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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

                       CONDUCT OF MONETARY POLICY

            Report of the Federal Reserve Board pursuant to

                 Section 2B of the Federal Reserve Act

                     and the State of the Economy

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 27, 2002

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-56

78-399              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 27, 2002............................................     1
Appendix:
    February 27, 2002............................................    55

                               WITNESSES
                      Wednesday, February 27, 2002

Greenspan, Hon. Alan, Chairman, Board of Governors, Federal 
  Reserve System.................................................     5

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    56
    Greenspan, Hon. Alan.........................................    59

              Additional Material Submitted for the Record

Greenspan, Hon. Alan:
    Board of Governors of the Federal Reserve System, Monetary 
      Policy Report to the Congress, February 27, 2002...........    77
    Written response to questions from Hon. Michael G. Oxley.....   112
    Written response to questions from Hon. Christopher Cox......   128
    Written response to a question from Hon. Janice Schakowsky...   129
    Written response to questions from Hon. Ronnie Shows.........   131

 
                       CONDUCT OF MONETARY POLICY

                              ----------                              

                      WEDNESDAY, FEBRUARY 27, 2002

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m., in room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley, 
[chairman of the committee], presiding.
    Present: Chairman Oxley; Representatives Baker, Bachus, 
Castle, King, Royce, Kelly, Paul, Cox, Biggert, Hart, Gillmor, 
Shadegg, Miller, Cantor, Grucci, Capito, Ferguson, Rogers, 
Tiberi, LaFalce, Frank, Kanjorski, Sanders, C. Maloney of New 
York, Carson, Sherman, Sandlin, Meeks, Lee, Mascara, Inslee, 
Schakowsky, Moore, Capuano, Ford, Hinojosa, Watt, Maloney, 
Hooley, Gonzalez, Tubbs Jones, Lucas KY, Shows, Israel, and 
Ross.
    Chairman  Oxley. The hearing will come to order. Before we 
formally welcome Chairman Greenspan, I want to take a moment to 
welcome the Committee back to our newly refurbished Committee 
room. We've completed the bulk of our renovations to our 
Committee hearing rooms, which have taken a full year to 
accomplish.
    Over the last 6 weeks, we replaced the original 40-year-old 
audio system with a state-of-the-art digital sound system. The 
new system will enable all of us, and the audience, to hear 
each other clearly for the first time. We also added some 
multimedia and broadcast capabilities to the tools available to 
the Committee. All of these improvements will improve the work 
of this Committee, and make its proceedings even more 
accessible to the public.
    I particularly want to thank Chairman Ney for all of his 
support and hard work in helping us to complete this project. 
It probably didn't hurt to have him on the Committee either. I 
also want to thank all the Members of this Committee for their 
strong support in making every aspect of this Committee, 
including our hearing rooms, the best on Capitol Hill.
    With that said, good morning, Chairman Greenspan, and thank 
you for coming here today.
    The world economy has been turbulent, and you've had issues 
to deal with that even you've never seen before. The economy 
has benefited greatly from your leadership at the Fed. In these 
uncertain times, experience and steadiness at the helm with the 
central bank are particularly important, so we're all grateful 
for your continued service.
    Before we begin today, I also wanted to say that this 
Committee--and the Nation--owes you its appreciation for 
everything the Fed did in the days immediately following 
September 11th. The Fed, working with financial institutions of 
all kinds, all over the country, made it possible for our 
system to continue to work flawlessly at a time of great 
confusion and great peril. It is a great story, one that not 
enough people know about. And we owe you, and everyone at the 
Fed, our gratitude and I remember our conversation when you 
came back from Europe the day after the 11th tragedy, and your 
experience and dedication are most appreciated.
    Terrorism gave our stagnating economy a hard shove, but so 
far the war has caused no lasting economic damage. In fact, our 
economy is rebounding from recession despite the war, and 
despite the difficulties experienced by individual companies in 
many different markets. This is an amazing testament to our 
fundamental economic strength.
    We look forward to your views on what's happening in the 
economy and what else can be done to speed the economic 
recovery. Congress also must do its part in a number of areas. 
We look forward to your opinions and reactions to many of those 
issues.
    This Committee overseas the growth engine of the economy--
the companies that provide the capital for all of our 
businesses to expand, and to begin. That's why your visit here 
twice a year, and that's why we always seek your advice on 
things Congress can do that will help grow the economy.
    Our Committee was the most productive in Congress after 
September 11th. We've enacted bills ranging from the Patriot 
Act to eliminating excess fees investors pay for operations of 
the SEC--the second biggest tax cut of this Administration. We 
passed terrorism insurance legislation and a host of other 
bills. Throughout it all, we were doing much more than 
responding to terrorism: we're trying to help the economy 
recover and grow.
    Economic growth remains our Committee's focus today. It's 
more important than ever for this Committee to focus on all the 
ways we can remove barriers to economic growth. As you state in 
your testimony, ``deregulation and innovation in the financial 
sector have been especially important in enhancing overall 
economic performance.''
    Congress has made great initial strides in the 1990s. We 
began to deregulate financial and product markets in Gramm-
Leach-Bliley. We made sure the trading on the stock markets 
occurred in decimals. We worked to help investors get more 
information from companies so they can make informed decisions 
about their portfolios.
    The result was unprecedented prosperity--and the 
unprecedented ability to bounce back after a recession after 
September 11.
    But it's no time to rest on those accomplishments. There's 
a lot more to do. Now more than ever, we need to free up 
capitol to seed new businesses and expand existing businesses. 
We need to make sure that the whole value of every business is 
reflected in its accounting and in its financial statements. We 
need to increase the transparency and usefulness of financial 
statements to the investing public so that as much light as 
possible to be shed on the operations of every company.
    We must continue to remove unnecessary economic and 
regulatory burdens on our businesses so that they can lead the 
economic recovery. We're trying to do that here, both by 
reforming the deposit insurance system and by spearheading 
regulatory relief for financial institutions.
    On these issues, and many others, we look forward, Mr. 
Chairman, to your continued advice and assistance and we 
appreciate your appearance here today.
    With that, let me yield to the gentleman from New York, 
Ranking Member, Mr. LaFalce, for an opening statement.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 56 in the appendix.]
    Mr. LaFalce. Thank you very much.
    Chairman Greenspan, it's always a pleasure to have you 
before us. I'd like to highlight two areas that I believe are 
of great importance to the economy today. The fallout from the 
systemic problem known as Enron, and conditions in both our 
domestic and global economy.
    But first, I want to address monetary policy directly. I do 
not believe it is now appropriate to raise interest rates. I 
believe a move to raise rates in the weeks ahead could well 
jeopardize our fragile recovery in the domestic economy, and 
would likely have adverse consequences for the global economy. 
Much of my concern about the performance of the United States 
economy in the months ahead relates to the aftermath of the 
stock market bubble, the collapse of Enron, and what both have 
meant for the soundness of corporate financial statements and 
corporate governance.
    Between 1995 and 2000, you and a few others grew 
increasingly concerned about the possibility of a stock market 
bubble. Essentially, the stock valuations did not reflect the 
underlying earnings of publicly-traded companies. The concern 
was that the inevitable market correction could be volatile and 
steep, setting off adverse reactions in investor confidence, 
consumer confidence, banks' willingness to lend, and so forth.
    Then, most recently came Enron. Unfortunately, I believe 
Enron is too symptomatic of a condition that has spread across 
corporate America in tandem with the stock market bubble. The 
desire to meet the expectations of an ever-rising market drove 
grossly inappropriate accounting and corporate governance 
practices, and exposed the shortcomings of regulation in these 
areas.
    I warned about these shortcomings shortly after our 
Committee obtained jurisdiction in January of 2001. I began 
calling in this Committee, the Rules Committee, the floor of 
the House, for a 200 to 300 percent increase in the budget of 
the SEC. In June of 2000, I sent all 600,000 of my constituents 
a newsletter on this subject dealing with the protection of 
investments and talking about the need to beware of Wall Street 
recommendations and to beware of the numbers explaining the 
earnings manipulation that has been taking place across 
corporate America, calling the conditions that existed in June 
2001 the tip of the iceberg and calling upon our Committee to 
focus on one issue primarily: accounting.
    It took Enron to give this issue the attention it deserves. 
Unfortunately, I believe we have to be at least as concerned 
about these very same issues internationally. If the United 
States purportedly has the highest corporate financial 
standards in the world, what are we to make of the potential 
for Enrons in countries like Japan, China, India, even the EU, 
all of which have well-developed financial markets but may have 
less than adequate regulatory standards. And our Big Five 
accounting firms are in virtually every major city in the world 
and very often the same auditors of the largest global 
companies.
    With an eye toward the global economy, I now want to go 
back to the issue of U.S. monetary policy. It's clear to me 
that U.S. monetary policy has an increasingly long reach, 
extending well beyond our domestic borders. In particular, I'm 
concerned about the impact of premature rate increases in the 
United States on the situations in Japan and in Europe. In 
Japan, because they've had a stagnant economy for a decade, and 
are the second largest economy in the world. In Europe, because 
it's going through the difficult process of solidifying a 
centralized monetary policy and achieving economic integration 
while also bringing in about ten new countries into the union. 
I believe it's critical that the United States be cognizant of 
any policies that could impact economic conditions globally, 
especially in Japan and the EU.
    With respect to the EU, the member countries of it are in 
the midst of a grand political, social, and economic experiment 
not unlike the one our own founding fathers embarked on 226 
years ago, and the global economy will be the ultimate 
beneficiary of successful economic integration. I hope that we, 
in our monetary and fiscal policy, will do all in our power to 
help support that endeavor. And Dr. Greenspan, I hope in the 
course of this morning's dialogue, you'll be able to discuss 
some of these issues too.
    Thank you.
    Chairman Oxley. The Chair is now pleased to recognize the 
gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you.
    Good morning, Mr. Greenspan, and thank you for appearing 
before us today. After eleven interest rate cuts over the last 
year, we are all hoping that the Fed will report that the 
country is through the worst of the recession and that growth 
is ahead. While we're all hoping for a turnaround in the coming 
months, as many as two million Americans are expected to 
exhaust their unemployment insurance. These families cannot 
wait until a rising tide lifts all boats. The combination of 
the recession and the economic impact of the World Trade Center 
has made the situation particularly dire for your home State of 
New York, where 71 percent more people are now on unemployment 
insurance than at the same time last year.
    Last quarter alone, 65,000 New Yorkers exhausted their 
unemployment insurance benefits. The good news is that both the 
Democrats and the Republicans agree that we should help these 
families and pass a 13-week extension of unemployment benefits. 
I hope the House will soon follow the Senate and pass a clean 
unemployment extension.
    I am concerned that the predictions of some of the 
economists--and some of them have stated that they are 
concerned that positive statements from you today could 
foreshadow increases in interest rates; in fact, futures 
traders are betting that the Federal fund rate will rise this 
summer. My concern is that the Fed may reverse direction and 
begin to put the brakes on the recovery before out-of-work 
people benefit from the turnaround in our economy.
    Other questions that I look forward to hearing from you 
today are your views on the failure of Enron, and the crisis of 
confidence it has caused in our financial markets. Also, in New 
York City, constituents tell me that the lack of terrorism 
insurance is holding back building projects, causing a credit 
crunch, and stalling the City's overall recovery. I look 
forward to your comments on insurance and its impact on our 
economy.
    Finally, since your last appearance, our Government 
finances have turned 180 degrees. We have shrunk a $5.6 
trillion unified surplus by $4 trillion. This is the most 
radical fiscal reversal in my lifetime. New spending to fight 
terrorism, to protect the homeland and to rebuild after the 
attacks is definitely legitimate, but I am very much opposed to 
the very expensive, retroactive special interest tax breaks 
that are likewise proposed. One earlier version of the budget 
even included a tax break for Enron. I look forward to your 
testimony today, as always. Thank you for being here.
    Chairman Oxley. The gentlelady's time has expired.
    We now turn to our distinguished witness, the Chairman of 
the Federal Reserve, Dr. Greenspan.

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS, 
                    FEDERAL RESERVE SYSTEM.

