to make a judgment on. 

My general concern is that if we knew for sure that the contingent liabilities that now exist are viewed in the private marketplace as similar to the real debt of the federal government, then 

technically moving funds in a carve-out of the way that the President is talking about would have no effect on interest rates, no effect, indeed, which would then be an accounting system which 

would be based on accrued receipts. 

The problem is caused by the fact that we are running unified 

budget——

Mr. MOORE OF KANSAS. Moving aside from the interest rates concern right now, which I understand is a huge concern, if we were 

to borrow $2 trillion or $1 trillion right now—and I am saying right 

now, over the next several years—to finance these partially private 

accounts and divert money out of present retirement benefits being 

paid to Social Security recipients, wouldn’t that just pass a debt 

along to our children and grandchildren? And is that fair? 

Mr. GREENSPAN. Well, the question is, remember that, at least 

as I understand the President’s program, which has not been produced sufficiently as yet, that is offset by potential benefits to be 

paid or scheduled to be paid at a later time. So taking the full context of a particular individual’s period, then the debt in that regard 

does not change over the long run. 

Mr. MOORE OF KANSAS. I understand. But we can have the best 

intentions in the world, and when the President talked to Congress 

about the Medicare program it was $400 billion, now it is $754 billion. 

Ms. PRYCE. Gentleman’s time has expired. 

Mr. MOORE OF KANSAS. Projections don’t always work. Isn’t that 

correct, sir? 

Mr. GREENSPAN. That is, of course, correct. 

Mr. MOORE OF KANSAS. Thank you. 

Ms. PRYCE. Mr. Barrett is recognized for 5 minutes. 

Mr. BARRETT. Thank you, Madam Chairman. 

Mr. Chairman, I was concerned about your testimony on the differences in wages from skilled and non-skilled workers. And I have 

seen the result in my rural district in South Carolina. 

I know that education is an important tool when we are talking 

about trying to lessen the differences between the skilled and the 

unskilled. But is there anything else we can do, other than education, to help balance the two? 

Mr. GREENSPAN. The issue of education is so critical to this that 

it overwhelms, in my judgment, all alternate policies to address 

43

this issue. Now, you have to include in education, obviously, on-thejob training, even education which is not even formal. 

And the essential reason is that what makes our country competitive is in my judgment two things. One, it is our Constitution, 

which creates a rule of law which people want to invest in. And 

two, it is what is in the heads of our children, because they are the 

future of the people who will staff our increasingly complex capital 

stock. 

I am not sure what else there is to do, because the job is very 

large in the issue of education and I would not divert resources to 

anything other than that, if the purpose is to address and resolve 

this particular issue. 

Mr. BARRETT. Thank you, Mr. Chairman. 

Thank you, Madam Chairman. 

Ms. PRYCE. Mr. Capuano is recognized for 5 minutes. 

Mr. CAPUANO. Thank you, Madam Chair. 

Thank you, Mr. Chairman. 

Mr. Chairman, I just want to just point out a couple little facts. 

You have repeatedly stated how strongly you support the PAYGO 

rules. 

And just as a point of information, the last vote this Congress 

had on those was November of 2002, as they were expiring, and 

only 19 members of the House voted to continue those rules. Of 

those 19 members, three of them are on this panel today. They include myself, Congresswoman Waters and Congresswoman Lee. 

Now, my guess is that, if you don’t know the rollcalls, most people wouldn’t have expected the three of us to have voted to continue the PAYGO rules. 

But I guess the reason I say that is, I agree with you. I think 

it is fair to have the PAYGO rules in the context of you get what 

you pay for, period. Be honest. Without the PAYGO rules, we run 

a dishonest accounting system. As far as I am concerned, for all intents and purposes this government is bankrupt. 

Fair enough. We lost. I think we have to get over it. I don’t think 

they are going to come back. With only 19 votes on the floor, I don’t 

think they are going to come back. 

So for me, though I agree with you 100 percent that the PAYGO 

rules were good and we should readopt them, they are not going 

to get readopted. And therefore, we have to look, how else to we 

do it? How else do we get back some fiscal sanity; in my opinion, 

it is fiscal honesty. 

Every time you have come before this committee since I have 

been on it, you state your support for tax cuts for the wealthiest 

amongst us. I respectfully disagree. I understand your position. I 

am not going to challenge you on it. I don’t think you are about 

to change. But clearly your opinion is that the tax cuts for the 

wealthiest amongst us are more important than programs. 

Because if you have it on a system, you only have revenues and 

expenditures, we haven’t cut back our expenditures as much as you 

would need to balance our budget, and especially when we cut our 

revenues, so therefore we have an imbalance. We have a deficit. 

And if we are not going to change our expenditures, which we 

haven’t, we shouldn’t change our revenues, I would argue. And I 

understand that we disagree. 

