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23–738 PDF 2005

MONETARY POLICY AND THE

STATE OF THE ECONOMY

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JULY 20, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–47

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

ROBERT U. FOSTER, III, Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on: 

July 20, 2005 ..................................................................................................... 1

Appendix: 

July 20, 2005 ..................................................................................................... 49

WITNESSES 

WEDNESDAY, JULY 20, 2005

Greenspan, Hon. Alan, Chairman, Federal Reserve Board ................................. 7

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 50

King, Hon. Peter T. .......................................................................................... 52

Greenspan, Hon. Alan ...................................................................................... 53

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

‘‘The Problem of Executive Compensation,’’ April 18, 2005 .......................... 66

Neugebauer, Hon. Randy: 

Written letter to Hon. Alan Greenspan .......................................................... 74

Greenspan, Hon. Alan: 

Written response to questions from Hon. Randy Neugebauer ..................... 75

‘‘Monetary Policy Report to the Congress,’’ July 20, 2005 ............................ 77

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MONETARY POLICY AND THE 

STATE OF THE ECONOMY 

Wednesday, July 20, 2005

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

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

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

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

Royce, Lucas, Kelly, Paul, Gillmor, Shays, Miller of California, 

Kennedy, Hensarling, Garrett, Brown-Waite, Barrett, Gerlach, 

Pearce, Neugebauer, Fitzpatrick, McHenry, Frank, Waters, 

Maloney, Velazquez, Watt, Ackerman, Hooley, Carson, Sherman, 

Lee, Moore of Kansas, Crowley, Clay, Matheson, Miller of North 

Carolina, Scott, Davis of Alabama, Green, Cleaver, Bean, 

Wasserman Schultz, and Moore of Wisconsin. 

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

The chair recognizes himself for an opening statement. 

Chairman Greenspan, once again, we welcome you back to the 

Financial Services Committee for now your 35th appearance before 

this committee and our predecessor, the House Banking Committee, for the Monetary Policy Report. 

I know I speak for all of our 70 members when I say that your 

economic analysis and our discussion with you is the highlight of 

our calendar year here at the Financial Services Committee. 

Welcome once again, in what will likely be your final appearance 

here before the Financial Services Committee. To that end, we 

have enjoyed the opportunity to work with you in a number of capacities over the years, and I know I speak for the entire committee when I say that. 

We can report to the nation today that our U.S. economic growth 

is steady and strong. While we face some uncertainty abroad, and 

we can be assured of the likelihood that there will always be uncertainty abroad, our national economic performance is the envy of the 

world. More Americans are working than ever before. 

We recently received the news that 146,000 jobs were created in 

June, achieving a 5 percent unemployment rate, the lowest since 

the fateful month of September 2001. 

Not so long ago, many economists believed that there was a 

structural unemployment floor of 6 percent or 7 percent. They did 

not believe that our economy had the ability to reach the goal of 

5 percent unemployment, and yet it has done so this month, with 

a total of 1.1 million jobs created this year alone. 

2

An important leading indicator, durable goods, increased 5.5 percent in May, and U.S. manufacturing continues to expand at rates 

that exceed expectations. 

Our GDP is growing at a good clip of nearly 4 percent, and the 

important non-manufacturing sector has been increasing each 

month now for over 2 years. 

The markets have risen nicely, recovering from their post-bubble 

and post-9/11 declines and selloffs, with the Dow now just 500 

points shy of its historic high. 

These positive economic conditions mean that more Americans 

than ever before have reached the goal of home ownership. With 

President Bush’s housing policies and the American Dream Downpayment Act, home ownership will soon be within reach for even 

more American families. 

With 14 consecutive quarters of economic growth, there is further 

good news for American consumers, and that is, inflation has remained in check. The prices of goods and services did not go up 

during the month of June. Prices for businesses, the producer price 

index, actually went down slightly, indicating that businesses have 

been able to handle recent high energy prices. 

Americans are well aware of the economy’s steady growth, low 

inflation, and strong housing markets. Consumer confidence numbers are optimistic, and economic predictions show annual growth 

in the 3 percent to 4 percent range. 

A thriving economy, growing businesses, and working Americans 

are the components of a healthy tax base and strong revenues. 

President Bush’s tax cuts have been an important factor in the recent projection that the federal budget deficit will be far lower than 

previously expected, perhaps up to $100 billion lower, and that will 

help to keep interest rates as low as possible. 

Over the long term, the president’s programs to make the tax 

cuts permanent, to restrain government spending, to ensure retirement security, and to expand U.S. exports through free trade will 

further enhance our economic success. 

Mr. Chairman, according to the Federal Reserve Web site, its objectives include ‘‘economic growth in line with the economy’s potential to expand, a high level of employment, stable prices, and moderate long-term interest rates.’’

It is an immense achievement that all of those objectives have 

been met, and we congratulate you and your colleagues at the Fed. 

You have the distinction of having served the Council of Economic Advisers under President Ford and serving as the Fed chairman under every president since Reagan. Certainly the confidence 

of five presidents is also a testament to the nation’s faith in your 

economic leadership. 

We thank you for your extraordinary service to our country, for 

the stalwart policies that have guided us to many years of prosperity. This success has advanced American businesses, has increased American influence throughout the world, and has created 

economic conditions in which American families thrive. 

I again thank you for your service. 

I now yield to the gentleman from Massachusetts for an opening 

statement. 

Mr. FRANK. Thank you, Mr. Chairman. 

3

Mr. Chairman, I was reading your statement this morning and 

I had an ‘‘a ha!’’ moment and realized that I could from now on, 

to some extent, preach the gospel according to Greenspan, with 

some reservations—the revised standard version. 

On Page 11, you state something really quite profound, that I 

hope people will take to heart. You and I will differ about how to 

respond to it, but I thank you for stating it. ‘‘We collectively confront many risks,’’ then I skip. This is the chairman’s testimony. 

‘‘Another prominent concern is the growing evidence of 

antiglobalization sentiment and protectionist initiatives, which, if 

implemented, would significantly threaten the flexibility and resilience of many economies. 

‘‘This situation is especially troubling for the United States, 

where openness and flexibility have allowed us to absorb a succession of hard shocks. That flexibility is, in large measure, a testament to the industry and resourcefulness of our workers and business. But our success has also been aided importantly by more 

than 2.5 decades of bipartisan effort aimed at reducing unnecessary 

regulation and promoting the openness of our market economy. 

‘‘Going forward, policymakers will need to be vigilant to preserve 

this flexibility, which has contributed so constructively to our economic performance.’’

I agree with you, Mr. Chairman. 

I am going to solicit later your opinion of the bill dealing with 

trade with China, which is apparently going to be put forward as 

part of the price of winning CAFTA, and I will be interested in 

your evaluation of that particular piece of legislation—which has 

been the subject of a marvelous conversion on the part of many of 

the Republican leaders. 

I agree with you that we face these attitudes, and I agree with 

you that they can have negative consequences. But I hope you will 

agree—and I think, from previous statements, you would—this is 

not simply perversity on the part of American citizens; this is not 

just the workers getting into a bad mood. 

The problem is that the very growth that these policies have fostered, the growth that you believe to be endangered by the rise in 

these sentiments and the opposition to these measures, has increasingly been unfairly shared. 

You said—and I salute you for it—a little over a year ago to the 

Joint Economic Committee that virtually all of the gains from increased productivity were going to corporate profits, the owners of 

capital; very few, if any, were going to real wages. 

In the report this year, the Monetary Report, on Page 16, you do 

say, ‘‘Measures of labor compensation suggest that the remaining 

slack in labor markets continued to restrain increases in base wage 

rates.’’

You do note, ‘‘Large increases in some of the more flexible components have added to labor costs.’’

What are those? Stock options and bonuses, as you say. 

In other words, if you are eligible for a stock option, you are 

doing okay. If you get a bonus, you are doing okay. If you are an 

owner of capital, you are doing super okay. And then, to make it 

even better, we have reduced the tax rates on all those. 

4

But if you are working for straight wages or salary, you are not 

doing very well. Certainly you are not participating in the increased prosperity. Real wages, as you have acknowledged, leaving 

aside stock options, leaving aside bonuses—real wages—have not 

increased. Inflation has eaten them up. 

It is true that some workers have been told by their employer, 

‘‘We are giving you more in compensation.’’ To some extent, that 

means the employer is paying more for their health care benefits, 

or perhaps putting more into the pension fund; but the worker is 

not taking home another penny. 

And working people—and I want to go back. I think you are 

right about these sentiments, and I think you are right that they 

could lead to some negatives. 

We have on a bipartisan basis in this committee—as you know, 

with the support and advice from your institution—allowed the financial institutions to take advantage of information technology. 

We have done things to try and help them modernize. 

There is growing consumer resistance to many of those. There is 

resistance to trade, so that they are going to have to make this bargain, they are going to try and buy CAFTA with this China deal. 

I do not know if it will work or not. 

The point I am making is this, you have got to connect the dots. 

The fact is that increasingly average workers do not see that the 

prosperity that results from these policies is benefiting them. And 

in fact fewer Americans are getting health benefits. They are paying more for them. 

And so this combination of increased growth—and the economy 

is growing—and job stagnation does not help. 

I would just say, finally, I was struck by the hosannas—to stay 

with the religious motif—which greeted the fact that we created 

146,000 new jobs last month. That is way below every projection 

this administration had made. 

I am giving out a sheet here called ‘‘The Evolution of Diminishing Expectations.’’ And what it shows is, the administration has 

finally met its job projection figures—by lowering them. 

The Council of Economic Advisers in 2003 said we would get 

305,000 jobs a month. Secretary Snow in October of 2003 said we 

would get 200,000. He was lowballing. Then the council went back 

up to 325,000. That was the last one before the election. They projected 325,000 jobs a month. Then it dropped to 175,000 jobs a 

month. 

In fact we have never made, over any prolonged period, any of 

those projections. We have not hit 200,000 jobs a month. 

So job creation has been stagnated. Unemployment has dropped 

largely, as Paul Krugman pointed out——

And I ask unanimous consent to put his Monday column in the 

record. 

The CHAIRMAN. Without objection. 

Mr. FRANK.—largely because the participation rate is declining 

in the economy. 

So, as you say in the report, there is still slack in the labor market. That is holding down wage costs; i.e., people are not getting 

increases in wages, health care for those who are employed is eroding. 

5

And so people see this growth and do not see that they are getting a part of it, and that is why you get this ‘‘resistance’’ that you 

mentioned. 

So when we get to the question period I will ask you what you 

think we can do about that. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from New York, Ms. Maloney, is recognized for 3 

minutes for opening statement. 

Mrs. MALONEY. Welcome, Mr. Greenspan. 

As always, it is a pleasure to hear your testimony—all 35 times. 

You have served, more than any other person, as our country’s 

captain of monetary policy. You have guided us through economic 

growth, recession, and into globalization. 

In serving our country, you have often spoken out strongly 

against positions that you disagree with. So I find it very surprising that you are not strongly criticizing the ballooning deficits 

this administration has foisted on the American people. 

The Bush legacy is the largest national debt in history. The Republican Congress and president inherited a surplus, yet they have 

voted three times to raise the debt ceiling. 

We now have a record debt of over $7.5 trillion, the largest in 

history; and this breaks down to each citizen’s share being over 

$26,000. 

We also have the largest trade deficit in our history, supported 

by the willingness—at least so far—of foreign investors and governments to keep extending us credit. We have the largest percentage 

of foreign holders of U.S. debt ever. 

We keep being told that the administration is going to fix this, 

but nothing is happening. Just last week the administration announced that the federal budget deficit for this year will not be as 

large as they were predicting it would be in January. 

Republicans are taking this as some kind of evidence of a supplyside miracle in which the president’s tax cuts are actually creating 

large increases in revenue. 

And surely a man of your reputation, or anyone who actually 

read the OMB Mid-Session Review, is not going to take it as evidence of any real change in the structural budget deficit picture. 

As analysts at Goldman Sachs and in other places have pointed 

out, this year’s large increase in tax receipts stems from temporary 

factors that are unlikely to be repeated, including the expiration of 

the tax cut on business investment. 

CBO Director Holtz-Eakin, a former Bush administration economist, has made the same point about the temporary nature of the 

revenue surge, saying that once you go out to 2008 and 2010, 

things look about the same as they did before we found out about 

this year’s jump in revenues. 

The administration, in my opinion, is trying to distract us from 

the long-term budget problems they have created with irresponsible policies. 

But the American people deserve to know the truth, and surely 

you, of all people, Mr. Greenspan, should be speaking out about 

this. 

6

You were part of the team that helped the Clinton administration balance the budget, you were part of the team that helped 

build the surplus, and you know it can be done. 

The American people are absolutely being skewered with this 

crushing debt that will affect them and the lives of their children, 

their grandchildren, their quality of life. 

I really would hope that today and in the future you will take 

a stand against spending the American people into a hole that is 

very difficult to get out of and very painful to get out of, and I wish 

that you would speak out as strongly on this issue and as forcefully 

on this issue as you have on others. 

The CHAIRMAN. The gentlelady’s time has expired. 

The gentlelady from Ohio, Judge Pryce? 

Ms. PRYCE. Thank you, Chairman Oxley. 

Welcome, Chairman Greenspan. Thank you for taking time to 

discuss with us your insightful thoughts on monetary policy and 

the state of our economy. 

I am pleased to read in your testimony that you believe overall 

the economy remains steady. Many financial analysts have credited 

the strong, vibrant housing market as a vital segment of the health 

of our economy. 

Recent studies have found that housing accounted for more than 

one-third of economic growth during the previous 5 years. 

Many observers, including yourself, have noted that mortgage refinancing provided crucial support to the economy during the past 

recession, enabled homeowners to reduce their debt burdens and 

maintain adequate levels of consumer spending by tapping into the 

equity of their homes. I for one took great advantage of that. 

Despite these latest gains in home ownership, I am concerned 

about the recent surge in home prices in many metropolitan areas. 

In most countries, the recent surge in home prices has gone hand 

in hand with a much larger jump in household debt than in previous booms. 

Not only are new buyers taking out bigger mortgages, but existing owners have increased their mortgages to turn capital gains 

into cash that they can spend. 

So I hope to hear your views on the current status of this country’s housing market and whether a nationwide bubble exists, also 

what effect a measured rise in inflation will have on the housing 

market. 

As we have seen in the Australian economy, they experienced a 

surge and were able to slowly raise rates and control real estate 

speculation, keeping that economy healthy after the market 

peaked. 

So I look forward to talking more about that with you. 

Shifting gears, I would also like to know—and I will ask later—

whether you feel the recent string of data security breaches has affected consumer confidence in our payment systems. 