    Mr. Greenspan. Thank you very much, Mr. Chairman. I've a 
rather extended statement and I will excerpt from it, but 
request that the full statement be included for the record.
    Chairman Oxley. Without objection.
    Mr. Greenspan. Since last July, when I last reported to you 
on the conduct of monetary policy, the U.S. economy has gone 
through a period of considerable strain, with output 
contracting for a time and unemployment rising. We in the 
Federal Reserve System acted vigorously to adjust monetary 
policy in an endeavor both to limit the extent of the downturn 
and to hasten its completion. Despite the disruptions 
engendered by the terrorist attacks of September 11, the 
typical dynamics of the business cycle have re-emerged, and are 
prompting a firming in economic activity. An array of 
influences unique to this business cycle, however, seems likely 
to moderate the speed of the anticipated recovery.
    One key consideration in the assessment that the economy is 
close to a turning point is the behavior of inventories. Stocks 
in many industries have been growing down to levels at which 
firms will soon need to taper off their rate of liquidation, if 
they have not already done so. Any slowing in the rate of 
inventory liquidation will induce a rise in industrial 
production if demand for those products is stable or is falling 
only moderately. That rise in production will, all other things 
being equal, increase household income and spending.
    But that impetus to the growth of that activity will be 
short-lived unless sustained increases in final demand kick in 
before the positive effects of the swing from inventory 
liquidation dissipate. Through much of last year's slowdown, 
spending by the household sector held up well and proved to be 
a major stabilizing force. As a consequence, although household 
spending should continue to trend up, the potential for 
significant acceleration in activity in this sector is likely 
to be more limited than in past cycles.
    Changes in household financial positions in recent years 
are probably damping consumer spending, at least to a degree. 
Overall household wealth relative to income has dropped from a 
peak multiple of about 6.3 at the end of 1999 to around 5.3 
currently. Moreover, the aggregate household debt service 
burden, defined as the ratio of households' required debt 
payments to their disposable personal income, rose considerably 
in recent years, returning last year to its previous cyclical 
peak of the mid-1980s.
    However, increased debt burdens appear disproportionately 
attributable to higher income households. As a result, although 
repayment difficulties have already increased, particularly in 
the sub-prime markets for consumer loans and mortgages, the 
overall levels of debt and repayment delinquencies do not, as 
of now, appear to pose a major impediment to a moderate 
expansion of consumption spending going forward.
    We have already seen significant spending restraint among 
the top fifth of income earners, presumably owing to the drop 
in equity prices. Moderate income households have a much larger 
proportion of their assets in homes, and the continuing rise in 
the value of houses has provider greater support for their net 
worth. Reflecting these differences in portfolio composition, 
the net worth of the top fifth of income earners has dropped 
far more than it did for the bottom 80 percent.
    Accordingly, most of the change in consumption expenditures 
that resulted from the bull stock market, and its demise, 
reflected shifts in spending by upper income households. The 
restraining effects from the net decline in wealth during the 
past 2 years presumably have not, as yet, fully played out and 
could exert some further damping effect on the overall growth 
of household spending relative to that of income.
    Perhaps most central to the outlook for consumer spending 
will be developments in the labor market. The pace of layoffs 
quickened last fall, especially after September 11th, and the 
unemployment rate rose sharply. However, layoffs diminished 
noticeably in January, and initial claims for unemployment 
insurance have decreased markedly, on balance, providing 
further evidence of an improvement in labor market conditions. 
Even if the economy is on the road to recovery, the 
unemployment rate, in typical cyclical fashion, may resume its 
increase for a time, and a soft labor market could put 
something of a damper on consumer spending.
    However, the extent of such restraint will depend on how 
much of any rise in unemployment is the result of weakened 
demand for goods and services and how much reflects 
strengthened productivity.
    In the latter case, average real incomes of workers could 
rise, at least partially offsetting losses of purchasing power 
that stem from diminished levels of employment. Indeed, 
preliminary data suggest that productivity has held up very 
well of late, and history suggests that any depressing effect 
of rapid productivity growth on unemployment is only temporary.
    While the balance of factors influencing consumer demand 
will have important consequences for the economic outlook in 
coming months, the broad contours of the present cycle have 
been, and will continue to be, driven by the evolution of 
corporate profits and capital investment.
    The retrenchment in capital spending over the past year-
and-a-half was central to the sharp slowing we experienced in 
overall activity. New orders for equipment and software 
hesitated in the middle of the year 2000 and then fell abruptly 
as firms re-evaluated their capital investment programs. For 
much of the last year, the decline in investment outlays was 
fierce and unrelenting.
    These cutbacks in capital spending interacted with, and 
were reinforced by, falling profits and equity prices. Indeed, 
a striking feature of the current cyclical episode relative to 
many earlier ones has been the virtual absence of pricing power 
across much of American business, as increasing globalization 
and deregulation have enhanced competition. In this low 
inflation environment, firms have perceived very little ability 
to past cost increases on to customers.
    Business managers, with little opportunity to raise prices, 
have moved aggressively to stabilize cash flows by trimming 
work forces. These efforts have limited any rise in unit costs, 
attenuated the pressure on profit margins, and ultimately 
helped to preserve the vast majority of private sector jobs.
    Part of the reduction in pricing power observed in this 
cycle should be reversed as firming demand enables companies to 
take back large price discounts. Though such an adjustment 
would tend to elevate price levels, underlying inflationary 
cost pressures should remain contained. Slack in labor markets 
and further increases in productivity should hold labor costs 
in check and result in rising profit margins even with 
inflation remaining low.
    Improved margins and more assured prospects for rising 
final demand would likely be accompanied by a decline in risk 
premiums from their current elevated levels toward a more 
normal range. With real rates of return on high tech equipment 
still attractive, that should provide an additional spur to new 
investment.
    The recovery in overall spending on business fixed 
investment is likely to be only gradual; in particular, its 
growth will doubtless be less frenetic than in 1999 and early 
2000--a period during which outlays were boosted by the 
dislocations of Y2K and the extraordinarily low cost of equity 
capital available to many firms.
    Even a subdued recovery beginning soon would constitute a 
truly remarkable performance for the American economy in the 
face of so severe a decline in equity asset values and an 
unprecedented blow from terrorists to the foundations of our 
market systems. For, if the tentative indications that the 
contraction phase of this business cycle is drawing to a close 
are ultimately confirmed, we will have experienced a 
significantly milder downturn than the long history of business 
cycles would have led us to expect. Crucially, the imbalances 
that triggered the downturn and that could have prolonged this 
difficult period did not fester. The obvious questions are what 
has changed in our economy in recent decades to provide such 
resilience and whether such changes will persist into the 
future.
    Doubtless, the substantial improvement in the access of 
business decisionmakers to real time information has played a 
key role. The large quantities of data available virtually in 
real time allow businesses to address and resolve economic 
imbalances far more rapidly than in the past.
    The apparent increased flexibility of the American economy 
arguably also reflects the extent of deregulation over the past 
quarter century. Certainly, if the energy sector was still in 
the tight regulatory fetters of the 1970s, our flexibility 
today would be markedly less. Airline, trucking, and rail 
deregulation has added flexibility to the movement of people 
and goods across our Nation.
    Both deregulation and innovation in the financial sector 
have been especially important in enhancing overall economic 
resilience. New financial products--including derivatives--have 
enabled risk to be dispersed more effectively to those willing 
to, and presumably capable of, bearing it. Shocks to the 
overall economic system are accordingly less likely to create 
cascading credit failure. Lenders have the opportunity to be 
considerably more diversified, and borrowers are far less 
dependent on specific institutions for funds. Financial 
derivatives, particularly, have grown at a phenomenal pace over 
the past 15 years, evidently fulfilling a need to hedge risks 
that were not readily deflected in earlier decades. Despite the 
concerns that these complex instruments have induced--an issue 
I will address shortly--the record of their performance, 
especially over the last couple of stressful years, suggests 
that on balance they have contributed to the development of a 
far more flexible and efficient financial system.
    As a consequence of increased access to real time 
information and, more arguably, extensive deregulation in 
financial and product markets, and the unbundling of risk, 
imbalances are more likely to be readily contained, and 
cyclical episodes overall should be less severe than would be 
the case otherwise.
    However, the very technologies that appear to be the main 
cause of our apparent increased flexibility and resiliency may 
also be imparting different forms of vulnerability that could 
intensify or be intensified by a business cycle.
    From one perspective, the ever-increasing proportion of our 
gross domestic product that represents conceptual, as distinct 
from physical value added, may actually have lessened cyclical 
volatility. In particular, the fact that concepts cannot be 
held as inventories means a greater share of GDP is not subject 
to the type of dynamics that amplify cyclical swings. But an 
economy in which concepts form an important share of valuation 
has its own vulnerabilities.
    As the recent events surrounding Enron have highlighted, a 
firm is inherently fragile if its value-added emanates more 
from conceptual as distinct from physical assets. A physical 
asset, whether an office building or an automotive assembly 
plant, has the capability of producing goods even if the 
reputation of the managers of such facilities falls under a 
cloud. The rapidity of Enron's decline is an effective 
illustration of the vulnerability of a firm whose market value 
largely rests on capitalized reputation. The physical assets of 
such a firm comprise a small proportion of its asset base. 
Trust and reputation can vanish overnight; a factory cannot.
    The implications of such a loss of confidence for the macro 
economy depend importantly on how freely the conceptual capital 
of the fading firm can be replaced by a competitor or a new 
entrant into the industry. Even if entry is relatively free, 
macro economic risks can emerge if problems at one particular 
firm tend to make investors and counterparties uncertain about 
firms that they see as potentially similarly situated. The 
difficulty of valuing firms that deal primarily with concepts 
and the growing size and importance of these firms may make our 
economy more susceptible to this type of contagion.
    Another more conventional determinant of stability will be 
the economy's degree of leverage, the extent to which debt, 
rather than equity, is financing the level of capital. Clearly, 
firms find some leverage advantageous in enhancing returns on 
equity, and thus moderate leverage undoubtedly boosts the 
capital stock and the level of output. A sophisticated 
financial system, with its substantial array of instruments to 
unbundle risks, will tend toward a higher degree of leverage at 
any given level of underlying economic risk. But, the greater 
the degree of leverage in any economy, the greater its 
vulnerability to unexpected shortfalls in demand and mistakes.
    Although the fears of business leverage have been mostly 
confined to specific sectors in recent years, concerns over 
potential systemic problems resulting from the vast expansion 
of derivatives have reemerged with the difficulties of Enron. 
To be sure, firms like Enron, and Long-Term Capital Management 
before it, were major players in the derivatives markets. But 
their problems were readily traceable to an old-fashioned 
excess of debt, however acquired, as well as to opaque 
accounting of that leverage and lax counterparty scrutiny. 
Swaps and other derivatives throughout their short history, 
including over the past 18 months, have been remarkably free of 
default. Of course, there can be latent problems in any market 
that expands as rapidly as these markets have. Regulators and 
supervisors are particularly sensitive to this possibility. 
Derivatives have provided greater flexibility to our financial 
system. But their very complexity could leave counterparties 
vulnerable to significant risk that they do not currently 
recognize, and hence these instruments potentially expose the 
overall system if mistakes are large. In that regard, the 
market's reaction to revelations about Enron provides 
encouragement that the force of market discipline can be 
counted on over time to foster much greater transparency and 
increased clarity and completeness in the accounting treatment 
of derivatives.
    How these countervailing forces for stability evolve will 
surely be a major determinant of the volatility that our 
economy will experience in the years ahead. Monetary policy 
will have to be particularly sensitive to the possibility that 
the resiliency our economy has exhibited during the past 2 
years signals subtle changes in the way our system functions.
    Although there are ample reasons to be cautious about the 
economic outlook, the recuperative powers of the United States 
economy, as I have tried to emphasize in my presentation this 
morning, have been remarkable. When I reported on monetary 
policy to the Committee last summer, few if any of us could 
have anticipated events such as those to which our Nation has 
subsequently been subjected. The economic consequences of those 
events and their aftermath are an integral part of the many 
challenges that we now collectively face. The U.S. economy has 
experienced a substantial shock, and, no doubt, we continue to 
face risks in the period ahead. But the response thus far of 
our citizens to these new economic challenges provides reason 
for encouragement.
    Thank you very much, Mr. Chairman. I look forward to your 
questions.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 59 in the appendix.]
    Chairman Oxley. Thank you, Mr. Chairman, and it's always 
good to have you here in front of the Committee. Let me begin.
    Obviously, your statements regarding Enron were timely and 
probably predictable as well, and I suspect the questions will 
be in that regard as well.
    In light of recent market movements, in the wake of Enron, 
it has been suggested by some that ultimately the market does a 
far better job of deterring abuses than does Government.
    What are your thoughts in that regard, and what would be 
some suggestions that you would give this Committee as we work 
our way through some of these difficult issues?
    Mr. Greenspan. I think Enron, as I indicated to the Senate 
Budget Committee the other day, is not a significantly negative 
event to the economy and, in fact, in the long run, its 
emergence may alter the way we govern corporations. That the 
long history of corporate governance will continue to be a very 
substantial and positive force for economic growth and 
productivity. I do believe that something fundamentally 
different has happened in this most recent period, and I think 
it's important for us to go back and look at the causes of it.
    I would say particularly what has changed from the way I 
recall corporate governance, stock prices, stock markets, 
security analysis, years ago, is that in earlier years there 
was not any really significant emphasis of the type we see 
today on short-term corporate earnings. Indeed, dividends were 
exceptionally high. In fact, the yield on dividends before 1950 
for several years was 6 percent; it's now a little more than 1 
percent. And if most of what you get from a corporation is 
cash, you don't worry about how it was calculated, you just 
take the money and that's it. But one with the significant 
change that occurred with the propensity to buy back stock, 
which only occurred in the early 1980s with rulings which 
somehow delimited the concerns that stock buybacks would be 
perceived as price manipulation. That very act caused a very 
major shift from cash dividends to stock purchase.
    Two other events were very important in that context to 
create the environment which ultimately led to the Enron 
debacle. One was the unfortunate reversal of the FASEB ruling 
in the early 1990s about stock option accounting. We estimate 
that over the past--or say the period 1995 to the year 2000--
almost 3 full percentage points of the annual average gain in 
earnings resulted from the fact that stock options, rather than 
cash, was used as compensation amongst our major corporations. 
This undoubtedly had an effect of accelerating the earnings 
outlook which in turn had been very significantly propelled 
upward by the structural change in productivity.
    And so what occurred as a consequence of all of these 
forces was an endeavor to try to game the accounting systemin a 
manner to create the perception of short-term earnings growth 
which would be confused with long-term earnings growth. If 
long-term earnings growth were properly evaluated over this 
period, I don't think we would have had very much of the type 
of problems that we've had, but there's been a significant 
endeavor to make the data look as though something 
fundamentally different is going on in corporate America, and 
that has been unfortunate.
    Much of that has already been reversed by the market. There 
is now a very significant shift toward corporations endeavoring 
to be far more transparent on what they are doing, the markets 
are clearly creating price earnings premiums for corporations 
which are perceived to be without spin, so to speak. And so a 
goodly part of what needs to be done to restore corporate 
governance to where it was in earlier years, and I must say 
back then it did a pretty good job, and the vast majority of 
corporate governance in today's markets, even with Enron 
debacle, is of superior nature and indeed far superior than any 
other place in the world, but we do need to fix what is wrong 
with our system, and I would suggest that a proper diagnosis is 
clearly the first step in determining what should be done.
    Chairman Oxley. Thank you, Mr. Chairman. My time has 
expired.
    Let me now yield now to the gentleman from New York, the 
Ranking Member, Mr. LaFalce.
    Mr. LaFalce. Thank you very much, Mr. Chairman. I disagree 
with you fundamentally and also with Dr. Greenspan in some of 
his introductory comments. First of all, I think we've shown 
that we cannot rely on the unfettered magic of the marketplace 
alone. That with respect to publicly traded there must be 
significant regulation. That the SROs, the self-regulatory 
organizations have not worked. They've not worked with respect 
to the securities analysts, they've not worked with respect to 
the accounting firms. We need a significantly enhanced role for 
the Securities & Exchange Commission. We need to appropriate 
moneys for pay parity. We need to significantly enhance their 
resources to do the job, because so many Americans today do 
have almost all of their wealth in the markets. They have 
