U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

22–918 PDF 2005

S. HRG. 108–852

NOMINATION OF ALAN GREENSPAN

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

ON

THE NOMINATION OF ALAN GREENSPAN, OF NEW YORK, TO BE CHAIRMAN

OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JUNE 15, 2004

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

LINCOLN D. CHAFEE, Rhode Island

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

PEGGY R. KUHN, Senior Financial Economist

MARTIN J. GRUENBERG, Democratic Senior Counsel

AARON D. KLEIN, Democratic Economist

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

TUESDAY, JUNE 15, 2004

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Sarbanes .............................................................................................. 2

Senator Bunning ............................................................................................... 4

Senator Schumer .............................................................................................. 5

Senator Crapo ................................................................................................... 5

Senator Bayh .................................................................................................... 6

Senator Dole ...................................................................................................... 6

Senator Miller ................................................................................................... 7

Senator Hagel ................................................................................................... 7

Senator Stabenow ............................................................................................. 8

Senator Chafee ................................................................................................. 8

Senator Sununu ................................................................................................ 9

Senator Allard ................................................................................................... 9

Senator Reed ..................................................................................................... 26

Senator Carper ................................................................................................. 28

Senator Corzine ................................................................................................ 28

Senator Bennett ................................................................................................ 31

NOMINEE

Alan Greenspan, of New York, to be Chairman of the Board of Governors

of the Federal Reserve System ............................................................................ 10

Biograhpical sketch of the nominee ................................................................ 35

Response to written questions of:

Senator Sarbanes ...................................................................................... 48

Senator Carper and Senator Miller ......................................................... 49

(III)

(1)

NOMINATION OF ALAN GREENSPAN

OF NEW YORK, TO BE CHAIRMAN OF

THE BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM

TUESDAY, JUNE 15, 2004

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:03 a.m., in room SD–538, Dirksen Senate Office Building, Senator Richard C. Shelby, Chairman of the

Committee, presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

This morning, we will consider the nomination of Alan Greenspan to serve his fifth term as Chairman of the Federal Reserve

System. If confirmed, and we expect that will happen, Chairman

Greenspan will be only the second Federal Reserve Governor to

serve beyond his fourth term, equaling the record held by the distinguished William McChesney Martin.

Chairman Greenspan, you have led the Federal Reserve System

since August 1987, a period of nearly 15 years. During that time,

the U.S. financial system has withstood a number of significant

challenges, including economic disruptions in Mexico, Russia, and

the currency crisis which engulfed much of South Asia. Your tenure

also includes the 1991 to 2001 economic expansion, the longest in

American history. This Committee has benefited from your wisdom

in crafting a number of significant pieces of legislation, including

the Financial Institutions Reform, Recovery and Enforcement Act

of 1989, the Federal Deposit Insurance Corporation Improvement

Act of 1991, and most recently, the Gramm-Leach-Bliley Act. I

know that my colleagues will further remark on your successful

track record.

Chairman Greenspan, I would like to note your recent remarks

at the Federal Reserve Bank in Chicago on financial literacy. In

your speech, among other things, you noted that as a young man,

it was music that grabbed your interest and that you visualized

yourself someday playing with the likes of the Glenn Miller Orchestra or becoming another Benny Goodman. Obviously, your career

path ultimately took another direction and for that, Mr. Chairman,

the United States and the world financial markets I believe are

grateful. The music world will never know what it may have

2

missed, but this Committee and this Senator express our thanks

for your extraordinary public service.

Chairman Greenspan, we look forward to your testimony and at

the proper time I would get back to you on the oath.

Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman.

I join you in welcoming Chairman Greenspan back before the

Banking Committee this morning as we review his nomination to

another term as Chairman of the Board of Governors of the Federal Reserve System.

Let me start by congratulating Chairman Greenspan on his nomination to a fifth term as Chairman of the Federal Reserve Board.

If confirmed, as I fully expect he will be, Chairman Greenspan

would join William McChesney Martin, as you noted, as the only

Fed Chairman to be confirmed for five terms. In terms of longevity

of service, he is currently second only to Chairman Martin.

Over the years, I have both agreed and disagreed with Chairman

Greenspan over the conduct of monetary and fiscal policy. That is

what a democracy is all about, and I understand that. I believe the

relationship Chairman Greenspan formed with the then-Secretary

of the Treasury Robert Rubin during the 1990’s led to the conduct

of fiscal and monetary policies which complemented one another

and which helped achieve high growth and employment with low

inflation and served the country well.

As I look back, I think with respect to monetary policy, my

sharpest disagreement with Chairman Greenspan was probably in

1994 when the Fed raised rates in a preemptive manner that I

thought was not warranted by inflationary pressures. In regard to

fiscal policy, my strongest disagreement with Chairman Greenspan

came in the beginning of 2001 when we were told that the debt was

being paid down at such a rapid rate that we had to slow the trajectory otherwise we would pay it off too quickly. That took the lid

off the punch bowl as far as tax cuts were concerned. Of course,

now we are experiencing very large deficits and they are projected

well out into the future.

I do want to underscore the agreement I have had with the

Chairman and the Fed on issues of bank regulation, particularly in

regard to the need for vigorous holding company supervision, and

in maintaining the separation of banking and commerce.

Let me say though, Chairman Shelby and my colleagues, that

even when I found myself disagreeing with Chairman Greenspan,

I have always enjoyed our public exchanges. They have always

been focused on the substance of the issues. I found them thoughtprovoking and informative. Chairman Greenspan has carried out

the responsibilities of his office with great skill and dedication, and

has sustained the tradition of outstanding economic statesmanship

provided by such former Fed chairmen as Marriner Eccles, William

McChesney Martin, Arthur Burns, and Paul Volcker.

I would like to take a moment to commend Chairman Greenspan

for what I believe will be an important legacy of his chairmanship

of the Federal Reserve. That is the movement by the Federal Open

Market Committee of the Fed to be more open and transparent in

3

its conduct of monetary policy. That movement began in November

of 1993 when the Federal Reserve decided to release all historic

transcripts of meetings of the FOMC, and the decision in January

1995 to release transcripts of FOMC meetings going forward with

a 5-year lag.

Perhaps most significantly, in February 1994 the Federal Reserve decided that changes in monetary policy by the FOMC would

be accompanied by an immediate public announcement of the

change with an explanation of a reason for the change. Now that

was followed by the decision in January 2000 to release an announcement after every meeting of the FOMC whether or not a

change in monetary policy was made, with a brief statement assessing the balance of the risks. And most recently, they have

added the recorded votes of the individual members of the FOMC

on the conduct of monetary policy.

I also should mention that, in 2000, the Congress, with the support of the Fed, amended the Federal Reserve Act to make the Federal Reserve Chairman’s Congressional testimony on the Semi-Annual Monetary Policy report a statutory requirement. Until then

the testimony was customary but not required by law.

For those who have followed the conduct of monetary policy by

the FOMC over the years and advocated greater transparency in

its decisionmaking, these steps taken during Chairman Greenspan’s tenure were meaningful and significant changes which have

made the deliberations more transparent. I think it has made the

members of the FOMC more accountable for the conduct of their

responsibilities. Chairman Greenspan deserves great deal of credit

for these positive changes.

In fact it has been my perception that members of the FOMC,

both Governors of the Fed and the Federal Reserve Bank Presidents have become more open in their public discussions of the

work of the FOMC and have made greater efforts to explain their

deliberations to the public. I believe the Fed has also developed a

greater appreciation of how important communication to the public

and to the markets is to the conduct of monetary policy. I regard

these as positive developments with lasting consequences.

Finally, let me note, Mr. Chairman, that while this nomination

is for a 4-year term as Chairman, Chairman Greenspan has to

cease to serve as a governor in February of not next year but the

following year, 2006.

Chairman GREENSPAN. January 31, 2006.

Senator SARBANES. We have the date exactly, January 31, 2006—

because of the limitation on the length of term a governor can—

you can have one 14-year term, but you can have part of a term

and then all of a 14-year term, which is the situation Chairman

Greenspan would find himself in. At that point he would, of course,

have to leave the board. That would help to get the chairmanship

and the presidential elections back on what I regard as a more

preferable track, which would be a new President would be able to

appoint a chairman about a year after he came into office. So you

would have some removal from the political process but not a total

exception to it. I think that is a better synchronization on which

to have the process work.

4

But again, I close by congratulating Chairman Greenspan on this

nomination to a fifth term as Chairman of the Federal Reserve. I

look forward, as always, to his testimony this morning and, Mr.

Chairman, I look forward to supporting you as you move through

this nomination process.

Chairman SHELBY. Senator Bunning.

STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. Thank you, Mr. Chairman.

Chairman Greenspan, I appreciate your service to our country,

especially over the last 12 years, and I have no doubt that you will

be reconfirmed as Chairman to serve the last 2 years of your 14-

year term. Many are afraid of what will happen when your term

expires in 2006. There is much fear and trepidation. But both you

and I remember that there was much fear and trepidation when

your predecessor, Paul Volcker, left. But our economy survived, and

when you step down and decide to play tennis full-time, our economy will survive again.

I think it is obvious to everyone by now that I disagreed with you

many times on your monetary policy decisions. As you know, I have

already stated that I will not be able to support your renomination.

I am quite sure that I will be the only Member this Committee not

to support your renomination, and that there is a good chance that

I will be the only Member of the U.S. Senate not to support your

renomination. But that is okay. This is a democracy. We both know

what it is like to take unpopular stands.

There have been many things you have done right in your tenure

as Chairman. Since January 2001, I think you have done a pretty

good job on monetary policy. I think that the Fed has done a very

good a job on working with our financial institutions on combating

terrorism. I also think that the Fed, under your leadership, has

done a good job about briefing Congress on your antiterrorism activities and other initiatives the Fed has undertaken. And you have

let sunshine into the Fed. Though I believe more can be done in

that area.

But you know my problems, I have pointed them out to you on

many occasions. I do not think that you have always moved aggressively enough to cut rates in the past, especially in 1992 and 2000,

and I think you have involved yourself in many things outside the

Fed’s charter. Believe me, I know that you are asked to comment

all the time on things that have nothing to do with monetary policy

or banking regulations. Quite often, it is a Member of Congress

asking those questions that have nothing to do with your job. I just

wish you would be more respectful in declining to answer those

type of questions.

Your words matter, Mr. Chairman. You know that. You know

what happens when you use the term ‘‘irrational exuberance.’’ You

know what happens when you use the term ‘‘wealth effect.’’ And

you know how violent and volatile the markets can be. You knew

that deleting the phrase, ‘‘for a considerable period’’ from the

FOMC statement back in February, what it would do. I am sure

there are times that you wish your words did not matter as much

as they did. But people pay attention to what you say. Sometimes

that is very good. Sometimes that is very bad. The job of the Fed

5

is to set monetary policy. And I believe that when the Fed strays

from that into other areas that we get into trouble.

I look forward to continuing working with you in the future. And

hopefully the good people of Kentucky will decide to send me back

here so we can work together for the last 2 years of your term.

With monetary policy, I hope you will act aggressively. You have

over the last three-and-a-half years. I would very much like to see

you be the Chairman you have been since January 2001, not the

Chairman of the summer and fall of 2000. Remember, if our questions, even today, do not have anything to do with your job, you

do not have to answer them.

Thank you for time, Mr. Chairman.

Chairman SHELBY. Senator Schumer.