As you know, Mr. Chairman, I, along with many of my colleagues 

on both sides of the aisle here, are working hard on some legislation that will provide uniform national standards for consumer protection and data breach notification, and we would appreciate any 

insights you care to share. 

7

Data security breaches are something that all of us are concerned with, as we see more and more instances of breaches in the 

headlines every day. 

I am pleased to be working with many members, Congressman 

Castle and LaTourette, Moore, Hooley, even Mr. Frank, on these 

important issues. 

And we appreciate the leadership of Chairman Oxley and Chairman Baucus as well. 

But under Gramm-Leach-Bliley, financial services firms already 

have an obligation to keep consumer information secure and confidential, and we need to extend those safeguards to information 

brokers and others. 

When a breach occurs that could lead to financial fraud or misuse of sensitive financial identity information, customers have the 

right to be informed about the breach and what steps they should 

take to protect themselves. 

I believe there should be one federal standard for data security 

and for notification. Disparate standards that vary from state to 

state are an administrative nightmare and make compliance very 

difficult. 

Varying standards can cause consumer confusion, and customers 

should be assured that when their information is breached, they receive the same notification no matter where they live. 

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

forward to your testimony. 

And thank you, Chairman Oxley. 

I yield back. 

The CHAIRMAN. The gentlelady yields back. 

We now turn to our distinguished chairman of the Fed. 

Chairman Greenspan, again, welcome back to the committee. 

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, 

FEDERAL RESERVE BOARD 

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

I have a rather extended formal presentation and would request 

that it be included for the record, and I will excerpt from that. 

The CHAIRMAN. Without objection. 

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

I am pleased to be here to present the Federal Reserve’s Monetary 

Policy Report to the Congress. I am surprised to hear it is the 35th 

time. 

In recent weeks, employment has remained on an upward trend; 

retail spending has posted appreciable gains; inventory levels have 

been modest; and business investment appears to have firmed. At 

the same time, low long-term interest rates have continued to provide a lift to housing activity. 

Although both overall and core consumer price inflation have 

eased of late, the prices of oil and natural gas have moved up 

again, on balance, since May and are likely to place some upward 

pressure on consumer prices, at least over the near term. Slack in 

labor and product markets has continued to decline. 

In light of these developments, the Federal Open Market Committee raised the federal funds rate at its June meeting to further 

reduce monetary policy accommodation. That action brought the 

8

cumulative increase in the funds rate over the past year to 2.25 

percentage points. 

Should the prices of crude oil and natural gas flatten out after 

their recent runup, the forecast currently embedded in futures 

markets, the prospects for aggregate demand appear favorable. 

Household spending, buoyed by past gains in wealth, ongoing increases in employment and income, and relatively low interest 

rates, is likely to continue to expand. 

Business investment in equipment and software seems to be on 

a solid upward trajectory in response to supportive conditions in financial markets and the ongoing need to replace or upgrade aging 

high-tech and other equipment. 

Moreover, some recovery in non-residential construction appears 

in the offing, spurred partly by lower vacancy rates and rising 

prices for commercial properties. 

However, given the comparatively less buoyant growth of many 

foreign economies and the recent increase in the foreign exchange 

rate of the dollar, our external sector does not seem poised to contribute steadily to U.S. growth. A flattening out of the prices of 

crude oil and natural gas, were it to materialize, would also lessen 

upward pressure on inflation. 

Thus our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures. 

In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation. This generally favorable outlook, however, is attended by some significant 

uncertainties that warrant careful scrutiny. 

With regard to the outlook for inflation, future price performance 

will be influenced importantly by the trend in unit labor cost, or 

its equivalent, the ratio of hourly labor compensation to output per 

hour. 

Over most of the past several years, the behavior of unit labor 

costs has been quite subdued. But those costs have turned up of 

late, and whether the favorable trends of the past few years will 

be maintained is unclear. 

Hourly labor compensation as measured from the national income and product accounts increased sharply near the end of 2004. 

However, that measure appears to have been boosted significantly 

by temporary factors. 

Over the past 2 years, growth in output per hour seems to have 

moved off the peak that it reached in 2003. However, the cause, extent and duration of that slowdown are not yet clear. 

Energy prices represent a second major uncertainty in the economic outlook. A further rise could cut materially into private 

spending and thus damp the rate of economic expansion. 

Judging from the high level of far-future prices, global demand 

for energy apparently is expected to remain strong, and market 

participants are evidencing increased concerns about the potential 

for supply disruption in various oil-producing regions. 

More favorably, the current and prospective expansion of U.S. capability to import liquefied natural gas will help ease longer-term 

natural gas stringencies and perhaps bring natural gas prices in 

the United States down to world levels. 

9

The third major uncertainty in the economic outlook relates to 

the behavior of long-term interest rates. The yield on 10-year 

Treasury notes, currently near 4.25 percent, is about 50 basis 

points below its level of late spring 2004. 

This decline in long-term rates has occurred against the backdrop of generally firm U.S. economic growth, a continued boost to 

inflation from higher energy prices, and fiscal pressures associated 

with the fast-approaching retirement of the baby-boom generation. 

The drop in long-term rates is especially surprising given the increase in the federal funds rate over the same period. Such a pattern is clearly without precedent in our recent experience. 

Two distinct but overlapping developments appear to be at work: 

a longer-term trend decline in bond yields; and an acceleration of 

that trend of late. 

Some, but not all, of the decade-long trend decline in that forward yield can be ascribed to expectations of lower inflation, a reduced risk premium resulting from less inflation volatility, and a 

smaller real-term premium that seems due to a moderation of the 

business cycle over the past few decades. 

This decline in inflation expectations and risk premiums is a signal development. 

As I noted in my testimony before this Committee in February, 

the effective productive capacity of the global economy has substantially increased, in part because of the breakup of the Soviet Union 

and the integration of China and India into the global marketplace; 

and this increase in capacity in turn has doubtless contributed to 

expectations of lower inflation and lower inflation-risk premiums. 

In addition to these factors, the trend reduction worldwide in 

long-term rates surely reflects an excess of intended savings over 

intended investment. This configuration is equivalent to an excess 

of the supply of funds relative to the demand for investment. 

What is unclear is whether the excess is due to a glut of savings 

or a shortfall of investment. Because intended capital investment 

is to some extent driven by forces independent of those governing 

intended saving, the gap between intended saving and investment 

can be quite wide and variable. 

It is real interest rates that bring actual capital investment 

worldwide and its means of financing global savings into equality. 

We can directly observe only the actual flows, not the savings and 

investment tendencies. 

Nonetheless, as best we can judge, both high levels of intended 

savings and low levels of intended investment have combined to 

lower real long-term rates over the past decade. 

Since the mid 1990s, a significant increase in the share of world 

gross domestic product produced by economies with persistently 

above-average savings, predominantly the emerging economies of 

Asia, has put upward pressure on world savings. 

These pressures have been supplemented by shifts in income toward the oil-exporting countries, which more recently have built 

surpluses because of steep increases in oil prices. 

Softness in intended investment is also evident. Although corporate capital investment in the major industrial countries rose in 

recent years, it apparently failed to match increases in corporate 

cash flow. 

10

In the United States, for example, capital expenditures were 

below the very substantial level of corporate cash flow in 2003, the 

first shortfall since the severe recession of 1975. 

That development was likely a result of the business caution that 

was apparent in the wake of the stock market decline and the corporate scandals early this decade. 

Japanese investment exhibited prolonged restraint following the 

bursting of their speculative bubble in the early 1990s; and investment in emerging Asia, excluding China, fell appreciably after the 

Asian financial crisis in the late 1990s. 

Whether the excess of global intended saving over intended investment has been caused by weak investment or excessive savings—that is, by weak consumption—or, more likely, a combination 

of both does not much affect the intermediate-term outlook for 

world GDP or, for that matter, U.S. monetary policy. 

What have mattered in recent years are the sign and the size of 

the gap of intentions and the implications for interest rates, not 

whether the gap results from a saving glut or an investment shortfall. 

That said, saving and investment propensities do matter over the 

longer term. Higher levels of investment relative to consumption 

build up the capital stock and thus add to the productive potential 

of an economy. 

The economic forces driving the global saving-investment balance 

have been unfolding over the course of the past decade, so the 

steepness of the recent decline in long-term dollar yields and the 

associated distant forward rates suggests that something more may 

have been at work over the past year. 

Inflation premiums in forward rates 10 years ahead have apparently continued to decline, but real yields have also fallen markedly 

over the past year. 

Risktakers apparently have been encouraged, by a perceived increase in economic stability, to reach out to more distant time horizons. These actions have been accompanied by significant declines 

in measures of expected volatility in equity and credit markets. 

History cautions that long periods of relative stability often engender unrealistic expectations of its permanence and at times may 

lead to financial excess and economic stress. Such perceptions, 

many observers believe, are contributing to the boom in home 

prices and creating some associated risks. 

And certainly the exceptionally low interest rates on 10-year 

Treasury notes, and hence on home mortgages, have been a major 

factor in the recent surge of home building, home turnover, and 

particularly in the steep climb in home prices. 

Whether home prices on average for the nation as a whole are 

overvalued relative to underlying determinants is difficult to ascertain, but there do appear to be, at a minimum, signs of froth in 

some local markets where home prices seem to have risen to 

unsustainable levels. 

Among other indicators, the significant rise in purchases of 

homes for investment since 2001 seems to have charged some regional markets with speculative fervor. 

The U.S. economy has weathered such episodes before without 

experiencing significant declines in the national average level of 

11

home prices. Nevertheless, we certainly cannot rule out declines in 

home prices, especially in some local markets. 

If declines were to occur, they likely would be accompanied by 

some economic stress, though the macroeconomic implications need 

not be substantial. 

Historically, it has been rising real long-term interest rates that 

have restrained the pace of residential building and have suppressed existing home sales, high levels of which have been the 

major contributor to the home equity extraction that arguably has 

financed a noticeable share of personal-consumption expenditures 

and home-modernization outlays. 

The trend of mortgage rates or long-term interest rates more 

generally is likely to be influenced importantly by the worldwide 

evolution of intended saving and intended investment. 

We at the Federal Reserve will be closely monitoring the path of 

this global development few, if any, have previously experienced. 

As I indicated earlier, the capital investment climate in the 

United States appears to be improving following significant 

headwinds since late 2000, as is that in Japan. Capital investment 

in Europe, however, remains tepid. 

A broad worldwide expansion of capital investment not offset by 

rising worldwide propensity to save would presumably move real 

long-term interest rates higher. Moreover, with term premiums at 

historical lows, further downward pressure on long-term rates from 

this source is unlikely. 

We collectively confront many risks beyond those I have mentioned. As was tragically evidenced again by the bombings in London earlier this month, terrorism and geopolitical risk have become 

enduring features of the global landscape. 

Another prominent concern is the growing evidence of 

antiglobalization sentiment and protectionist initiatives, which if 

implemented would significantly threaten the flexibility and resilience of many economies. 

This situation is especially troubling for the United States, where 

openness and flexibility have allowed us to absorb a succession of 

large shocks in recent years with only minimal economic disruption. That flexibility is, in large measure, a testament to the industry and resourcefulness of our workers and businesses. 

But our success in this dimension has also been aided importantly by more than two and a half decades of bipartisan effort 

aimed at reducing unnecessary regulation and promoting the openness of our market economy. 

Going forward, policymakers will need to be vigilant to preserve 

this flexibility, which has contributed so constructively to our economic performance in recent years. 

In conclusion, Mr. Chairman, despite the challenges I have outlined and the many I have not, the U.S. economy has remained on 

a firm footing, and inflation continues to be well contained. Moreover, the prospects are favorable for a continuation of those trends. 

Accordingly, the Federal Open Market Committee in its June 

meeting reaffirmed that it believes that policy accommodation can 

be removed at a pace that is likely to be measured. Nonetheless, 

the Committee will respond to changes in economic prospects, as 

needed, to fulfill its obligation to maintain price stability. 

12

Thank you very much. 

I look forward to your questions. 

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

on page 53 in the appendix.] 

The CHAIRMAN. Thank you, Mr. Chairman. 

And of course I think it is appropriate that your final appearance 

before the committee ended with price stability, because indeed, as 

you have indicated at least 35 times before this committee, that ultimately is the charge of the Fed—and you have performed extraordinarily well. 

I mentioned in my opening statement the fact that it appears 

now that federal revenues for the first quarter of this year have 

caused a lowering of the expected size of the budget deficit, perhaps as much as $100 billion. 

The evidence would indicate that most of that revenue came from 

capital gains and dividend taxes—and, at least in most quarters, 

is greeted with a lot of favor. 

Has the Laffer Curve come back or is this a temporary phenomenon that may be different, say, in the current quarter? 

Mr. GREENSPAN. Well, certainly, Mr. Chairman, dividends are 

higher; and indeed, to that extent, the overall general outlook for 

profitability has clearly had a substantial impact on the revenues 

to which you allude. 

It is too soon to actually make judgments about exactly where 

those revenues are coming from. We do know it is non-withheld, we 

do know it is corporate taxes, and we are even getting some in the 

withheld area. 

So it is a fairly broad expansion which does relate directly to the 

level of economic activity, which does seem to be expanding at a 

reasonably good pace. 

Now, we will not know in full detail until we get the statistics 

of income—which is often, of course, quite late—to get the full detail of exactly what is happening. 

But I would say that, as I have indicated on many occasions, I 

do think that the particular characteristic of recent taxation, which 

has eliminated part of the double taxation of dividends, has contributed to economic growth. 

We do not know that yet, and we will not know that for a number of years, because it is only in retrospect that we will be able 

to make that judgment fully. 

But at least I would say that is my impression, or at least I cannot see anything which contradicts that at this particular moment. 

The Laffer Curve is a much broader question, which I do not 

think I have time to discuss. But in general I must say I am 

pleased with the revenue increases that have occurred because it 

is a reflection of an economy which is doing well. 

The CHAIRMAN. I just threw that ‘‘Laffer Curve’’ in as kind of an 

enticement, to get your attention. 

[Laughter.] 

Let me ask you about this. When you were here in February you 

indicated the need to basically migrate our Social Security system 

toward individual accounts, particularly as it related to capital formation and giving us the ability to have the capital necessary to 

keep our economy strong and create jobs and growth. 

13

Have you had any different ideas or change of mind since February? 

Mr. GREENSPAN. No, but I think it is worthwhile reviewing 

where we are relative to this issue. 

We know, with as high a level of certainty as you ever can gather, that we are going to get a very substantial acceleration in the 

number of retirees in this country starting in 2008; but we also 

know that the next generation coming in behind the baby boomers 

is much smaller, which means that the working labor force is going 

to grow at a relatively small, a very small, rate. 