defined contribution plans today rather than defined benefit 
plans. They're not putting their money in banks where you, 
Chairman Greenspan, have your examiners there on a daily basis, 
where the State bank examiners are there on a daily basis. 
They're in the markets and we need to protect them.
    I disagree with you when you say that Enron is not a 
significant event. I think Enron is a most significant event. I 
think we can, you know, make lemonade out of lemons to be sure 
but we can never deal with the fact that four to five trillion 
dollars of American money has been lost in the markets, a great 
amount due to the excesses, to the bubble, to the speculation, 
but a significant amount due to earnings manipulation.
    Now, where I do agree with you strongly is with respect to 
stock options. So much of what took place was done by corporate 
officers and the audit committees of boards of directors, all 
with stock options that were interested in one thing and one 
thing only. And that was enhancing market capitalization so 
that they could have a good return on those stock options. And 
we must deal with all of those.
    Now who's we? We is Government. The marketplace will be 
more vigilant now for a month, for two, maybe a year or so, but 
nothing can substitute for a strong regulatory environment for 
our publicly traded companies, and that's what we must achieve. 
And if anybody thinks that we can achieve the end result of 
protection of American investors without that, they are 
deluded.
    Now, having said that----
    Mr. Greenspan. Can I respond?
    Mr. LaFalce. Sure.
    [Laughter.]
    Mr. Greenspan. You are quite correct, I might add, in 
saying that we need more resources for the Securities & 
Exchange Commission, especially on the pay parity issue, which 
I think is long overdue. I did not say, nor do I believe that 
there are not adjustments that are required and indeed ought to 
be made and I would start off with the way we account for stock 
options, I would account for a number of other issues as to the 
way we have corporate governance, because significant things 
have happened in the recent decades which require adjustment.
    I want to emphasize, however, that the overall level of 
corporate governance has served us well over recent decades 
including the current period by the vast majority of 
corporations who see their, management sees their self-interest 
as coincident with those of shareholders. I don't want to get 
into the economics of this, but if we could make that tie 
locked in some manner or another, we will maximize the 
allocation of capital in this economy.
    There has been a severance, in my judgment, of the 
interests of the chief executive officer in many corporations 
from those of the shareholders, and that should be pulled 
together. Stock options help but not if they are functioning in 
the manner in which they currently are.
    Mr. LaFalce. Dr. Greenspan, if I could just get one 
question. Could you comment on the conduct of United States 
monetary policy within the global context, given the fact that 
there is now one monetary policymaker in Europe that they are 
achieving integration with, while at the same time expanding, 
that Japan has been in the doldrums for a decade or so and the 
interplay that goes on in your decisionmaking between the 
domestic and the global economy.
    Mr. Greenspan. Well, Congressman, as you well know, our 
mandate is to maximize long-term sustainable economic growth in 
the United States. I mean, we consider foreign conditions only 
to the extent statutorily as they impact on us, and obviously 
as they increasingly do so, we become far more interested in 
what's going on in the world and respond to it. And indeed, we 
have. In other words, a considerable part of our analysis of 
what's been going on in the American economy in recent years 
has had a very high level of international interrelationship 
and fallout in certain respects. So we do evaluate the European 
economy, the Japanese economy, East Asia, Latin America, at a 
fairly extensive level to make certain that our policy, which 
is implemented here and focused on the American system is not 
going to be deflected by events that we perceive are occurring 
more abroad.
    Chairman Oxley. The gentleman's time has expired. The Chair 
is now pleased to recognize the gentleman from New York, Mr. 
King.
    Mr. King. Thank you, Mr. Chairman. Good morning, Mr. 
Greenspan. It's always a pleasure to have you here. Let me just 
at the outset, as a New Yorker and as an American commend you 
for the critical role you and the Fed played in providing the 
liquidity that was so important after September 11th. It was 
very reassuring and I want to thank you for that.
    I'm going to focus my questions on the question of interest 
rates. And this in a way is a follow-up to what Mr. LaFalce was 
talking about with the Japanese economy being in the doldrums. 
I would ask you if you could just make some comments on how low 
interest rates can go before the cutting of the interest rates 
loses its impact. Now Japan has had low interest rates for a 
number of years and it appears that has had no impact as far as 
rebuilding the economy. If you could tell us how close you 
think we are to that level where perhaps it can't go any lower.
    Second, in that regard, even though the rates have gone 
down, the discount rate has gone down, the long-term rates have 
not gone down. How essential do you believe the reduction of 
long-term rates are to the long-term growth of the economy?
    Mr. Greenspan. Well, Congressman, I would not view the 
Japanese experience as a general experience with respect to how 
low interest rates could or could not go. The problem in Japan, 
as I've indicated on many occasions, is that they have only one 
major form of financial intermediation, which is their banking 
system, and their banking system, as you know, is in very 
serious difficulty, so that the ability of monetary policy to 
function, in my judgment, is impaired in a manner which makes 
it very difficult to read what basically the level of rates and 
the level of economic activity are doing. I think it's very 
difficult and one should not generalize from the Japanese 
experience.
    The issue of long-term rates is quite an important one 
because, while undoubtedly short-term rates do have significant 
impacts on the American economy, far more it relates to longer-
term rates. Longer term rates are a function essentially of, 
one, inflation expectations, and the underlying real rate 
itself. And what we have observed in this economy is that long-
term rates did come down quite materially at the tail end of 
the year 2000, but have essentially stabilized, as I think you 
pointed out, for the last year or so. But they have stabilized 
their relatively low historic rate and indeed one can observe 
what's occurring in the housing market to basically see the 
impact of what mortgage rates have done.
    So it's a complex issue but at the moment I think that we 
do not see any really significant inflation premiums embodied 
in long-term rates and that frankly is a good sign.
    Mr. King. One follow up question, Chairman Greenspan, is 
regarding the Argentine and Japanese economies. How significant 
do you think their doldrums are going to have on our prospects 
for long-term growth?
    Mr. Greenspan. Well, as difficult as the problems in 
Argentina are, and they're really having considerable 
structural problems, and we only hope that they can correct 
them as quickly as possible, they have not had a contagion 
effect where one would ordinarily have expected them to have an 
effect, specifically in Brazil where markets are doing 
reasonably well and especially in Mexico, which has done quite 
well. So in Latin America, it's important that Argentina 
stabilize as quickly as they are capable of doing, but 
fortunately, there's not been significant fallout.
    Japan has been essentially stable for a decade now. Growth 
has been effectively zero. And it's difficult to read exactly 
how changes in the Japanese economy impact the rest of the 
world. Clearly to the extent that they are the second largest 
economy in the world, they do affect us, and clearly what is 
going on in Japan is negative to the United States outlook. But 
I do not perceive it as a major factor containing a recovery in 
the United States which we believe is just beginning to get 
underway.
    Mr. King. Thank you, Chairman Greenspan, Mr. Chairman.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Mr. Chairman, I want to likewise thank you for moving 
quickly and dropping interest rates 50 basis points in the very 
uncertain environment the day the financial markets opened 
shortly after September 11th. As New York works to recover from 
the terrorist attack, it's critical that we have an accurate 
assessment of the economic damage to our city, State and the 
private sector.
    After having contacted CBO and many other agencies, no 
single Federal entity is compiling an in-depth analysis of the 
economic impact on New York and costs to its institutions. I 
know the New York Federal Reserve has a very large and 
accomplished research staff and I would like to appeal to you, 
and will do so separately, to President McDonough, for just 
such a well-researched economic analysis. New York really needs 
your help. Could you help us with this?
    Mr. Greenspan. Well, Congresswoman, I agree with you that 
the Federal Reserve economic staff is first rate and a 
considerable part of what they do is a continuous evaluation of 
the Second District, obviously New York City being a very major 
part of that district. But I will communicate to them, and I 
assume you will speak to President McDonough, and my impression 
is that they probably are fairly far along in examining the 
type of issues that you think are important to be examined.
    Mrs. Maloney. That would be extremely helpful. As a 
Representative from New York, I am spending a great deal of my 
time on the recovery effort. One of the areas that I am hearing 
tremendous concern from my constituents is the lack of 
availability of terrorism insurance, the escalating cost of 
insurance. Many building projects and proposals have not been 
funded and turned down by the banks as being too risky, and 
there appears to be a credit crunch that is stalling the 
recovery of New York City and New York State. I would like to 
hear your comments on the fallout from the lack of insurance, 
terrorism insurance, and do you think a Federal reinsurance 
program is necessary? Could you share your thoughts?
    Mr. Greenspan. Well, we have obviously spent a good deal of 
time on exactly that issue, because it's a crucial aspect of a 
fairly large segment of the economy. The difficulty that one 
has when dealing with terrorism insurance is that it is 
exceptionally difficult for an insurer or even a reinsurer to 
have any sense whatever of what the probability distribution of 
a terrorist event is and, more importantly, what is its 
magnitude. In all insurance, you have to have some general 
knowledge of what the parameters of what could happen are, or 
you cannot set premiums. In this case, it is virtually 
impossible to do so and a number of people have argued I think 
somewhat effectively that what may be necessary here is for the 
Congress to stipulate that in the event of a terrorist attack 
clearly defined as a terrorist attack, that the Federal 
Government, with some deductible, would cover the cost of that.
    The problem that you have with trying to do it before the 
event is it's almost impossible to know precisely how to 
construct a response to it, but if individuals know that after 
the fact that it will, in fact, be covered one may hope that 
you can construct a means by which there can be some form of 
reinsurance to remove the types of problems that we see. This 
is an issue which I think there is considerable dispute on, 
because we don't know what the nature of what it is we are 
facing. But I'm one who thinks that we ought to be addressing 
this not solely because of its impact on the economy, but there 
is a very difficult problem of how one handles things over 
which one is not responsible. The issue of home security is 
now, in fact, indistinguishable from our national defense 
budgets, and much of that has the same basis of taxation for 
financing.
    Mrs. Maloney. Thank you very much. And I ask unanimous 
consent to add additional questions to the record. Thank you.
    Chairman Oxley. Without objection.
    The Chair now is pleased to recognize the gentleman from 
Alabama, the Chairman of the Financial Institutions 
Subcommittee, Mr. Bachus.
    Mr. Bachus. Thank you, Mr. Chairman.
    Chairman Greenspan, first of all I welcome your written 
testimony on Enron. You're on the President's working group and 
I think what you said here is very valid as to what happened at 
Enron.
    My question is--I'm not going to ask you for a prediction--
I'm going to ask you for what's happening real time. I know you 
have folks at the Fed who look over data. You spend a lot of 
time focusing on productivity. My question is a simple one. You 
talked about through the last decade a surge in productivity. 
Real time, are we continuing to see an increase in 
productivity, or is it slackening, is it constant, or is it 
declining?
    Mr. Greenspan. Well, Congressman, the data that now appear 
to be in real time, as you put it, probably are exaggerating 
the underlying trend in productivity, if for no other reason 
than the numbers look just too large to be credible. We're 
going to have another upward revision in the fourth quarter's 
productivity numbers, and if you take a look at the first 
quarter, we already have a good deal of data in on both the 
numerator and denominator of output per hour. And at this 
particular stage, unless average hours worked rises very 
sharply in the February-March period, for which we don't as yet 
have data, and/or payroll numbers rise significantly, we're 
going to have a very large increase in the first quarter. So 
while I doubt very much if they will be representative of the 
true underlying trend, the do nonetheless confirm that the 
long-term trend of productivity has managed to sustain itself 
through these very difficult times of say the second quarter of 
the year 2000 to date. That doesn't necessarily mean it will 
continue, but since you didn't ask me for a forecast----
    Mr. Bachus. No, that's right.
    Mr. Greenspan. And I think the real time data are really 
quite impressive.
    Mr. Bachus. Thank you very much, appreciate that. I'm going 
to yield the balance of my time to the gentlelady from 
Pennsylvania, Ms. Hart.
    Ms. Hart. Thank you, Mr. Bachus. I have a question actually 
regarding interest rates. They've obviously been quite helpful 
to some businesses we've heard. However, in my district there 
are some smaller and medium-sized businesses that now are 
having serious trouble getting access to credit caused by the 
new pressure on loan portfolios. Do you have evidence of the 
tightening of that kind of credit, particularly available to 
kind of the main street-type businesses? And if so, do you 
expect that to have a negative impact on our efforts to pull 
out of the recession?
    Mr. Greenspan. Congresswoman, the evidence there is mixed. 
We are observing certain tightening in some of the banks of a 
modest type. We've not yet seen, or I don't know whether you 
could say not yet, but we do not see the general pressure on 
small business as reported by the National Federation of 
Independent Business. They have a fairly extensive survey of 
their members, of credit conditions available to them, and 
their series have not indicated any really serious concerns. 
But it's highly unlikely, in a period such as we've been 
running through, that there wouldn't be some difficulties. 
Indeed, if somebody told me there were none, I would say the 
data are wrong. So there clearly are such events.
    Hopefully, if the economy continues to show the signs that 
it has been exhibiting of late, some of that pressure will be 
removed, and I would hope that the opening up of profit margins 
and improved balance sheets would bring a number of especially 
smaller enterprises up to a level where credit availability is 
no longer a difficulty for them.
    Ms. Hart. Is there an action regarding that that you think 
the Fed could take or should take that would be appropriate 
that would help them?
    Mr. Greenspan. I don't think that there's anything that we, 
the Federal Reserve, can do and at the moment frankly I don't 
think anything really needs to be done because, unless I'm 
mistaken and this whole change in the economic environment is a 
false dawn, then things should improve.
    Ms. Hart. Thank you. Also there was a report released 
yesterday. This is dealing with the steel issue and all the 
bankruptcies we've had in the steel industry. American 
University released a report that if the Administration didn't 
act strongly regarding the 201 and either implementing a tariff 
rate of maybe 40 percent or so, that about 325,000 American 
steel jobs would be lost in the coming months.
    Mr. Greenspan. How many?
    Ms. Hart. About 325,000.
    Mr. Greenspan. There aren't 325,000.
    Ms. Hart. I think it's steel producing jobs around that 
industry.
    Mr. Greenspan. I see.
    Ms. Hart. Anyway, there already are a significant number of 
bankruptcies. There are many more companies, especially in the 
area that I represent, and I think a lot of the areas in the 
midwest and in the east, that would lose a lot more jobs. And 
the bankruptcies are also affecting office suppliers and 
others.
    What effect do you think that would also have on the 
economy in general? Do you think it's large enough to affect it 
in general? And do you think it would slow our pulling out of 
the recession as well?
    Mr. Greenspan. Now, as you know, the President has to make 
a judgment before March 6th on the 201. It's a difficult 
decision for lots of obvious reasons. But I think the important 
issue which is on the table is not only the impact that it has 
on, one, jobs, and the 600,000 retirees in the steel industry, 
who have as we call significant legacy costs, but it's also an 
issue of what a marked increase in steel import prices would do 
to the costs of steel using industries, of which the numbers 
are quite significantly larger than the roughly 150,000, 
175,000 who work directly in the steel industry.
    In my judgment, far more important than that, because 
neither of those two issues are big as far as the domestic 
economy is concerned, is the implication for our international 
trade posture. And here the whole question of the importance of 
international trade and how we handle it is critical to, in my 
judgment, the next number of years, because even though I raise 
the issue of the flexibility and resiliency of our economy 
being the major reason for the fact that we didn't go into a 
severe contraction in this most recent period, but what I 
didn't mention but which is also the case is a very substantial 
part of the economic growth that we've experienced in the post-
World War II period occurs as a consequence of the opening up 
of international markets for which the United States has been 
the largest recipient of growth as far as I can evaluate. So I 
think the President's got a very difficult set of choices 
before him, and I wish him well.
    [Laughter.]
    Chairman Oxley. The gentleman's time has expired.
    Ms. Hart. Thank you Mr. Bachus, thank you, Mr. Chairman.
    Chairman Oxley. The gentleman from Massachusetts, Mr. 
Frank.
    Mr. Frank. This illustrates the dilemma, the colloquy you 
just had, which is this. You and many others believe, and I 
share that to some extent, that the increased open trade regime 
is helpful to the economy. One of the major obstacles is 
precisely the resistance engendered by the only 175,000 people 
who may lose their jobs. They tend not to think of themselves 
as ``only.'' Well, from the macro standpoint, they're only; for 
them, they're it.
    And I am afraid that we may be exacerbating that. I read 
the Administration's analytical perspectives on the budget and 
they, in their analysis on page 24, come back to something 
we've discussed before, the NAIRU, the non-accelerating 
inflation rate of unemployment and give it a much higher rate 
than I think experience has shown. And their projection is that 
given everything they want to do, this is their optimistic 
projection. If the Administration gets all that it wants in the 
budget, unemployment will level off at 4.9 percent for the next 
decade and stay at 4.9 percent. It's about 25 percent higher 
than we had managed to get it during the growth. Here's what 
troubles me.