44

So I just wanted to make that clear: The PAYGO rules—maybe 

I am wrong, but they were killed in 2002. There is no real serious 

talk that I have heard of to bring them back, though if you can 

generate that talk, I will support you. 

But what I do want to talk about is, okay, here we are. We 

haven’t got PAYGO rules. We have deficits for as long as we can 

see, climbing deficits, dangerous deficits. I know you don’t use the 

word ‘‘crisis,’’ but I would, relative to deficits. 

Now we have a proposal in front of us for whatever the program 

might be, it happens to be Social Security today, but whatever it 

might be, that might require this government to borrow trillions of 

dollars. I am not going to try to get you on any of these, because 

you are too good at avoiding answers you don’t want to answer. 

You didn’t answer it yesterday, I don’t expect you are going to answer it today as to what the impact of that $2 trillion borrowing 

might be on today’s market. 

But I do want to ask you, based on your own testimony, not your 

testimony, but the report that is in front of us, the table on page 

13 clearly indicates something that is a fact, but the table is not 

new to me, but it is interesting. Since the year 2000, the percentage of treasury securities held by foreign investors as a share of 

the total treasuries held has gone up above 45 percent, has increased by 45 percent in just 4 years. Regardless of additional borrowing, do you find that troubling? Do you think that is good, bad 

or indifferent? 

Mr. GREENSPAN. I find it difficult to make a judgment for the following reason: The reason that they are investing in the United 

States is they find our U.S. treasury instruments the safest instruments in the world. And in one sense, I am pleased by the fact that 

that is the view of the rest of the world. 

As we are becoming increasingly global, there is going to be a 

great deal of cross-border investment, and everybody’s portfolio is 

going to have a very big chunk of foreign something. 

Mr. CAPUANO. So then these foreign investors think that we are 

a good investment. So therefore there is no reason to believe that 

the market today would think that the payments coming due to the 

Social Security trust fund wouldn’t be paid. 

Mr. GREENSPAN. There is no response in the market at this particular stage that I am aware of. 

Mr. CAPUANO. Good. 

And would it be unreasonable or reasonable to presume, to add 

these two things together, that if we were to go out for an additional $2 trillion worth of borrowing, that, based on statistics 

today, is it reasonable to presume that 45 percent of that or 50 percent of that would be bought by foreign investors? 

Mr. GREENSPAN. It is conceivable that it might be more than 

that. 

Mr. CAPUANO. So, therefore, if we are going to mortgage our children’s future in Social Security——

Ms. PRYCE. The gentleman’s time has expired. 

Mr. CAPUANO.——we would be doing it to the Chinese, the Japanese, the Saudis and everybody else around the world except ourselves. 

Thank you, Mr. Chairman. 

45

Ms. PRYCE. Mr. Jones is recognized for 5 minutes. 

Mr. JONES. Madam Chairman, thank you. 

Mr. Greenspan, I would like to pick up on what my friend from 

Massachusetts was speaking to. And you are a very learned man. 

We all have great respect for you, whether we agree or disagree. 

But I just have to believe with this debt of this nation, the deficit 

of this nation, that there is going to come a time—and maybe we 

won’t be here—but there is going to come a time, if we don’t get 

a handle on this, we are going to be in deep, deep trouble. This is my question: If Japan owns over $700 billion of the U.S. debt, mainland China and Hong Kong together hold over $250 billion of U.S. debt, Mr. Chairman, the question is, if this deficit continues to rise, and it looks like we are not going to do what needs 

to be done to hold it from rising, what would be the impact on U.S. 

financial markets if Japan or China were to stop buying U.S. treasury bonds? 

This might be a hypothetical, but I would appreciate if you would 

give us your opinion. 

Mr. GREENSPAN. Yes. We have looked into that question, and I 

think that we have concluded that the effect of foreign borrowing 

of U.S. treasury instruments has lowered long-term interest rates 

a modest amount. And therefore, if they were to choose to stop buying or to sell, it would raise interest rates, but, again, by a modest 

amount. 

And the reason for this is that U.S. treasury securities, as big as 

they are, and as important as they are, are only a fraction of the 

competing securities around the world, which is what this market 

is. 

It is a worldwide market. And in a sense, it is a market in which 

interest rates in various different localities and for various different instruments are all arbitraged. 

And so if there is a significant purchase or sale of U.S. treasury 

security, it is sort of dispersed on the other parts of the market at 

the same time, so that the adjustment is not particularly great. 

But the issue you raise is a much deeper one. If we run into serious trouble with respect to our deficit, it is not a question of whether foreigners will buy or not buy our securities, it is whether Americans will buy or not buy our securities. And that to me is where 

the critical issues lies. 

We are looking at a gulf in our unified budget for all sorts of reasons, of which Medicare is the largest one, in the period as we get 

into the next decade. And unless we address that issue now, well 

in advance of its occurring, I am not sure that we are going to be 

able to get an appropriate handle on it before it creates serious 

problems down the road. 