This means that we are going to have a very substantial amount 

of people not productive, in the way they had been when they were 

in the workforce, essentially being supplied with goods and services 

by a labor force which is growing rather slowly. 

It is very difficult to convey how important it is when you take 

as productive a group of people coming out of the baby-boom generation—and they are now in their most productive years—and you 

move that group into retirement. Its impact is very substantial. 

But the major point I want to make is that Social Security has 

over the years, largely because of the demographics that we have 

observed in recent generations, been able to replace roughly 40 percent of the incomes that workers had prior to retirement. 

It strikes me that it is going to be very difficult to deliver that 

in real terms because of the extraordinary demographic shift which 

we are about to experience. 

But it is certainly also going to be the case that retirees are 

going to need something like 80 percent of their immediately preretirement income to maintain a reasonable standard of living, and 

that means a very substantial part of retirement resources is going 

to come from other than Social Security, of necessity; and that inevitably means private pension funds, defined benefit, 401(k)s, personal savings, other forms of income, and I suspect that we will require fairly significant expanding forms of private savings initiatives. 

And one of the reasons why I have been supportive of moving a 

significant part of Social Security toward private accounts is to develop that particular process. 

I have nothing, basically, new to say on the issue than what I 

discussed with you in February. 

The CHAIRMAN. Thank you, Mr. Chairman. 

My time has expired. 

The gentleman from Massachusetts? 

Mr. FRANK. Thank you, Mr. Chairman. 

I do have to note one further example, among many, of your discretion, when the chairman asked you about the Laffer Curve. 

You said—it was fairly early in his 5 minutes—that you did not 

have the time to answer it. There is an old, crude joke: ‘‘Do you 

have the time?’’ ‘‘Well, if you have the inclination.’’

My inference, frankly, is that you had the time but not the inclination. I honor that, and I understand it. I think it is very discreet. 

I want to go back to the point I raised before, and that is—and 

I agree with you, we have this resistance to many of the measures 

that have been helpful, that I think would be helpful. I may disagree on some. And we have had a bipartisan cooperation in many 

14

of these areas, going back to President Carter and others, who did 

deregulation. 

But people need to understand, people in the business community need to understand, that bipartisan cooperation is breaking 

down in the economic area—and I am not talking about bickering 

or squabbling; I am talking about profound philosophical differences. 

Many of us are convinced that we are in a situation now, because 

of information technology, globalization, and a lot of other factors 

which are, in many ways, benign, but they combine so that we are 

getting increased growth with increased inequality. 

You yourself have commented on this trend. You told the Joint 

Economic Committee over a year ago that a substantial part of the 

increased wealth and productivity was going to corporate profits. 

In fact, what you said was that—this is a little over a year ago: 

‘‘The consequence was a marked fall in the ratio of employee compensation to gross non-financial corporate income to a very low 

level by the standards of the past 3 decades.’’ Now, we had unemployment, but people are celebrating a decline in unemployment. 

But reading Paul Krugman’s article in July, my attention was 

called to a policy paper done of the Boston Federal Reserve, by 

Katharine Bradbury. 

And you are justly proud, I know, of the high-quality work that 

is done by your analysts. I do not know if you have had a chance 

to look at this one. It is a fairly recent policy brief. 

But her point is very straightforward: ‘‘Decrease in unemployment is substantially because of a decrease in the labor participation rate. Improvements in the unemployment rate overstate the 

strength of the recovery, since the nation’s labor force participation 

rate has not rebounded to date.’’

Even after job counts began to rise and joblessness subside, however, the fraction of the population that is employed did not increase, and it has not improved measurably to date. 

And that also, of course, is one of the reasons why we have not 

seen any increase in wages. And you noted in 2004 that wages 

were depressed. You have said yes, the wage sector is going up. 

But again, as your Monetary Report—and I am consistently 

grateful for the intellectual honesty and clarity of these reports—

that is largely because of stock options and bonuses, so that people 

working for hourly wages——

And I am going to ask to put in the record here a chart that Mr. 

Morris on my staff has prepared from Department of Labor, Department of Commerce data. Real wages, average hourly earnings 

for production and non-supervisory workers, adjusted for inflation, 

2001, $14.52. As of June of this year, $14.05: a 47-cent-per-hour decrease. 

Now, it is one thing for people to experience a decrease when 

they read about bad economic times; it is another when they read 

celebrations of how well the economy is doing but they are not 

doing well. 

That, to me, is the explanation for the phenomenon you deplored 

in your statement, about the ‘‘growing resistance.’’

15

Why do you think we are running into this growing resistance? 

Would you agree, or do you have some other explanation? I mean, 

do workers suddenly turn mean and surly or what? 

Mr. GREENSPAN. Congressman, first let me just say that we at 

the board do have some questions about that Boston Federal Reserve study. 

Very specifically, it fails to take into consideration, in our judgment, certain important structural changes, such as the fact that 

in early years we had an extraordinarily rapid rise in participation 

in the labor force of adult women. We finally got to the point when 

it would flatten out——

Mr. FRANK. Let me withdraw that, then. 

But I would be interested, subsequently: Why do you think we 

are encountering this resistance, this potential threat to the bipartisan consensus for flexibility? 

What do you think the reason is? 

Mr. GREENSPAN. I think the reason is basically that we are developing a bivariate labor market, as I have indicated in previous 

periods, and I think I did in February testimony here. 

We have an oversupply of high-skill jobs and an undersupply of 

people to fill them, the effect of which is to create a significant acceleration in average incomes of the highly-skilled segment of our 

labor force. 

And that, as you recall, I attribute to the fact that we have been 

unable in our educational institutions to move our younger people 

sufficiently quickly from grade 4 through high school, into college 

and beyond, at a pace which would create an adequate supply of 

the number of skilled workers which we need—which, incidentally, 

would bring the wage increases down—but also simultaneously remove an excess of lesser-skilled workers, which are depressing——

Mr. FRANK. I understand. But we have got the people—as you 

and I understand, that is for the future. 

We have got tens of millions of people who are beyond the educational stages. How do you deal with that? What is your——

Mr. GREENSPAN. Well, I was basically saying that the reason 

that a substantial part of our labor force feels as though it is not 

getting the benefits of the increased production is essentially a 

function, in my judgment, of problems in our educational system. 

Mr. FRANK. First of all, I would just quibble with ‘‘feels as 

though.’’ There has been a drop in their real wages. 

Secondly, though: We could agree on improving the educational 

system, but there are people in their 30s and 40s and 50s who are 

very, very unlikely to be affected by that. What do we do about 

them? 

Mr. GREENSPAN. No, I——

Mr. FRANK. Because if you do not do anything about them, you 

will continue to complain about this rise in resistance—because it 

is not that they ‘‘feel’’ it, it is that that they are in fact experiencing 

it. 

Mr. GREENSPAN. Yes. First of all, I do not envisage our education 

system as one which takes young people, graduates them, and they 

never see school again. 

As you well know, better than I, our community colleges have 

very substantial enrollment, and indeed they are the most rapidly 

16

growing part of our educational system, and they are predominantly people——

Mr. FRANK. Paid for with tax dollars, government entities——

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from Ohio? 

Ms. PRYCE. Thank you, Mr. Chairman. 

Mr. Chairman, if you do not mind, let us talk about data breach 

for a little bit, and I would really appreciate your insight as to how 

it has been affecting consumer confidence and to what effect. 

As we pursue some legislation here in this committee, do you 

agree we should have a national standard? 

I would appreciate any thoughts or——

Mr. GREENSPAN. National standards on what? 

Ms. PRYCE. On what constitutes a breach or anything—a national standard on any portion of legislation that would come out 

of this committee, what we should do, what we should not do. 

We do not want to make a situation that is pretty terrible, with 

implications that I believe are staggering, in terms of identity theft 

and misuse of other people’s credit and—we have to proceed cautiously, and I am just looking for you to help us here. 

Mr. GREENSPAN. Yes. It is a very tough and, frankly, discouraging issue. 

We obviously have equivalent issues at the Federal Reserve in 

protecting our information, and what we have tended to do is create redundancies in our mechanisms and procedures so that in the 

event that certain structures fail, we have ones that can come up 

and create support. 

That is expensive, and the problem that we are always trading 

off on all of these types of issues is how much risk, how much loss, 

how much disruption are we willing to accept as a minimum? Because we could eliminate that completely, but at a very significant 

cost. 

I am not sure I could add very much to your judgments with respect to what type of legislation, how it would be done. 

I am quite familiar with encryption capabilities and a variety of 

other issues that we employ. 

But when we are dealing with shipments of millions of names 

going all over the country, either electronically or in the back of 

trucks, something is going to drop off the back of the truck, and 

the only way to avoid that is to double up on efforts. 

There is no simple solution. There is probably no cost-free solution. And I think it is a tough judgment to make, as to how far you 

want to bring that issue to the forefront. 

I cannot judge because I am not familiar with the individual natures of the problems that clearly show up in the newspapers periodically, to my chagrin. 

Ms. PRYCE. Well, as we go, you know, the payment system from 

cash and checks to more a credit base, credit cards and debit cards, 

I think we have to address this as a government, and we do want 

to proceed cautiously. 

The consumer confidence issue is one that I can see severely affecting our economy. 

Mr. GREENSPAN. Yes. Fortunately, we have not yet seen any impact on national consumer confidence from any of these issues. 

17

But it should not be an issue of consumer confidence; it should 

be an issue of doing something which is important for protecting 

consumers. 

Ms. PRYCE. That is correct. 

All right. I appreciate the gentleman’s candor on that and look 

forward to working with you. 

And I yield back. 

The CHAIRMAN. Gentlelady yields back. 

The gentlelady from California, Ms. Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman and members. 

I would like to thank Mr. Greenspan for being here on this Monetary Policy Report to Congress. 

I know that when you come, we utilize this as an opportunity to 

ask you about all things we are concerned about, that we think you 

have some information on. 

As you know, we are going to be involved with a vote here in another week or so, perhaps, on CAFTA. 

The arguments for CAFTA are ones that, of course, you are very 

familiar with—may have even led on, I am not sure—that talk 

about how this will help us to reduce the trade deficit and how we 

can perhaps get the manufacture and production of cheap goods 

and products, that will cause our businesses to be able to profit because of the reduction in costs, that some of us are concerned about 

the outsourcing or the jobs that go offshore because we think that 

these jobs are very important to our own citizens, and even those 

jobs that do not pay huge wages. 

There are some people, whom you correctly identified or alluded 

to, who may not have benefited from our educational system in 

ways that they should; but they deserve to have a job also, and to 

work, and to have a decent quality of life. 

I do not know where you stand on CAFTA. I would like to hear 

what you think. 

How do we benefit from the passage of CAFTA? 

Mr. GREENSPAN. CAFTA is part of a broader issue of the extent 

to which we, the United States, want to engage in globalization. 

Globalization has two aspects to it, as best I can judge. One, it 

undoubtedly enhances standards of living worldwide, and indeed 

those economies that engage in international trade have invariably 

been boosted—and this has been especially the case since the end 

of World War II, and the United States has probably been the economy which has benefited the most. 

That process, however, of globalization is one of creative destruction in the sense that we are continuously competing and, in the 

process, we increase standards of living by essentially moving the 

depreciation from obsolescent facilities to cutting-edge equipment. 

And in fact, it is the difference between the two’s productivity 

where standards of living come from. But that process is very disruptive, and indeed it is associated with a very large turnover of 

the labor force. 

As I have mentioned here previously, we hire in this country 1 

million workers a week, and indeed people lose jobs in very large 

volumes every week as well. There is a large churning that goes 

on. 

18

To the extent we wish to secure jobs, to the extent that we wish 

to secure businesses from this competition, it will increase a sense 

of security, but it will do so at the expense of a lower standard of 

living. 

And the choice the Congress has to make—because indeed it is 

the Congress which makes these valued choices for the American 

people—is: To what extent do we wish to engage in international 

trade—of which CAFTA is just merely one aspect of it—with its 

churning, with its insecurities, but with its higher standards of living, or to what extent do we prefer a more tranquil, protected type 

of a society? And this is a very difficult judgment. 

I personally have argued very strenuously that I think that the 

globalization route is by far the superior route, because protection 

may appear to be helpful in the short run, but over the long run 

you cannot protect industries or jobs which are obsolescent. 

And I think that what we have to do is to move forward, as best 

we can, in globalization but to recognize that those who are the inevitable losers in this churning process be protected in some form—

in other words, to address, either through retraining or other 

means, that there are losers in this process, and we should, as a 

civil society, endeavor to find means to recognize that fact. 

The CHAIRMAN. The gentlelady’s time has expired. 

Ms. WATERS. Thank you. 

The CHAIRMAN. The gentleman from Iowa, Mr. Leach? 

Mr. LEACH. Thank you very much. 

An analog to this discussion. Your former colleague at the Federal Reserve, Mr. Bernanke, has emphasized that there is a savings glut in the Far East and a savings paucity here. 

In your statement today you have noted that in the Middle East 

savings has gone up to about a third of GDP. So there implicitly 

is a savings glut in the Middle East. 

Do you have any advice to these two regions—and it could be 

quite separate—on what should be done with this savings?—particularly if it is different than is currently being managed. 

Mr. GREENSPAN. Well, you are sort of putting me in a position 

to advise large segments of the world about what they ought to do. 

I appreciate that. 

[Laughter.] 

Mr. LEACH. Well, the Federal Reserve has the capacity to bail 

out large segments of the world——

Mr. GREENSPAN. I would point out, however, in my prepared remarks I do raise an issue—which I think is an important issue, 

sir—about the question of the geographical location of crude oil reserves being relatively concentrated; and that means that the productive capacity—that is, the conversion of those reserves into the 

capability of lifting crude oil—requires a very significant amount of 

capital investment and that the vast majority of these oil-producing 

countries do not look favorably upon foreign investment because 

they consider their experiences in the past to be undesirable in 

that regard. 

And yet because these are growing populations in these oil-producing areas, they perceive the need for the revenues that are coming from the oil production to go to domestic needs and not in any 

substantial extent to be reinvested to increase crude oil capacity on 

19

the reserves that they already have; and it strikes me that we are 

in a position where world oil demand is rising and is rising at a 

pace which is going to require significant amounts of capital investment. 

And how that is essentially resolved, whether the resources of 

international oil companies or others to invest in productive capacity in these areas is allowed—I mean, for example, in Mexico, as 

I am sure you know, there is a constitutional amendment which 

prohibits international, foreign investors engaged in that resource, 

and Pemex, the national oil company in Mexico, is pressuring to 

see if that prohibition could be reduced, because they perceive the 

need for the capital and the expertise to drill in areas in deep waters in the Gulf of Mexico where they know significant amounts of 

oil are available. 