    You say, and I hope you're right and I'm inclined to agree 
that the productivity gains that we have been having are not 
going away. It's the productivity gains in part that helped us 
get the unemployment rate lower consistent with low inflation. 
If in fact, you're accurate, I hope you're going to tell me you 
don't agree with this, because if you're going to go to a 4.9 
percent best case unemployment, we're talking about 4.9 percent 
after the recession and full recovery. If that's as low as we 
can get it, if, in fact, the Administration is correct, and I 
don't believe they are, that there's an economic rule that says 
we can't go below 4.9 percent for any considerable period lest 
we trigger inflation. Then not only is that going to be 
socially a problem but it's going to exacerbate precisely the 
resistance to the kind of trade regime you want to see. So I'd 
be interested in your comment.
    Do you agree with them. I know you've been skeptical about 
the whole concept of NAIRU but is it, in fact, the case that 
we're going to have 4.9 percent unemployment best case, going 
out, 25 percent higher than we've been able to get to?
    Mr. Greenspan. I don't consider the fact that there's a 
50,000, 100,000, 175,000 jobs at stake an irrelevant 
consideration. Indeed, it's much less than that because, as you 
know, half the industry is minimills, and they're not in the 
same difficulties that the so-called traditional coke operated 
and blast-furnace steel type of operation is in.
    But my own judgment is that we should focus very 
significantly on making certain that those, who through no 
fault of their own lose their jobs because of the opening up of 
international markets, that we make certain that they are 
appropriately compensated and taken care of by any number of 
programs which one can conceive of.
    Mr. Frank. All right, let me just ask in the written part. 
I want to get to some other questions. I'd be interested if you 
would give me a list of the ways of compensating people who are 
getting hurt this way that the Federal Reserve would think was 
a good idea.
    And the problem of course is that we're in a budgetary 
situation in which some of those things are being cut and not 
expanded, but I'd be interested in the programs you supported.
    Mr. Greenspan. Let me put it this way. In this regard, I'm 
speaking for myself, not the Federal Reserve.
    Mr. Frank. Well, I'll take a few personally. It's OK, the 
rest are on their own. I'll ask for that from you personally. 
But do you think 4.9 percent, though--let's get back to the 
macro question--do you think 4.9 percent is as good as we can 
do for the next 10 years unemployment?
    Mr. Greenspan. No, Congressman. I have not changed my view 
on that since we discussed it last. And I have serious 
questions about the concept itself, because I don't believe 
it's a stable number and I don't believe that one can 
categorize.
    Mr. Frank. Well, I appreciate that and I think having the 
Administration's official projection be that again, this is 
assuming that they get everything they want in terms of policy, 
we're going to be at 4.9 percent. That's very discouraging so I 
hope the next time you and Mr. Hubbard are talking, you might 
bring that up.
    Let me ask you another question about long-term interest 
rates. In the written report we got, on page 23, it talks about 
the failure of long-term rates to continue to drop, although, 
as you said, they've dropped some, and the report says, ``they 
may also have been held up last year by an increased likelihood 
of Federal budget deficits and investors' optimism about future 
economic prospects.'' Now that's another issue. Some have 
argued that the budget deficit is irrelevant or has only very 
slight relevance to long-term interest rates. Would you 
elaborate on that?
    Mr. Greenspan. I've always argued that there is a 
relationship and indeed I think the markets respond as though 
there is a relationship, and I think quite properly so.
    Mr. Frank. Well if the markets respond that way, then there 
is obviously.
    Mr. Greenspan. Of course.
    Mr. Frank. So you think there is a--you're unusually 
reticent. I hope it's not simply the reluctance to disagree 
with the Administration that gives us the shortest answer I've 
ever heard you give on an important issue.
    [Laughter.]
    Mr. Frank. Would you elaborate a little more? Do you 
believe that the switch in the Federal fiscal situation from 
expected surplus to expected deficit has had an impact in 
keeping long-term interest rates from dropping as much as they 
otherwise might?
    Mr. Greenspan. No. As I've commented and testified 
previously, I do believe that the extent to which interest 
rates have not come down as much as they ordinarily would have 
in a period say such as this is partly the result of a change 
in the long-term fiscal policy.
    Mr. Frank. That's two things to talk to Mr. Hubbard about.
    Chairman Oxley. The gentleman from Louisiana, Mr. Baker.
    Mr. Greenspan. I agree with most of what he says, however.
    Mr. Frank. Well, the Republicans can ask you that, Mr. 
Greenspan.
    Chairman Oxley. Call on Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    Chairman Greenspan, welcome. I wanted to return to what I 
believe is the underlying economic perspective of the statement 
this morning which is essentially that an information-based 
economy must have access to accurate free flow of information 
in order for it to function properly. Even with the free flow 
of such accurate information, that would not predetermine the 
advisability of some particular capital investment decision, 
but real time accurate information enables proper balancing of 
equities to minimize potential market distortions which have 
resulted from the release of misleading data. Thus, any 
revision of a rule, regulation, or statute that provides for 
additional transparency, responsibility for disclosure of 
material facts, even more forward-looking statement 
responsibility should, to the contrary opinion of some, 
minimize, not enhance, market volatilities.
    As I understand your statement, reputational capital or the 
belief that a non-marketed idea has significant value, 
underscores the need for meaningful corporate disclosure. 
Additionally, it is appropriate I think for careful review of 
all corporate governance standards, given the fact that 
reputation has driven many investment decisions. Some have 
suggesting that Government regulation can move faster than the 
markets to preclude unwarranted activity. I don't believe that 
is well-founded. Certainly smart investment individuals know 
that Rule 10.b[5] exists and fraudulent conduct can take you 
directly to jail without going anywhere else first.
    And for those who choose to distort and misrepresent, 
Government can provide for consequences of that inappropriate 
behavior, but we cannot preclude such behavior. However, real 
time disclosure of accurate information to the markets provides 
a much more difficult problem for those who choose to pursue 
ill advised course, and that is an inability to secure the 
capital in the first place to engage in an ill advised 
investment practice. Therefore, my question goes to the 
advisability of the Committee's future work, not only to 
examine but to modify where justified disclosure requirements, 
the nature of the disclosures to be made, the timing of the 
disclosures, to define more clearly the responsibilities of 
corporate executives and members of the board, not only to 
disclose material facts but to ensure the independence of the 
audit team in reporting of the accurate financial condition of 
the corporation.
    Such a system should ensure that markets, and by that I 
mean every investor, has a platform to make a decision from 
which real information leads to sound investment strategies, 
not always success but the best possible strategy one can 
devise from his own perspective.
    Looking backward, Rule FAS-133, for example, on the 
treatment of derivatives reporting, even the fair disclosure 
regulation I would suggest has not resulted in the type of 
disclosure regimes which I think enable competent investment 
decisions to be made. And we should be encouraging real time 
material fact disclosure, forward-looking statements in order 
to ensure that information flows precedent to the decision 
being made. Can you comment?
    Mr. Greenspan. Yes. Congressman, I generally agree with the 
whole thrust of your remarks. Let me just say this, that it's a 
very complex issue and clearly as we move toward an 
increasingly conceptual environment, the values that are 
relevant to producing future income flows and hence the market 
value of a firm, depend very much on, as I said in my prepared 
remarks, ideas which you cannot physically feel.
    Mr. Baker. Let me interrupt on that. Particularly on that 
point, a report that indicates the historical position of the 
corporation, which is 90 days old does not indicate where an 
idea-driven corporation is going in the next 30 days, and the 
reporting system itself leads to some misrepresentation in the 
investor's mind.
    Mr. Greenspan. I think that is a very relevant 
consideration. I would say that in periods in the past when 
most wealth was visible, in other words, you had automotive 
plants, petrochemical feedstock operations, steel mills, there 
was real assets which one could evaluate and you couldn't spin 
what your open hearth furnace capacity was, it was real.
    In today's environment, it is very important that the form 
of disclosure essentially fit the nature of the value creation 
process.
    Mr. Baker. And that the disclosure is complete so there's 
not off-balance-sheet obligations which do not reflect the true 
financial condition of the corporation.
    Mr. Greenspan. I would say, however, that it is important 
to remember that no matter what you do, unless you changes the 
incentives to game the GAAP accounting system, it will be 
gamed.
    Mr. Baker. Well, if an executive has a no-cost----
    Chairman Oxley. The gentleman's time has expired.
    Mr. Baker. Just three seconds. If an executive has a no-
cost option, can run up the stock price, capture that, and then 
do a restatement of earnings 6 months later, the shareholder 
takes the loss, the executive doesn't, and I think that's 
something we need to look at.
    Mr. Greenspan. Agreed.
    Chairman Oxley. The gentleman from Pennsylvania, Mr. 
Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Chairman, following up on Mrs. Maloney's question on 
terrorism insurance, we are going to have a hearing later on 
this afternoon on that very issue to see what the risk is to 
the economy. But, I would like to find out whether or not the 
Federal Reserve has gathered any evidence to demonstrate that 
this lack of coverage has caused any drag on the economy, or 
what the potential future of the economy is, and most of all, 
how you see the potential risk and exposure of our banks? Has 
there been any use of the failure to acquire terrorism 
insurance as a default mechanism in some of our financial 
institutions?
    Mr. Greenspan. Congressman, we haven't seen any impact of 
that nature on the banks. Indeed, much of the problem is it's 
presumed that banks won't lend unless a particular borrower has 
forms of insurance which previously they did not need. So the 
problem is not threats to the banking system, the problem 
basically is whether or not the types of real estate activity 
which occurred in the past very readily is being held up. 
Whether construction's being held up, whether, in fact, there's 
a significant impact on the economy.
    To date, in an aggregative sense, it does not appear to be 
the case. We are still struggling to get enough adequate data 
to make judgments but clearly there have been effects. What we 
do not know is what the aggregate size of those effects are 
because we largely are dealing with anecdotal rather than macro 
economic data systems. Hopefully at some point, we'll be able 
to get considerably more information but at this stage, I think 
it's actually too early to make a judgment of that type.
    Mr. Kanjorski. But could I assume, though, that you feel 
that the Congress should take action and provide some sort of 
backstop?
    Mr. Greenspan. I personally do, yes.
    Mr. Kanjorski. Now, moving to an entirely different matter, 
the Federal Reserve and the Treasury Department have had under 
consideration a proposal that would allow national banks and 
financial holding companies to engage in real estate management 
and brokerage. The proposal has attracted considerable 
opposition here on the Hill. As you know, in passing the Gramm-
Leach-Bliley Act, Congress did not intend for banks to engage 
in commerce. But this proposal, in my estimation, would subvert 
congressional intent. What is the status of this ill-conceived 
regulation? Could we get a report?
    Mr. Greenspan. Well, Congressman, as you point out, there 
has been considerable discussion on this issue, and the 
consequence of that is an extraordinary amount of comment that 
we have been getting as a consequence of our request for 
comment on various different types of rulings. The result is we 
have a lot of processing to do so we will work through it. And 
obviously since we have to coordinate with the Treasury 
Department, we will move as quickly sa we can, but at the 
moment it's going to be, in my judgment, a while just 
effectively dealing with the processing of comments that we 
have so far today.
    Mr. Kanjorski. Thank you, Mr. Chairman. I yield back my 
time.
    Chairman Oxley. The gentleman yields back.
    The Chair now recognizes the gentleman from the First 
State, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman.
    Chairman Greenspan, let me preview a question I'm not going 
to ask you but I'd like to submit in writing to you. I mean I 
know you've probably heard it before but it relates to the 
creation of money and the selling of money by the United States 
the Bureau of Engraving and Printing and the Mint which, as you 
know, are done fundamentally differently, and it seems to me 
that the BEP's methodology is clear, more transparent in terms 
of what they're doing and also accounts for the dollars in a 
better sense. The Mint I think the way they do it has a lot of 
obfuscation to it that perhaps there's some controls on the 
Mint which are not totally in place, not that they're doing 
anything wrong with it, and obviously it doesn't score income 
for Congress and the 50-state quarter program which I was 
involved with is going to produce now $5 to $10 billion in so-
called profits and that's something I think we need to look at. 
I'll submit in writing.
    My question I want to ask you, questions I want to ask you 
today relate to the economy, if you will. A year ago, your 
outlook report delivered here predicted, and I quote: 
``Stronger economic additions to emerge as the year 
progresses'' with the economy growing at a rate of 2 percent to 
2.5 percent. The report also said, and I quote again: ``an end 
to the profitable investment opportunities in the technology 
area does not yet seem to be in sight.'' I guess that was a 
longer term than a year statement, since households and 
businesses are still in the process of putting recent 
innovations in place. Even without the 9/11 attacks, it does 
not appear that the economy would have achieved the results, 
the 2 percent to 2.5 percent results.
    To what do you attribute this under performance?
    Mr. Greenspan. Well, Congressman, I'm not sure that that 
statement is accurate.
    Mr. Castle. You believe it was 2 to 2.5 percent?
    Mr. Greenspan. Well, no. I think it was less but not all 
that much less. As we were going into the month of August, the 
economy was clearly gathering some stability and as we've seen 
what's happened in the last few months, I'm sure we would not 
have made the actual, the Federal Market Committee's forecast 
would have fallen short, but I'm not sure it would have fallen 
short by a particularly large among.
    Mr. Castle. So you're saying without September 11th, we 
would have come close, even though we might not have achieved 
it?
    Mr. Greenspan. Clearly, without September the 11th, the 
third quarter would likely have been no change or maybe a small 
plus or very small minus, and the fourth quarter would probably 
have done better. Now whether or not that would have added up 
to the figures that we have, I don't know, but I think that the 
quality of the forecast, if I may differentiate from the 
numbers, was not all that far off in my judgment.
    Mr. Castle. Well, let me extrapolate all that and carry it 
to the future which is what I guess we're all more concerned 
about right now. Economic indicators demonstrate that we're 
coming out of the recession, at least some of them do that I've 
seen, if we're not out already on a technical basis. I would 
like to factor into that what the economic impact of the long 
term war on terrorism may be, which I think it is going to be, 
and also the Enron effect, which appears to be reduced capital 
markets of a substantial nature and other corporate uncertainty 
which is going on out there. Will these eventually trigger a 
recession, going back into a recession? If so, what steps 
should we be taking in Congress to prevent or mitigate this?
    Mr. Greenspan. Congressman, I think not. Indeed, as I said 
earlier, I think after the fact, we'll look back on this Enron 
episode as a period when we put our corporate governance back 
on track, which would not have happened without it, in my 
judgment, not fully. That is favorable to the long-term 
outlook. If it were going to have a significant impact on the 
economy in the short run, we'd already be seeing it, and we are 
not. And I don't deny that there may be other Enrons out there 
which we just have not, have not been exposed, it's conceivable 
to me, but it cannot be a large issue. It's almost too late for 
it to have had delayed effects which would be material. If they 
were going to occur, much of what we would have seen, much of 
what occurred would have likely occurred earlier rather than 
later.
    Mr. Castle. I don't mean to get in an argument with you 
about this; you know much more than I do, or split hairs, but 
it does seem to me that some of these effects could be long-
term.
    Mr. Greenspan. Oh, yes.
    Mr. Castle. Much longer term than we seen so far in terms 
of the accounting aspect of it, the effect on the corporations, 
capital markets, just a whole variety of changes which are 
going to occur.
    Mr. Greenspan. Congressman, I don't deny that. I'm just 
basically saying that the order of magnitude is not material 
for the long term outlook.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Greenspan. It will affect, there's no question that 
there will be long-term effects of Enron and I think that's 
good, not bad.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman, and it's 
nice to see you again, Mr. Greenspan.
    Mr. Greenspan. Thank you.
    Mr. Sanders. Mr. Greenspan, as the Nation's chief 
economist, I would like to tap your expertise. Over the years, 
I think, as you know, you and I have disagreed on some major 
economic issues. As I recall the last time you were here, you 
informed us, to my amazement, that you actually believe in the 
abolition of the minimum wage at a time when many of us think 
we should substantially raise the minimum wage.
    I also have a very difficult time in recognizing the kind 
of rosy economy that you are portraying, and that is not the 
economy that I see in Vermont and not the economy I think that 
exists in many areas of this country. The reality is, as you 
know, the tens of millions of Americans today are working 
longer hours for lower wages. Twenty-five or 30 years ago, when 
you and I were a little bit younger, the norm was that in the 
middle class one breadwinner, one person could earn enough 
money to take care of the family, and today for the middle 
class that is very much the exception to the rule. The 
statistics are amazing about how many two-worker families there 
are because of the decline in real wages. With a $400 billion 
trade deficit, some folks my colleagues talked about steel, but 
it's not just steel. We have lost millions of decent-paying 
manufacturing jobs to China, Mexico, and elsewhere and they are 
often being replaced by part time temporary jobs in the service 
economy which have no benefits, which are low wage. We have 44 
million Americans who have no health insurance, millions of 
senior citizens can't afford their prescription drugs. One end 
of the country to the other, there's a housing crisis. Middle 
class families are paying 50 to 60 percent of their incomes for 
housing. Families are going in debt to pay for college. The 