Mr. JONES. Mr. Chairman, I agree with you totally about the deficit. And thank you so much for being here today. 

I had a second question, but I want my colleagues to have equal 

time as I have. So I yield back my time. Thank you. 

Ms. PRYCE. Thank you, Mr. Jones. 

Mr. Crowley is recognized. 

Mr. CROWLEY. Thank you, Madam Chair. 

And thank you, Mr. Chairman, for being here once again before 

our committee. 

46

Mr. Chairman, I want to bring the issue back again to Social Security. In your view, is it possible to create private accounts, that 

my Republican colleagues would like to do, as the President would 

like to do as well, without substantially borrowing for the transition that would have to take place? And if so, how would you do 

that? 

Mr. GREENSPAN. The only way to do it is to essentially either 

borrow, raise taxes or cut other spending. 

Mr. CROWLEY. So the President’s options are—and I will just repeat them—would either be a massive tax increase on the American public—we are talking about massive, anywhere between $1 

trillion and $2 trillion, or twice what the IRS took in tax revenues 

last year. And I believe you stated yesterday that anything over $1 

trillion is considered—$1 trillion is large, a large tax increase on 

the American public. That was A. 

B, there would be a huge, potentially huge cut to benefits to both 

current and future, I am assuming, retirees, including the disabled, 

as well as the dependent children, which is a real possibility. 

But those benefit cuts would have to come to today’s retirees, as I mentioned before, almost immediately in order to pay the $1 trillion to $2 trillion in borrowing that is needed for the Social Security privatization plan. Or—and this, I think, is the most egregious—massive new deficits. 

And in essence my colleagues on the other side, I think very effectively, use the issue of the death tax politically incredibly well, 

and I think cornered us in many respects. 

What I think is even more immoral and more egregious is the 

fact—I have two children, 4 and 5, and, quite frankly, I am expecting a third child, although I don’t think my wife expected me to say 

that on national television. 

But if you take the fact that my children today owe $26,000, 

theoretically, in national debt, each, as we all do, my unborn child 

to be, once it comes out of the womb, will have a price tag of 

$30,000 that he or she will have to pay—you know, we are all 

going to die some day, and maybe we are going to need the death 

tax benefit to pay for our birth tax. 

And I think that is the most egregious thing about what we are 

doing to ourselves with this mess of deficit that we are putting our 

children and our children’s children into fiscal disability in the future. Can you comment on that? 

Mr. GREENSPAN. Congressman, the problem we have is that 

there is this yawning, unfunded future liability. This issue is going 

to emerge, no matter what solution you are talking about, because 

we are short of funds. The $1.5 trillion in the OASI fund is just 

not adequate. 

And the problem that we are going to confront is somewhere 

along the line, you are going to have to increase taxes or reduce 

spending somewhere, if we are going to keep the deficit under control. 

Mr. CROWLEY. Mr. Chairman, I appreciate—I am going to yield 

back in just a moment. Let me just say, I believe in personal responsibility. That is not just a Republican adage, Democrats believe that as well. I do believe that we have to contribute, ourselves, to our own personal retirement. 

47

And building up ownership in the retirement, as I think the 

Chairman mentioned earlier in his opening statement or in his 

opening question to you, I believe in that. I think we all have to 

contribute in some way toward that. 

But Social Security was one leg of the stool, or the chair or the 

table, in that vein. 

I am 42 years of age. I still don’t think about Social Security. I 

am not even thinking about retiring. But I also know that I have 

to do other things in order to retire, to save for my retirement. And 

that includes making sound fiscal choices. 

And I think part of that is investing in the stock market, is in 

401(k) plans, is in other pensions, et cetera, et cetera. 

I think that you are right that we will have to do something, this 

is a problem that will have to be addressed. It certainly is not a 

crisis. And I don’t think that it has really borne well for the President or my colleagues on this side to present it as a crisis. 

It is a problem we all should try to, and I think will work to 

solve. But I think it goes beyond just Social Security. It is about 

retirement and what we have to do to the American public to understand that it is about personal responsibility, they need to be 

engaged in this, and it is not just a problem of Social Security. 

And I yield back the balance of my time. 

Ms. PRYCE. Thank you. 

The gentleman from Pennsylvania, Mr. Fitzpatrick, is recognized. 

Mr. FITZPATRICK. Thank you, Madam Chair. 

Mr. Chairman, I want to go back to the issue of workforce investment, following up on Mr. Barrett’s question earlier. 

Even though the unemployment rate has dropped to 5.2 percent, 

there are many men and women in my district in Pennsylvania 

who are still looking for jobs and whose job skills miss the skill requirements of the jobs that are actually available in Pennsylvania 

and across the nation. 