So it is a very difficult question. So far as emerging Asia is concerned, they seem to be doing quite well, and in my judgment, will 

eventually resolve that question of their excess flow of savings. 

Mr. LEACH. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from New York, Ms. Maloney? 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Chairman Greenspan, last week the administration issued its 

Mid-Session Review of the budget, showing that the deficit in 2005 

will be lower than we thought it would be back in January. 

My question is: Do you agree with analysts, like those at Goldman Sachs, who point out that much of the improvement in 2005 

comes from temporarily-high corporate profits and the expiration of 

the temporary tax cut on business investment? 

Mr. GREENSPAN. Oh, I think that is correct, but I think OMB recognizes that as well. 

Mrs. MALONEY. And so then you do agree with the former CBO 

director, Holtz-Eakin, that once you go out a few years, the budget 

outlook is about the same as it was in January? 

Mr. GREENSPAN. I am not sure about that, and the reason, basically, is that we can disaggregate revenues and we can make adjustments for what we perceive to be the cause of this surge, at 

least on the individual side, which is increased bonuses and presumably a significant increase in exercise of stock options as well 

as capital gains realizations. 

But even after you account for that, you have unknown changes 

that are going on, the so-called technical adjustment—which is 

what, for example, Treasury uses to translate its forecasts of taxable income into taxable receipts. As I mentioned earlier, we really 

will not have a good insight into the sources of these revenue increases this year until we see the statistics of income, which are 

published, a couple of years from now. So we really will not know 

until we look backwards. 

I do think anybody who is projecting from here forward with respect to revenues is confronted with some significant elements of 

uncertainty. But I would not necessarily say that either the longerterm views that the most recent revenues are wholly temporary or 

those who believe that the revenues will continue at the same levels are probably correct. 

The answer is probably somewhere in the middle. 

20

Mrs. MALONEY. So your answer is: Yes, probably yes. Correct? 

Mr. GREENSPAN. I am sorry, ‘‘yes’’ is what? 

Mrs. MALONEY. Probably ‘‘Yes’’ for both the Goldman Sachs and 

the CBO director? 

Mr. GREENSPAN. No, not necessarily. I would say that yes, that 

it is probably in between where OMB is and Goldman Sachs, if I 

had to guess. But it is a guess. 

Mrs. MALONEY. Okay. 

Mr. Greenspan, is there sufficient strength in the labor market 

to justify the continued rate hikes? 

And I would like to cite that after the 2001 recession, this was 

followed by really the most protracted job slump we have seen 

since probably the 1930s. And was it not common in the expansion 

of the 1990s, for example, to see payroll employment growth of over 

200,000 jobs per month, and has it not been rare to see that kind 

of job growth in this economy? 

And I am sure that you are familiar with the study that has been 

cited recently by Katharine Bradbury of the Federal Reserve Bank 

of Boston, calling attention to how the labor force participation rate 

has not recovered as it usually does in an economic expansion; and 

does not that raise questions about whether there is some hidden 

unemployment not being captured in the official unemployment 

rate? 

And finally, wage growth has not kept up with inflation, and 

most of the productivity gains achieved over this expansion have 

gone into profits and not into the wages of the working men and 

women of this country; and my main question is: Does the Fed take 

into account all this evidence that there may still be a considerable 

slack in the labor market when it decides whether or not to keep 

raising interest rates? 

Mr. GREENSPAN. Well, Congresswoman, let me say, as I was 

mentioning to Congressman Frank: That Boston study presumes 

that 1 to 3 percentage points of the decline in the participation rate 

is as a result implicitly of the conditions you are suggesting. 

We at the board, doing similar type of analysis but addressing 

it somewhat differently, believe that the number is actually less 

than a half a percent; and that is strictly a technical issue, that 

we think certain calculations that were made at the Boston Fed inadequately captured what was going on. 

Having said that, let me just go further with respect to: It is the 

case that the 80 percent of our workforce which are production 

workers do have a very slow rate of growth in average hourly earnings, real and even nominal, in that respect. 

One of the reasons—other than the issue that I raised earlier; 

namely, the educational question and the skill and the imbalances—is that the benefit levels have gone up very substantially, 

and what tends to happen, as best that we can judge, is that ultimately benefits are paid by the employee and that if benefits go up 

the way labor market pressures tend to work, the aggregate package is what is determined in the markets, and it is essentially the 

individual workers who, over the long run, determine what the mix 

is. 

I think that there is a really serious problem here, as I have 

mentioned many times before this committee, in the consequent 

21

concentration of income that is rising as a result of what is a very 

obvious case of a major requirement to increase the skill level of 

the capital stock which we need to move forward and maintain 

high levels of productivity and the supply of workers that we create 

to essentially staff that capital stock. And the reason that we are 

getting this very disparate earning pattern is—and I will repeat 

again—where something is deficient, at least in an international 

context, of how we deal with our workforce as they come out of 

school or, more exactly, as they move through the educational system. 

The CHAIRMAN. The gentlelady’s time has expired. 

The gentleman from Alabama? 

Mr. BACHUS. I thank the chairman. 

Chairman Greenspan, on Page 5 of your report there is a chart 

on personal savings. I also read a recent report by the American 

Institute of Certified Public Accountants that says because of the 

decline in personal savings America is on a collision course with 

disaster. 

Is that an overstatement or——

Mr. GREENSPAN. Yes, sir. 

[Laughter.] 

Mr. BACHUS. All right. Good. 

How serious is it? And let me ask you this. We hear figures—

the Department of Commerce recently made a statement that 

Americans are spending $1.22 for every dollar they earn; yet we 

hear that personal savings rates are 0.5 percent of disposable income, or 3 percent. They are obviously below the 8 percent or 12 

percent or 10 percent rates. 

But how serious is the problem of decline in personal savings 

rates? 

Mr. GREENSPAN. It is difficult to tell. I think one of the issues 

here is to distinguish between what households perceive they are 

saving, and if you survey them, they are perfectly satisfied; and the 

reason that they are satisfied and these numbers look very low is 

that they are two different measures. 

The average household, when the value of their 401(k) goes up 

or they are holding stocks that go up, see their net worth go up, 

and as far as they are concerned, they are pleased by it; however, 

for national income accounting—which is basically what this personal savings rate endeavors to capture—you have to extract all 

capital gains out of the system. 

While an individual who has just, say, sold a home or some stock 

and has got real cash, they do not distinguish between whether 

they got that from wages and salaries or from capital gains. It is 

purchasing power, and that is savings, as far as they are concerned. 

But, without getting into the economics of this, capital gains do 

not finance capital investment. Only savings, at its book value, if 

I may put it that way, do that. And as a consequence, we have reasonably high capital investment in this country, but we do not have 

enough domestic savings and personal savings as part of that to finance it. 

A significant part of our investments are, as you know, financed 

by borrowing from abroad, and that is our current account deficit. 

22

So in the sense that we do not have adequate domestic savings 

and we cannot count indefinitely that we will be able to borrow at 

the rate we are borrowing from abroad, clearly, then, our savings 

rate is inadequate, and we must address that over the longer run. 

Mr. BACHUS. And you have said earlier today that the baby 

boomers beginning to retire is simply going to accelerate this decline in personal savings rate? 

Mr. GREENSPAN. I would think that will be the case, yes. 

Let me just say parenthetically: I do not expect that the personal 

savings rate will stay down this low indefinitely. Part of it is related to the fact that there is a very significant amount of extraction of equity from homes in this country financed by mortgage 

debt. 

Since the debt which is employed in doing that is a subtraction 

from savings, you will find that that is a major factor creating the 

low level of savings; and when equity extraction slows down, as 

eventually it will at some point, I think you will find this personal 

savings rate starting back up. 

Mr. BACHUS. Now, you mentioned some other concerns about 

this. One was federal spending and the amount of the federal deficit. So obviously one thing that we in Congress could do would be: 

try to reduce federal spending. Is that——

Mr. GREENSPAN. That would be most helpful. And indeed I have 

testified before this committee on numerous occasions, as well as 

other committees in the House and Senate, that this is a critical 

aspect of the long-term planning of this country and that, unless 

we address that issue I think we are in potentially serious difficulty as we move into the next decade. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from New York, Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman Greenspan, the recent suicide bombings in London 

highlight the growing threat that terrorism plays in our society. 

From an economic perspective, the London bombings will only add 

to the government’s investment in security. 

The federal government is set to spend over $30 billion on homeland security, while it is estimated that private sector expenditures 

for homeland security may double from pre-2001 levels to over 

$100 billion per year. 

The threat of terrorism has clearly changed the spending priorities of government at all levels and businesses across the country. 

No one can argue with the goals of this investment, as it is necessary to ensure the safety of our country. 

But from your perspective, what is the effect of this higher level 

of investment in homeland security; and do you have concerns that 

it will lead to lower economic growth as investment flows to lessproductive sectors? 

Mr. GREENSPAN. Well, I would agree with the way you put the 

issue, Congresswoman. 

Obviously, to the extent that a society devotes part of its resources for protection, those resources cannot also be used to 

produce goods and services or increase productivity. 

We have been fortunate in this country that—I would have assumed, following 9/11/2001, that we would see some impact on proVerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH
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ductivity as a consequence of the increased efforts that were devoted, the diversion of resources, toward protection. It did not happen that way. Indeed, as you know, our productivity actually accelerated. 

But there is no question that the use of those resources are displacing resources that would otherwise be used for productive purposes, and this is one of the reasons that the Congress has to make 

the judgment as to: at what level do we try to insure ourselves 

against this sort of violence. 

Ms. VELAZQUEZ. Mr. Chairman, due to the job losses in manufacturing and the sluggish hiring we are seeing in corporate America, 

many individuals are entering the growing ranks of the self-employed. 

The most recent Labor data suggest that self-employed workers 

constitute a growing segment of the U.S. labor market. Many have 

become self-employed out of necessity, with no other option but to 

seek out any work they can locate on their own. 

While this helps keep corporate America’s expenses lean, the 

newly self-employed often must purchase health or retirement coverage, at great cost, or go without such benefits altogether. 

If this trend were maintained, what would be the long-term economic effect of this shift toward higher self-employment? 

Mr. GREENSPAN. Well, fortunately, Congresswoman, I think that 

the trend has changed. In other words, the very most recent data 

do suggest that there is an increasing return of self-employed to 

the corporate sector more generally. 

And incidentally, one of the reasons I suspect it is probably happening is that medical costs being provided by corporate organizations are attractive to a number who are not doing as well, selfemployed, as they would like. 

Clearly, it is an issue here of: Do we like to have a lot of selfemployed in the country? Of course we would. Do we want to have 

them because they lost jobs? The answer is, of course: not. 

But I think the facts are that this is not becoming an ever-increasingly difficult problem, and I trust that it will continue to be 

that way in the future. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlelady’s time has expired. 

The gentleman from the first state, Mr. Castle? 

Mr. CASTLE. Thank you, Mr. Chairman. 

Chairman Greenspan, I am also interested in some of the data 

security issues that I understand Mrs. Pryce spoke to you about. 

Unfortunately, I had to handle an amendment in another committee, so I have just come back and missed some of that. 

But let me ask you, first and foremost, just to make sure this is 

clear. As you know, the various states have been dealing with this, 

passing legislation in a variety of ways. 

Is it your judgment that this is an issue in which federal preemption is essential, at least in large part, or would you make exceptions in certain areas, versus state legislation? 

Mr. GREENSPAN. I missed your point. What issue? 

Mr. CASTLE. I am sorry. The data security issue and the protection of data. 

Mr. GREENSPAN. Yes. 

24

It is hard for me to answer that. In other words, the self-interests of the people who handle data, and that those data be secured, 

is so extraordinarily high, I just balk at the notion that anyone has 

to tell them what their self-interest is. I cannot believe that we 

need regulations to tell people how to make a profit. And in this 

regard, unless they protect those data, they are going to have some 

very serious problems. 

Mr. CASTLE. Just as a matter of discussion—I agree with you, obviously, completely on that. I personally feel we do have to do 

something on the federal level. I do feel that you cannot have 50 

different state laws on a variety of these issues. 

Mr. GREENSPAN. Okay. If you are asking whether it is better to 

have fewer laws than a proliferation of state laws on this issue, I 

would say, Of course. 

Mr. CASTLE. Right. 

Mr. GREENSPAN. But I just hesitate to accept the overall concept 

that this is something which is a federal issue or government issue, 

in the broadest sense, to the extent that we are making it. 

Mr. CASTLE. Right. I agree with you on that too, but unfortunately the media drives this to a degree. And I worry about overnotification. I worry about the fact we overreact, to a great degree, 

about these various things. So your concerns are legitimate. 

On the other hand, it seems to me, under Gramm-Leach-Bliley, 

that we did a lot to address this as far as financial institutions are 

concerned. But then you have a heck of a lot of other people, it 

turns out, who are dealing with data, companies—we hear their 

names, we do not even know what they do—who are not under any 

kind of a regulator at this point, and they are into the enforcement 

side of it, I guess, under the FTC. 

So as a result, I think that is where a lot of the breaches have 

been. I mean, some of the stuff is amazing to me. I mean, it is in 

transportation, it is in——

Mr. GREENSPAN. It is remarkable. 

Mr. CASTLE.—not encrypting it at all. I mean, it is just amazing 

that it happens. So I think that we need to do something. 

Mr. GREENSPAN. Yes. I would certainly say this, that this issue 

has to be resolved. I mean, it cannot fester, because I think we will 

have some serious consequences. It has not, really, yet, but it could. 

And I do not deny that where issues of legality are involved statutes are required for clarification and understanding whose rights 

are in what particular area. I have heard some incredibly complex 

stories of people who, for example, had outsourced certain types of 

projects with a huge number of names which they had collected 

which got lost, and they are responsible. 

So the question of ‘‘Who is legally responsible under those sorts 

of conditions?’’ is a critical issue which the law has to address. 

I am just basically saying what I am a little concerned about, is 

that we all of a sudden have this major advance in technology—

which is the whole electronic system—and that it is making major 

incursions into many areas where huge progress is occurring, and 

I am a little worried that we will stifle the process if we overdo it. 

But if you are getting at the issue on responsibility, on who has 

responsibility in the event of event X——

Mr. CASTLE. Right. 

25

Mr. GREENSPAN.—which is a legal question, then anything that 

clarifies that, I think, is essential. 

Mr. CASTLE. Would be helpful, right. 

I think there are consumer issues as well, the consumer reaction. 