childcare situation is a national disgrace. So I don't quite 
see the economy that you are talking about for the working 
families of this country.
    But, in fact, the issue that I wanted you to comment on had 
to deal with a front page story that appeared in the Wall 
Street Journal on Monday. And that dealt with the growth of 
economic oligarchies in this country, and the reality that a 
small handful of corporate executives have enormous power today 
over the U.S. economy, and perhaps never before in our history 
have so few people had so much power over the American economy 
as is the case today.
    The Wall Street Journal gave some examples, and let me give 
some others. Twenty years ago, there were thousands of small 
cable TV companies; today a pending deal would leave three 
companies in control of two-thirds of the market. We used to 
have many defense contractors selling defense products to the 
Government. Today there are five. We used to have many, or at 
least eight, Baby Bell telephone companies; today there are 
four. In terms of the media, fewer and fewer giant media 
corporations control television, radio, newspapers, and 
magazines. Oil, in the wake of oil company mergers, five 
companies control more than two-fifths of domestic production. 
Agribusiness five firms now account for over 80 percent of the 
beef packing market. Six firms account for 75 percent of pork 
packing. Airline competition is almost non-existent in many 
parts of this country.
    So my question to you is has the Government been too lax in 
terms of enforcing antitrust regulations. Have we allowed fewer 
and fewer corporate executives to have huge amounts of economic 
power by controlling industry after industry. Is it morally 
right that CEOs of large corporations now make over 500 times 
what their workers make, and seem to make more money to the 
degree that they lay off American workers. Do you have any 
concern about any of these issues?
    Mr. Greenspan. Well, Congressman, let me just say there are 
a few qualifications I would make to the data that you cite. 
First, to be sure, there has been a very considerable 
consolidation of defense procurement activities because the 
defense budget, as a percent of the GDP, is very much smaller 
than it was in periods past, so when you have a declining 
industry, you'd expect that to happen.
    Mr. Sanders. Several hundred billion dollars is not 
insignificant.
    Mr. Greenspan. Several hundred billion dollars is a good 
deal less than the--remember we're talking about the 
relationship within the economy--so that if you go back 20, 30 
years, the proportion of the economy which represented defense 
was much larger and you can afford--or put it this way; there 
was enough business for a much larger number of companies to 
function.
    Mr. Sanders. But it's not just defense, Mr. Greenspan.
    Mr. Greenspan. No, I understand that. Let me go down to--I 
mean, to be sure, there's been a consolidation in the oil 
industry, but remember that a very significant change has 
occurred in the last generation or so when most of the oil, a 
very significant part of the oil-producing properties have 
effectively been taken over by host countries, especially in 
the Middle East, so that the nature of the international oil 
companies have changed.
    Now I'm not going to say what is in the media. The media is 
a very significantly controlled operation and that really gets 
down to what Government policy should or should not be. But we 
have an extraordinarily competitive economy today. It's more 
competitive than I ever recall it and indeed the international 
aspects of the competition is one of the reasons why I think, 
contrary to the remarks that you made, that the standard of 
living of this country is higher than it's ever been on 
average, and two----
    Mr. Sanders. I would respectfully disagree with you. I 
think the facts do not speak to what you say.
    Chairman Oxley. The gentleman's time has expired. Does the 
Chairman wish to continue?
    Mr. Greenspan. I just basically wish to stipulate that we 
have an extraordinary standard of living. I don't deny that 
there are, as there always will be, significant parts of our 
population which are basically in difficulty in one form or 
another with respect to the economy. I think we ought to work 
as hard as we can to alleviate that but I don't think it 
changes the fact that the economy is doing extraordinarily well 
in an historic context, that all of the data that most 
economists would adhere to believe the standard of living is 
higher than ever before on average. And if you wish to dispute 
that then to be sure we do have a very significant disagreement 
as we always do.
    Chairman Oxley. The gentleman's time has expired.
    The pivoting from one corner of the philosophical divide to 
another, I now recognize the gentleman from Texas, Mr. Paul.
    [Laughter.]
    Mr. Paul. Thank you, Mr. Chairman.
    Welcome, Chairman Greenspan. I wanted to start by referring 
to a speech you gave in January at the American Numismatic 
Society where you spoke profoundly about monetary policy and 
said that central bankers have had relative success over the 
past decades, and it raises hopes that the fiat monetary system 
can be managed in a responsible way. So I think you're still at 
the point of hoping that this system will work. I maintain that 
the jury is still out on whether or not fiat money will work 
over the long-term.
    And then you followed it up by saying, in case it didn't 
work, and I don't know whether you had tongue-in-cheek or not 
about this, but you said that we might have to go back to sea 
shells and oxen as our medium of exchange.
    And then you reassured everybody that the discount window 
would have an adequate supply of oxen. Chairman Oxley, if we 
get to this point, which I suspect we will someday, I ask you 
that we have hearings to debate the issue of what medium of 
exchange we have before the Fed starts using oxen as a medium 
of exchange.
    Chairman Oxley. Are you referring to the Chairman here?
    Mr. Paul. Yes, I hope that you will at least consider that. 
But I think it is an important point and I want to relate that 
to the Enron issue, because in many ways, I think the system 
that you have been asked to manage is similar to being asked to 
manage an Enron system. Because Congress is notoriously in 
favor of deficit spending, we're currently expanding the 
national debt at $250 billion a year, and we have nearly a $6 
trillion debt.
    Now we create that debt by buying votes. We spend a lot of 
money. Then the Federal Reserve comes in and they buy that debt 
in order to maintain the interest rate that they think is the 
right interest rate. And they take that and use it as an asset. 
You put it in the bank. You call this debt that we created an 
asset, and you use it as collateral for our Federal Reserve 
notes. So that's a pretty good scheme, and I think in the moral 
terms, as well as the economic terms, it's very similar to how 
Enron operates. I'm not convinced the system works very well 
because a lot of people here praise you for the adequate amount 
of liquidity and that's what inflation is: create more money, 
lower interest rates. Every time you ask for liquidity, and 
every time you ask for lower interest rates, you're asking for 
inflation of the money supply. I think that what we fail to do 
is to ask about the cost. Do we ever concern ourselves about 
the people who have had two-thirds of their income removed 
because they happened to be savers and living off interest? We 
gouge them with inflation, the loss of purchasing power, and 
taxes. A lot of people in this country have suffered from this 
particular system.
    Now the analogy I would like to draw is something you said 
in your testimony on page 13, and you have mentioned several 
times now that Enron may be a good lesson, and I think it is. 
And I'm not for more of this regulation by SEC. I think you're 
correct that derivatives provide a market tool that is 
worthwhile, but you also said the Enron decline is an effective 
illustration of the vulnerability of a firm whose market value 
largely rests on capitalized reputation, with very little on no 
physical assets. That's exactly what our monetary system is all 
about, and that's why I believe the dollar is vulnerable. We in 
Congress do not have a responsibility to run Enron. Some other 
government has the responsibility to deal with fraud. We have a 
responsibility to the dollar, and I think that's what we fail 
so often to address around here.
    In addition, you said that Enron provides encouragement 
that the force of market discipline can be counted on over time 
to foster a much greater transparency. That's exactly what the 
market does with money. If you look at the rapid and the sudden 
devaluations of the fiat currencies around the world, such as 
what happened to us in 1979 and 1980, that was the market 
coming in and forcing vulnerability and transparency on us. Now 
gold gives you a hint as to what's happening. Gold has sent a 
mild message in this past year. In spite of the fact that 
central banks and others continually sell and loan out gold and 
push the price of gold down, there is a message there.
    So I would ask you, can you see any corollary whatsoever on 
what you're asked to do in running our monetary system to that 
which Enron was involved in?
    Mr. Greenspan. I hope there are fundamental differences. 
First, dealing with essentially a fiat currency, what it is 
that we are doing is that the currency is granted value by fiat 
of the sovereign, as it is said in the textbooks. The issue 
there is that in years past, there has been considerable 
evidence that fiat currencies have been mismanaged in general, 
and that inflation has been too often the result. What I was 
mentioning in the speech that you were referring to is the fact 
there is some evidence that we're learning that lesson, 
learning how to manage a fiat currency. I've always had some 
considerable skepticism about whether that in the long run can 
succeed, but I must say to you that the evidence of recent 
decades is that it has been succeeding. Whether that continues 
is a forecast which I can't really project on.
    The Enron situation is essentially one in which there was 
an endeavor to imply that earnings were much greater than they 
really were, that increasing debt was hidden. I can think of no 
reason to have done what they did with their off-balance sheet 
transactions other than to obscure the extent of the debt they 
had, and what essentially was squandered in that process was 
the reputational capital which they had succeeded in achieving 
over a period of time. And I don't perceive that anything that 
we are doing as a Central Bank involves anything related to 
that. I hope that where we need to be transparent and indicate 
what we are doing we do so, and we do so except in those areas 
where it, as I mentioned to you previously, inhibits the 
ability to actually function as a Central Bank.
    But as I say in summary, I hope your analogy is 
inappropriate.
    Mr. Paul. I guess we'll all keep hoping.
    Chairman Oxley. The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you.
    Thank you, Chairman Greenspan, for an outstanding 
presentation. As before, I've got far more questions than the 5 
minutes allotted so, as in the past, I'd like to start off with 
some questions that I hope that you and the Fed Staff would 
respond to for the record.
    We met here a year ago. Of course, you come every 6 months, 
but a year ago is the last time I'd had a chance to ask you a 
question, and we dealt with the incredible deficit and I'd coin 
the term ``trade debt,'' that is to say, the trade deficit 
building up year after year, the transfer of assets abroad, and 
I'm still amazed that the dollar sells for more than the euro, 
and that we hope that this trade debt and deficit reach a soft 
landing. I don't know anyone who could have predicted a decade 
ago that the country could run a trade deficit as long and as 
large as we have and still have such a strong currency.
    I'd like to restate the concern that I expressed to you in 
this room a year ago, and echo the comments of Mr. Kanjorski 
that real estate brokerage was never designed to be something 
included in the grant of powers to national banks and financial 
institutions. Not only is it bad public policy, but I think 
that if the bank regulators go down that road, it will undercut 
your relationship with Congress. We were in this room for 
literally hundreds of hours over half-a-dozen or more years 
trying to paint a picture for ourselves as to what financial 
reform would mean and under particular statutory text.
    None of us in this room ever put forth the idea that the 
bill we passed would open this huge industry to those insured 
financial institutions. And I noted that you have not acted 
precipitously in this area. You indicated that you're going to 
wait for a chance to respond to all the incoming comment and if 
what it takes to avoid precipitous action is additional 
incoming comment that needs response, I'm sure that can be 
arranged.
    First, as to economic stimulus, there's two ways to do it, 
monetary and fiscal. The monetary has immediate effect. You 
could meet in the next day. The interest rates are lower. It 
may not have an immediate impact. Fiscal takes months, it 
seems, for the IRS to even get the checks out to even have an 
effect, let alone an impact. Yet it's odd that this country is 
now thinking in terms of fiscal stimulus and monetary sedative, 
for want of a word to express the opposite of stimulus. First, 
let me urge you to consider cutting interest rates one more 
time instead of increasing them.
    But second, putting aside your well-known preference for 
lower total Federal expenditures, and assuming those 
expenditures are going to remain the same, does it make any 
sense for Congress to be thinking of fiscal stimulus while the 
Fed is at least rumored to be considering monetary sedative?
    Mr. Greenspan. The problem with fiscal policy, as 
economists have begun to realize over the decades is that it's 
very difficult to implement in a timely manner largely because 
our capacity to forecast in a specific timeframe itself is 
limited.
    Nonetheless, as I indicated over the last year or two, if 
it turns out that you can fortuitously time a tax cut in a 
period of economic weakness, it obviously does do some good. I 
do think that the tax cuts of last year in the middle of the 
year did show up as increased expenditures in July and August. 
That's not the way they were constructed in that timing, but 
they turned out to be actually quite effective as best I could 
judge.
    But the broader question still remains whether it is 
possible to implement an effective fiscal policy with the 
inevitable time lags that are involved. I'm skeptical myself 
that it is feasible.
    Mr. Sherman. Do we need stimulus at this time, let alone is 
there any evidence that we need stimulus 6 months from now, or 
a year from now?
    Mr. Greenspan. Well, the question really rests on whether 
the level of final sales will kick in, as I put it in my 
prepared remarks, prior to when the obvious significant 
positive thrust coming from a reduction in inventory 
liquidation dissipates. It's too soon to make that judgment at 
this particular point. So one can argue that if one believes 
that it might not, that as an insurance policy, you might want 
some fiscal stimulus.
    My own impression is that it's probably not necessary, as I 
indicated in previous testimony. But there is a credible 
argument for it as an insurance policy for those who believe 
that the economy may be at risk of not being able to follow 
through after we get the inventory turnaround.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Sherman. If I could have just ten seconds, though.
    Chairman Oxley. The gentleman from California, Mr. Cox.
    Mr. Cox. I'd yield ten seconds to my colleague.
    Mr. Sherman. I just want to point out that the cheaper 
insurance policy is for you to cut interest rates which would 
have the stimulus effect if that was determined to be needed 
without increasing the national debt. I thank the gentleman.
    Mr. Cox. Mr. Chairman, welcome. As you point out in your 
testimony, the proper functioning of our markets depends upon 
investor confidence. And the Enron debacle, which is in major 
part an accounting scandal, has eroded public confidence in, 
among other things, financial reports generally. It has put a 
glaring light on the role of directors, particularly members of 
the audit committee. It has cast into doubt the adequacy of the 
entire accounting profession.
    To address these problems you, regulators, Congress, the 
SROs and the private sector know that we have got to take every 
responsible step to increase auditor independence, to 
strengthen the role of the audit committee, of an independent 
audit committee, to fortify the accounting profession to 
attract highly skilled, intelligent people of integrity. And 
yet if we survey the lay of the land today, we know that the 
market forces, the trends, the incentives are all running in 
the opposite direction.
    At a time when we need the very best people to serve on 
boards, the risk to such service is greater than ever. We can 
ask ourselves based on very real experience of late, who would 
want to volunteer for service on an audit committee of any 
large enterprise today? Whereas, 30 years ago, many top 
graduates of the Nation's business schools headed for the 
accounting profession. That's no longer the case, and Enron has 
almost certainly made the problem worse.
    The question I'd like to put to you is what we as Congress 
can do and what the private sector can do, what regulators and 
SROs can do to address the problem of auditor compensation 
while still--or not while still, but while actually increasing 
auditor independence? And what can we do to encourage people of 
character and reputation to risk those irreplaceable assets to 
serve on the boards and the audit Committees of the Nation's 
businesses?
    Mr. Greenspan. Congressman, this is an issue which the 
President's Working Group is deeply involved in at this 
particular stage. One of the things that I think is becoming 
evident is that the change in corporate governance which has 
occurred over the generations where you very rarely now have 
shareholder control in a limited number of hands so that 
effectively the directors are appointed and work for the 
shareholders and the CEO is appointed and works for the 
directors.
    The fact that such a substantial amount of shareholding is 
now for investment and not for control has effectively switched 
the locus of control from shareholders to the CEO. And if the 
CEO endeavors to run the company wholly in the interests of 
shareholders, then there's no loss in the structure of 
corporate governance. And it's in our judgment that what we 
have to start to do is to try to find those areas where the 
CEO's self-interest has diverged from that of shareholders and 
try to find means and incentives which would restore what, I 
think, was the case 20 or 30 years ago before short-term 
earnings expectations became such a critical issue in what 
individual corporate managements were able to do.
    My own judgment is that you have to be careful about trying 
to presume that directors are really, truly independent. I've 
served on innumerable boards in the private sector, and there 
is an asymmetry of information between an insider in a 
corporation and an outside director which will never be 
breached, which will never be brought together, I should say.
    The result of that is that it is crucially important that 
the incentives require that the CEO behave in a certain manner 
or be incentivized in a certain manner. I've served on too many 
audit committees to know that even though I would consider 
myself independent, I would consider myself knowledgeable, I 
did not know what questions to ask the chief financial officer 
during meetings to find out what it is that conceivably is 
going wrong in the corporation, and he wasn't about to tell me.
    So that there is a very difficult problem that one 
confronts, and the mere presumption that you somehow make a 
bunch of people independent and have an independent audit 
committee, it won't work that simply because if you make 
everybody on the board independent, what's going to happen is 
you're going to have competing power centers within a 
corporation. And in my judgment, corporate governance will 
suffer as a consequence.
    Mr. Cox. Mr. Greenspan, I wonder also if--you're making the 
case for the complexity of the problem. I wonder if you could 
address the concern which is no matter how we address corporate 