And I am a new member of Congress, and find out now, I have 

been visited already by the community colleges from my district. I 

have heard from my technical high schools. There are a number of 

federal programs out there investing in education and workforce investment. 

I was wondering, Mr. Chairman, if you have any thoughts, or 

even recommendations on better coordination of education funding 

to better meet the needs of the next generation of Americans, so 

that they will be prepared to take the jobs that are actually available? 

Mr. GREENSPAN. Congressman, I think we have two problems in 

the area of education. One is to solve the dilemma that one of your 

colleagues mentioned earlier, namely that in the fourth grade our 

students seem to rank average or somewhat above average in math 

and science relative to the rest of the world, but by the twelfth 

grade, we are down quite low, in the lowest quartile, as I recall. 

In other words, we are not doing something that the rest of the 

world does to bring forward the skills of fourth graders through the 

end of high school. And we have got to address that, because it is 

a really crucial problem. 

Secondly, within the types of institutions generally where we 

seem to be getting the most leverage is the community college, in 

48

the sense that people are going back to school, and as you probably, 

I am sure, are aware, a significant proportion of enrollees in community colleges are in their 30s. It is not just the young kids, just 

coming out of high school. And they are going back to pick up the 

skills which they need to compete in the world. 

And I think the dramatic growth that we have seen in community colleges suggests that the demand is there for exactly the type 

of education, which is an education usually very specific to a specific profession, it is not a generic education, which is what the 4-

year college tends to do. And that seems to have been quite effective. 

We do have the problem, as I have indicated before, that we have 

not solved this question of matching skills with the requirements 

of our capital stock, but it is clear that where we are making 

progress apparently, or at least doing the right thing, is in advancing our community colleges. 

Mr. FITZPATRICK. Thank you, sir, for your thoughts and for your 

service to our nation. I appreciate it. 

I yield back my time. 

Ms. PRYCE. Thank you. 

Mr. Clay is recognized. 

And let me just say, there has been a vote called, and this will 

be the last question of the day. 

And you may proceed. 

Mr. CLAY. Thank you, Madam Chairman. 

Chairman Greenspan, I am concerned about the deficit, and you 

have voiced concerns numerous times about deficit spending also. 

There are those who champion tax cuts without regard for future 

budget consequences. Those who championed the tax cuts of 2001 

repeatedly cited the benefits to the economy of that tax cut. 

Of course, there were those of us who said that most of the cuts 

were unfunded mandates of a sort and would result in deficits. 

The CBO has released new data that show that the changes en- acted since January 2001 have increased the deficit by $539 billion. 

They also say that in 2005, the cost of tax cuts enacted over the 

past 4 years will be over three times the cost of increases in domestic spending. 

Mr. Chairman, what are your concerns about this huge deficit? 

And do you still view the tax cuts as being beneficial to the economy? Where do you suggest we go from here? And if you could, 

elaborate. 

Mr. GREENSPAN. Well, Congressman, I want to emphasize that 

our critical first priority is to get the long-term deficits under control. 

In that context, you do have room—or should have room, as we 

will indeed have room—to, one, increase spending on certain programs, and reduce taxes on others. You can’t go, with the huge 

budget that we have, you can’t think in terms that everything goes 

in the same direction. That is not the way the Congress should or 

does adjust the priorities of the nation. 

So I think that I would say the first priority is to assure that 

deficits are under control. After that, I think the resources that we 

use and in what form we use them are judgments that the Congress has to make. 

49

I personally think that we would be well served by having significant elimination of the double taxation on dividends because I 

think that is a crucial aspect of economic growth, which obviously 

has an effect on the revenue base. But others can disagree others 

can have different ideas, but that is where I come from. 

Mr. CLAY. But on that point, do we then go through the budget 

and slice programs that are wasteful, or do we not make the 2001 

tax cuts permanent, or do we target middle-income Americans and 

give them some financial help? 

Mr. GREENSPAN. That is the choice of the Congress. I mean, the 

point is, the wonderful thing about our system is we have elected 

representatives who have to make these judgments. And if they 

don’t reach you, somebody else made them, and they are easy decisions. You only get the tough ones. 

Mr. CLAY. Thank you for your response. 

I appreciate it, Madam Chair. 

Ms. PRYCE. Thank you, Mr. Clay. 

And thank you, Chairman Greenspan, for your service to our 

country and for your time that you spent with this committee 

today. It is very much appreciated, and we will welcome you back 

in about 6 months. 

With that being said, the chair notes that some members may 

have additional questions for this panel or this witness which they 

may wish to submit in writing. Without objection, the hearing 

record will remain open for 30 days for members to submit written 

questions to this witness and to place their response in the record. 

Hearing nothing further, this hearing is adjourned. 

[Whereupon, at 12:52 p.m., the committee was adjourned.] 

(51)

A P P E N D I X

February 17, 2005

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