STATEMENT OF SENATOR CHARLES E. SCHUMER

Senator SCHUMER. Thank you, Mr. Chairman. I am pleased to be

here. As a New Yorker, I am particularly proud. New York has

made countless contributions to our Nation, and you are not the

least of them, Mr. Chairman, so thank you for the good work that

you do. Your longevity is testament to your excellence. Markets

and the Nation breathed a sigh of relief when you agreed to serve

another term, and with good reason. Your integrity, your intelligence, and your ability to balance prosperity and inflation, a very

difficult thing to do, are second to none. I, for one, am delighted

that you are going to serve another term and am enthusiastic

about your renomination.

I would just make one point in disagreement, and that is, it

seems to mean that as I think your role in the bully pulpit is a

good role. I must respectfully disagree with my colleague. I think

we have few people who look out for the long-term health of the

Nation. If the Federal Reserve Chairman does not do that, who

will?

But in those pronouncements, my one concern here is that your

voice against too much spending that creates deficits seems to be

a lot stronger than your voice against tax cuts that threaten the

deficit. I hope that in your next term you will strengthen your voice

against unbalanced tax cuts that threaten the viability of our recovery through overwhelmingly large deficits.

Having said that, my view is you have been an A-plus chairman

and I am glad you will continue to be.

Chairman SHELBY. Senator Crapo.

STATEMENT OF SENATOR MICHAEL CRAPO

Senator CRAPO. Thank you very much, Mr. Chairman.

Chairman Greenspan, I welcome you back. I am one of those who

will be supporting your confirmation. I appreciate the visit that we

had when we discussed your confirmation. And frankly, I appreciate your strong leadership in the country.

There are a number of issues on which your voice has helped

people to gain the confidence to take very important steps we needed to take. I am sure you do not appreciate it, but you are always

going to get pulled into this tax cut fight. I appreciate the voice you

have had in that tax cut debate with regard to the question of

whether we should focus on spending. I think we all agree with

6

your strong comments about not spending ourselves into deficit.

Those of us up here on the Hill will probably continue to debate

forever the question of whether tax relief is helpful and stimulative

to the economy, or whether it is harmful, and the circumstances in

which it should be utilized and which it should not be.

But I frankly just wanted to let you know that you have taken

some shots here today from different perspectives. You are used to

taking those shots, but you are universally recognized as one of

those who has made a difference in America and I appreciate your

service. Thank you.

Chairman SHELBY. Senator Bayh.

STATEMENT OF SENATOR EVAN BAYH

Senator BAYH. Mr. Chairman, welcome. I must remark upon the

differences among our institutions of governance. Your 17 years as

head of the Fed rank you second in the history of our republic, and

yet I look around the Senate and you would be a relative newcomer

in this institution, or at least it seems to me that way. But I compliment you on your years of devotion to our country and your capable service and would only add—I am going to save most of my

remarks for our question period. But I would only add that I think

the only potential stumbling block to your reconfirmation is the victory margin I would anticipate and the professional jealousy that

might engender in some of us up here.

So, I thank you for your service and look forward to its continuation.

Chairman SHELBY. Senator Dole.

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Thank you, Mr. Chairman.

Today, I certainly want to lend my voice in strong support of the

renomination of Alan Greenspan. Senators on both sides of the

aisle have long admired the wisdom, the leadership, the integrity

of Alan Greenspan since he first took office under President

Reagan in 1987.

He has repeatedly demonstrated that a cool head and keen understanding of the markets can lessen the dangers when events

panic the markets and capital crisis ensues. While it may seem obvious today, Chairman Greenspan has repeatedly had to remind us

all that the fundamentals of the U.S. economy remain strong.

Within 2 months of assuming the chairmanship of the Board of

Governors, Alan Greenspan reassured investors and brought the

necessary liquidity into the market when a panic caused the loss

of more than 23 percent of the stock market value in October 1987.

Then again, Chairman Greenspan demonstrated his considerable

skills in the 1987–1988 global financial crisis when, with considerable finesse and three rate cuts, he was able to avert problem after

problem as the world markets panicked. It is for these reasons, and

many more, that I have full confidence in Chairman Greenspan’s

ability to continue as the head of the Federal Reserve System.

While many would expect an economist to simply see the numbers before him, Chairman Greenspan is also keenly aware of the

people most affected by the numbers he analyzes. For example, he

understands the growing wage difference between skilled and unVerDate 11-MAY-2000 16:48 Aug 24, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 22918.TXT SBANK4 PsN: SBANK4
7

skilled labor, and for that reason he has been a strong advocate for

the continuing education of our workforce.

I share Chairman Greenspan’s admiration for the excellent work

of our community colleges, which is so important to North Carolina

as we strive to retrain displaced workers due to enormous job

losses in manufacturing. I am proud to be working with my colleagues Senators Enzi and Alexander to write legislation which

provides additional assistance to our community colleges and other

institutions of higher learning for training and retraining students

in high-growth job markets. We are currently working on this bill

with the Senate HELP Committee and I look forward to its introduction later this year.

In the past year, we have witnessed an economy that continues

to grow stronger. Over 1.1 million jobs have been added since last

August, with 8 consecutive months of gains. The Nation’s unemployment rate is 5.6 percent, below the average of the 1970’s, the

1980’s, and the 1990’s. Economic growth over the last three quarters has been the fastest in 20 years. American companies are reporting record productivity with growth between the years 2000

and 2003 at the fastest 3-year rate in half a century. All of this

is thanks to both the excellent efforts of Chairman Greenspan and

tax relief that clearly works.

I look forward to the swift consideration of Chairman Greenspan’s nomination and its quick passage by the full Senate.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Miller.

STATEMENT OF SENATOR ZELL MILLER

Senator MILLER. Thank you, Mr. Chairman.

Mr. Chairman, thank you for your years of service to this country. Thank you for being willing to continue to serve and work in

the arena; not always the quietest and most comfortable place to

work. But your wisdom and your integrity are especially needed

today. Thank you for your willingness to serve and thank you for

your long and distinguished career.

Chairman SHELBY. Senator Hagel.

STATEMENT OF SENATOR CHUCK HAGEL

Senator HAGEL. Mr. Chairman, thank you. I too welcome Chairman Greenspan and I strongly support his leadership and his renomination. I do that, Mr. Chairman, because I think Chairman

Greenspan has been one of the most effective leaders in monetary

policy that we have had in this country, during some very difficult

and challenging times. He has provided steady, common sense, and

strong leadership. I have particularly appreciated his wider lens

view of these issues, understanding that the fabric is a weave of

many dynamics: trade, monetary and fiscal policy, foreign policy,

and geopolitical issues. He has done that extremely well and I

think has presented his case in that wider lens context which has

been helpful to this country and to the world.

Mr. Chairman, thank you.

Chairman SHELBY. Senator Stabenow.

8

STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman.

I also would begin by welcoming Chairman Greenspan. I appreciate your leadership, your service to the country over the past 16

years, and I am proud to support your efforts and willingness to

continue to do that.

Chairman Greenspan has clearly steered monetary policy for our

country through good times and bad, as colleagues have indicated

today on the Committee. He has seen difficult recessions and boom

times, and he has been an outspoken voice for question and reason

when we have needed it.

For example, he warned us, when many did not want to hear it,

that the dot.com boom period could be fueled in part by irrational

exuberance, and the subsequent correction in the market proved

him right. Exponential growth in many market stock portfolios was

indeed not based on sound market pricing.

Chairman Greenspan has also not been afraid to aggressively

fight off inflationary pressures when he thought the economy was

overheating. During my time in the House and the Senate, I have

appreciated his willingness to warn policymakers about the danger

of out-of-control deficits. I believe that we should be more responsible about both how we spend money and how we approach our

revenue needs and our tax policy.

I had the opportunity to visit with Chairman Greenspan a few

weeks ago and we discussed many important issues. I reiterated

my concern to him at the current difficult economic environment

with the Federal deficit is simply not sustainable or responsible.

We are going to have to rethink our current fiscal policies if we are

going to honor our promise to the baby-boom generation as they retire. I am glad that as we consider how to take care of our aging

population, Chairman Greenspan has been willing to repeat his

support for budget triggers.

Chairman Greenspan and I also recently discussed the important

issue of financial literacy, and the Federal Financial Literacy Commission that I worked with Senator Sarbanes, Enzi, and Chairman

Shelby to set up. I know of the Chairman’s personal commitment

to financial literacy, which I appreciate. Financial literacy creates

more efficient markets. It also helps people to make financial decisions that are in their personal best interests, and I am glad that

we have a Federal Reserve Chairman who believes financial literacy should be a priority.

Chairman Shelby, thank you for calling today’s important nomination hearing. I intend to support Chairman Greenspan’s nomination to another term. And, again, I thank you for your service, Mr.

Greenspan.

Chairman SHELBY. Senator Chafee.

STATEMENT OF SENATOR LINCOLN D. CHAFEE

Senator CHAFEE. Thank you, Mr. Chairman, and congratulations

on your nomination for a fifth term. You are one of the few in this

town that has served under Presidents of both political parties. I

particularly want to salute the work you did prior to coming to the

Federal Reserve in the early 1980’s on the Social Security Commission. Successful at raising the age of eligibility on a slow glide path

9

from 65 to 67; something we have not been able to do on Medicare.

So congratulations.

Chairman SHELBY. Senator Sununu.

STATEMENT OF SENATOR JOHN E. SUNUNU

Senator SUNUNU. Thank you, Mr. Chairman.

Mr. Greenspan, my staff was hoping that I would ask you upon

which piece of U.S. currency you would most like to see your portrait, but I pointed out to them that your modesty and sense of

fairness would preclude you from singling out one denomination

over another.

[Laughter.]

So instead I simply want to welcome your testimony, of course,

and your appearance here, but ask that in your testimony and any

written submissions to the Committee you focus on those areas

that I think are most pertinent to the Fed, areas of capital market

regulation, and banking regulation, and monetary policy. As I look

through the issues that we dealt with this year, just this session

of Congress, whether it is regulatory issues or legislative issues,

market structure, mutual fund regulation, terrorism risk insurance, the structure of public boards and their liability, hedge fund

regulation, GSE legislation, all of these issues I think have the potential to really change the structure of our capital markets, their

operation, their efficiency, and public confidence in the capital markets.

I would very much like to see, whether it is a resubmission, a

restatement, or clarification of the guiding principles that you believe should shape both regulation and legislation in these areas affecting the efficiency of the capital markets and public confidence

in the capital markets, because most of the issues that I just mentioned are not going to go away at the end of this year. We are

going to be taking them up again next year, and I think any perspective that you can provide to us to help guide and shape our

views as policymakers would be welcome. Thank you very much.

Chairman SHELBY. Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Mr. Chairman, again I would like to thank you

for holding this hearing on the renomination of Dr. Greenspan to

be the Chairman of the Board of Governors of the Federal Reserve

System. I look forward to his testimony and the opportunity to

have the Chairman come before this Committee and share his expertise on economic issues and factors that are driving and hindering economic growth.

Today, I want to extend my appreciation for his unfettered commitment to analyzing and interpreting the peaks and valleys of our

U.S. economy. His contribution to this country has been exemplified by his constant vigilance to the factors that play such an influential role in the direction and success of our economic system. Dr.

Greenspan has served on the Board of Governors of the Federal Reserve System since August 1987 and as Chairman of the Board of

Governors since June 2000. He has witnessed, obviously, a great

deal of uncertainty and change in those years as the heightened

10

impact on our economy of technological advances, competition, and

robust productivity have become evident.