All of us here in this room are consumers, probably, of all this, and 

how would we react to different notices we get. I mean, that is a 

whole other area that is very, very difficult, in terms of what we 

do, credit freezes and stopping our credit cards and that kind of 

thing. So I think we have to do a lot of work there. 

But I appreciate your thoughts on it. 

I yield back to the chairman. 

The CHAIRMAN. The gentleman yields back. 

The gentlelady from Oregon, Ms. Hooley? 

Ms. HOOLEY. Thank you, Mr. Chairman. 

Thank you, Mr. Greenspan, for appearing today. 

According to a letter you wrote to the Joint Economic Committee 

of Congress, you said, ‘‘High energy costs are forecast to shave 

three-quarters of a percentage point off this year’s growth to the 

U.S. gross domestic product.’’ You also noted that ‘‘The U.S. economy seems to be coping pretty well with the runup of crude oil 

prices, aside from these headwinds.’’

Well, I know many middle-income families making the decision 

of whether or not to take a vacation this summer might disagree 

with you. 

Rising gas costs of well over $2.50 a gallon certainly impacts a 

majority of family budgets. And in my state, of Oregon, we are suffering still a 6.5 percent unemployment rate, and many people 

would argue that impact is already being felt. 

My question is: If the economy is coping well and these are only 

headwinds, at what point do the rising gas prices pose a serious 

threat to our markets and economy; and at what price level will 

our economy no longer be able to cope? 

Mr. GREENSPAN. Well, Congresswoman, it depends not only on 

the level of prices but on the pace of change, and the reason I say 

that is, what we seem to do with gasoline consumption, and probably diesel as well, is: When prices go up, we consume just the 

same amount of gasoline, largely because we do not curtail our 

travel very much. 

If you look at the aggregate amount of motor gasoline consumption in the face of this very sharp rise in price, you will be hardpressed to find any reduction. Yet what we do know from experience is that while people do not cut their mileages down very 

much, they do tend, when prices go up, to buy cars and trucks with 

much better fuel efficiency. 

And so over time, if prices stay up, what is going to happen is 

that the amount of gasoline consumed is going to go down, and indeed it could go down quite considerably. People will be traveling 

in lighter cars, more fuel-efficient, maybe more hybrids. 

One thing about Americans is that our cars are critical to our 

day-by-day existence, and they do notice when gasoline prices go 

up; and it probably does curtail other forms of spending. Indeed 

you can see it in certain income groups, where high gasoline prices 

lead to less purchases elsewhere. But what they do not do is drive 

fewer miles. At least that is what the data suggests. 

26

Ms. HOOLEY. I would like to take just a different tact, very shortly, and talk a little bit about the currency prices in China. 

Sixty percent of China’s economists think they should allow the 

country’s currency to increase in value sometime this year. 

Would you advocate a gradual increase in the value of Chinese 

currency; and what would be the impact on both the American and 

global economy; and if China refuses to increase the value of their 

currency significantly, would you advocate imposing punitive tariffs 

against China’s imports? 

Mr. GREENSPAN. Well, first of all, I have said previously that I 

believe it is in China’s interest to allow its currency to move up, 

largely because the procedures that it uses to support its currency 

requires that their central bank accumulate very large quantities 

of U.S. Treasury securities. 

Unless they sterilize that very substantial inflow, they create significant distortions in their financial system, and ultimately it 

could be very serious for the Chinese economy. 

They know that, and they have said that they intend to adjust 

the currency. The issue that seems to be on the table is when, and 

what is the nature of the change? 

I would not be in favor of a significant punitive tariff, so to 

speak, largely because I do not think, one, it will accomplish what 

a lot of people think it would—namely, significantly improve jobs 

and manufacturing in the United States. But also because the global system is something which is terribly important, not only to the 

world at large but very specifically to the United States. And anything that we do which restricts world globalization, at the end of 

the day, redounds to our disadvantage. 

The CHAIRMAN. The gentlelady’s time has expired. 

Ms. HOOLEY. Thank you. 

The CHAIRMAN. The gentleman from California, Mr. Royce? 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman Greenspan, it is nice to have you back before our committee, and I hope we will continue to hear from you in the future. 

I hope you will be a visitor in years to come. 

I would like to also add that I am most appreciative of the many 

years of service you have given to the United States of America 

and the wise counsel that you have shared with us on so many occasions. 

I would like to ask you a question going to a bill that the committee recently passed to strengthen oversight of the housing 

GSEs. 

In my view, the legislation has a number of positives in it; however, I could not support it because the negatives outweigh the 

positives. And, unfortunately, as we considered this legislation in 

the committee, we did not seek the formal views of the Federal Reserve. 

However, in your testimony to the Senate Banking Committee 

earlier this year, in April, you stated that: ‘‘To fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventative actions are required sooner 

rather than later.’’

27

Before we have a full vote in the House of Representatives, I 

wanted to ask you if you believe H.R. 1461 is sufficient reform. 

Does it fully address the concerns of the Federal Reserve? 

Mr. GREENSPAN. It does not, Congressman. 

I think that there are several aspects of the act passed by this 

committee which do not address the concerns that we at the Federal Reserve have, most specifically the issue of the size of the portfolios which have been accumulated over the years by the GSEs, 

which concern us in ways which you just described. Unless and 

until we can address those issues, I do not think we have appropriately removed what is a very significant threat to our financial 

system longer-term. 

Mr. ROYCE. Let me ask this, then. In your opinion, would no bill 

be better than moving the approach in 1461 at this time? 

Mr. GREENSPAN. That would be my opinion. 

Mr. ROYCE. Okay. 

Mr. Chairman, a number of people have criticized both the Federal Reserve and the administration for moving the goal posts, as 

they say, on GSE reform. Essentially, the criticism is that the Fed 

was not talking about portfolio limits 2 years ago and now is saying, you know, that the limits are a much-needed step in the reform of oversight; and I wondered if you could explain how and 

why the board of governors came to this conclusion. 

Mr. GREENSPAN. I think that is describing the situation quite 

correctly. 

It is called a learning process. It has taken us a considerable period to understand the internal mechanisms of how those GSEs 

function, what their structure is with respect to securitization and 

portfolio accumulation, how they make their profits, how they are 

a profit-making organization, primarily, and how they try to meld 

that with their housing GSE goals. 

It is a very complex system. I have been in the financial system 

for many, many decades, and when I first took a look at them, I 

did not understand how they worked, I mean what it is they were 

doing, and it took a while; and I must say that, with the help of 

Federal Reserve staff, we learned how they worked, and as we 

learned, we recognized the extent of the type of risks which they 

impose on the structure. 

And so our changing view is merely a learning curve, and we did 

not understand the significance 2 years ago, for example, of what 

was going on. 

Mr. ROYCE. Thank you very much, Chairman Greenspan. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman yields back. 

The gentlelady from Indiana, Ms. Carson? 

Ms. CARSON. Thank you very much, Mr. Chairman. 

Thank you very much, Mr. Greenspan, for being here and for 

your public service, and also for the financial literacy workshop 

that you conducted for me. It has been very beneficial. 

Mr. GREENSPAN. Thank you very much. 

Ms. CARSON. Grants for downpayments, where we give money to 

people to buy homes, I noticed in your statement, on Page 10, you 

talk about the increase in the prevalence of interest-only loans and 

the introduction of more exotic forms of adjustable-rate mortgages. 

28

Would you consider the giving of a grant for a downpayment for 

a low-income family to be an exotic form of support? 

And then also I am concerned about the housing market, because 

I am the queen of predatory lending. And also I think Indiana still 

ranks highest among foreclosures. So that sort of relates to the 

question that I asked. 

But, anyway, I know you have taken steps to control inflation, 

but there is still a dearth of housing available to people with modest incomes, but I am afraid that the availability is pricing the 

moderate-income people out of the housing market. 

Thirdly, if you have time, can you comment on whether or not 

the oil prices that our consumers face are related to a war. It is 

not a political question. It is whether or not you believe that the 

fires in the oil fields and the drawing up of the oils has in fact got 

a direct correlation to the insurmountable inflation prices of oil. 

Thank you very much, Mr. Chairman. 

Mr. GREENSPAN. First of all, I do not consider that grants to lowincome families for downpayments are a problem that is systemic 

to the financial system. That is not the issue that I was raising. 

I was raising the questions of the use of, say, for example, interest-only mortgages; which, incidentally, properly employed are perfectly fine instruments, but not for those who need to find some 

new exotic form of mortgage to raise enough money to buy a house 

that they want to buy. 

In other words, if you need an exotic mortgage—and there are 

all sorts of odd types of mortgages, which essentially seem to cost 

little now but much more later, which you employ because you 

want to purchase a much higher-priced house—it is those types of 

mortgages that I am concerned about; in other words, that the safety and soundness of banks requires that the mortgagor is able to 

repay the mortgage or the bank has got a problem. 

And so it is that type of issue, which I think is currently being 

addressed by supervisors in the Federal Reserve, in the OCC, and 

others. The general view of this issue is not that we want to address this huge expansion in homebuilding and home prices by 

using supervisory capabilities, that we have, to restrain the markets. 

Our judgment is basically based on making certain that there are 

sound loans that are being made. If that is done, it will tend to constrain excesses in the marketplace. But it is not the excesses which 

are essentially driving our supervisory activities as such. 

With respect to the oil issue, the oil price is up largely because 

demand has been rising and there is a shortage of capacity, or at 

least perceived excess capacity. I think that that would have occurred with or without the wars. 

Ms. CARSON. Thank you, Mr. Chairman. 

Yield back. 

The CHAIRMAN. The gentlelady yields back. 

The gentlelady from New York, Ms. Kelly? 

Mrs. KELLY. Thank you, Mr. Chairman. 

Chairman Greenspan, thank you so much for your patience in 

coming to report to us, this committee. 

You mentioned the London attacks in your testimony, and earlier 

this year we had a dialogue about the terrorism insurance area and 

29

where you believe that government activity is needed; and you stated at the time there was not an efficient market that was functioning in the area and it really probably cannot because violence 

is very difficult to quantify. 

I am wondering if the London attacks recently have done anything to change your view on this issue. 

Mr. GREENSPAN. Well, I think this is an extraordinarily difficult 

question. 

The issue that I have been concerned about is the difficulties 

that our system would have in meeting very large costs of a terrorist attack. The question is, you know: How does a civilized society, with a rule of law, deal with losses from violence? I mean, it 

is essentially a critical question. 

We socialize part of it in the sense that we substitute military 

and police power for individual protection, but I think we—correctly—choose to leave the vast majority of risk to be absorbed by 

the private sector; and the reason for that is that, unless risk is 

essentially a private issue, the allocation of capital in a market 

economy is not optimized and that therefore standards of living are 

not optimized. 

So what we have got is the issue here of scale. To the extent that 

modest historic levels of violence occur, the private market has 

been wholly and fully capable of dealing with that. 

The type of terrorism that is arising in the context of increasing 

technologies which were not available before has created the possibilities of huge losses, and there is no way for a private system to 

handle that. 

Private markets presuppose an essentially nonviolent environment where individual voluntary exchange can go on, people can 

deal with one another without fear. You throw a bomb in the middle of that, and people withdraw, the division of labor goes down, 

the GDP goes down. 

It is very difficult for a free market society to deal with outsized 

levels of violence. 

As a consequence of that, I think what the Congress has got to 

do is to recognize that it is a tradeoff here. That is, so long as we 

have terrorism which has the capability of a very substantial scope 

of damage, there is no way you can expect private insurance system to handle that. 

But we have to be careful, in creating whatever we do in government insurance or reinsurance, to make certain that we do not go 

beyond the point which is necessary, because obviously everybody 

likes free goods, and the government can create them. 

To the extent that we socialize risk, we reduce our standard of 

living. And so it is a tradeoff. 

But as I indicated when this issue came up in the last committee 

meeting, I do not see how we can avoid the issue of a significant 

segment of government-backed reinsurance in this particular area. 

Mrs. KELLY. All things being equal, Mr. Chairman, if TRIA were 

modified to create a government-backed reinsurer that had access 

to capital markets and a Treasury window for borrowing, what 

kind of ownership structure provides the most discipline for owners 

and investors in the securities? 

30

Mr. GREENSPAN. I do not know specifically, but I do know that 

we are already beginning to see private solutions to a lot of the 

types of problems that we have got; and I think it is important to 

recognize that if the government decides to move in and set up a 

large structure immediately, it will abort those activities which are 

effectively addressing the system. 

You know, there is another interesting question here, which is a 

very major question of tradeoffs: To what extent do you recognize 

the rise of terrorism as an element which should affect our lives? 

I mean, clearly it has to affect our lives, and does. 

And we are confronted with the issue of how we trade off the 

question of trying to change our way of life to minimize the losses 

that occur because terrorism exists, which means it tells us where 

we build, how high we build, what types of trophy buildings we 

construct. 

How much of that do we want to preserve and how much of that 

do we cut back on? These are very tough judgments. And in the 

sense—the markets will do it. 

In other words, if Congress will enact a certain law, then the 

markets will adjust to that. It is an issue which is not going to be 

readily and easily resolved. Civilized societies have not had to deal 

with this type of technology of terrorism previously. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from California, Mr. Sherman? 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I ask unanimous consent that we all be given 5 days to submit 

additional questions for the record. 

The CHAIRMAN. Without objection. 

Mr. SHERMAN. Mr. Chairman of the Federal Reserve Board, so 

many have bemoaned the fact that this is your last appearance before us. I think they should be seeking solutions to this. 

First, I hope you will come back and share your wisdom with us, 

even if you are no longer drawing a government paycheck. 

But I will be introducing legislation to say that someone who has 

served a part of a term and then served a full 14-year term can 

still be appointed for another 5 years to the Federal Reserve, and 

I know my colleagues would begin chanting ‘‘5 more years’’ except 

they do not want to erode my 5 more minutes. 

Mr. GREENSPAN. Does my wife have a vote in this? 

[Laughter.] 

Mr. SHERMAN. Thank God she does not. 

I have got so many questions I will basically be submitting them 

for the record. 

We are heading eventually for a realignment of currency values 

such that our trade deficit is ameliorated, perhaps reversed. It is 

deferrable. But this realignment is not avoidable. It will have benefits. It will also have enormous harms, even if it is done smoothly. 

But if it is not smoothly, it could be a disaster. 

I will be asking in writing how we can work with other countries 

to assure that there is a smooth currency realignment and not a 

crash of the dollar. 

I will be submitting questions about the importance of subprime 

lending to our economy, particularly when those loans are not 

made by depository institutions that are insured by the federal govVerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH
31

ernment but do not pose those risks because they are made by private uninsured lenders; andd I will also be asking about the importance of the private auditing function to our capital markets. 