governance issues remains, and that is how you attract quality 
people. Because I think the accounting profession has taken a 
hit. I think that the ranks of boards and audit committees are 
going to take a hit. And we've got to have good people in these 
positions if we're going to lick these problems.
    Chairman Oxley. If I could interfere just briefly. We have 
a vote on the floor. Make that the last question. The Chairman 
could respond and then we'll take a break for the vote.
    Mr. Greenspan. Why don't I answer it later then, if that's 
the case?
    Mr. Cox. Well, I'm happy to put the question to you now and 
hear your response and not put any further questions so that we 
can that wrap it up, Mr. Chairman.
    Chairman Oxley. Yes. If the Chairman would like to respond.
    Mr. Greenspan. Which specific question did you want to ask 
quickly?
    Mr. Cox. The burden of my question is, we are seeing 
increasing risk to the individuals who we want to be even more 
responsible than they have been in the past, and we've got to 
attract persons of training and integrity to these positions. 
What structurally can you recommend to the Congress that we 
might do to fortify the accounting profession and the ranks of 
our directors?
    Mr. Greenspan. It's my impression on the basis of 
experience I've had in an innumerable number of boards on which 
I have served that if you get a chief executive officer who 
looks toward his outside auditor as somebody to tell him what 
he is doing wrong rather than somebody who should try to 
acquiesce in a particular set of accounting principles, he will 
change the whole nature of the relationship between directors, 
CEOs, and he will certainly create the type of independence of 
the audit function that will attract numbers of people back 
into the accounting profession and create the type of directors 
who will be most effectively helpful to the CEO and to the 
shareholders in getting appropriate corporate governance.
    Chairman Oxley. The gentleman's time has expired. The Chair 
would declare a recess of the hearing for the vote, and we will 
reconvene in 10 minutes.
    [Recess.]
    Chairman Oxley. The hearing will come to order. And the 
Chair now recognizes the gentleman from Pennsylvania, Mr. 
Mascara.
    Mr. Mascara. Thank you, Mr. Chairman.
    I'd like to revisit the steel crisis issue, Mr. Chairman. I 
come from Southwestern Pennsylvania where steel and coal used 
to be king. And as we all know, there is an apparent steel 
crisis. The steelworkers will be here tomorrow at a rally to 
stand up for steel and I certainly will visit with them.
    First of all, I happen to believe that the steel crisis is 
a microcosm of our failed trade policies. And I don't want to 
get into that, because that's a long story. But, I respectfully 
disagree with you in an earlier comment to a question about 
what effect tariffs would have on steel, and that perhaps 
prices would increase as a result of even as high as 40 
percent. The President, on March the 6th, will make a decision 
about the percentage of increase on steel tariffs.
    I don't believe that I've seen any decrease in the cost of 
automobiles, appliances as a result of the consumer consumption 
or the domestic steel users in this country of that cheap steel 
passing that profit on or any part of it to the people who buy 
automobiles and appliances. That's one point I want to make. 
And I'm wondering whether you have any feel for what the 
President--I'm not asking you to guess the President--but what 
the President should do in regards to the March 6th decision 
that he has to make?
    On Sunday, I was on KDKA television in Pittsburgh with the 
CEO of Weirton Steel that employs 3,500 steelworkers. He said 
that 20 percent would be of no help and that eventually the 
steel industry would die on the vine, that companies continue 
to go into Chapter 11. In fact, Wheeling-Pittsburgh Steel plant 
in my district is now in Chapter 11. And I was wondering 
whether you had any feel where that number should go from 40 
percent down, given that 20 percent won't work.
    Mr. Greenspan. Well, first of all, I'm not clear as to what 
you mean if you put a tariff on that the price will not go up. 
If it doesn't go up then it has no impact on the domestic steel 
price that the traditional steel operations are still under 
severe pressure because their margins are not going to change. 
I'm not sure if a tariff doesn't increase the domestic price 
its impact on domestic profitability and employment is zero.
    Mr. Mascara. What I said, Mr. Chairman, is that the savings 
that the domestic users of steel to make their products with, 
that savings has not been passed on to the consumers.
    Mr. Greenspan. Well, if it hasn't, then the profits of the 
steel-using industry must have risen significantly and there's 
no evidence of that happening, Congressman.
    Mr. Mascara. Well, I don't have those facts here. But there 
is a concern that the steel industry will cease to exist. Have 
you considered the national security impact? Bethlehem Steel, 
which is one of the only producers of the steel that's used in 
ships and tanks, is also in Chapter 11 now. And do you feel 
that if the steel industry does, in fact, cease to exist in 
this country--and those kinds of talks are going on currently--
what will we do in the event that we need to produce that kind 
of steel? Would we have to depend on foreign production of that 
type of steel?
    Mr. Greenspan. Are you talking about defense?
    Mr. Mascara. Yes.
    Mr. Greenspan. You're talking about steel plate and the 
like?
    Mr. Mascara. Yes.
    Mr. Greenspan. Well, first of all, I don't believe that 
it's credible to presume that the steel industry will no longer 
exist, because half of the mills, as you know, are electric arc 
furnace, steel scrap consumers and while they're under some 
pressure because of the obvious weakness in steel prices, 
they're doing reasonably well. And there's no evidence of which 
I am aware would suggest that they're going out of business.
    The crucial issue that really is involved with the notion 
of the traditional steel industry is there are certain types of 
steel which cannot be made effectively in a scrap furnace. In 
other words, the chemical control that you have of the scrap 
makes it difficult to create the type of steel which for 
example you need in an automobile for forming purposes and the 
like.
    And so that there is a need in the country for a certain 
what I would call ore-originated steel, because you can 
essentially control the metallurgy in an appropriate manner. 
But that's not a very large number. And indeed, as you know, 
there's a good deal of slab imports which are made from ore and 
which are rolled into a type of cold-rolled sheet which the 
automobile manufacturers need.
    As far as steel for defense, the amounts that we need are 
extraordinarily small. And I'm not convinced, at least from 
what I understand it, that with the appropriate amount of 
pellets within say a scrap mix that a goodly part of the actual 
heavy steel that we need is not available.
    But in any event, I mean there's certainly not going to be 
a disappearance of the traditional steel industry. I do agree 
with you that it's under severe difficulty and as one who is 
old enough to have visited the old Homestead Works when they 
were really extraordinarily effective and productive, I know 
what it means for that type of industrial structure to fade.
    Mr. Mascara. My time has expired. But apparently we 
disagree on some issues as it relates to the stability of steel 
industry. There are hundreds of thousands of retired 
steelworkers who now may lose their health care and pensions. I 
think the President ought to do something and do it very 
quickly. Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from New York, Mrs. Kelly.
    Mrs. Kelly. Thank you, Mr. Chairman.
    Mr. Greenspan, you've been here a long time and so I really 
want to make this fast. But I noticed something that I wanted 
to ask you about. We saw in the news this morning the Commerce 
Department said that durable goods rose by 2.6 percent in 
January and they rose in December by .9 percent. But in your 
testimony on page 4, you said, as a consequence, although 
household spending should continue to trend up, the potential 
for significant acceleration in activity in that sector--this 
sector is likely to be more limited than in past cycles.
    That seems to be somewhat in conflict with the numbers, and 
I wanted to know if you believe that this is a trend in durable 
goods and one that's likely to continue. I wonder if you'd 
address that for me.
    Mr. Greenspan. I would say looking at the data that we saw 
today, clearly it's encouraging that the markets are coming 
back. But they went down in an awfully extended way and they 
were under really severe pressure. So I think that it's going 
to take a while to be sure that we're getting the type of 
response that we're going to ultimately need.
    There are a number of elements in the capital goods markets 
which are still quite weak. And indeed, some of the anecdotal 
stuff especially. And in the telecommunications area, for 
example, orders are not showing very much. They did improve in 
this morning's numbers and that was encouraging. But all I 
would say to you is that, yes, the durable goods orders were 
somewhat better than I would have expected this morning. That 
if they continue that way, then I think things will clearly 
improve.
    But it's too soon to make those types of judgments. We need 
a good deal more time to see that this recovery is integrating, 
is taking shape in an integrated form.
    Ms. Kelly. So you don't feel that the numbers over the 
past--I know the projects in December had projected zero growth 
or negative, and we got a .9 percent. And here we are in 
January with a 2.6 percent. You're saying you don't feel that 
that yet, that that's enough to make a trend?
    Mr. Greenspan. No. I think it's certainly enough to 
indicate that the hypothesis that we're coming out of what has 
been a period of significant stress that the probability is 
improving. It's nonetheless still early in the sequence.
    Ms. Kelly. Let me just throw something else in that 
equation. According to the National Association of Realtors, 
existing home sales for January set a monthly record. They 
topped out a $6 million mark for the first time.
    On page 5 of your testimony, you say in recent months, low 
mortgage interest rates and favorable weather have provided 
considerable support to homebuilding. Moreover, attractive 
mortgage rates have bolstered the sales of existing homes and 
the extraction of capital gains embedded in home equity that 
those sales engender.
    With all that said, do you feel that this is a trend in the 
new home sales and you think that's a sustainable trend for the 
near future or do you think that trend may slow down?
    Mr. Greenspan. You mean $6 million annual rate figure? 
That's clearly not going to be sustained. I mean, there's just 
no evidence that we're off on a different track. Because 
remember that existing home sales are essentially a rate of 
turnover of the existing single family housing stock plus 
condominiums. And historically, that ratio doesn't change all 
that much. It's a gradual change in households, and the 
turnover is related very largely to demographic forces as well 
as the obvious economic forces which I cited.
    So if you're asking me do I think the $6 million number 
will stay up there, I think unlikely. But nonetheless, it's 
still impressive.
    Ms. Kelly. Would you say that you feel that the trend 
toward increasing home sales would continue whether it hits 
that mark or not?
    Mr. Greenspan. Well, I think the trend of existing home 
sales has been relatively flat at a reasonably high level for 
quite a long period of time. And if we can even maintain that, 
I think we're doing well.
    Ms. Kelly. Thank you very much. My time is up. Thank you, 
Mr. Chairman.
    Chairman Oxley. The gentlelady's time has expired.
    The gentleman from Washington, Mr. Inslee.
    Mr. Inslee. Thank you.
    Mr. Chairman, we've all been talking about the concerns 
about Enron and the prospect of other Enrons out there, of 
other organizations that would overstate revenues and 
understate costs. And I know of at least one other large 
organization that's exactly in that position of deceiving 
essentially their shareholders in that regard. You're smiling. 
You see where I'm going with this. Which is the United States 
Federal Government.
    And it's my belief that our deceit of our shareholders sort 
of makes Enron look like small potatoes, considering the phony 
accounting that we indulge in that I believe is leading us to 
chronic deficits over the next decade unless something happens. 
And let me just list three of those that I believe that are 
phony bookkeeping that disguises the fact that we're going to 
have these chronic deficits. We're already over $100 billion 
this year, as you know.
    You know, we tell the American people that tax exemptions 
that are now in the Code aren't going to be renewed when the 
Administration makes their projections. We all know that's not 
true. They're going to be renewed. Everybody in this town knows 
it, including the folks in the White House.
    We know that the AMT eventually is going to be fixed, has 
to be fixed, because so many millions of Americans will be 
subject to it. Everybody in this town knows that, and yet we 
don't tell the American people that. We base projections on 
that phony statement.
    We know there's going to be relief for Medicare of some of 
the cuts that have damaged health care in this country, and 
everybody in this town knows that this is going to happen.
    Now assuming that's true, looking at the numbers, we're in 
for, at least in my view, long-term deficits somewhat 
approaching the history of the 1980s, which was a movie we saw 
once before, of big tax cuts, big defense buildup, and 
unrestrained domestic spending. And I guess my question to you 
is, if we end up back in that pickle because of our Enron-like 
activities at the Federal level, what impact do you think could 
that have on the U.S. economy in the next decade?
    Mr. Greenspan. Well, obviously, if we resort to a 
significant amount of deficit spending, the question 
essentially is how is it financed? And it's financed basically 
by extracting capital from the private sector. And to the 
extent that you do that, obviously, the capital assets which 
are produced are generally less productive in producing 
economic goods than is the case when the Government's drain on 
resources is neutral or zero even or slightly in surplus so 
that it's merely a simple question of how it's financed and 
what the implications of that are, and history tells us that 
it's not very helpful.
    Mr. Inslee. I think there's another downside, too, and let 
me just ask you about this. And that is that essentially the 
Administration is financing this budget deficit by raiding 
Social Security. And of course, Congress and the Administration 
has told Americans for the last couple of years that raiding 
Social Security was no longer going to be countenanced in this 
town, and that's exactly what we're doing.
    And now, because of these faulty, phony numbers that we're 
posing about, we're going to be again raiding Social Security 
for the next decade to finance this deficit. I've heard it 
expressed that that in itself is a problem when you talk about 
Americans' confidence. And I can tell you that people right 
now, because of that seriously question whether Social Security 
is going to be there for them.
    I was meeting with a group of young people in their early 
twenties. They honestly don't believe Social Security is going 
to be there for them. And one of the reasons they do is because 
of this budget that the majority--and I'm not a part of that 
here--as past will put us back in these deficits.
    So I guess is that a factor that we should consider when we 
look at what people are doing in their personal investment 
decisions?
    Mr. Greenspan. Well, first of all Congressman, remember 
that the types of accounts which are kept both at OMB and CBO 
are reflective of the laws passed by the Congress. In other 
words, if the statute stipulates that a certain law is to end 
as of a certain date, it, meaning OMB--well, it's basically 
CBO, because OMB can assume that and extend it if it wants, but 
CBO cannot. In other words, it's not making the laws, it's 
merely registering what the accounts imply under existing 
statute.
    So I would think that if you want to alter that, you're 
going to have to change the statute or change the rules on 
which you request CBO to give you the types of data which they 
do.
    With regard to the issue of Social Security, if the Social 
Security trust fund goes to zero, the chances that benefits 
will be curtailed in my judgment is zero. And the reason for 
that is I see no credible scenario in which the Congress would 
fail to adhere to the benefits as now appear in law. So I don't 
think it's a credible issue to be concerned about what is 
happening to the Social Security trust fund if the issue is 
whether benefits will be continued. Because I've been around 
this town long enough to know that that's not the way it works 
and I think if you're talking about making certain we keep the 
books balanced, I would also suggest that we try to resolve the 
issues that are real and I don't think it's a real issue, nor 
do I think the American people have to be concerned about their 
benefits disappearing if the fund disappears.
    Now what I think younger people are concerned about is the 
rate of return that they're getting in benefits from the 
numbers that they put in the fund is much lower than, for 
example, my generation. I mean, if you look at what I put in 
and what I got out or what I would have gotten out if I retired 
at 65, is an extraordinary rate of return. And Social Security 
was remarkably popular for my generation. I don't think it is 
for the younger generation. But, because of the fact that 
they're not perceived as getting back an adequate return.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Inslee. Thank you, Mr. Chairman.
    Chairman Oxley. Mr. Chairman, we're glad you didn't retire 
at 65. The gentlelady from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman. And thank you, Mr. 
Chairman for staying this long to allow us to ask questions.
    As you're aware, the electronic transfer of value was not 
interrupted by the tragedy of September 11th, but as I 
understand it, for a period after September 11th, many of the 
banks really didn't know what their true financial position was 
because it was impossible to move the checks and payments 
around the country, particularly because of the airlines not 
flying and for various other reasons.
    But is the Fed doing anything to ensure that the payments 
mechanism really is going toward or using the technology such 
as electronification of paper checks to facilitate the 
stability of that system?
    Mr. Greenspan. We are, Congresswoman. We were sort of taken 
aback by the extent to which the amount of telephonic exchange 
and data processing exchange which presumably was supposed to 
be back up in the lower Manhattan area during the period 
subsequent to September the 11th, we had assumed that a goodly 
part of that backup would work. The trouble, unfortunately, is 
a lot of the backup went over the same cable lines that the 
original systems went and were quite useless for a while. And 
as you point out, we had a very significant amount of float in 
the system as a consequence of the airlines effectively 
stopping and not delivering.
    We have a proposal, I believe it's up to the Hill now, on 
truncation of checks and the effect of implementation of a 
significant amount of electronic processing to move the checks 
through the system in a much more facile way.
    Mrs. Biggert. Do you think that Congress needs to pass such 
a bill on check truncation? Or can the Federal Reserve do it 
through their rules and regulations?
    Mr. Greenspan. No. I think we need legislation.
    Mrs. Biggert. Thank you. Let me turn for a minute to trade. 
I don't think we've talked too much about that. What effect 
would a free trade area of the Americas have on the U.S. 
economy? And can we afford to wait for the time that it seems 
to be taking to get that through?
    Mr. Greenspan. Well, I think the evidence increasingly is 
persuasive that the greater the amount of cross-border trade, 
the higher the standards of living everywhere. And to the 
extent that we can facilitate the emergence of greater trade 
irrespective of where, provided that the individual trade 