Accordingly, Dr. Greenspan and the other members of the Board

of Governors have altered the framework in which they analyze the

economic system so that they may gain a more accurate depiction

of what the economy looks like and how better to formulate monetary policy in light of those changes.

Dr. Greenspan, I appreciate your commitment to this Committee

and to this country, and look forward to supporting your nomination for a fifth term as Chairman of the Federal Reserve Board.

Thank you, Mr. Chairman.

Chairman SHELBY. Chairman Greenspan, I ask now that you

stand and take the oath. Would you raise your right hand?

Do you swear that the testimony that you are about to give is

the truth, the whole truth, and nothing but the truth, so help you

God?

Chairman GREENSPAN. I do.

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

Chairman GREENSPAN. Mr. Chairman, I do.

Chairman SHELBY. Chairman Greenspan, we welcome you to the

Committee. You may proceed as you wish.

STATEMENT OF ALAN GREENSPAN, OF NEW YORK,

TO BE CHAIRMAN OF THE BOARD OF GOVERNORS

OF THE FEDERAL RESERVE SYSTEM

Chairman GREENSPAN. First I want to express my gratitude to

President Bush for his confidence in me, and to you, Mr. Chairman,

and Members of the Committee, for expeditiously holding this hearing on my renomination for a fifth term as Chairman of the Board

of Governors of the Federal Reserve System. The Federal Reserve

has had a close and productive relation with this Committee over

the years. If you and your Senate colleagues afford me the opportunity, I look forward to working with you in advancing our shared

goal of strengthening the firm foundation upon which the American

people have built a prosperous economy and a sound and efficient

financial system.

The performance of the U.S. economy has been most impressive

in recent years in the face of staggering shocks that in years past

would almost surely have been destabilizing. Economic policies directed at increasing market flexibility have played a major role in

that solid performance. Those policies, aided by major technological

advances, fostered a globalization which unleashed powerful new

forces of competition, and an acceleration of productivity, which at

least for a time has held down cost pressures.

We, at the Federal Reserve, gradually came to recognize these

structural changes and accordingly altered our understanding of

the key parameters of the economic system and our policy stance.

But while we lived through them, there was much uncertainty

about the evolving structure of the economy and about the influence of monetary policy.

The Federal Reserve’s experiences over the past two decades

make it clear that such uncertainty is not just a pervasive feature

of the monetary policy landscape; it is the defining characteristic

11

of that landscape. As a consequence, the conduct of monetary policy

in the United States has come to involve, at its core, crucial elements of risk management. This conceptual framework emphasizes

understanding the many sources of risk and uncertainty that policymakers face, quantifying those risks when possible, and assessing the costs associated with each of the risks.

This framework entails devising, in light of those risks, a strategy for policy directed at maximizing the probabilities of achieving,

over time, our goals of price stability and the maximum sustainable

economic growth that we associate with it. In designing strategies

to meet our policy objectives, we have drawn on the work of analysts, both inside and outside the Fed, who over the past half century have devoted much effort to improving our understanding of

the economy and its monetary transmission mechanism. A critical

result has been the identification of key relationships that, taken

together, provide a useful approximation of our economy’s dynamics. Such an approximation underlies the statistical models that we

at the Federal Reserve employ to assess the likely influence of our

policy decisions.

However, despite extensive efforts to capture and quantify what

we perceive as the key macroeconomic relationships, our knowledge

about many of the important linkages are far from complete and,

in all likelihood, will always remain so. Every economic model, no

matter how detailed or how well-designed, conceptually and empirically, is a vastly simplified representation of the world that we experience with all its intricacies on a day-by-day basis. Policymakers

have needed to reach beyond models to broader, though less mathematically precise, hypotheses about how the world works.

A central bank needs to consider not only the most likely future

path for the economy, but also the distribution of possible outcomes

around that path. The decisionmakers then need to reach a judgment about the probabilities, costs, and benefits of the various possible outcomes under alternative choices for policy.

As the transcripts of the Federal Open Market Committee meetings attest, faced with these abundant challenges, we find the making of monetary policy to be an especially humbling activity. In

hindsight, the paths of inflation, real output, employment, productivity, stock prices, and exchange rates may seem to have been preordained, but no such insight existed as we experienced these

developments at the time.

Yet, during the past quarter-century, policymakers managed to

defuse dangerous inflationary forces and to deal with the consequences of a stock market crash, a large asset price bubble, and

a series of liquidity crises. These developments did not divert us

from the pursuit and eventual achievement of price stability and

the greater economic stability that goes with it.

Going forward we must remain prepared to deal with a wide

range of events. Particularly notable in this regard is the fortunately low, but still deeply disturbing, possibility of another significant terrorist attack in the United States. Our economy was able

to absorb the shock of the attacks of September 11 and to recover,

though remnants of the effects remain. We, at the Federal Reserve,

learned a good deal from that tragic episode with respect to the impact of policy and, of no less importance, the functioning under

12

stress of the sophisticated payment system that supports our economy. Our efforts to further bolster the operational effectiveness of

the Federal Reserve and the strength of the financial infrastructure continue today.

Each generation of policymakers has had to grapple with a

changing portfolio of problems. So while we importantly draw on

the experiences of our predecessors, we can be sure that we will

confront different problems in the future.

The Federal Reserve has been fortunate to have worked in a particularly favorable structural and political environment over the

past quarter-century. But we trust that monetary policy has contributed meaningfully to the impressive performance in our economy in those year. I have been extraordinarily privileged to serve

my country at the Federal Reserve during most of these years and

would be honored if the Senate saw fit to enable me to continue

this service.

Thank you very much, Mr. Chairman.

Chairman SHELBY. Thank you, Chairman Greenspan.

Chairman Greenspan, this morning the Commerce Department

reported that the business inventories climbed 0.5 percent in April

to $1.212 trillion, a record high and the eighth straight monthly increase. What do these increases tell us about any potential inflationary pressures?

Chairman GREENSPAN. At the moment not too much, Mr. Chairman. The reason is that even though, as you point out, inventories

have risen to record high levels, as a ratio to sales or production

they are close to, and probably are at, record lows. Indeed, there

is a very significant path of inventory reduction over the last couple of decades, the so-called just-in-time inventory process. So, I

would perceive that that is going to continue on, but there is no

evidence at this stage that I can unearth that suggests to me that

recent inventory patterns are contributing either to inflation or deflation.

Chairman SHELBY. Mr. Chairman, what can we expect, in your

judgment, in terms of job growth in light of these heavy inventory

numbers? Is there any correlation there at all?

Chairman GREENSPAN. Strangely enough, I would reverse it and

say that the fact that inventories in a general context of the level

of sales being quite low leads me to conclude, indeed to those purchasing managers who try to evaluate the inventory position of

their customers, that the next change in inventory policy, at least

for the short-run, is probably going to be some element of either

accumulation or at least, at a minimum, a temporary stabilization

of the inventory-sales ratios before the long-term trend continues.

What that suggests is that even flattening out of inventory-sales

ratios creates a significant increase in the rate of increase in inventories during any particular period. And since inventory accumulation adds to final demand to get production and employment, I

would presume that, if anything, the inventory picture today is

probably more likely to be helpful in expanding employment than

in contracting it.

Chairman SHELBY. The Federal Open Market Committee, you

referenced that a minute ago, will be meeting at the end of this

month. It is widely anticipated that the Federal Open Market ComVerDate 11-MAY-2000 16:48 Aug 24, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 22918.TXT SBANK4 PsN: SBANK4
13

mittee will move to increase short-term interest rates. You have

noted any upward movement will be, your word ‘‘measured’’ although you also noted that, ‘‘the FOMC is prepared to do what is

required’’ to maintain price stability, which is important to everybody. In other words, to pursue a more aggressive interest-rate

strategy there.

What factors will you be looking at between now and the end of

this month to determine whether or not a measured or an aggressive response is necessary?

Chairman GREENSPAN. Mr. Chairman, as I said in the remarks

which you are quoting from, our best judgment is that the economy

is growing in a solid fashion. To be sure, underlying unit costs,

having gone down for quite a long period, have now started to turn

up modestly. But our general view is that inflationary pressures

are not likely to be a serious concern in the period ahead.

Therefore, we concluded in our policy statements that the removal of an increasingly unnecessary degree of accommodation in

monetary policy is very likely to be measured over the quarters

ahead. But clearly, this is our general view of the outlook and forecasts are subject to error. If our judgment as to how the economy

is going to evolve and how inflation is going to evolve turns out to

be mistaken we will change, because our fundamental goal is, as

you point out, to maintain price stability over the longer-run as a

means of creating maximum sustainable growth.

Chairman SHELBY. Do you believe that the economy will continue

each month to add a significant number of jobs as we have seen

in recent months?

Chairman GREENSPAN. So far the pace of economic activity, and

a slightly lessened pace of productivity increase compared to what

it had been, numerically creates job growth, if I may put it in those

terms. We see nothing in the immediate outlook to suggest any

major change in the path of employment growth going forward.

Chairman SHELBY. Thank you.

Senator Sarbanes.

Senator SARBANES. Thank you very much, Chairman Shelby.

Chairman Greenspan, the economy has now 1.9 million fewer

private-sector jobs than it had when the recession began 38 months

ago in March 2001. Now in every other recession since World War

II, the economy has recovered all of the private-sector jobs that had

been lost by this point in the cycle; generally well before this point.

In fact when compared to a typical recovery, our economy has 5

million fewer private-sector jobs at this point in the recovery period

than under a typical recovery.

Let me just show you this chart to make this point. The red line

is the average of nine recessions since World War II in terms of the

recovery of private-sector jobs. This dark line here is what has happened in this recovery. The thing that is interesting is that it started off and they pretty well tracked the same course going down.

But then in previous recessions we got an upswing and we came

back up here, then we pass the point of—now we are getting net

gain in jobs. But this time we stayed down here on this trajectory

so there is a gap here of 5 million private-sector jobs short of a typical recovery.

14

I find obviously that is a matter of great concern. What is your

explanation for that? These are the amount of months. So we are

out here now. We are at 37, 38 months out here in the period and

we have not come back up. We are not even back up to recovering.

We are still 1.9 million short, and we are 5 million short of—when

you compare it with the average of the nine recessions since World

War II. What is your explanation for that or your theory on that?

Chairman GREENSPAN. Senator, I think there are two explanations. First, and most important, is the extraordinary increase in

the rate of productivity growth, which has been very unusual for

a period of economic weakness such as prevailed since the peak of

economic activity in the year 2000. Productivity growth has never,

in my recollection, grown anywhere near as rapidly as it has grown

during the period of comparable weakness that has been experienced in the last several years.

What this means is that even though demand picked up, that increasing efficiencies have enabled businesses to meet that demand

without hiring new people. This has been a fairly pronounced and

significant trend over a large number of quarters.

Second, the size of the upswing that you show in your chart is,

in many respects, a function of the size of the downswing that preceded it. The fact that we have had a very shallow recession most

recently, indeed, the shallowest recession that has occurred in the

post-World War II period, means that even if the productivity gains

were not there, or let us put it more exactly, with the same average

of the nine recessions that you are pointing out on your chart, we

would still have had a lag in employment, largely because there is

not enough of a bounceback that ordinarily occurs out of a shallow

recession as one which is far more deep. Indeed, I recall, for example, the 1975 recession most vividly when we had an extremely

sharp decline. That was the spring of 1975. And by the first quarter of 1976 the economic growth rate was almost 10 percent at an

annual rate and employment had come back very substantially.