A recent op-ed in the American Banker notes that our committee 

and the House passed this—well, our committee passed this GSE 

reform bill, and we reported it out by an overwhelming vote, that 

it would establish a better regulator for the GSEs; and I will be 

asking whether you would concur in this assessment or whether 

you would agree that stronger capital and prompt corrective action 

authority as provided in the bill makes sense and just how important it is that Congress pass GSE reform legislation this year. 

One issue I have asked you about before is the issue of the regulations issued by the Treasury Department and the Federal Reserve Board allowing national banks to engage in real estate brokerage and real estate management. 

As you know, these regulations have been blocked by congressional action on an annual basis, which is hardly an efficient way 

to provide for a national system to regulate who can and cannot, 

and under what circumstances, engage in real estate brokerage activity. 

Now, you have consistently opposed mixing banking and commerce, and a commercial activity is a commercial activity even if 

it involves financing. 

For many of my working-class-family constituents, they are not 

even aspiring to buy a home, they are aspiring to buy a car, and 

the lending function who will make the loan is the most important 

part of selecting an automobile dealer. Wheat and steel, even this 

shirt, can be financed on a credit card, so just because something 

is financed does not mean it is not commerce. 

So I hope you would explain: Why is buying and selling of real 

estate a financial activity if buying and selling cars, steel, et cetera, 

is not? 

Perhaps you could respond orally to that question. 

Mr. GREENSPAN. You want me to respond——

Mr. SHERMAN. Yes. I actually think I have some time. 

Mr. GREENSPAN. Yes. 

Let me just say that the broader question, which is finance and 

commerce, is one which will gradually erode in the sense that technology is making the distinction ever less obvious. 

Our general concern is not that mixing banking and commerce 

is inherently dangerous; it is that we do not wish to see it occur 

too quickly, because we are currently in the process, at this stage, 

of absorbing very significant changes in technology, globalization, 

structures in finance, and we have seen very major changes in the 

financial system. 

And it is very important, from the supervisory point of view, to 

be able to judge what is occurring; and, so far, we conceive of the 

way we, as umbrella supervisors of various institutions, have been 

able to interrelate with an evolving, fairly rapid, change in technology. 

If we were to break the bounds of banking and commerce at this 

stage, we would get some very discontinuous changes, which, we 

are fearful, would make it exceptionally difficult to supervise according to the statutes that we operate under. 

32

So it is not that we are saying that there is something fundamentally different about these activities, because they are not. I 

mean, finance gradually looks like commerce and commerce looks 

like——

Mr. SHERMAN. If I can interject——

The CHAIRMAN. The gentleman’s time has expired. 

Mr. SHERMAN. I would just say ‘‘5 more years.’’

Thank you. 

Mr. PAUL. Thank you, Mr. Chairman. 

If indeed this is your last appearance before our committee, Mr. 

Greenspan, I would have to say that in the future I am sure I will 

find these hearings a lot less interesting. 

[Laughter.] 

But I do have a couple of parting questions for you. 

Keynes, when he wrote his general theory, made the point that 

he had a tremendous faith in central bank credit creation because 

it would stimulate productivity. But along with this, he also recognized that it would push prices and labor costs up. He saw this as 

a convenience, not a disadvantage, because he realized that in the 

corrective phase of the economic business cycle, that wages had to 

go down, and people would not accept a nominal decrease in wages; 

but if they were decreased in real terms, it would serve the economic benefit. 

Likewise, I think this same principle can be applied to our debt. 

To me, this system that we have today is a convenient way to default on our debt, to liquidate debt through the inflationary 

scheme. 

Even you, in the 1960s, described the paper system as a scheme 

for the confiscation of wealth. And in many ways I think this is exactly what has happened. We have learned to adapt to deficit financing, but in many ways the total debt is not that bad because 

it goes down in real terms. As bad as it is, in real terms it is not 

nearly as high. 

But since we went on a total paper standard in 1971, we have 

increased our money supply essentially 12-fold. Debt in this country, federal debt, has gone up 19-fold; but that is in nominal dollars, not in real dollars. 

So my question is this: Is it not true that the paper system that 

we work with today is actually a scheme to default on our debt? 

And is it not true that, for this reason, that is a good argument 

for people not—eventually, at some day—wanting to buy Treasury 

bills because they will be paid back with cheaper dollars? 

And indeed in our lifetime we certainly experienced this in the 

late 1970s, that interest rates had to go up pretty high, and that 

this paper system serves the interests of big government and deficit financing because it is a sneaky way of paying for deficit financing. At the same time, it hurts the people who are retired and 

put their money in savings. 

And aligned with this question, I would like to ask something 

dealing exactly with gold: If paper money—today it seems to be 

working rather well, but if the paper system does not work, when 

will the time come, what will the signs be, that we should reconsider gold? 

33

Even in 1981, when you came before the Gold Commission, people were frightened about what was happening, and that was not 

too many years ago, and you testified that it might not be a bad 

idea to back our government bonds with gold in order to bring 

down interest rates. 

So what are the conditions that might exist for the central bankers of the world to reconsider gold? We do know that they have not 

given up on gold. They have not gotten rid of their gold. They are 

holding it there for some reason. 

So what is the purpose of the gold if it is not with the idea that 

someday they might need it? They do not hold lead or pork bellies; 

they hold gold. 

So what are the conditions that you might anticipate when the 

world may reconsider gold? 

Mr. GREENSPAN. Well, you say central banks own gold or monetary authorities own gold. The United States is a large gold holder. 

And you have to ask yourself: Why do we hold gold? And the answer is essentially implicitly the one that you have raise; namely, 

that over the generations, when fiat monies arose, and indeed created the type of problems, which I think you correctly identify, for 

the 1970s, although the implication that it was some scheme or 

conspiracy gives it a much more conscious focus than actually, as 

I recall it, was occurring, it was more inadvertence that created the 

basic problems. 

But as I have testified here before to a similar question, central 

bankers began to realize in the late 1970s how deleterious a factor 

the inflation was, and indeed since the late 1970s central bankers 

generally have behaved as though we were on the gold standard. 

And indeed the extent of liquidity contraction that has occurred 

as a consequence of the various different efforts on the part of monetary authorities is a clear indication that we recognize that excessive creation of liquidity creates inflation, which in turn undermines economic growth. 

So that the question is: Would there be any advantage, at this 

particular stage, in going back to the gold standard? And the answer is: I do not think so, because we are acting as though we were 

there. 

Would it have been a question, at least open, in 1981, as you put 

it? And the answer was: Yes. Remember, the gold price was $800 

an ounce. We were dealing with extraordinary imbalances; interest 

rates were up sharply; the system looked to be highly unstable; and 

we needed to do something. Now, we did something. 

In the United States, Paul Volcker, as you may recall, in 1979 

came into office and put a very severe clamp on the expansion of 

credit, and that led to a long sequence of events here, which we are 

benefiting from up to this date. 

So central banking, I believe, has learned the dangers of fiat 

money, and I think as a consequence of that we have behaved as 

though there are indeed real reserves underneath the system. 

Mrs. KELLY. [Presiding.] The gentleman’s time has expired. 

Ms. Lee? 

Ms. LEE. Thank you, Madam Chair. 

Hello, Mr. Greenspan. Good to see you again. 

34

Let me also thank you for your years of dedicated service. And 

I just want to also thank you for your very forthright interaction 

with many of our organizations around the country, especially in 

California, such as the Greenlining Institute, and I think that——

Mr. GREENSPAN. They are good friends. 

Ms. LEE. And thank you very much for everything that you have 

done to help move this agenda forward, in terms of the fairness in 

our economic system. 

I wanted to ask you a couple of things. And we have been in 

touch with each other over the years with regard to CRA, and I 

want to thank you—the Community Reinvestment Act, and why 

and how banks can receive an A rating when in fact they are lending to African-Americans and Latinos, in terms of home lending, 

between 2 and 3 percent. As it relates to the Hispanic community 

in California, I think it is about 18 percent, when 35 percent of the 

population is Latino. 

And your response, of course, was that CRA cannot, you know, 

deal with the ethnic composition of any lending transaction because 

they are not required to, but the enforcement of fair lending laws 

is what would allow for the insurance of nondiscrimination actions. 

But yet I have to ask you: The fair lending laws appear not to 

have been enforced, given the very dismal mortgage lending rates 

of these institutions. And so in going back and forth, over the 

years, I have been reading your responses, and I want to ask you 

today if it makes sense, then, that we ask you to look at how to 

conduct—or maybe the Federal Reserve could conduct—a disparity 

study, to really begin to look at what is taking place, because, for 

the life of me, I cannot understand why in fact the home lending 

rate is so low when in fact these institutions are getting such high 

ratings. 

And so I would like to ask for some specific solutions to this so 

that we can move forward to ensure more fairness in mortgage 

lending. 

Mr. GREENSPAN. Yes, this is a very difficult issue, which, of 

course, we have all been struggling with for quite a good deal of 

time. 

We, at the Federal Reserve—and indeed this is also true at our 

colleagues at the other banking regulatory agencies—enforce a 

statute which is passed by the Congress. We do it as best we can 

and indeed endeavor not only to capture the letter of the law but 

the spirit of the law as well. We cannot go beyond that. In other 

words, we do not create the laws. 

Ms. LEE. But, Mr. Greenspan, Mr. Chairman, let me just ask 

you, though: Should not we consider at this point an amendment, 

maybe, to the Community Reinvestment Act, to broaden, for example, the goal to at least gather this data so we will know? 

Mr. GREENSPAN. Well, I think there is an issue here which has 

to do with what type of data and what type of burdens you put on 

institutions in collecting the data, because it is not a costless operation. 

Ms. LEE. Sure. 

Mr. GREENSPAN. I do think we, for example, have expanded 

HMDA over the years—I mean, we will be releasing HMDA data, 

35

I believe, in a couple of months for the year 2004—and there are 

many new sources of information in those data systems. 

And in that regard, it is a very large data requirement that is 

involved here, and there are obviously going to be continuing discussions of what types of information, what types of evidence of 

discrimination occurs, and how does one essentially pick it up. But 

it is not a simple solution. 

Ms. LEE. I understand, Mr. Greenspan. 

Before my time is up, let me just say I understand the fact that 

this would cost some money. But I think, long-term, the cost of discrimination and the costs of denying loans to minority potential 

homeowners far exceed the cost of gathering the data. 

When you look at small business lending, it is my understanding 

now—and we are looking to verify this information—that AfricanAmerican-owned businesses receive less than 2 percent of the small 

business lending; Latino-owned businesses less than 2 percent also. 

And so at some point, in addition to trying to enforce fair lending 

laws, we have got to do something to make sure that there does 

not exist discrimination and that there is a level playing field in 

the future whether it costs the financial services industry a few 

dollars or not. 

Mr. GREENSPAN. Well, I agree with——

Mrs. KELLY. The gentlewoman’s time has expired. 

Ms. LEE. I will follow up with you——

Mr. GREENSPAN. I agree with what you stated. 

The issue basically is, how do we extricate the discriminatory 

forces which inevitably still exist in the system? It is an ongoing 

project, and I think we are making progress, but I certainly agree 

that there is more to be done. 

Ms. LEE. Thank you, Mr. Chairman. 

Mrs. KELLY. Mr. Gillmor? 

Mr. GILLMOR. Thank you, Madam Chairwoman. 

Mr. Greenspan, I want to commend you for the great job you 

have done over the years, and for your service to the country. You 

are going to be missed. 

I have a couple of questions regarding ILCs, industrial loan companies, I would like your views on. 

Could you give us your thoughts about the rapid expansion of 

commercial firms obtaining industrial loan company charters and 

what that means for the overall banking system? And in respect to 

that, are there any risks, or even systemic risk, to our banking system in the avoidance of Fed oversight that an ILC charter allows? 

Mr. GREENSPAN. This issue is related to the issue we discussed 

just a short while ago with respect to the question of the move from 

banking to commerce that is really an issue here. 

The ILC is, as you point out, not subject to umbrella supervision, 

as indeed other banking institutions are; and there is a concern on 

our part that an expansion in this particular area—especially if 

they are given additional powers, which create essentially commercial banks—that we have effectively made a decision to eliminate 

the distinction between banking and commerce, inadvertently; in 

other words, by basically creating an ILC which ultimately turns 

out to be a commercial bank which can be owned by a commercial 

interest. 

36

If that is indeed the case, Congress ought to do it directly. My 

reaction, however, is that if we do it—and we will eventually do 

it—it be done in a way which is measured and understood to be 

sufficiently sensitive to the supervisory adjustments that go along 

with that process. 

So I think that what our major concern is, is not, as I said before, 

the issue of breaching commerce and banking over the long run—

which we think is probably inevitable and is something that can 

and should be handled—it is the way we are doing it. I think that 

is wrong. 

Mr. GILLMOR. Well, you indicate it might or might not be inevitable. If I am reading your response fairly, I think you are saying 

it is not a good idea. Would that be accurate? 

Mr. GREENSPAN. Yes: It is not a good idea. I am sorry if I did 

not make that clearer. 

Mr. GILLMOR. Well, you probably did, but I just wanted to drive 

a nail through the board. 

Let me ask you another question—and maybe it has come up before, but I had to be in another markup. 

House prices are up, obviously, a great deal, so for people to afford them you have got the use of ARMS, you have got no downpayment, you have got interest-only loans. It seems to me that a 

lot of people are kind of cutting it very thin financially. 

And so I guess my question is: If we do have a spike in long-term 

rates, sooner or later there are going to have to be payments on 

those no-interest loans; the adjustable-rate mortgages are going to 

go up. 

In your view, what would be the impact of a significant spike in 

rates on the people who have gotten into the housing market in 

that manner? 

Mr. GREENSPAN. Well, incidentally, one of the reasons why we 

have engaged in the type of monetary policy which we have over 

the past year is to reduce the probability of that occurring. And obviously, should that occur, we will have, obviously, adjustable-rate 

mortgages will be impacted. 

However, remember that most recent adjustable-rate mortgages, 

to a very large extent, begin with a fixed component. In other 

words, they are not immediately variable. So the actual level of 

mortgage debt which is interest-sensitive at this particular stage, 

including what we call adjustable-rate mortgages, is not very high. 

But it is certainly the case that, over time, if you get a spike in 

interest rates—and indeed by a spike I assume you mean they go 

up and they stay there—then their effects are quite significant. 

And I must say: It is basically a function of appropriate monetary policy to avoid such outcomes. 

Mr. GILLMOR. Thank you, Mr. Chairman. 