groups do not themselves become protectionist, then it's all to 
the good. And all I can say, Congresswoman, is I trust that we 
will move forward expanding trade and gain the benefits and 
recognize that the problems that that invariably creates for a 
number of our industries which are under severe competitive 
pressures, that we recognize that we should find ways to 
assuage those problems.
    Mrs. Biggert. Is there any difference between bilateral 
trade agreements or multilateral? Should we be looking if we 
can't get the free trade area, start with bilateral?
    Mr. Greenspan. Well, no. I would say that the greater the 
number of players, if I may put it that way, the better. So 
multilateral and indeed global is by far the best. Bilateral 
trade is helpful but only as a fallback position, because it is 
better than no trade but certainly not as good as global trade.
    Mrs. Biggert. Thank you. Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman from Kansas, Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    And Chairman Greenspan, I very much appreciate your being 
with us again today. Secretary Paul O'Neill recently requested 
that Congress increase the statutory limit on the public debt 
from $5.9 trillion to $6.65 trillion, about three-quarters of a 
trillion dollars. I guess my question is, and I don't know if 
there's any good answer to this, are we opening up the 
checkbook so to speak if we increase it by three-quarters of a 
trillion dollars, say, as opposed to $250 billion? Do you have 
any thoughts about that?
    Mr. Greenspan. Well, first of all, I think that I'm not a 
great proponent of this type of legislation to begin with, 
because I think that the Congress enacts tax structure and it 
enacts appropriations, and the difference between those two is 
the change in the debt.
    To then have to reauthorize a different level of debt is 
very much like trying to restructure arithmetic. I mean, you've 
already done it. And it's not really appropriate to then put on 
a debt ceiling and then find yourself with contrary law. 
Because clearly, you cannot simultaneously have your tax 
legislation, your appropriations and your debt ceiling, they 
may not be in agreement, in which case some law is being 
violated, and I think that is inappropriate.
    Mr. Moore. Is there any benefit, though, to such a check 
and saying we're going to have a public discussion about this 
before we increase the public debt any more?
    Mr. Greenspan. Well, first of all, I should hope one does 
that in the appropriations discussions.
    Mr. Moore. Certainly.
    Mr. Greenspan. I mean, that's where theoretically it 
occurs. The problem I have with the specific legislation is 
that if you're going to do it, and as I say, that's not what I 
would do, I would put it on the debt to the public, which is 
truly the difference between receipts and outlays in the 
unified budget. The inclusion of the two-odd-trillion dollars--
a little more than two trillion dollars--in intragovernmental 
holdings in my judgment serves no useful purpose, and that as a 
consequence of that, even granting, I mean, even granting that 
a debt ceiling might be usable, that's not the one I would use.
    Mr. Moore. Chairman Greenspan, you talked about the 
importance of confidence of people in the economy and how that 
affects the economy. And I wonder, is there a relationship 
between fiscal surpluses and/or debts and long-term interest 
rates? And I've heard some people in the past, for example, 
say--and maybe this is too simplistic, and you can tell me if 
it is--that if we're able to pay down $100 billion or $300 
billion or a half a trillion dollars in debt, that it would 
beneficially affect interest, long-term interest rates.
    Mr. Greenspan. I think that's right. And indeed, just 
remember, it's other things equal.
    Mr. Moore. Yes, sir.
    Mr. Greenspan. I think the evidence pretty much is 
conclusive on that, although I must tell you that there's a 
very considerable degree of differences amongst economists. And 
clearly, I don't want to get into the details of it, but you 
will find people who don't agree with that. And I think 
everyone agrees that under extreme circumstances where, in 
fact, you have huge deficits and inflation is being engendered 
that long-term interest rates go up and indeed, in those types 
of economies, you cannot sell long-term debt. No one will buy 
it.
    But there is a legitimate dispute as to what the 
relationship is between surpluses and deficits when those are 
in a relatively narrow range, is it conceivable that the 
changes are very modest? And the answer is yes, it is 
conceivable, and that may indeed be the case.
    Mr. Moore. One of the Members said that they were happy 
that you hadn't retired when you were 65, and I was listening 
to NPR this morning. They were talking about the possibility of 
your departure prior to the expiration of your term. And I for 
one hope you stay.
    Mr. Greenspan. Thank you very much.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Welcome, Chairman Greenspan. What I wanted to ask you about 
specifically were some of the incentives that are currently in 
place for management. Incentives, especially in terms of the 
evolution of compensation packages with stock options, which at 
times in some firms have management pushing for very aggressive 
accounting methodologies, and then at the same time have 
management deciding who is going to do the audit and then 
trying to influence the outcome of that audit.
    And it seems to me that one of the questions would be can 
we change the structure in some way so that either the audit 
committee is truly independent and truly picking the auditor, 
the auditor responding to the audit committee rather than to 
management, and do you do that by setting up some special 
regulatory structure where the audit committee reports 
separately? Or do you do that by maybe requiring audit 
insurance perhaps rather than the mandate of an outside audit, 
have the insurer have the vested interest for transparency in 
the accounting? Or do you look at these public companies that 
are on the New York Stock Exchange or the Nasdaq and say, all 
right, give the Exchange the responsibility of picking the 
auditor?
    Any of these approaches might make the audit truly 
representative, even in these cases like Enron's, because it 
would change the incentive structure. Either that or change the 
incentives for management's compensation, which would be 
another way to approach the same problem and have management 
act in the interest of the shareholders.
    But could you maybe respond to those concepts and whether 
you think they're viable?
    Mr. Greenspan. Yes. Well, I do agree that how a firm is 
audited and by whom is quite important. The issue that I think 
is crucial here is that if properly constructed and I would say 
the structure of corporate governance, that it's interest of 
the CEO to see that you have an effective external audit, 
remembering that it's an audit of the internal auditing system, 
you certainly want an auditor who knows your business, knows 
your company and consequently the reason why it's important to 
at least have the corporation either choose or acquiesce in a 
specific choice of an auditor is that it is quite credible to 
get somebody who doesn't have a clue as to what, in fact, he's 
auditing.
    And the experience of the auditing profession is under such 
conditions you find that embezzlements occur far more readily 
in the early years of a new audit system than they do later on. 
So you have to be careful about unintended consequences of 
alternating a system which has evolved over the years.
    The President's Working Group has been instructed to look 
into this issue in some considerable detail, and we are in the 
process of doing that.
    My general impression personally, having looked at a whole 
series of ways of coming at this, that because under the vast 
majority of corporate relationships with outside auditors, the 
outside auditor not only is a good independent auditor but also 
is very helpful to the CEO in overseeing how his own internal 
system works and suggesting to him what he can do to improve 
the internal workings of the system. And it's my judgment, 
having seen this function for decades, it's best when you have 
a good relationship between the auditor and the CEO.
    If, however, it turns out, as I fear regrettably seems to 
have been the case in the Enron situation, that a number of 
internal strategies thought up by internal auditors were agreed 
to by the external auditor only to find later on that it had to 
be reversed. Now that is very unfortunate circumstance and 
probably regrettably as a consequence of incentives not being 
appropriately positioned.
    I reemphasize as I've said to your colleagues in earlier 
questioning, if you can somehow find a way to create a set of 
incentives for the chief executive officer to function solely 
in the interests of the long-term values of the shareholders, 
then the whole issues of independent directors, independent 
auditors and good corporate governance system comes into play.
    Mr. Royce. As part of that, just to follow up, would part 
of that potentially be looking at the way in which proxy votes 
are manipulated by management and vesting more direct power in 
the shareholders by making changes or recommending changes in 
the system where management can't corral basically proxy votes 
in order to----
    Mr. Greenspan. Well, that obviously is the type of thing 
which I think is an appropriate issue for evaluation. The way, 
regrettably, the system works today is that the vast, vast 
majority of votes by shareholders are either 99-to-1, 98-to-2 
if it's 95-to-5, it's perceived to be a disaster for 
management.
    Now what that clearly tells you is that the slate of 
directors, the various issues presented to shareholders for 
authorization, largely comes from the CEO. And unless and until 
you change the incentives for the CEO to do things in a 
different way, the issue of gaming the system, gaming the GATT 
rules, endeavoring to make it appear as though short-term 
earnings growth reflects longer-term earnings growth, so long 
as there are incentives for management and specifically the CEO 
to do that, I don't care what else you do, it will not work.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Royce. Thank you, Chairman Greenspan.
    Chairman Oxley. The gentleman from Massachusetts, Mr. 
Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Chairman Greenspan, thank you for that last clarification. 
You just answered one of the questions I was going to ask you. 
I don't think your answer earlier was as clear as the answer 
you just gave in differentiating short-term interests from 
long-term interests. I think you just did it, and I appreciate 
that clarification.
    One of the questions I do want to ask you, though, is have 
you had an opportunity to review the CBO report that came out 
roughly about a month or two ago that looked at the economic 
stimulus proposals that are currently floating around Capitol 
Hill?
    Mr. Greenspan. I'm aware of it, but I must say to you, 
Congressman, I did not look at it in detail.
    Mr. Capuano. Fair enough.
    Mr. Greenspan. I'm familiar with the general procedures.
    Mr. Capuano. OK. At some point, since you're not familiar, 
in general their conclusions were that the proposals currently 
floating around will not sufficiently or accurately stimulate 
the economy in a short-term basis. I would appreciate it if you 
and your staff could review that report and comment on it to 
see if you would agree with their conclusions or not, if that's 
an appropriate request to make of you.
    Mr. Greenspan. Well, what I'd like to point out, however, 
is remember that the agreed procedures in which they make those 
evaluations are what economists call a static model in which 
feedback effects are not counted. Everybody who works in this 
field knows that that's a very major shortcoming of this 
procedure. But, because there's such dissent as to what to do 
with respect to the feedbacks, there's sort of a fallback 
position that we all agree, at least that's the first 
approximation.
    So I think you have to be a little careful about making 
judgments as to what the economic effects of particular 
proposals are with a static model. We'll be glad to take a look 
at that and respond to it, obviously, but I just wanted to 
clarify that the ability of those models to forecast even in a 
dynamic sense has not been impressive. And therefore, their 
ability to project the economic consequences of a program are 
somewhat marginal.
    Mr. Capuano. I understand that, and I respect their 
limitations, but that's why I'm asking you to take a look at it 
so we can have somebody else with a different view take a look 
at it.
    I guess the thing I always ask you when you come by relates 
to productivity and a little bit on unemployment. I'd like to 
start with the unemployment rate. The numbers in the report, 
not your statement, but the report that accompanies it, cites a 
5.6 percent rate in January. Do you know whether that report--I 
had read earlier that that number did not include 900,000 
unemployed people who had been taken off the rolls because they 
had stopped seeking employment. Is that an accurate belief or 
an inaccurate belief?
    Mr. Greenspan. Well, it is certainly the case that the 
unemployment rate is measured by the number of people who are 
seeking jobs in a certain actively defined way and that the 
ratio of those who are employed plus unemployed by that 
definition is the labor force. And the unemployment rate is the 
ratio of the unemployment to the total.
    To the extent that people withdraw from the labor force--
either go back to school or are discouraged workers or have any 
of a number of reasons not to be seeking a job, according to 
the definition--they do not appear in the unemployment data.
    Mr. Capuano. The reason that it concerns me obviously is 
900,000 is a big number and any number in addition to that is a 
big number. But also as the unemployment rate, whatever level 
it is, once it levels off, those people, many of them will try 
to get back into the workforce, therefore extending the length 
of time that the unemployment rate is high. That's why I wanted 
to get a clarification.
    Mr. Greenspan. Let me just say one quick question about the 
900,000. That's a sample statistic, and my suspicion is that 
it's exaggerated, because we only have a 50, 60 thousand sample 
of households. But the issue you're raising is a valid one.
    Mr. Capuano. And I guess I'm going to make a comment that 
I've made to several members of the Administration. That when I 
read unemployment rates, I hate reading percentages alone, and 
I would ask that in the future as you talk about them, you talk 
about absolute numbers. Even a 5.6 percent unemployment rate is 
8.1 million Americans, which is larger than the workforce, the 
total workforce of all but three States, which is larger than 
the combined workforce of 16 States. It's a huge number of 
individuals, and I just think that out of respect to them and 
to get a real handle on what a percentage really means, that 
absolute numbers should be at least in a footnote someplace.
    Mr. Greenspan. They actually are reported in some detail in 
the reports themselves.
    Mr. Capuano. OK. I didn't see them here.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Capuano. Thank you, Mr. Chairman.
    Chairman Oxley. The gentlelady from California, Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman.
    Good to see you. Let me ask you a couple of things about 
CRA ratings. but first let me just preface this by saying that 
we all on both sides of the aisle agree that home ownership is 
key to the accumulation of wealth, to acquiring equity so that 
working men and women, working families, minorities, can send 
their children to college, can start a small business. Equity 
in one's home is really the primary way that the majority of 
Americans ever see any wealth in terms of accumulation.
    One of the areas which many of us have been concerned about 
is the disparity in home ownership in the minority community. I 
believe nationally it's about 47 percent, as compared to white 
home ownership at about 72 percent. So we've been in touch with 
you with regard to the lending practices of some of the banks 
in California which have received very outstanding or highly 
satisfactory CRA ratings yet have a very poor record or 
minority lending.
    Let me just give you an example of what I'm talking about. 
Citibank, for example, less than 2 percent of its California 
conventional home loans were made to African Americans, also 
for Latinos. Yet it received an outstanding on the lending 
test. Bank United made less than 1 percent of their homeowner 
loans to African Americans but also received an outstanding in 
terms of their CRA ratings. Chase Manhattan received a high 
satisfactory CRA rating, and I could go on and on. And I thank 
you for providing the basic raw data for us to compile this 
analysis which was actually put together by the Greenlining 
Institute.
    So what I'm asking you today, Mr. Chairman, is how do you 
reconcile these great CRA ratings with the poor lending 
practices of these institutions and what do you think we can do 
about it? I actually wrote to you February 20th and made some 
suggestions in terms of follow-meeting and to really begin to 
sort this through. But I'd like to get your take on this.
    Mr. Greenspan. Let me just say, I just signed off on a 
response to you and you'll probably be getting it this 
afternoon. Let me just say briefly that there are a number of 
issues that we take into consideration by law on CRA rating. 
More generally, it's got to do with making certain that the 
individual institution have appropriate credit availability for 
the total community and that there are a number of other issues 
involved other than mortgage loans.
    Second, as I think we may have discussed with you at 
another time, it's important in looking at the issue of 
mortgage extensions to look not only at the bank itself but its 
subsidiaries, because many banking organizations do a goodly 
part of their mortgage lending through subsidiaries rather than 
through the bank itself. And these numbers which you are citing 
refer to as I recall conventional mortgages only. And you'll 
find that FHA and VA, which is a fairly significant amount of 
the lending, show very significantly different figures from the 
ones that you cited.
    Now I don't know what those data will show, because we have 
not compiled them. But I do suggest to you that before you 
reach conclusions on this issue that it's probably worthwhile 
to look at it in the broader sense. There are a number of other 
technical issues which are involved in our CRA ratings which I 
try to outline in the letter we're sending up to you and I hope 
it's a satisfactory response. If not, come back and I'll try to 
respond again.
    Ms. Lee. Thank you, Mr. Chairman. I appreciate that. And 
let me just, while I still have a couple of seconds left, I 
would like to just ask you with regard to the issue of housing 
production as a viable economic stimulus initiative or plan. 
Housing production creates jobs. Yet we haven't been able to 
find the resources to establish a massive affordable housing 
production strategy.
    I've introduced a bill with my colleague Congressman 
Sanders to call for a $15 billion Federal investment in 
affordable housing production. How do you see this right now in 
terms of the recession? And does a housing production program 
make sense in terms of job creation?
    Mr. Greenspan. Well, Congresswoman, as I mentioned 
previously, residential building has been holding up remarkably 
well through this period of contraction. And by all historical 
standards, it's reasonably high at this stage. And as you know, 
even though you point out the differentials between minority 
and non-minority home ownership, both are rising significantly.
    You may recall when I was in San Francisco I think I quoted 
a number of those statistics, and the rise in minority home 
ownership, the black and Hispanic, is really quite impressive. 
I mean, I grant you it's still not where I would like to see 
it. I think that the more people who own homes, the greater 
their interest in the community in which they function and the 
more effective they are as citizens. So that's clearly a desire 
over and beyond the economics that are involved.
    But so far as home residential construction is concerned, 
it's doing reasonably well. And you have to ask yourself in 
allocating funds as to whether, in fact, that's the most 
appropriate and effective use of the funds you're referring to 