This is the other extreme that we are looking at today.

Senator SARBANES. On that second point, the job loss pretty well

parallels. I think the GDP drop was shallower in comparison with

previous recessions.

Chairman GREENSPAN. Excuse me, what is the first date? Is that

March 2001? I believe productivity was increasing fairly significantly at that point.

Senator SARBANES. Let me ask you this question in view of that

answer. The long-term unemployed workers has not substantially

improved over these last several months even though we are getting some job growth. There are 1.8 million long-term unemployed

workers who constitute 22 percent of all unemployed workers

today. That percentage has remained elevated above 20 percent for

the past 20 months, the longest such streak with respect to a recovery. The average duration of unemployment today remains 20

weeks and 80,000 workers lost their benefits in April.

It seems to me that this chart and what we are discussing here—

and let us accept the hypothesis about productivity, but that still

leaves us with the fact that workers have lost their jobs and we

are not creating jobs and they are not getting back to work. Yet

the unemployment insurance system is geared to expire after 26

15

weeks unless you make extensions. It seems to me that poses a

real problem for us, because workers run out of their benefits. The

labor market has not strengthened sufficiently that they can move

back into jobs. It seems to me to cry out for an extension of unemployment insurance benefits, which of course, we have done in the

past. In fact, we have done it in the past in a more responsive way

than I think we are doing it in this recession, even though we have

this added factor that you have just detailed which has inhibited

job growth.

What is your view on temporarily extending unemployment insurance further?

Chairman GREENSPAN. Senator, I have testified before that I

thought that the extraordinarily high degree of exhaustions out of

the unemployment insurance fund, which indeed is a reflection of

the point you are making, namely, the fairly significantly longer

average duration of unemployment in this period, creates a problem because, as I pointed out previously, these people in this type

of labor market have lost their jobs through no fault of their own.

And we have constructed an unemployment insurance system

which is closely geared to the issue of trying to take care of those

who lose their jobs from no fault of their own, and to a concern

many people who construct such programs that a fairly generous

unemployment insurance program will tend to create unemployment, as indeed the evidence does suggest.

I think our system is very well-balanced and that is the reason

why I have argued in the most recent past that under these conditions it is presumably appropriate to extend employment insurance.

But I would say that given the increase in job growth that is in

process, and my suspicion, although I do not have the evidence,

that exhaustions most recently are beginning to fall away, should

you go ahead with the extension of unemployment insurance I

think you will find that a short-term extension will probably serve

your concerns with respect to the exhaustees.

Senator SARBANES. The extension we are talking about is 13

weeks, which is not a very lengthy period under the circumstances.

Chairman GREENSPAN. I agree with that.

Senator SARBANES. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Bunning.

Senator BUNNING. Thank you, Mr. Chairman.

You have ventured into some unusual places again. Thank you.

Would you agree or disagree with this statement, a recent statement that has been made, that ‘‘this economy is the worst economy

since the Great Depression?’’

Chairman GREENSPAN. Senator Bunning, I would strongly disagree with that statement.

Senator BUNNING. Thank you.

Have the high energy prices acted as a brake on the economy?

In the absence of the high cost of energy, do you believe the Fed

would have already been forced to raise the discount rate?

Chairman GREENSPAN. I am not sure the energy changes that

have occurred, while important and having fairly broad impacts on

the world economy and the United States, are a material factor in

monetary policy at this point. They could become a problem.

16

I do not think we are there yet, but we are watching the situation, obviously, fairly closely because the cost of energy is a very

important element in the underlying cost structure of American

business, but also extraordinarily important amongst our trading

partners. Because imports as a share of our economy and exports

are very large relative to where they were a decade ago, and obviously even earlier, our interaction with the international economy

is increasingly important to our prosperity. Therefore, anything

which undermines the world economy, and very high oil prices

would do that, would be a concern to us, and indirectly, should it

impact on our economy, would therefore affect monetary policy. But

it is the impact on our economy, not the energy prices changes

themselves, which would induce us to respond.

Senator BUNNING. Mr. Chairman, if energy per barrel cost would

escalate beyond $42 a barrel and maintain that cost over a year,

or 2 years, would that not directly impact our economy?

Chairman GREENSPAN. It would certainly have some impact. The

question I think at issue, which we do not know the answer to,

Senator, is how significant the impact would be. It is the answer

to that question which essentially would determine how monetary

policy would or would not respond.

Senator BUNNING. The Chairman of the Committee asked you

about inflation and evidence of inflation in the economy. I always

ask you the question when you come, besides energy costs and energy prices, are there other factors, like commodity prices and

things, that are indicating to the Fed that we do have an escalation

of inflation in the economy?

Chairman GREENSPAN. Senator, I think the issue which would

concern us most is the slowdown in the extraordinarily rapid rate

of productivity, which I mentioned before. Because average hourly

compensation has been edging up in recent months, the effect of

the combination of a decline in the rate of increase of productivity

growth and the slightly quickening pace of wage increase has

caused unit labor costs, which had been going down for quite a

number of quarters, to have turned up in most recent quarters. On

a consolidated basis, that accounts for more than two-thirds of the

costs of nonfarm, American business. While at the moment those

increases are still modest, it is there where our central focus is

likely to be because it is such a large part of the total cost area.

But certainly, as you point out, commodity costs, prices of imported goods, capital costs, interest costs, and the like, all have impact on the underlying cost structure. It is essentially the package

of costs which we focus on most closely, and on our ability to try

to forecast in the direction in which they were going. In that regard, we spend a good deal of time trying to make judgments about

what is the trend of average hourly earnings, what causes it to

change, for example, the underlying depreciation cost is another

item. It is in that pattern that we try to focus on the whole structure of prices and costs and profitability in making judgments as

to whether individual price changes are significant and are expressing an underlying trend. It is the underlying trend which

monetary policy endeavors to address.

Senator BUNNING. Thank you very much.

Thank you, Mr. Chairman.

17

Chairman SHELBY. Senator Schumer.

Senator SCHUMER. Thank you, Mr. Chairman. And I thank you,

Chairman Greenspan, for your good work. My concern is the deficits. It is interesting that when we get new economic news, the

stock market does not go up, but goes down sometimes in the last

few months. And even if we have a very strong recovery in the next

several months, my worry is about longevity because of the large

deficits that we have.

Given the fact that the deficits are at large levels, we can debate

how they compare historically. It is high, historically, some people

say higher than in other times, some people say, well, about the

same or a little less, but they are high or certainly higher than you

thought or anyone thought they would be in 2001.

Do you think we should make the tax cuts that were temporarily

extended in the last tax bill permanent, as the President is seeking

to do?

Chairman GREENSPAN. Senator, let me answer that in two parts.

First, I have always been strongly supportive of the elimination of

the double taxation of dividends largely because I have always considered it a type of tax which probably impeded capital expansion

and economic growth as a consequence. So, I was very strongly

supportive and remained supportive of those types of tax cuts, including marginal tax-rate cuts. Second, I also have been consistently supportive of maintaining PAYGO and discretionary caps on

spending, and I was very much concerned in September 2002,

when the fairly effective caps and PAYGO were allowed to lapse.

I would hope that the Congress will put them back in place as

they were before. And, in that context, obviously, I am stipulating

that, because the individual tax cuts which I found very important

would lapse, they would, under the rubric which I am discussing,

be required to go through a PAYGO evaluation in order to be

passed.

Senator SCHUMER. And as you know, we are debating this right

now in the budget resolution, and there are many who want

PAYGO for spending, but not for tax cuts. And my question to you

is twofold: One, should PAYGO be enacted for both spending and

for tax cuts; and, two, if Congress should fail to enact PAYGO legislation in this budget resolution, so we would be faced with the

choice of making the tax cuts permanent without offsets in spending or in other taxes, would you be for making those permanent?

Chairman GREENSPAN. Let me just say this. I believe that the

legislation, which was in place prior to September 2002, in my

judgment, was the correctly balanced legislation. As I have often

stated, I think the real problem over the longer-term is constraining spending because I think there is a bias in the way our

system functions. But I think, looking at the issue from the point

of view of fiscal policy, a symmetry is required in the way one looks

at that.

So, I am not willing to acknowledge the fact that PAYGO would

not be put back in place.

Senator SCHUMER. Right. But if it was not? Because I will tell

you the odds, and there are some people sitting around this room

who are under big pressure not to do it. If it was not, would you—

and this is an important question because of what was menVerDate 11-MAY-2000 16:48 Aug 24, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 22918.TXT SBANK4 PsN: SBANK4
18

tioned—if we did not enact PAYGO, the way we had it in 2002 on

the tax side, should Congress enact permanent tax cuts without offsets on either the spending or tax side? Because that will increase

the deficit even further if we do that.

Chairman GREENSPAN. I am aware of that. I am reluctant to answer that question largely because I do not want to get involved

into the details of negotiations beyond the positions that I have

taken. There are lots of hypothetical questions which——

Senator SARBANES. Some of us think you have already answered

it by your answer on the PAYGO question.

Chairman GREENSPAN. Well, the Senator presumes otherwise.

Senator SCHUMER. Yes. I just think this is an important issue,

and your words are very important. They get interpreted in many

different ways, and I am looking for as clear an answer as possible.

I think I can read the same thing that Senator Sarbanes did, but

there are going to be many who say, no, that is not the case. And

if we end up at the end of this Congressional session with a further

increase in the deficit, I think that will bode real trouble for the

recovery. I guess you would agree with that.

Chairman GREENSPAN. I actually am somewhat less concerned

about the short-term budget deficit because I think, given what appears to be a fairly solid recovery, which seems to have legs to it,

revenues are going to be reasonably good over the next fiscal year,

and I think that that will contain the deficit. However, there is no

way to look at the longer-term trends of our fiscal system without

concluding that we will run into fairly serious difficulty in the next

decade, say, 2011 and forward, as the very large numbers of babyboom retirees leave the labor force and join retirement.

The numbers I find very disturbing, and while I appreciate that

that is seemingly a number of years off, it is not far enough into

the future to say we can handle it at another time. The time for

addressing the size of the commitments made for the next generation of retirees, relative to the economic resources we are likely to

have to finance them, I find deficient and disturbing.

Senator SCHUMER. I thank you, Mr. Chairman. My time has expired. I would just note that a lot of these permanent tax cuts

would take effect in that 2010, 2011, 2012 timeframe when the

crunch will occur.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Dole.

Senator DOLE. I would like to follow-up, Chairman Greenspan,

on the response to Senator Bunning, when you spoke about wage

growth. Let me ask about the reports of the stagnation of wages.

In past years, we witnessed strong productivity growth, but that

has not resulted in a real increase in wages. My question is do you

believe that is a trend that will be corrected in the short-term or

do you see that as something that will continue?

Chairman GREENSPAN. Senator, I think it is in the process of

changing. If you would just look back from an accounting point of

view, the very significant increase in productivity from, say, the

first quarter of 2003 to the first quarter of 2004 is reflected wholly—almost wholly—in rising profit margins. In other words, very

little spilled over into real wage increases.

19

Now, the evidence suggests that is beginning to turn, as it always does in this regard, meaning that profit margins are now flattening out or are likely to flatten out, and the catch-up invariably

is in real wages. This is a very typical pattern, where productivity

gains are first picked up in rising profits and then, essentially, in

part, are given back in the way of real wages because of competitive pressures that invariably occur when profit margins are large.