Mrs. KELLY. Thank you. 

Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

Mr. Chairman, last July you testified before this committee that 

average hourly earnings of non-supervisory workers had been subdued in recent months and barely budged in June. 

I cannot find any reference in your testimony today to average 

hourly earnings with non-supervisory workers. Mr. Frank pointed 

37

to the information in your report about earnings, or wages, but it 

does not seem to match that figure. 

It does say that the employment cost index for hourly compensation had actually gone down about half a percentage point from 

what it had been the last couple of years. 

On the continuum from subdued to modest to exuberant to 

frothy, where do increases in average hourly earnings of non-supervisory workers fall? 

Mr. GREENSPAN. Well, I think what we do, basically, is we collect 

data from various different sources. The broadest coverage of wages 

and salaries in this country is the quarterly report that occurs as 

a consequence of companies reporting for unemployment insurance 

coverage, which is universal; and those numbers are probably coverage way up into the high 90s, and they are fairly complete. 

We have another set of data which essentially endeavors to pick 

up production workers as distinct from supervisory workers, and 

that is about 80 percent of the workforce. 

So we separate the wages and salaries into the production workers and into supervisory workers, essentially, the 20 percent, or the 

skilled management professional. 

What we find is the production workers’ average hourly earnings 

are rising very modestly; but because of the distribution of skilled 

worker supply and demand, we are finding that the increase implicitly in supervisory workers’ average hourly earnings is going up 

very much more rapidly. 

Mr. MILLER OF NORTH CAROLINA. I am sorry, say that again. 

Mr. GREENSPAN. It is going up very much more rapidly——

Mr. MILLER OF NORTH CAROLINA. For the supervisory employees? 

Mr. GREENSPAN.—for the supervisory workers, the 20 percent; 

the supervisory, professional, et cetera, the more skilled aspects of 

our labor force. 

So we are getting a bivariate income distribution. And as I have 

said many times in the past: For a democratic society, this is not 

healthful, to say the least; and as I have indicated on numerous occasions, I believe this is an education problem that requires us to 

get the balance of skills coming out of our schools to match the 

skills that our physical facilities require. 

So there is a reconciliation, and the reconciliation is that we are 

getting some really divergent trends. 

Mr. MILLER OF NORTH CAROLINA. Mr. Greenspan, Mr. Chairman, 

you did testify about home mortgages and about the concerns about 

exotic mortgages and said that home equity extraction was occurring, mortgage market finance withdrawals of home equity—in 

other words, people were borrowing against their homes—and it 

seems to be that homeownership, as Chairman Oxley said, is good 

news, but it is about the only good news in the American economy 

for most workers—about 80 percent—whose wages remain subdued 

or increasing modestly. 

All of your testimony appears to go to the effect this is having 

on the safety and soundness of lenders or on the effect on housing 

prices. 

Have you looked at what these exotic mortgages, particularly for 

refinancing, are doing to the economic status of most American 

families? 

38

You pointed out we have a 1 percent savings rate. The latest figure I have seen on credit card debt is $800 billion. Wages for 80 

percent of American workers are very modest or subdued, and their 

increase—and the good news that 69 percent of American families 

own their homes but the equity in their homes is the bulk of their 

net worth. 

What are these exotic mortgages for refinancing doing to the financial position of American families? 

Mr. GREENSPAN. Well, fortunately, Congressman, not much yet, 

because they are still very small. In other words, it is the tip of 

an iceberg, that we are concerned about that it gets larger. 

In the total scheme of things, the aggregate amounts are small. 

But for individual cases, they could be disastrous, largely because 

there are a number of loans which require, for example, no equity 

early on; and if you have gotten your downpayment through a piggyback loan or something like that, you are essentially depending 

on the price of the home continuing to rise and your equity continuing to rise—and that is a little bit tricky, because this type of 

expansion in prices historically does not go on very long. 

And indeed, while it is hard to forecast—and I am not sure that 

it is going to occur—there may be, and certainly will be, in certain 

local areas, price declines; and if you have some of these interestonly, very low downpayment, exotic mortgages, which essentially 

are issued by banking or other institutions on the expectation that 

prices will continue to go up and therefore the loan will always be 

good, if you are depending on that, there is potential individual disaster there. 

Fortunately, that is a very select and small group so far, and we 

very much would like to keep it that way. 

Mrs. KELLY. The gentleman’s time has expired. 

Mr. Shays? 

Mr. SHAYS. Thank you, Chairman Greenspan. 

I think that you, frankly, are one of the most important powerful 

individuals in the world and one of the most outstanding public 

servants, and I thank you for using your power well and for being 

such an outstanding public servant. 

I have a number of questions, and if the answers could be as 

brief as possible, I might get to a few. 

I look at the budget deficits, the trade deficits, the unfunded liability that the federal government has in Social Security and 

Medicare, I look at state budget deficits and their debt and their 

liabilities and pension funds and so on, and it seems pretty significant to me. 

And then I look at the low level of savings that Americans have, 

and I am wondering why—I am amazed that the economy does so 

well in spite of that. I would like the short version of why it does 

so well in spite of that. 

Mr. GREENSPAN. First of all, even though we have a very low 

level of savings, we use our savings exceptionally efficiently, and by 

that I mean we have a really quite sophisticated financial system 

which enables us to use the little savings that we have most productively, and that shows up in the increased productivity that we 

are able to function with. 

39

But the other issues that you present are long-term problems, 

and it is hard to imagine how we can continue on without addressing those issues. 

Mr. SHAYS. Yes. 

I am surprised that it costs me $55 to put gasoline in my Jeep, 

that these incredibly significant increases in oil prices has not 

brought down our economies, and I do not understand why. 

Mr. GREENSPAN. Well, to a very large extent, it is the fact that 

following the oil shocks of the 1970s, there was a very dramatic decline in the intensity of the use of oil. In other words, oil in barrels 

divided by real GDP has been going down at a very dramatic pace. 

And indeed, it is only half of what it was 30 years ago, and it is 

still going down. And the basic reason, the answer, is that everybody is adjusting to the fact that oil prices are high. 

Mr. SHAYS. I hear that. 

But it seems to me that it has been such a—I mean, a dollar increase in prices per gallon would strike me as being a pretty big 

shock in spite of your point about the GNP. 

Mr. GREENSPAN. No, it is a shock. And indeed, as has been mentioned before, we do estimate a three-quarters of a percentage point 

loss in real growth this year as a consequence of these prices. 

Mr. SHAYS. When I look at the housing market—first, let me ask 

you this. 

With the decline in manufacturing jobs, is it not true that we 

have actually increased the productivity—not productivity, but actually increased output in manufacturing? 

Mr. GREENSPAN. Output as a ratio to GDP has gone down very 

gradually, and indeed the reason for that, that it is going down, is 

that we are an increasingly conceptual economy, that an ever-increasing proportion of what we create, values that others, other 

countries want, are non-material. 

And therefore we are seeing some gradual decline in goods production as a ratio to overall GDP, but the rest of the GDP being 

ideas. 

Mr. SHAYS. And that is a very important point for me to think 

about. 

But forget the ratio. Has not our output in manufacturing actually gone up? 

Mr. GREENSPAN. It has, yes. 

Mr. SHAYS. And so I see the same analogy when I look at agriculture. We have 3 percent in the marketplace now, whereas we 

used to have two-thirds in the early 1900s, but our production, you 

know, vastly increased. 

Is it wrong for me to think that that is a bit of a comfort, or 

should I be concerned about the lack of even greater growth in 

manufacturing? 

Mr. GREENSPAN. Well, I think the critical issue is that we 

produce something which would be accepted as value in trade by 

others. What it is we produce is less important, or how we do it. 

And what the United States has adjusted to over the generations 

is to somehow maintain our leadership in the world largely by producing most efficiently those goods which consumers, our own and 

others, perceived as most valuable. 

Mr. SHAYS. Thank you, Mr. Chairman. 

40

Thank you, Madam Chairman. 

Mrs. KELLY. Thank you. 

Mr. Scott? 

Mr. SCOTT. Thank you very much. 

Mr. Chairman, Chairman Greenspan, so good to have you again. 

And let me just also include with the chorus of praises that you 

rightfully deserve: We hate to see you go; and I am sure if your 

wife would give you the permission to stay another 5 years, we 

would all agree with that. 

Mr. GREENSPAN. Thank you. 

Mr. SCOTT. Your intellect is just extraordinary, and your contributions have been monumental. You are indeed one of the most 

powerful voices in the world. 

And I want to get to a series of questions, that I might, and if 

you could be brief with your responses. 

My first one is on the war on terror and our financial security 

here at home and around the world. 

The recent bombings in London produced some extraordinary 

new facts in this war, one of which is that these were basically 

homegrown young terrorists that were citizens of Great Britain. 

I am sure that Prime Minister Blair would say he went to Iraq 

to fight them there—as Mr. Bush has said—before they got home, 

but they are right there. That is a new phenomenon, that certainly 

raises our own concerns here at home—the homegrown cells. 

The second one is that there appears to be a very, very violent 

and radical interpretation of the Islamic religion, that is creating 

tremendous problems. 

I am concerned that the leaders of the Muslim world, leaders of 

the Muslim financial world, the Muslim world itself, is not taking 

its leadership and responsibility. 

There seems to be no way we are going to win this war on terror, 

solve this terror problem—and with these new revelations coming 

out of the London bombing—without intense and serious and courageous leadership from the Muslim community. 

Do you see that forthcoming in the Muslim world? Is there leadership coming forward in financial markets that are controlled by 

Muslim countries to deal with this terrorism? 

It is not just a problem of the West. And with the religious factor 

coming into this, it is paramount, because one of the by-products 

could be extraordinary retaliation against the Muslim community, 

as we have seen in the numerous attacks in London and elsewhere, 

of Muslim communities. 

It is important that they step forward. And I wanted to know, 

do you see that? 

Mr. GREENSPAN. Well, I certainly see much the same things that 

you do, Congressman. 

I do think that many people of the Islamic faith whom I deal 

with in the international area are acutely aware of the importance 

of maintaining civil societies and they are not supporters of some 

of the interpretations, but I am not sufficiently knowledgeable 

about a number of the various areas that are involved here, to give 

a reasonable judgment as to where we all go from here. 

But I do think that issue of civility is critical to the growth of 

market economies, and I find that there is exactly the same view, 

41

that those who are in Islamic countries, who are in central banking, in areas of finance, in areas of economics, are all most concerned about the issue of what they are—I think appropriately—

concerned about: backlashes against people of this Islamic faith in 

this country and elsewhere. 

Mr. SCOTT. Yes. One of the issues is in terms of terrorist financing, that emanates and weaves its way through Muslim communities, Muslim financial institutions: Are you familiar with such an 

endeavor that is known as ‘‘wahalas,’’ which have been known to 

be suspect—from our intelligence—of being ways and means in 

which terrorist financing has come through legitimate Muslim financial institutions? Are you aware——

Mrs. KELLY. The gentleman’s time has expired. 

Mr. SCOTT. Would you respond to that? 

Mr. GREENSPAN. Yes. Well, let me just say very quickly that they 

are a very effective and historic means of finance, and I think it 

is based on trust. And so to the extent that they are misused for 

purposes other than they were originally created for is most unfortunate, but we do, as you I am sure are well aware, have directed 

considerable amount of efforts at trying to identify sources of finance that will support terrorist organizations. 

Obviously the U.S. Treasury Department is very acutely involved, and clearly we are aware of what, essentially, they are employed in doing. 

Mr. SCOTT. Thank you. 

Mrs. KELLY. Mr. Hensarling? 

Mr. HENSARLING. Thank you, Madam Chair. 

Chairman Greenspan, I do not know if you feel like you are being 

eulogized this morning, but please allow me to add my voice to 

those thanking you for your service to your country. It has truly 

been a significant and positive impact on our nation’s history. 

Mr. Chairman, I have seen a report from CBO, dated January 

of 2005, that says that Medicare over the next 10 years will grow 

by 9 percent, Medicaid by 7.8 percent, and Social Security by 5.6 

percent a year. 

I have also seen a GAO report, dated early March, entitled, 

‘‘Budget Process: Long-Term Focus Is Critical.’’ It states that as of 

today, if we do nothing, that we are on a collision course to either 

double taxes or cut federal spending by 50 percent by the year 

2040. 

Many of us may not be here in 2040, but we certainly hope and 

pray our children and grandchildren may be. 

There are many in this body who have shown no inclination for 

handling or dealing with the spending side of the equation. You 

testified before the House Budget Committee on March 2nd of this 

year, and you said, ‘‘Tax increases of sufficient dimension to deal 

with our looming fiscal problems arguably pose significant risk to 

the economic growth and the revenue base.’’

So I have a two-part question. If you were familiar with the GAO 

and CBO reports that I allude to, do you agree with their numbers? 

If you do not agree with their numbers, do they get the essential 

thrust and trend lines correct? 

And if so, what does the world look like in 2040 if we double 

taxes on the American people? What does that mean to housing? 

42

What does it mean to job creation? What does it mean to standard 

of living? 

Mr. GREENSPAN. A lot, Congressman. 

Let me direct you to a footnote in my prepared remarks, in which 

I endeavor, essentially in short form, to address the instabilities 

that conceivably could occur as a consequence of the fact that we 

have in law already committed the allocation of resources implicitly, in real terms—which, in my judgment, may very well be in excess of what we have the capacity to deliver—and it is terribly important for us, essentially for the retirees that will begin to retire 

in the next decade, to make sure that they know that what they 

are being promised will be delivered. 

I am not sure we have the capacity to do that, and this is indeed 

what the issue is. And CBO and GAO studies clearly come up with 

the same results. 

Mr. HENSARLING. In an attempt to deal with at least one facet 

of our long-term structural deficit, a number of members of Congress, including myself, have introduced budget process reform legislation. 

Many in this body hold PAYGO to be a panacea in that quest to 

deal with our long-term fiscal challenges, but as of today I believe 

that mandatory spending and interest accounts for 61 percent of 

the federal budget. 

According to the House Budget Committee, within a decade we 

will go from 61 percent of the budget to mandatory and interest, 

to 71 percent. 

I have personally introduced legislation that would include a ceiling on the growth of the federal budget. If spending is a significant 

part of the challenge, inasmuch as every PAYGO proposal I have 

seen does not deal with mandatory spending, does not deal with 

the automatic inflation included in baseline budgeting, and if our 

quest is to control spending, is not a ceiling on the growth of government a superior alternative to traditional PAYGO? 

Mr. GREENSPAN. I think that there are numbers of ways you can 

address the question. For example, I have often advocated that all 

statutes be sunsetted, and that includes the Federal Reserve Act. 