In other words, companies try to increase production in a sense to

harvest those profits, and by so doing, they bid up the wage structure. That seems to be occurring at this particular stage, although

as I pointed out to Senator Bunning, not at a pace which, in our

judgment, looks to be moving unit labor costs to an inflationary

plateau.

But I think that the sharp decline in the share of national income going to compensation of employees over this most recent period is now in the process of turning and is likely, through the next

year or two, to go back to its normal level after this adjustment.

It is not a long-term trend.

Senator DOLE. I have read recent reports stating that real disposable income is rising, up 11 percent since December 2000. In

fact, Americans’ real disposable income is at its highest level ever,

I believe, and some have said that, well, this is because a lot of the

new jobs that are being created are in industries that are paying

higher-than-average amounts. Others have said it is due to the tax

relief, putting more money in the pockets of Americans.

I would be interested in what you attribute this rise to, this impressive rise in disposable income, and is this a trend that you believe is going to continue?

Chairman GREENSPAN. It is very difficult to tell whether, in fact,

the rise is attributable to differential gains within the wage and

salary area. You can look at it in two ways. Let us go back to

wages and salaries, from the beginning.

If wages and salaries are growing per hour, as they are now, is

it pretty broad-based? And the answer appears to be, yes, but we

are not sure for the following reasons. It is certainly the case that

the rise in wages that would have occurred, if the industry structure had frozen, is about exactly the wage rise we have actually

perceived which suggests that the increases are across all industries. What we do not know, however, is that within industries,

whether the trend of highly skilled versus lesser skilled is continuing to open up.

My suspicion is that when we finally get the data, which are

quite delayed in this respect, we are going to find that. But it is

not an issue of industry, because we have those data, and there is

no evidence, at least in the last 4 months, when the significant increase in disposable income has occurred, there is no evidence that

it is the industry mix that is doing it. In other words, it looks that

the gains are across the board in industry.

With respect to the tax cut, that was very significant last year.

It is a lesser issue this year. Most of the rise in income is that the

economy is beginning to move, and as I indicated before, profit

margins are no longer taking the lion’s share of the big increase.

20

Senator DOLE. Mr. Chairman, my time has expired, but I have

a number of other questions that I would like to submit for the

record, if I could.

Chairman SHELBY. You may do that.

Senator DOLE. Thank you.

Thank you, Mr. Chairman.

Chairman SHELBY. Thank you.

Senator SARBANES. Mr. Chairman, could I be very clear on one

thing, on the answer to this question? As I understand it, real disposable income could rise very substantially on the basis of tax cuts

at the top end of the scale because that would bring very large increases in disposable income. That figure alone does not show what

is happening to ordinary workers. Would that not be the case?

Chairman GREENSPAN. I think that is correct. But I am saying

that in the last 4 months of increase, it is basically the underlying

economy which is moving the real wage rate.

Senator SARBANES. But before that.

Chairman GREENSPAN. Before that, a significant part of the increase in disposable income was the result of tax cuts.

Chairman SHELBY. Senator Bayh.

Senator BAYH. Mr. Chairman, I appreciated your focus in your

statement about the importance of risk management and the inherent difficulty, ambiguity, ‘‘unknowability’’ of many of the forces that

we must anticipate or contend with. You listed several things that

have helped to reduce the level of systemic risk with which we

have to contend. And then you said, going forward, we must remain prepared to deal with a wide range of events, and you specifically mentioned terrorism. I would like to ask you what other

events you are concerned about or that we need to prepare for.

Chairman GREENSPAN. We, at the Fed Reserve, as a general rule,

obviously try to make an evaluation of where we think the most

probable trend of events is going and construct our preliminary policy programs with respect to that path. But we also try to consider

a whole series of alternates. I do not want to list them because one

sounds scarier than the next. And even though the probabilities are

very low, I am always hesitant to mention something.

Senator BAYH. Let me suggest a couple then. I am not asking you

to tell us what, if anything, keeps you up at night. I hope you sleep

soundly, but a couple of things.

There was a headline today, I am sure you saw, about the current figures in the balance of trade and the fact that the recent figures were not good, although there is some debate about whether

they overstate the situation, in fact. What about the risk of some

event triggering, rather than an orderly, a disorderly fluctuation in

our currency?

Chairman GREENSPAN. That is obviously one of the issues which

we have focused on. We have done a number of studies of how developed countries have handled very large current account deficits,

which is the larger version of the trade deficit. And what we have

concluded is that international financial markets are sufficiently

flexible to allow the inevitable adjustment of those outsized deficits

to gradually lower in such a way which is not disruptive to economic activity.

21

We have done a great deal of work in trying to evaluate how the

current one is going to change. You cannot know, for certain, but

what is reasonably clear, at least in my mind, is that if we maintain a high degree of flexibility in our economy and in the international economy, which indeed we have today, then market forces

will gradually adjust the imbalances, but we cannot tell at this

stage or in advance whether it is relative prices in various economies, whether it is the exchange rate, whether it is the relative different growths in various economies which will do it. But what

these various studies of developed countries suggest is that those

adjustments will, in some form or another, take place.

Senator BAYH. A high degree of flexibility, Mr. Chairman, you

said is a key to trying to deal with the unanticipated event? Is it

not true that our twin deficits reduce our margin for error, reduce

some of the flexibility that we have?

Chairman GREENSPAN. Well, the flexibility is mainly institutional. In other words, for example, we have very flexible financial

markets which adjust very quickly, and we have extraordinarily

broad labor markets which are quite flexible as well, better than

in most of the rest of the world. So, yes, indeed, the budget deficit

and the current account deficit are problems, but I am saying there

is a difference. The current account deficit is largely going to be adjusted one way or the other by market forces. The Federal budget

deficit will be adjusted partly by market forces——

Senator BAYH. Policy decisions.

Chairman GREENSPAN. —but mainly policy.

Senator BAYH. Before my time expires, Mr. Chairman, let me

mention one of the risks that is popularly thrown out there, and

we have asked you about it before, and you have responded, but

things have changed some since your last response, and that is

with regard to housing and the fact that housing prices have outstripped the growth incomes over the last several years.

Now, the effect of that was ameliorated by the lower interest

rates, which enabled people to afford these higher prices. Interest

rates may now be in the process of adjusting some. And your response previously had been that immigration and that land scarcity would help to sustain these higher prices.

Are you concerned about housing prices at this point and perhaps the effect that that will have on consumer spending if prices

prove not to be justified at current levels?

Chairman GREENSPAN. It is certainly the case, as you point out,

Senator, that prices have been moving up faster than they had

been. But remember that because productivity growth in residential construction has historically been moving more slowly than the

average over the longer-run, largely because there is a good deal

of custom house building—in other words, we would like our own

idiosyncratic house—this means you cannot have mass production

such as you can have in the general area of manufacturing, mainly.

So that there is a gradual long-term updrift in the price of homes

relative to the price of everything else, but to be sure, there has

been a faster pace today, but not enough, in our judgment, to raise

major concerns.

It could become a problem if it were to accelerate further. We see

little evidence that that is likely to happen, largely because we perVerDate 11-MAY-2000 16:48 Aug 24, 2005 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 22918.TXT SBANK4 PsN: SBANK4
22

ceive that the very strong expansion in new and existing home

sales is now flattening out, and the really quite unexpected boom

in home sales over recent years is unlikely to be continued. Our

forecast is generally flat in aggregate volumes. Where house prices

go, I am not sure, but I would be quite surprised if they showed

continued acceleration on the upside.

Senator BAYH. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Chafee.

Senator CHAFEE. Thank you, Mr. Chairman.

Chairman Greenspan, you were hopeful that with the improving

economy, the added revenues would help address the deficit, but

there are also some unknowns, particularly on the prescription

drug benefit, what exactly that is going to cost and also what we

are going to have to invest in stabilizing Iraq and the region there.

If the deficits do continue to grow, I know there are some concerned that could produce a sharp devaluation of the U.S. dollar,

something that did happen in 1985, which would, in turn, undercut

European exports, and that would affect European economies.

Is that of a concern to you?

Chairman GREENSPAN. Senator, it is an issue which a number of

people have raised, and obviously we have looked at it. And there

is very little evidence, at this particular stage, that the size of the

Federal budget deficit and the point, or indirectly, relating to the

fairly significant amount of our Government issuances to finance

that deficit, which would be purchased by foreign central banks

and, indeed, by others.

We look at it fairly closely. The markets seem to be adjusting remarkably well, and a good part of those securities which are purchased by foreign central banks are shorter term. So that there is

no real basic concern that a lot of people have argued in favor of,

namely, that a major endeavor to disgorge those holdings could

have a destabilizing effect back here. We do not think so.

In other words, we think, as I pointed out earlier, that the degree

of flexibility in our financial system is sufficient to absorb very considerable amounts of change. Remember that our financing system

is huge relative to the rest of the world, and the demand to hold

U.S. dollars by foreigners is a very high propensity which continues

irrespective of these deficits which we are looking at.

So could it become a problem in the future? It could, but there

is no evidence of which I am aware which suggests any such problems are on the horizon.

Senator CHAFEE. Last year, I believe we sold $208 billion of

Treasury securities just to Japan, China, and other Asian countries, $208 billion just last year. But you are saying that is short

term and not of concern?

Chairman GREENSPAN. Well, $200 billion is not a small number,

obviously. It is a big number. And as I think the Treasury pointed

out the other day, that of marketable securities foreigners own

somewhat more than half, currently.

I think that if it were a significant problem, we would be seeing

the forward edge of the problem already, but we do not. There is

an unquenchable demand to hold claims against American residents largely because they are presumed to be safe, and they are

23

presumed to have significantly higher rates of return adjusted for

risk in most other areas in the world.

Senator CHAFEE. I have heard some people rail against the fact

that it is not in our best interests to have the Chinese buying our

T-bonds, and that is all the fault of the deficit. If we did not have

this deficit, the Chinese would not be buying our T-bonds. I guess

that is the point I am making.

Chairman SHELBY. Thank you, Senator Chafee.

Senator Stabenow.

Senator STABENOW. Thank you, Mr. Chairman.

Chairman Greenspan, we have talked a little bit about PAYGO

today. I am a very big supporter of PAYGO, both in terms of tax

policy and spending policy. But when you were in my office a couple of weeks ago, we talked about another way of trying to keep

that balance, which is a budget trigger. And as you know, Senator

Bayh, Senator Snowe, and I, and others proposed back during the

original debate on tax cuts earlier that we should have a trigger

that covered both spending and tax cuts. And I believe we would

not be where we are now if we had, in fact, been able to put that

into place.

Could you speak about your support for the notion of a trigger

on these kinds of major tax and spending policies?

Chairman GREENSPAN. Senator, 20, 30 years ago, certainly 50

years ago, nobody was concerned about long-term budget problems

in the United States because we never had commitments that

lasted very long. Our Social Security system, for example, was relatively small at that point. The commitments in the military were

sometimes for 3 to 5 years on some weapons system, but we never

had any ability nor need to worry about what the budget deficit

would look like 5, 8, or 10 years in the future, and we always had

the capacity to adjust as time went on.

As entitlements, specifically retirement entitlements, have grown

to an ever-larger proportion of our budget, our ability and our necessity to have a sense of where fiscal balances will be 10 years

from now have all of a sudden become a very crucial issue for determining what current fiscal policy should be.