The importance of that is: If you get into a situation where your 

entitlements or mandatory spending is moving out of line, you just 

merely cannot say, ‘‘Well, we will pass a law and require it to come 

down a certain amount,’’ because the Congress may not vote that 

law. In other words, what you basically need is a vehicle which will 

enable individual acts to be reevaluated, and indeed to get a majority, positive majority, to keep them going forward. 

I am not sure that even—I have often advocated triggers and 

various other vehicles which address this particular type of question. 

But it is a very serious issue. 

Mr. HENSARLING. Well, and I certainly agree with you that 

sunsetting would be a very important part of the mix in the legislation. 

In the time I have remaining, allow me to switch subjects, back 

to an earlier subject of the recent GSE legislation. 

Part of that legislation includes an Affordable Housing Fund, 

which I believe you are acquainted with, has Fannie and Freddie 

43

using 5 percent of their after-tax profits to fund this particular 

fund, on top of approximately 82 other government housing programs, all ostensibly aimed at affordable housing. 

Given the duopoly nature of Fannie and Freddie, do you believe 

they have sufficient market power to essentially impose that cost 

upon the market, so that at the end of the day, perhaps, we are 

taking money out of one affordable housing dynamic and simply 

turning around and turning it over to another? Do they have sufficient power to impose that cost on the ultimate consumer? 

Mr. GREENSPAN. I do not know. And indeed, all I can say to you 

is that we at the Federal Reserve have not taken a position on this. 

It is interesting, I think, that the new CEO of Freddie Mac, Richard Syron—as I remember reading somewhere recently—claimed 

that there is no longer a duopoly, that they no longer have the 

power they used to have. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

My time has expired. 

Mrs. KELLY. Thank you. 

Mr. Davis? 

Mr. DAVIS OF ALABAMA. Thank you, Madam Chairwoman. 

Chairman Greenspan, I certainly—like, I think, every one of my 

colleagues today—wish you enormously well and a lot of good fortune in the remaining part of your career and your life. 

For those of us new members who have been here, like Mr. 

Hensarling and myself, you have been a living seminar on economic policy, and we appreciate your playing that role. 

Mr. GREENSPAN. Thank you. 

Mr. DAVIS OF ALABAMA. I want to ask you about the phenomenon 

of globalization, because one of the things that strikes me is that 

when you have talked about it and when a lot of people in this 

room have talked about, it has been in terms of an either-or kind 

of dynamic. 

You have had people on the left, if you will, or even the extreme 

right, who have taken the position that globalization is counterproductive, is unfortunate; and you have taken the opposition position, I think the responsible position, that globalization is a good 

thing, that redounds in our favor. 

But it strikes me that, frankly, for those of us who were voting 

on these agreements, it is not an either-or proposition in terms of 

globalization or nonglobalization. There is a third place, and that 

third place is the kind of pro-trade policies we are going to have. 

It strikes me that there are two kinds of pro-trade policies that 

one could have. One kind would spur other countries toward reform. One kind would spur other countries to allow the right to organize or to adopt a regimen or regime that prevented child labor 

or to take discrimination against women more seriously. 

And, frankly, another kind of pro-trade policy essentially leaves 

these governments and these countries as they are. 

I have not heard you talk a lot about that kind of distinction. 

So I want you for just a moment—and I will have another question; I will ask you to respond to them both, one after the other. 

But I would like you for a moment to talk about whether or not 

it would be somehow detrimental to our economy and detrimental 

to the concept of globalization if we had included conditions in 

44

some of these agreements that would deal with the absence of child 

labor laws, that would deal with the absence of sex discrimination 

laws, or would deal with the right to organize. Question number 

one. 

Second set of questions has to do with the phenomenon of tax 

cutting. It, too, has been advanced in terms of an either-or dynamic: people on my side of this room, who say the tax cuts have 

been too big, they have been too outsized; you, and people on the 

other side of the room, have said that, ‘‘Well, the tax cuts have 

been good; they have been the right size to provide stimulus to our 

economy.’’

I am wondering again if there is not a third approach: if we could 

not have had a series of tax cuts that were distributed and aimed 

more toward the middle class, more toward the people whose wages 

have been stagnant the last several years, and I am wondering if 

we could have cut taxes much more dramatically for the middle 

class if we could have provided more tax relief for those Americans 

who are struggling day in and day out without imperiling the stimulative impact of the tax cuts as a whole. 

So can you comment on those two sets of questions? 

Mr. GREENSPAN. There is another aspect to this; namely, that 

you have to decide whether or not the purposes of tax cuts relate 

to the issue of the distribution of income or its production, and my 

focus has been on production. 

In other words, I have been focusing on how to establish a tax 

structure which increases level of economic growth, and therefore 

a tax base, and hence revenue. 

I have not been particularly focused on the question of the distribution of tax for the purpose of redistributing income, because 

that is basically a function of the Congress, and I have no real view 

on that as such. 

And that is the reason, I might say, that I supported the issue 

of elimination of double taxation of dividends, as I have for many 

years, because I think that is a critical element in a tax structure 

which enables growth to be at its maximum. 

With respect to the first issue, with respect to applying our 

standards to others——

Mr. DAVIS OF ALABAMA. Well, not even our standards, but just 

standards that are different and would raise the——

Mr. GREENSPAN. Oh, okay. No, I take the correction. 

There is a cost in that. In other words, in a more general sense, 

are there people with whom we feel, for moral reasons, we should 

not trade? In other words, it is a more fundamental question about: 

What are the conditions which are necessary, voluntary, people or 

countries, to engage in trade? 

And it raises a fascinating question of: Is associating with a certain group of people considered sufficiently morally offensive to 

your own values that you do not want to do it? 

The issue of imposing standards—not ours necessarily, but some 

standards—is a version of that. 

It is a very difficult question. There is no doubt that if you do 

it, you will have less trade; but that may be what you want. And 

it is a judgment that implicitly the Congress, again, makes. 

45

In other words, the one thing that I have learned over the years, 

especially being here 35 times, is that it is you who have to answer 

all of these extraordinary questions and decide what do you do 

when confronted with choice. And my only criticism would be that 

sometimes—like everybody else, ourselves included—when confronted with a choice, you would prefer somebody else to do it. 

But fortunately our system is such that we have to make these 

choices, and they are not easy. And the one that you raise, I think, 

is a very legitimate question, as to where your tradeoff is, basically, 

in that respect. 

Mrs. KELLY. The gentleman’s time has expired. 

Mr. Pearce? 

Mr. PEARCE. Thank you, Mr. Chairman. 

The problem with coming this late in the day, all the adjectives 

have been used and the questions have been asked, so I have had 

to resort to extreme measures. 

Mr. Shays finally did the last deal in declaring you powerful and 

outstanding, that took the last two words I could have used; so just 

let me add my voice to those of your admirers who find you also 

to be a handsome man. 

[Laughter.] 

Mr. GREENSPAN. Thank you. 

Mr. PEARCE. As far as my questions, I think that you have the 

concern I do about—you put it much better than I do—an overabundance of highly-skilled jobs and an underabundance of highlyskilled workers. 

I saw that play out when my father retired from a major oil company, and he was able to wring out, say, 100 barrels a day from 

certain wells, that the guy who was my age, that went on, could 

only get 50 barrels a day. And so we have incrementally seen a 

weakness in our economy because of an underperformance. And the 

next guy was paid exactly the same as my father was, and even 

more, and yet the productivity was not there. 

And so I am concerned about that. But I will tell you the concern 

that I have, that I do not hear many people speak of, is: If we take 

some of the tendencies to competition, say the ILCs, or large institutions buying the smaller ones, I wonder how long our economy 

can go without the reinvestment in the rural parts of the country, 

because always capital is going to find the larger rates of return, 

and I will guarantee you that every rate of return on any project 

in Manhattan is going to quadruple or be 50 times’ the most attractive project in the state of New Mexico. 

And so incrementally I see our economy consolidating into the 

large centers, and it looks good on paper but has an underlying 

strength. 

Would you care to comment on my concern, both a parochial concern, but then for the country overall. Can we support the nation’s 

economy from just the large power centers? 

Mr. GREENSPAN. Yes. Congressman, I am not sure I agree with 

you, and let me tell you why. What we do know is that the cutting 

edge of this economy is basically new companies which start from 

scratch, small business. Most of them fail. Those that really make 

it, do well. 

46

Now, it may very well be the case that after they make it, the 

entrepreneurs move to the big city. That may be true. But the real 

growth in this country is in the peripheral areas, where technology 

and innovation is the most pronounced. 

We do have an extraordinary advance that has occurred in the 

financial system in the United States in the last decade, which essentially has meant that we have carried technologies that would 

develop not in Manhattan Island, but they are most obviously applied to Manhattan, so that the value added, in a good part of Manhattan, is quite significant and growing, but the source of it is not 

fundamentally there. 

And I think what is so extraordinary about this country is the 

flexibility and the mobility. People move all the time. I mean, I 

think something like 20 percent of our households move every year. 

Mr. PEARCE. Let me address one piece of that, then, and I know 

we are trying to——

Mrs. KELLY. Mr. Pearce, we have been called——

Mr. PEARCE. Yes. 

Mrs. KELLY.—for a vote. 

Mr. PEARCE. All right. Thank you. 

Mrs. KELLY. I am sorry. I am going to try to get as many people 

in as possible. 

Mr. PEARCE. Thank you, Madam Chair. 

Mrs. KELLY. Let me go now to Ms. Wasserman Schultz. 

And please, Ms. Wasserman Schultz, do not take more than 2 

minutes. I am going to try to get everybody in. 

Ms. WASSERMAN SCHULTZ. No problem. 

Thank you, Madam Chair. 

Mr. Greenspan, I just wanted to ask you to touch on health care. 

Yesterday the Financial Times reported that U.S. companies can 

expect about an 11 percent increase in health care costs over the 

next year. 

That will affect wage growth, it will affect their ability to hire 

more permanent workers and ask workers to share more of the expense. 

Can you talk about the ever-rising effect on our economy, with 

the significant increase in costs for health care over the years. 

Mr. GREENSPAN. This is clearly a major issue in this country. As 

you know, per capita we spend considerably more on health care 

than anybody else in the rest of the world. We do so because we 

have extraordinary advances in technology, and we have a much 

more sophisticated—overall—medical system. But we do not seem, 

as a consequence, to be able to significantly get better morbidity or 

mortality rates than others. 

It is mainly a system which is becoming ever larger, in part because pharmacological advances and technological advances have 

been so extraordinary that—especially with third-party subsidized 

payments, essentially, out of the Medicare system—you get huge 

demand; and my judgment is that because of this, we have a commitment to future retirees, under existing law, of medical services 

which could very well, as I indicated before, be a much larger demand on net real resources than we have the capacity to deliver. 

So I would say it is an extraordinary problem to have, because 

there is no question that we are making huge advances in medical 

47

technology, and the changes have enhanced American life, unquestionably, especially for the elderly. 

Mrs. KELLY. Thank you, Mr. Greenspan. 

Mr. Garrett? 

Mr. GARRETT. Yes. 

Thank you, Mr. Greenspan. I appreciate your being with us 

today, and also the times in the past. 

Just one question, which is a follow-up question with regard to 

the GSE reform. 

And I also appreciate your opening comment saying that when 

you first arrived, that you had a hard time getting your hands 

around exactly how they operate. So if you have that difficulty, 

then I feel a lot better myself, trying to figure out how they operate. 

You had indicated already to one question with regard to the 

portfolio size your concerns about that and the concerns about this 

committee’s lack of passing legislation that would address the 

growth in portfolio size. 

And the question by Mr. Hensarling was regarding another significant portion of that bill, and that is that 5 percent portion, as 

far as adding to the housing stock in the country. 

My question to you is: How do these two issues dovetail? And 

that is to say, with that 5 percent provision in there, is that just 

going to exacerbate the portfolio problem by putting any pressure 

or impetus on the industry to grow their portfolios so they——

Mr. GREENSPAN. Well, there are some who argue that because it 

is a percent of profits—and profits are very clearly a function of the 

proportion of purchased mortgages which are put in portfolios, as 

distinct from securitized—then clearly one could argue, and indeed 

many have argued, that the incentive there is to increase the size 

of portfolios in order to create the income. 

But as I said before, we at the Federal Reserve have not taken 

a position on that particular aspect of the bill. That is not where 

our problems lie. 

Mrs. KELLY. Thank you, Mr. Greenspan. 

Mr. GARRETT. Your problems are in the portfolio side? 

Mr. GREENSPAN. Correct. 

Mr. GARRETT. Thank you. 

Mrs. KELLY. Ms. Moore? 

Ms. MOORE OF WISCONSIN. Thank you, Madam Chair. 

Thank you so much for all your years of service, Mr. Greenspan. 

You have indicated over and over again that you favor China reevaluating its currency, and certainly in these halls there is huge 

debate about forcing them to do that. You said that they will do 

it for their own good. 

There are many people who think that we are darned if they do 

and we are darned if they do not, that if in fact they stop providing 

the cheap loans to us and in fact sort of call some of their loans 

in in order to buoy up their economy, because people are living 

very frugally over there, that there will be a huge burst in our 

housing market, that interest rates will rise, that consumer spending will fall, and it will lead to a recession. 

48

Do you agree that we are at risk, you know, particularly as we 

find ourselves pressing and pushing them to do this, that we could 

be at risk of seeing our economy fail? 

Mr. GREENSPAN. Well, all I can say to you is that we have examined the issue of the impact of purchases of foreigners’ of U.S. 

Treasury issues and the increase or decrease of those purchases on 

U.S. interest rates; and there is an effect, but it is not a very large 

effect, and the reason is that in the aggregate world markets, there 

are enough securities that compete with U.S. Treasuries, for example, that you do not get as large an impact as you would suspect. 

But we do get an impact, there is no question about that. 

Ms. MOORE OF WISCONSIN. And just very quickly, in terms of our 

low savings rate, do you think that a lot of thrust and call for these 

private accounts is based on sort of making up for the deficit——

Mrs. KELLY. The gentlewoman’s time has expired. 

Because of a prior agreement with Mr. Greenspan, and because 

we have been called for a vote, the chair is going to end this session with you, Mr. Greenspan. 

We are honored to have you with us. We thank you very much 

for, every time you have been here, your great patience. 

The chair notes that some members may have additional questions for this panel, which they may submit in writing. 

Without objection, the hearing record will remain open for 30 

days for members to submit written questions to these witnesses 

and to place their responses on the record. 

This hearing is closed. 

[Whereupon, at 1:01 p.m., the committee was adjourned.] 

(49)

A P P E N D I X

July 20, 2005

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