Because our ability to forecast 10 years out is very marginal, at

best, I have always believed that we have to make the best judgment we can, but also put in place some mechanism in which, if

our path of budget balance, whether surplus or deficit, goes significantly off-track that we have fiscal mechanisms to get us back on

track. That is essentially what a trigger is. It is a vehicle which

stipulates that if a particular program is not doing what it was projected to do, then certain adjustments would occur automatically or

certain adjustments would require that the Congress revisit the

program.

There are lots of different triggers. But the main concept is to

recognize that we no longer have year-by-year budget-making as

the process of fiscal policy. We are in a wholly different world, and

part of that world, in my judgment, requires triggers because our

capacity to forecast is so limited as we get out that far.

Senator STABENOW. Thank you. I could not agree with you more,

and I am hopeful, as we go forward, that we will have the opporVerDate 11-MAY-2000 16:48 Aug 24, 2005 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 22918.TXT SBANK4 PsN: SBANK4
24

tunity to debate again and hopefully put in place some kind of a

trigger.

One other question, Mr. Chairman, that is particularly important

to my home State of Michigan. I am extremely concerned about

currency manipulation and how it is effectively creating an artificial tax on U.S. goods exported abroad and giving the Chinese and

the Japanese an unfair advantage when they ship goods into our

country. We know this is happening.

The Chinese pegging of their currency to the dollar prevents an

appropriate float of their currency, and the Japanese have been

very aggressive and willing to intervene in currency markets when

they feel that it is warranted, to their advantage.

I have raised this issue with Treasury Secretary Snow in the

past. The Administration, up to this point, has not been willing to

take concrete steps to end the currency tax. I am wondering, Mr.

Chairman, do you agree that currency manipulation is going on

and is it having a detrimental impact on U.S. goods, in particular,

in the manufacturing sector, which hits my State so heavily?

Chairman GREENSPAN. Senator, first, the Japanese ceased their

intervention in the yen-dollar market a while back, and they have

not been involved since mid-March. In mid-March, they announced

that intervention had ceased and that is indeed the fact.

Senator STABENOW. And I would just say that we hope that they

will not return to that policy.

Chairman GREENSPAN. I think one issue here is that it is not to

the advantage of foreign central banks to accumulate very large

amounts of foreign currency after a certain point because it creates

domestic problems of monetary stability. The issue is most relevant

in this regard to China because they are acutely aware of the fact

that their stabilization of the renminbi versus the dollar has required very large accumulations of dollar assets on the balance

sheet of the People’s Bank of China, the central bank, and this creates problems that are obviously exaggerating the difficulties they

are currently having with respect to underlying inflationary pressures and boom conditions, which they are endeavoring and, apparently successfully, beginning to constrain.

I think that over the longer-run it will become very apparent, as

indeed it is increasingly becoming apparent, to the Chinese financial authorities that intervention of the type that they had been

doing has not been helpful to them. So, I think in their own interest that is going to change, and I think that issue that you are concerned about will go away.

Senator STABENOW. Mr. Chairman, I hope you are correct, because in the short-run, certainly in my State, we are seeing what

I believe to be unfair incentives on the exporting of American jobs.

So, I am hopeful that you are accurate and correct on that.

Chairman SHELBY. Senator Sununu.

Senator SUNUNU. Thank you, Mr. Chairman.

I have a number of areas of capital market regulation that I

mentioned in my opening statement, and I will probably submit a

list, hopefully not too long of a list, for the record. But, Mr. Greenspan, I did want to ask you about a couple of items, one of which

you have addressed before, one which you may have not.

25

First, we have had a series of hearings and discussion here in

the Committee about market structure and market structure reform, and I would be curious to hear your assessment of what the

impact on cost of capital, access of capital, or the efficiency of the

capital markets would be of a modification or an elimination of the

trade-through rule.

Chairman GREENSPAN. Senator, which rule?

Senator SUNUNU. The trade-through rule on the New York Stock

Exchange.

Chairman GREENSPAN. This is a highly complex issue which, as

you know, is being debated up in New York, and it is a problem

concerning trading procedures on the New York Stock Exchange

and the large institutional investors who are endeavoring to get the

best type of execution they can get.

I have, as you pointed out, stayed out of this, largely because of

rare good judgment on my part.

[Laughter.]

And I think I will probably endeavor to maintain that position.

I do think it is a very interesting issue. I am not certain that it

is not being properly handled in the debate, and I think the right

issues are on the table and the people who are involved I trust will

come to the most reasonable solution.

Senator SUNUNU. Well, that is not a great deal of consolation to

me, for a number of reasons, not least of all, you know, we have

spent an hour here talking about PAYGO and housing prices and

a whole list of Jim Bunning’s pet peeves.

[Laughter.]

And this is obviously an issue that does, I think, have a direct

impact on issues of capital market stability and access to capital

and cost of capital and underlying economic performance.

Chairman GREENSPAN. Let me cut through it. I will be very

straightforward in this respect. I do not think that we at the Fed

know as much as the participants involved in the negotiations to

have a firm opinion which we think should override those of the

Exchange and some of the major players on the Exchange. We are

in contact with them. I have spoken to both sides at considerable

length, and I am learning something from them, but I do not think

that I have—and I am not sure my colleagues have—a great deal

to present with respect to this issue.

I would say that our real problem is we know where we would

like it to all come out, namely, in a system which is stable, and has

efficient execution. I am not sure we at the Fed know how to get

there. If we did, I probably would find a way to communicate that

to the parties involved.

Senator SUNUNU. This is not by design, but that does provide a

nice segue to my second and final question, which is about hedge

fund regulations. You have spoken out against further regulation

of hedge funds in the past. There are obviously some proposed

rules and modification to existing regulation that have been put on

the table. Has your thinking on this issue changed in any way substantively over the last 6 or 12 months?

Chairman GREENSPAN. It has not, Senator. Let me just repeat

why I think it is so important that these types of organizations are

left free to supply the extent of liquidity that they are, in fact, supVerDate 11-MAY-2000 16:48 Aug 24, 2005 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 22918.TXT SBANK4 PsN: SBANK4
26

plying to our financial markets. I have made a special point in my

prepared remarks and in earlier questions that the degree of flexibility in our economy has been instrumental in enabling us to absorb the shocks which have been so extraordinary in recent years.

And one of the most flexible parts of our system is financial and

our ability to absorb financial shocks.

If you start to inhibit the number of types of unregulated participants in the financial market from taking the types of risks and

supplying the liquidity, I am fearful that we will remove some of

the flexibility that we have in our overall system. I am certainly

of the opinion that should hedge funds accept capital from retail investors, they should go under the same regulations as a mutual

fund. But so long as their sources of equity funds are professional

or large investors with net worths, say, exceeding $1 million or

more, I see no purpose in regulation, and I see very significant potential loss in doing so.

Senator SUNUNU. Thank you very much, Mr. Chairman. I see the

time has expired, and I appreciate your patience.

Chairman SHELBY. Senator Reed.

STATEMENT OF SENATOR JACK REED

Senator REED. Thank you very much, Mr. Chairman. And, Chairman Greenspan, welcome.

You spoke earlier with great insights about productivity growth

and its impact on the economy, but one of the things that is interesting and, indeed, troubling is that even with this rapid growth

in productivity, we have not seen a rapid growth in labor compensation to the extent we have seen in other periods of expanding

productivity, which leads me to the conclusion that the expansion

is now driven more by debt than by income. People are buying

things not from increased wages in their paycheck but credit cards,

which is not sustainable over a longer period of time.

And I suspect there are some structural reasons for this, or let

me just pose the question: Why is labor compensation not keeping

up? Why is this expansion, as a result, a result of debt and credit

cards rather than wages being devoted to consumption?

Chairman GREENSPAN. First of all, I think that as I indicated to

Senator Dole, a very substantial part of the increase over the last

year in productivity has ended up in increasing profit margins. But

that seems to have come to an end as margins have gone from a

very low level to a very high level and, historically, they have stabilized at this point. And there is evidence that that is occurring.

This will mean that productivity growth will feed into a fairly

pronounced up-trend in real wages, and indeed, there is evidence

that that is already in the process of occurring.

The amount of income that is now moving into consumer markets is becoming an ever important factor in consumption, and

even though it is the case that credit card debt has moved up significantly, it is not large enough to be a serious concern, and indeed, the delinquencies and the defaults are not particularly large

relative to what one ordinarily expects in that type of business.

And, indeed, delinquencies generally have been exceptionally low

across the board in the consumer area, especially, for example, in

mortgage and in home equity loans.

27

So, I am not actually concerned at this point that we are looking

at a really serious consumer debt problem, especially when one of

the major factors in the growth of mortgage debt. In fact, 10 percent of the level of mortgage debt occurs: As a consequence of the

fairly significant increase in the ratio of households who are homeowners, because if we had the 64-percent homeownership ratio that

we had 10 years ago rather than the current 68, 69 percent, we

would not have had a very significant number of renters buying

homes, which has had two effects: One, it obviously increases the

asset side of their balance sheet by the value of the home, but two,

it increases almost to the same extent the liability side, which is

mortgage debt. And as a consequence of that, what you have is a

very significant part of the population which have gone from renter

to homeowner, and in the process have statistically increased the

amount of household debt, mortgage debt in this case, very substantially. But I would never argue that the renters by becoming

homeowners had their financial situation significantly deteriorated.

So part of this ratio of debt-to-income is not evidence of deterioration in household finances. It is the case, however, that if we continue to get very significant increases in the ratio of household

debt-to-income, the debt service charges obviously will be going up.

And there is a conceivable point out there which I would consider

worrisome. I just do not think that we are anywhere near there

yet, and I doubt if we will get there.

Senator REED. Mr. Chairman, you suggest that the wages are

improving a bit, yet in May, according to the Labor Department,

real wages fell by about 0.4 percent. And according to the Economic

Policy Institute, over the past year hourly wages are up about 2.2

percent, just about the rate of inflation.

Part of my question was the notion that there might be structural reasons here, the outsourcing of jobs, the threat of

outsourcing putting pressure on the ability of employees to ask for

money, decline of labor union participation, fewer and fewer workers are organized, they have, therefore, less ability to negotiate.

Are any of these factors structural factors that will mitigate increases in wages going forward?

Chairman GREENSPAN. I do not think that they are related to the

average increase in wages. They are a problem on the distribution

of wages. As I have pointed out many times in recent months, we

are seeing, and probably are continuing to see even to this day, a

continuing opening up of the wage spread between highly skilled

and lesser skilled workers; and that this is in my judgment largely

an educational problem that is confronting us, which I think has

to be addressed. But the consequence is that the real wage below

the median has been flat to declining, whereas in the upper quartile it has been rising. And that is largely reflected in skill differentials, but on average, what we are observing is now a fairly acrossthe-board increase industry-by-industry, as I indicated to Senator

Dole, but I suspect that within industries, we are getting this more

skilled/lesser skilled spread continuing.

So in that sense, it is a problem caused basically by our skill mix

not keeping up with the technology that our capital stock requires.

I guess that is a structural problem. But it is one that can be and

must be addressed because I think that it is creating an increasing

28

concentration of incomes in this country. And for a democratic society, that is not a very desirable thing to allow to happen.

Senator REED. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Carper.

Senator CARPER. Chairman Shelby——

Chairman SHELBY. Senator Carper, if I could go vote, and I do

not know how long the Majority Leader will indulge us here, but

if you will go ahead and if no one comes back, then Senator

Corzine. Will that be okay?

Senator CARPER. Yes, sir.

Chairman SHELBY. Thank you.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Mr. Chairman, just a real quick question, and

I will ask for a very brief response because I still have not voted

either. But I want to ask this question. We are probably going to

take up legislation on class action reform later this month, something that a number of us have pushed hard for for the last several

years. And there will be a number of amendments offered to our

class action bill. Some will be germane; some will be nongermane.

One of the nongermane amendments that is likely to be offered to

the bill is one dealing with an increase in the minimum wage,

which you may recall has not been raised I think since 1997 at the

Federal level. And I would appreciate it if you just take a minute

or two and give us some things that we might want to keep in

mind as we address that issue. I think there is a good likelihood

that it will be raised, probably phased in over several years, I think

it should be, but some things that we should keep in mind as we

approach this decision.

Chairman GREENSPAN. I am the wrong person to ask, Senator,

because I am one of probably a few people whom you talk to who

does not think the minimum wage is a good idea to begin with.

And the reason is I think it destroys jobs. I think it prevents people

who are of the lesser skill and are trying to work their way up the

ladder of skill, from working because they cannot earn the minimum wage. I think that is a mistake.

This is a very large and big debatable issue, and I think you are

aware of both sides of the issue. So, I just want you to know I have

nothing to suggest at this stage because I am not one of those who

considers it a desirable policy.

Senator CARPER. Well, that was certainly a brief answer—not the

one I expected, but a brief one. Thank you very much.

Senator Corzine.

STATEMENT OF SENATOR JON S. CORZINE

Senator CORZINE. Thank you, Senator Carper. It seems like we

have control over here on the other side of the aisle for a change.

[Laughter.]

Maybe it is only temporary.

Let me recommend that I put a statement in the record. I apologize for not being here for your opening statement, Mr. Chairman.

In that statement, I give testimony to your tenure and efforts in

leading us in one of the most important roles in our Nation, and

I think our economy and our country is a lot better off because of

29

your service, and I congratulate you on your nomination and I expect that I will be voting in the affirmative.

That said, I have some concerns that a number of my colleagues—I was watching some of the questions and responses.

Many of these come down to definition of statistics. We seem to

focus on macro statistics and GDP growth, and we talk about averages as opposed to means and distributions. I am particularly

pleased to hear you talk about the differential that it is occurring

between highly skilled and low-skilled workers. But it does cover

a lot of impact for middle-class America, in particular. We hear and

will hear, I suspect, during the campaign about the middle-class

squeeze. And it has some merit. I think it actually ties to this underlying issue that you have identified, skilled versus lower-skilled

workers.

Do you consider an auto worker at a Ford Motor plant in my

home State who loses a job after 20 years a low-skill worker?

Chairman GREENSPAN. I think it is relative to the demands of

the job structure itself. I would put it this way: The requirements

for the level of skills increase year on year because, as we get ever

more sophisticated capital stock, the skills that are required to

staff that structure are going up, on average. And if a certain person, say, 20 years ago had a specific skill which at that point in

time was a highly skilled job, but did not change at all over a 20-

year period, it is conceivable that in today’s environment that could

be considered a medium- or even a lower-skill job, which is the reason why I have argued the necessity for continuing education

throughout one’s life. You cannot stop. We have to have means by

which skills are continuously upgraded.

So the answer is, yes, it is possible that somebody who was highskilled in an earlier period, did not lose any of those skills, could

in a later context be designated as medium- or low-skilled.

Senator CORZINE. It might even be the pace at which they picked

up those skills. They may even have trained themselves for an advancing economy, but not stayed with the pace.

I think that there is concern—I certainly have concern about the

erosion of the industrial base in the context of this. And I think you

see that in these low-real-wage increases, whether it is 2.2 percent

or other measurements that show jobs lost versus the job that replaces it for those individuals being sharply lower. And I think that

has ended up undermining the broad health that is covered by the

term ‘‘averages.’’ I do not know whether the number is 400 times

or 500 times that corporate executives are receiving relative to lowest wage earners. There are different surveys and different statistics. But, quite obviously, if those numbers are very high and they

are added together with those workers who are in these newly defined low-skill wages, we can have averages that are moving up

and, in fact, broad swaths of our society are not where they are.

I think this is one of the most important issues for us to debate.

It does get to the long-term issue of education and retraining,

which gets to the second element that I would like to talk about.

That gets to having the ability for society to have the resources to

be able to invest in education to help create that skill set as we

go forward, whether it is investing in community colleges or it is

30

investing in Pell grants that allow for many of those people who

come from low-skill families to access higher education.

We have a serious budget problem in the country, and we are

about to impose on ourselves or at least some think we are about

to impose on ourselves PAYGO rules that work against spending

but do not work against taxes. And I heard your response to Senator Schumer that you do not like answering hypotheticals. But

this does not seem like a hypothetical. We have proposals on the

table that would suggest that we must have PAYGO rules apply to

spending and not with regard to making permanent tax cuts.

How are we going to be able to deal with these most important

broad social issues that I think you have talked about, high-skill,

low-skill workers, and still deal with what I think is appropriately

identified? You said we are okay. You can live with current deficits

maybe in the immediate horizon, but you talked about 2011. How

can we do that when all of these permanent tax cuts come at a

later time and we still have great social needs in this country?

Chairman GREENSPAN. Senator, I have indicated earlier in this

testimony that I think because of the longer-term structural problems that are emerging in our budgets, we need new tools in order

to make certain that we appropriately allocate our resources in a

manner through the Federal budget in a way which we cannot do

today. I have cited three sets of rules which I believe will be very

helpful—I assume they may even be sufficient—which are a symmetrical PAYGO rule, discretionary caps, and triggers on both

spending and on taxes.

I think that it was a mistake to allow the fairly effective PAYGO

rules, in place in September 2002, to expire. And in my judgment

it would be very wise to take that structure which existed back

then and reenact it.

Senator CORZINE. If the logical extension of that is dealing with

the permanent tax cuts, then that is the logical extension.

Chairman GREENSPAN. That is for the Congress to decide.

Senator CORZINE. But I am taking the logical extension.

Chairman GREENSPAN. Okay, fine.

Senator CORZINE. You do believe, though—and I just reiterate—

that we have a very serious structural fiscal problem in the outyears as we evolve.

Chairman GREENSPAN. I do. As I have said on numerous occasions, Senator, I am most concerned because of our inability specifically to make a judgment of what resources will be required for

Medicare in the next decade and beyond. Given the very large increase in retirees, because of the uncertainty, I think we have to

be quite cautious because I am fearful we are on the edge of the

possibility—I do not know what the probability is, but the

possibility— that we are making promises in real terms to the next

generation that we may not be able to fulfill.

Senator CORZINE. Just one quick follow-up, and then I will have

used up more than my fair share of time. Was it by choice that you

left out Social Security when you said that our future obligations

that we are laying down are ones that—you have primarily focused—you did focus on Medicare as opposed to Social Security,

and then we just saw a recent CBO analysis that makes us feel at

least somewhat more comfortable with——

31

Chairman GREENSPAN. Social Security is a defined benefit program. There are ranges over which long-term estimates can occur,

but relative to Medicare, they are extremely narrow.

As CBO indicates, as the Social Security trustees indicate, Social

Security is currently long-term unstable and requires adjustments.

The adjustments, however, are far clearer and the size of the problem is far easier to get our hands on because it is a defined benefit

program than is the case with Medicare. So there are lots of ways

of solving Social Security, and we are not doing any of them, I

must say, because every time somebody raises a way to do it, that

is unacceptable.

Social Security is far less of a problem than is Medicare. Medicare is the one that has the very large uncertainties associated

with it. But even in the CBO report that came out yesterday, it has

a range of probabilities for what the Social Security outlook is over

the next 100 years, and it is a very wide range.

Senator CORZINE. Of course.

Chairman GREENSPAN. But it still——

Senator CORZINE. A soluble problem.

Chairman GREENSPAN. Yes, exactly.

Senator CORZINE. Thank you.

Thank you, Mr. Chairman.

STATEMENT OF SENATOR ROBERT F. BENNETT

Senator BENNETT. [Presiding.] Thank you very much.

Chairman Greenspan, I will be mercifully brief so you can get to

lunch and the rest of us will as well. You said in your response to

Senator Corzine that we cannot wait and we should be working on

this long-term structural problem now. I felt we should be working

on it when I came to Congress 10 years ago, and, unfortunately,

we have not been able to do that.

I think we have a cautionary tale for us in what is happening

in Europe. Is it not true that their problems are substantially

greater than ours with respect to these two, retirement pay and

medical for the aged?

Chairman GREENSPAN. I think that certainly the demographics

in Europe are far more formidable a barrier to fiscal balance than

in the United States. It varies by country, obviously. It is not the

same everywhere. But I would say, in general, their problems are

more difficult than ours, as you point out.

Senator BENNETT. Yes, that is my concern. One overall question—and, by the way, being unable to be here for an opening

statement, let me just for the record thank you for your splendid

service to the country, not only in your tenure as Chairman of the

Federal Reserve but also your previous service in a variety of preparatory assignments. It is not everyone who is willing to give as

much time to public service as you have, give as large a percentage

of one’s life to public service as you have. And the Nation should

be very grateful, and expressions of appreciation are never too

many. So let me add mine to those that you have received and

make the record clear that I will vote for you with enthusiasm but,

more importantly, with gratitude for the work that you have done.

Chairman GREENSPAN. Thank you very much, Senator.

32

Senator BENNETT. Isn’t it true—well, that is not the way to start

it. That is the way lawyers start. I am not a lawyer.

It is my conviction that the next President, whoever he may be,

will enter office at a time of extremely strong economic growth and

very robust—it will be almost too late speaking of it in terms of a

recovery, because I think it will happen throughout all of 2004. I

would like your reflections on that, if I am overly optimistic or if

you think there are some soft spots we should worry about. But as

I look forward, whoever the next President might be, he will be fortunate enough to take office at a time of extremely strong economic

performance.

Chairman GREENSPAN. I think that is right, Senator. The reason

I hesitate is that forecasting even 6 months out is slightly precarious. But as I indicated in a presentation I made last week, there

is something about this recovery which does not have underlying

destabilizing momentum, in other words, of going too fast. And the

way we know that is that, despite the fact that capital investment

has been rising fairly appreciably, it has fallen behind the very significant rise in cashflow. And it is very rare in a recovery that you

will find that capital investment at this stage of the recovery is not

running well ahead of cashflow and that borrowing requirements

accordingly are very significant.

That is not the case today. The corporate bond markets are very

slow. Indeed, in the month of May, the last time we had data, actual net bond issuance—that is, gross issuance minus retirements—was negative. So that is yet another shoe to drop in the expansion, if I may put it that way, which is an increasing sense of

confidence in the business community to start moving up capital

investment to still higher levels. And that is the reason why I

think that this particular recovery has some momentum in it and

does not look to be short-lived.

Obviously, numbers of things can happen adversely, the oil price

or any of a number of destabilizing events. But right now I tend

to be fairly much in the same camp that you are with respect to

the outlook.

Senator BENNETT. Thank you very much.

Thank you, Mr. Chairman.

Chairman SHELBY. Mr. Chairman, I have a number of questions

for the record, but I will submit those for the record, a couple of

things, and maybe we can go into the early afternoon—get out of

here, in other words.

Mr. Chairman, you have previously testified before this Committee about your concerns on the unrestrained growth of debt by

the GSE’s. With the current rise of long-term interest rates and the

possibility of the Federal Reserve raising short-term rates within

the year, the housing market has seen a dramatic fall in mortgage

refinancing. What effect, if any, would a potential slowdown of the

housing market and asset-backed securities industry have on the

current health of Freddie Mac and Fannie Mae? Does that concern

you at all?

Chairman GREENSPAN. No, that doesn’t, in the sense that I have

no problem with the way they manage their structure, both their

portfolio and the securitization parts of their business. I think it is

rather well done. They do a fairly impressive job.

33

My concern is the issue which I raised before this Committee

previously namely, the subsidy. The size of the subsidy is debatable, but I am sure there is one. The subsidy creates the problem

of expanding assets, mortgage assets—or, indeed, any set of assets—in a way which could become destabilizing if it continues on

very much beyond where they are, because they have become very

large financial institutions, and because of the subsidy, they do not

have the automatic market adjustment forces constraining their

growth.

Now, to be sure, they have slowed their rate of growth fairly recently, and I trust that is the beginning of a conscious trend to

slow things down. But if you have a subsidy, the initiation of which

is wholly up to you—remember, this is not a subsidy that the Congress has given them. It is the market’s perception that in the

event of a serious problem, the U.S. Government will bail them out

and that, therefore, the debentures should sell close to U.S. Treasuries. But there is no limit to how far that debt can expand because it is up to the companies, Fannie and Freddie, to determine

how much. That is what concerns me.

Chairman SHELBY. Mr. Chairman, I do not have the exact figures

before me now, but if you put Freddie Mac and Fannie Mae’s debt

together, they are way up there. They are approaching the public

debt of the country, are they not?

Chairman GREENSPAN. Indeed they are.

Chairman SHELBY. And that has to be——

Chairman GREENSPAN. And in certain of the measures, they exceed it.

Chairman SHELBY. Yes. Thank you.

Mr. Chairman, under your tenure at the Fed, what particular

changes have been made in the system as an institution that you

think were the most significant?

Chairman GREENSPAN. You mean changes in the Federal Reserve

System?

Chairman SHELBY. Yes, sir, while you have been there. As you

reflect back.

Chairman GREENSPAN. Yes. It is a very interesting question because you tend not to think in those terms. You are usually thinking above what have we done recently.

I think that our technique of evaluating how the economy is

functioning and our ability to understand how markets are operating and, most specifically, how we interface with the rest of the

world are new initiatives in the last decade or so, in fact, being

driven by the world economy, essentially.

In response, we have built up technical capabilities that enable

us to evaluate these things far better than I think we were able

to earlier on.

Technology has created a major improvement in the payment

system in the United States and, indeed, in the world, and our

interface with that payment system and our oversight of it has increased very significantly. And looking back at the overall efficiency of the American financial system and the extent where we,

at the Fed, have been helpful along the way I think has been very

important from our point of view.

34

Then as Senator Sarbanes indicated very early on, we have also

found that we interface with the markets better as we disclose

more. There are limits to how far we can go. If we were to televise

our FOMC meetings, I think we would find that disclosure became

absolute, but our efficiency would not. So we have to trade off the

ability of knowing how best we can manage our deliberations to fulfill the Congress’ mandate, and I think we are gradually moving in

that direction. I think we have a way to go. We are not there yet.

But we have come a good way on the issue of getting optimum

transparency.

Chairman SHELBY. What particular reforms or measures are you

interested in achieving during your fifth term as Chairman? If you

are at liberty to talk about it now. Maybe you are not. What would

you like to do?

Chairman GREENSPAN. The major focus that we are involved

with is, as I have indicated earlier, the elimination of the increasingly unnecessary level of accommodation in monetary policy in

order to restore financial balance in a manner which essentially

leaves the American economy and financial system in a degree of

stability. We seem to be on track, but as we duffer golfers like to

say, it is not a gimme putt.

Chairman SHELBY. Sure. Mr. Chairman, we appreciate your patience here today, your appearance. We will move your nomination

as expeditiously as possible, you can be assured. Thank you very

much.

Chairman GREENSPAN. I thank you very much, Mr. Chairman.

Chairman SHELBY. This hearing is adjourned.

[Whereupon, at 1:16 p.m., the hearing was adjourned.]

[Prepared statement, biographical sketch of the nominee, response to written questions, and additional material supplied for

the record follows:]

35

36

37

38

39

40

41

42

43

44

45

46

47

48

RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES

FROM ALAN GREENSPAN

Q.1. The Federal Reserve recently issued for public comment proposed regulatory revisions to address concerns about bounced check

protection programs. Rather than specify disclosures as required

for all other extensions of credit by the Truth-in-Lending Act

(TILA) and Regulation Z, the Board instead proposes to make

changes to Regulation DD which implements the Truth-in-Savings

Act. It is my understanding that the Board has referred to bounce

protection loans as credit. In your letter to me explaining your reasons, you stated you exempted these programs from TILA, despite

the fact that they are credit. The Board’s action appears inconsistent with statutory requirements for exempting credit transactions from TILA coverage. Section 105 of TILA appears to require

the Board to go through an analysis before exempting credit transactions from coverage. Please explain why the Board did not undertake the evaluation outlined in subsections (a) and (f) of Section

105 before issuing proposed regulations that implicitly exempt such

bounced transactions from TILA.

A.1. In recent years, some institutions have begun to market courtesy overdraft protection by disclosing the dollar limit that consumers may be allowed to overdraw their account if it is in good

standing. Under these programs, when an institution pays an overdraft, a fee is imposed and the consumer is informed that the overdraft must be covered within a specified period, typically 5 to 30

days. You have asked for an explanation of how such transactions

are exempt from Truth-in-Lending Act (TILA) coverage if they constitute credit.

The Board’s Regulation Z, which was originally issued in 1969,

has never covered overdrafts on a deposit account when the institution has not previously agreed, in writing, to pay such items. Accordingly, banks’ historical payment of overdrafts on an ad hoc

basis has been exempt from TILA’s coverage, while traditional

overdraft lines of credit, which are generally subject to a written

agreement, have been covered under TILA.

Regulation Z applies only to a consumer credit transaction that

is subject to a finance charge, or is payable by written agreement

in more than four installments. In adopting Regulation Z in 1969,

the Board determined that fees imposed by a financial institution

for paying items that overdraw an account should not be deemed

‘‘finance charges,’’ unless the payment of such items and the imposition of the charge were previously agreed upon in writing. The

Board’s determination that such fees should not be disclosed as ‘‘finance charges’’ under TILA is consistent with the Board’s general

rulemaking authority under Section 105 of the statute. The Board’s

classification of overdraft fees under Regulation Z was designed to

facilitate depository institutions’ ability to accommodate consumers

on an ad hoc basis.

Although some depository institutions market courtesy overdraft

protection as a feature of their deposit accounts, these institutions

generally reserve the right to exercise discretion and to not pay any

particular overdraft. Because there is no written credit agreement

to cover overdrafts, the fees imposed are excluded from the finance

charge that would be disclosed under Regulation Z (see 12 CFR

49

§ 226.4(c)(3)). Institutions’ overdraft protection programs generally

do not provide for repayment in installments. Accordingly, these

overdraft protection programs typically are not covered by Regulation Z.

On May 28, the Board issued for public comment proposed revisions to Regulation DD, which implements the Truth-in-Savings

Act, to address concerns about disclosures for overdrawn accounts

generally and, in particular, concerns about overdraft protection

services. The proposed improvements in the disclosures provided to

consumers under the Truth-in-Savings Act are intended to aid consumers in understanding the costs associated with overdrawing

their accounts, and promote better account management. The

Board’s issuance of proposed revisions to Regulation DD did not entail any determination to issue an exemption under Section 105 of

TILA. The proposal does recognize, however, that fees imposed in

connection with overdraft protection services that do not involve

written agreements have never been considered finance charges,

and thus have never been subject to disclosure under Regulation Z.

Accordingly, the Board’s proposal under Regulation DD represents

a decision not to amend Regulation Z to cover these transactions,

although the Board also expressly noted that further consideration

of the need for such coverage may be appropriate if concerns about

these programs persist.

RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER

AND SENATOR MILLER FROM ALAN GREENSPAN

Q.1. Chairman Greenspan, you last appeared before the Senate

Banking Committee on April 20 to discuss the ‘‘Condition of the

Banking Industry.’’ During that hearing you entered into a discussion with Senator Carper regarding the dual banking system and

you said . . . ‘‘The dual banking system is a very unusual competitive structure for regulation, and it has served us well, and I am

concerned that however we develop issues in the years ahead, that

we be careful to be certain that we maintain the appropriate balance of regulation between State and Federal agencies.’’

It has also been reported to us that you have recently said that

you believe that there is an imbalance in the dual chartering system right now particularly for larger multistate operators. This

issue is a concern for several institutions in our States as well as

our State banking commissioners.

Do you think there is an imbalance between the charters currently? Can you clarify for us what your concern is? What should

be done?

A.1. Under our ‘‘dual’’ banking system, banks may elect to be chartered by either the States or the Federal Government (acting

through the Office of the Comptroller of the Currency). Congress

historically has sought to maintain a competitive dual banking system, that is one in which both national and State-chartered banks

may compete effectively. Over time, a healthy dual banking system

promotes diversity, flexibility, and inventiveness in the banking

system. For these reasons, the Board has long supported the dual

banking system and efforts to ensure the viability of both the State

bank and national bank charters.

50

For many years, there has been a rough equilibrium in the banking system between State-chartered and nationally chartered institutions as measured by both the percentage of banks that are State

chartered and the percentage of banking assets controlled by Statechartered banks. As reflected in Table A, the percentage of insured

commercial banks that are State-chartered fluctuated only slightly

between 1992 and 2003, rising from 69 percent in 1992 to 74 percent in 2003. Moreover, the percentage of banking assets held by

State-chartered banks also remained relatively constant over this

time period.

Recently, a number of State-chartered banks have converted, or

have announced their intention to convert, to a national charter. As

a result, the percentage of banking assets held by all State-chartered banks is forecast to decline from 44 percent to 33 percent and

the percentage of banking assets held by State member banks,

which are directly supervised by the Federal Reserve, would decline from 25 percent to approximately 15 percent.

Although this projected shift in assets controlled by State banks

is significant and larger than seen in some time, it is too early to

tell whether it reflects a temporary anomaly or an underlying imbalance between State and Federal charters that should be of concern to the Congress. Regarding the implications of these changes

for supervision, the Federal Reserve has adapted and refined its

supervisory programs and practices regarding bank and financial

holding companies in response to changes in the financial industry

and the statutory requirements established by the Congress. The

Board believes that the Federal Reserve should continue to play a

meaningful role in the supervision of banking organizations to assist in fulfilling its broader responsibilities for conducting monetary

policy and managing and containing risk within the financial system.

At this point, we do not believe that the recent developments

have hampered the Federal Reserve’s ability to maintain a ‘‘handson’’ role in the supervision of large banking organizations through

our role as umbrella or consolidated supervisor of bank holding

companies, financial holding companies, and the U.S. operations of

foreign banks. Looking ahead, if these developments adversely affect the Federal Reserve’s window into the banking system over

time, the Board will bring the matter to the attention of the Congress to ensure that it retains the authority and access necessary

to carry out the full range of its central bank responsibilities.

51