rather than some other priority, and that's a judgment that the 
Congress has to make.
    Ms. Lee. Thank you very much.
    Mr. Greenspan. You're welcome.
    Chairman Oxley. The gentlelady's time has expired.
    The gentlelady from Illinois, Ms. Schakowsky.
    Ms. Schakowsky. Thank you Mr. Chairman.
    And Chairman Greenspan, I appreciate your spending so much 
time with us this morning and that I have the opportunity to 
ask a few questions. I'm going to ask them all, and if you have 
time to respond to all of them, fine. Maybe otherwise in 
writing later, I hope you will.
    Last year, you stated some support for a large tax cut, and 
that support I think was based at least in part about some 
concerns that you had about too quickly paying down the public 
debt. I'm assuming that those concerns have changed somewhat, 
and I wanted to ask you if you have a different view on the 
wisdom of those large tax cuts, particularly those that go to 
the very wealthiest of Americans.
    Second, on the economic stimulus package, the one that 
passed the House and others that have been recommended by the 
leadership emphasize major tax cuts it seems to me over 
investment. That is, speeding up the tax cuts that were passed, 
giving new ones, largely to corporations, some to very 
profitable corporations. The one that passed the House would 
have given a rebate of $254 million to Enron. I wondered if you 
had comments on the thrust of the economic stimulus package, 
the one that passed and the ones that are being considered in 
the House.
    Third, on the issue of predatory lending, which has been 
very dear to my heart, I know that the Fed and other regulators 
have suggested that Congress should act. We haven't acted yet 
in any way. I'm wondering if you feel that we still should take 
some steps to deal with that problem.
    And finally, I can't stay away from Enron too far. Your 
Board of Governors disclosed that Ken Lay at some point last 
October during a period when the company was looking for some 
help from senior Government officials did make a call to you. I 
was wondering what he said in that call and what your response 
was.
    Those are my questions.
    Mr. Greenspan. First of all, the issue that I was concerned 
about a year ago reflected the notion that if you believe the 
CBO data that we would create far too rapid a decline in the 
debt outstanding which would require an accumulation of assets 
by the Federal Government which I thought was very bad policy.
    In the event taxes were cut, spending was increased and 
that problem was, if you want to put it that way, taken care 
of. So I no longer have that problem. But it was the tax cuts 
and the spending increases which obviously obviated further 
action. So, yes, it is no longer a concern of mine.
    Second, on the economic stimulus proposals, as I said 
previously, it' really comes down to a judgment as to whether 
you think that the emerging stabilization that has now occurred 
after the significant weakness in the economy is a prelude to a 
self-adjusting recovery after the rate of inventory liquidation 
dissipates. If you believe that there is not enough potential 
final demand, then one could argue for some form of stimulus 
program. I've argued that it's probably not necessary. The 
economy is very likely to recover without it. And that would be 
my judgment. But it is a credible argument to stay that 
stimulus might be helpful in this particular context.
    Ms. Schakowsky. And the stimulus being, as I said, heavily 
weighted toward tax cuts rather than investment?
    Mr. Greenspan. I'm sorry. Tax cuts instead of investment?
    Ms. Schakowsky. Instead of, for example, housing, school 
construction, and so forth.
    Mr. Greenspan. That's a judgment that the Congress has got 
to make. I'm not certain that, without getting into the full 
detail you can very easily determine----
    Ms. Schakowsky. Well, I guess the question is, though, 
whether or not you believe that tax cuts, speeding up the 
current tax cuts or giving more corporate tax cuts is viable as 
an economic stimulus.
    Mr. Greenspan. If you're asking me would it stimulate the 
economy, the answer is probably yes.
    On the issue of predatory lending, as you know, we have 
just recently come out with a ruling related to that and the 
Congress has it under consideration, and it's a disputable 
issue. Because there's sort of a fairly strong argument that 
subprime lending as a general issue is not a bad thing under 
certain conditions. When carried to what we call predatory 
levels, it is. And a lot of people have difficulty 
differentiating what is and is not predatory in the subprime 
categories. And I think that's one of the reasons why it's 
getting difficult to come to conclusions on this issue.
    Chairman Oxley. The gentlelady's time has expired.
    The gentleman from Tennessee.
    Mr. Greenspan. I'll answer the others for you.
    Mr. Ford. Thank you, Mr. Chairman, Mr. Oxley and Chairman 
Greenspan. In fairness to my good friend Ms. Schakowsky, what 
you may call ``spending'' we call ``investment'' up here, so I 
think that's what she might have been referring to, Mr. 
Chairman.
    I have two quick questions. Last year before the Committee, 
at least one of your trips to the Committee, you advocated the 
idea of a trigger mechanism where tax cuts would be delayed if 
the fiscal situation worsened, obviously meaning if our 
projections or expectations of revenues did not meet the 
grandiose projections made by some of my colleagues.
    In your testimony last year, I think you specifically said 
you supported a trigger mechanism largely because of the 
uncertainties that one has with respect to 10-year budget 
forecast are very high. Two parts to the question. In 
retrospect, with the dramatic reduction or deterioration of 
projected revenues that we've experienced, do you think a 
trigger mechanism would have been helpful? And two, there's 
been considerable talk here from some of my colleagues on the 
other side of the Hill in the Senate and here regarding efforts 
to revisit the tax cut and that parts of the tax cut and even 
to revoke parts of it that have not gone into effect yet.
    President Bush has eloquently and forcefully suggested that 
he would not support such an idea and has even equated a 
revisiting the tax cut with actually raising taxes. I'd be 
curious to get your thoughts on both strands of that question, 
Mr. Chairman. And I, too, am glad you didn't decide to retire 
once you reached the eligible age.
    Mr. Greenspan. Thank you. First of all the trigger I was 
referring to was a trigger on both taxes and spending 
initiatives. And the reason for that is that the Federal 
budgetary process which 15, 20, 30 years ago never really got 
beyond 1 or 2 years out, largely because the vast proportion of 
it was discretionary and the Congress could very readily 
reverse or sunset any type of program it wanted with ease. 
That's increasingly less credible as the greater proportion of 
spending outlays become what we used to call uncontrollables, 
entitlement programs of some form or another.
    Under those conditions, you have no choice but to make 
long-term forecasts, because even if you don't make a forecast, 
there is an implicit forecast in the actions you're taking in 
the Congress. So it's better to have a bad forecast than none 
at all. But those forecasts, as you point out, are bad. And 
hence, it's far superior to have some form of mechanism which 
recognizes the fact that if they are really very far off that 
the actions which were promulgated on them will not take place. 
So I still believe that that process should still exist.
    I have no particular comments on the issue of what one 
would do or not do about existing programs. But the point that 
the President is making with respect of changing the existing 
tax structure now, say, reversing, implying some form of tax 
increase is correct in the sense that there are some parts of 
the economy where people are making judgments about the future, 
making current investments about which are go-no go 
investments, depending on what the presumed tax structure is in 
the future.
    So if you change rates, if, for example, you had a tax cut 
pending and you go back to neutral, that effectively creates an 
effective tax increase for somebody who is making an 
investment.
    Mr. Ford. I understand that. But I guess obviously a lot of 
things have changed since we passed that tax cut, and as you 
indicated, the fiscal situation irrespective of what occurred 
on September 11th has changed things dramatically. And I would 
imagine as you chair a Board that has consistently lowered 
short-term rates for a period of time, you are in the business 
of adjusting. So as much as I appreciate your point, I'm a 
little confused by it.
    I know my time is running and I'd love to maybe get a 
longer answer from you, Mr. Chairman, on that. But the last 
time you were before the Committee I raised it, the last time I 
had an opportunity to address some of my thoughts to you before 
the Committee, my State of Tennessee, where I'm from, and other 
States were experiencing enormous budget shortfalls, and we see 
now that many other States are faced with the same crisis. The 
National Governors Association met last week here. I don't know 
if you had an opportunity to address them. I know some of my 
colleagues and Members of the Administration had that 
opportunity.
    One of the things that they declared, Mr. Chairman, was 
that the current, quoting, the current fiscal crisis for States 
compounded by unsustainable growth in the Medicaid program is 
creating a situation in which States are faced with either 
making massive cuts in programs or being forced to raise taxes 
significantly.
    My question last time dealt with I couldn't understand for 
the life of me how you could reconcile the idea of growing 
exploding surplus projections with the reality of States facing 
budget shortfalls. And I guess my question is, as those of us 
at the Federal level try to boost the economy, and you tried to 
address some of these questions here, while maintaining some 
fiscal discipline, what will be the effect of the budget 
problems off the 50 States and will any drastic spending cuts 
or even tax increases at the State level offset our efforts 
here at the Federal level? And for that matter, offset the 
Herculean efforts that your organization has engaged in over 
the last year.
    Mr. Greenspan. Well, as I think I may have answered last 
year, one of the reasons why we had this extraordinary Federal 
surplus and difficulties in the State areas is that there were 
a significant amount of tax cuts that occurred within the 
States to essentially remove considerable surpluses that were 
emerging. And so when the situation turned around, you would 
expect, as indeed has happened, States are in far greater 
difficulty than even the Federal budget system is.
    But as you point out, Congressman, from the point of view 
of looking at the economy overall, you consolidate the Federal 
and the State and local systems so that clearly cuts in 
spending in State and local authority or an increase in taxes 
has the same effect essentially as that which would occur at 
the Federal level.
    Mr. Ford. Mr. Chairman, I know my time is up, but just one 
last point. You mentioned how there may be those who are 
depending on the tax cut that was passed and the idea that tax 
cuts will kick in. I just can't imagine that too many of my 
friends, at least the ones I've spoken to, and I don't know a 
lot of friends with big estates, but the or two I do know, 
they've indicated they've not made any dramatic changes in 
their estate planning as a result of what we passed last year. 
So as much as I appreciate that comment, I can't imagine----
    Mr. Greenspan. I wasn't referring to the estate taxes. I 
was referring to individual income taxes.
    Mr. Ford. Right, fair enough. Fair enough. Thank you for 
letting me go over my time. Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Greenspan, could you give us an idea of how the 
decline in long-term rate would impact the household incomes 
and possibly what effect it would have on individuals like the 
one you were just talking about in making decisions to make 
investments, whether they be in their investment portfolio of 
securities or businessmen wanting to invest in say equipment 
and machinery in their factories?
    Mr. Greenspan. Congressman, in our type of economy, long-
term interest rates play a fairly significant role. Most of us 
deal with it wholly from the mortgage market only and that 
clearly what the interest rate is on these 30-year fixed rate 
mortgages has a fairly significant impact on what your monthly 
payment is and does, has a major effect on how one behaves.
    They are also relevant where you are involved in investing 
in plant and equipment, as you point out, because to the extent 
that you're borrowing money over the long run, that has very 
major effect on the potential profitability of that investment 
and clearly, lower interest rates imply that the profitability 
under any existing state of technology will be higher for 
corporations who borrow money to finance it.
    So it's generally a very important element within the 
economy. And one of the reasons why we are so focused on 
keeping inflation expectations down is inflation expectations 
are a critical factor in the determination of long-term 
interest rates. And if inflation expectations go up, it tends 
to inhibit a lot of economic activity in this country.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from Indiana, the very patient lady, is now 
recognized.
    Ms. Carson. Thank you very much, Mr. Chairman.
    And thank you very much, Mr. Chairman, for your patience. 
I'm going to ask you this question because you are perceived--
and correctly so--to know everything, and that is a compliment. 
It is not a put-down at all, and we appreciate very much that 
you're here today.
    Indiana has a spiraling rate of foreclosures, housing, home 
foreclosures among its citizens. Could you tell me why that is?
    Mr. Greenspan. Well, I think the foreclosure rate 
generally, and more importantly, the bankruptcy rate for 
individuals has been going up recently, in large part because 
the economy is weak, the unemployment rate has gone up and 
there's been obviously specific difficulties. I don't know the 
situation specifically in Indiana, but there's no reason to 
believe that that is dramatically different.
    I should say that the foreclosure rate, while it is up, is 
not up a great deal as I recall at the national level, and it 
varies by whether it's FHA, VA, conventional. And as a 
consequence of that, it's very hard to generalize. But the 
basic reason is that the economy has been weak.
    Ms. Carson. Do you see, Mr. Chairman, one quick other 
question, any reversal of that trend, given all of these people 
that are going to be propelled into homelessness, if you will? 
These are homeowners. People that were taxpayers. People that 
were long-time employees and now they're losing their place of 
abode. Do you see any reversal of the trends that has 
precipitated that chronic situation among so many people?
    Mr. Greenspan. I think so, Congresswoman. The evidence that 
we're seeing nationwide is that we seem to have stabilized. A 
lot of the weakness that we saw earlier seems to be 
dissipating. And while I've argued that it's too soon to say 
that we're on our way back and moving at a reasonable pace, 
nonetheless, there are signs that those types of improvements 
are taking place. And if they do, that will be by far the most 
effective program to address the particular concerns that you 
have in that regard.
    Ms. Carson. How are they beginning to reverse? And I don't 
want to hold you. But what signs do you see related to what?
    Mr. Greenspan. Well, what we see, for example, is that the 
gross domestic product, which was negative during the third 
quarter and appeared to be going into the fourth quarter as a 
significant negative, at the end turned out to be a small 
positive. And for the first quarter, the numbers do at this 
moment appear to be positive as well. So we are beginning to 
see the forces which engendered the rise of unemployment 
starting to simmer down, and while we're not to the point where 
I think you can essentially say that we're over the hump with 
respect to unemployment, we're approaching it.
    Chairman Oxley. The gentlelady yields back. The Chair now 
recognizes the gentleman from New York, Mr. LaFalce.
    Mr. LaFalce. Chairman Greenspan, in my introductory remarks 
I asked some largely global questions which we didn't have an 
opportunity to get into. Now I'd like to get into some more 
local and specific questions.
    You and I, I'm sure, are equally concerned about unfair and 
deceptive practices within the field of financial services. 
It's my understanding that some 25 years or so ago, a law was 
passed that delegated responsibility to the Federal Reserve 
Board to promulgate regulations articulating what an unfair and 
deceptive practice is. Correct me if I've been misinformed. But 
it's my understanding that we haven't seen regulations in the 
past 25 years from the Federal Reserve Board.
    I've also been advised that the Comptroller of the Currency 
recently brought a lawsuit saying that we could operate under 
the aegis of the law itself absent regulations, and that was 
challenged in the courts by the financial institutions. The 
initial lower court holding was that indeed the Comptroller was 
correct. I don't know the status of that case on appeal. But 
could either you or Mr. Mattingly advise me as to what the 
status of that is?
    Mr. Greenspan. I would say you would be much better advised 
by Mr. Mattingly.
    [Laughter.]
    Mr. LaFalce. Virgil?
    Chairman Oxley. Would the gentleman identify himself for 
the record, please?
    Mr. Mattingly. Virgil Mattingly. I'm the General Counsel of 
the Federal Reserve.
    Chairman Oxley. Thank you.
    Mr. Mattingly. The Comptroller has taken that position, the 
one you articulated in several cases, and so far, my 
understanding is he's been upheld on that.
    Mr. LaFalce. OK. But can we go to the first issue, Virgil? 
And that's what's taken 25 years to articulate those regs?
    Mr. Mattingly. The Board wasn't required to issue regs. It 
was given the authority to identify practices for banks that 
would be unfair and deceptive. And I think the Board has done 
that my recollection is once, only once.
    Mr. LaFalce. Only once in 25 years. But it's also my 
understanding that there's an expectation that the Federal 
Reserve will promulgate regulations. As a matter of fact, that 
was the gravamen of the argument that was used against the 
Comptroller, and the Comptroller--nobody seems to dispute that. 
I mean, 25 years and one example. It seems to me you could be a 
bit more aggressive.
    [Laughter.]
    Mr. Mattingly. Well, that may be so. But as you are well 
aware, during that 25 years, Congress itself has passed a lot 
of laws that have applied to banks.
    Mr. LaFalce. But the unfair and deceptive practices have 
not been dealt with adequately. You need to become much more 
aggressive on this. And I would like to have a meeting with 
Chairman Greenspan and you and the other member of the Federal 
Reserve Board who is responsible for this issue in order to 
discuss the possibility of a much more aggressive Federal 
Reserve Board on this issue.
    Mr. Mattingly. Certainly.
    Mr. LaFalce. Thank you.
    Chairman Oxley. The gentleman yields back. Let me if I can, 
Mr. Chairman, use the prerogative of the Chair to ask a few 
questions as we wrap up here. And you've been very gracious 
with your time and we most appreciate it.
    Recently, Secretary of the Treasury O'Neill suggested that 
CEOs of public companies be required to personally certify 
financial statements and such CEOs be held personally liable 
for such certifications, thereby avoiding or not having the 
protection of insurance. Do you have any opinion on that 
proposal?
    Mr. Greenspan. The general proposal is to switch the onus 
of decisionmaking with respect to a whole series of corporate 
governance questions which we've been discussing today to the 
CEO. I fully support that. I think having served on many 
boards, indeed, Paul O'Neill and I served on the Alcoa Board 
together, there's no question in my mind that unless you get 
the CEO effectively saying not we have met every GAAP 
requirement and therefore we have no liability further that he 
has to be able to say that irrespective of any particular GAAP 
regulation the accounts which we have appropriately certify 
what this company is all about.
    Now the question, getting down to the issue of penalties to 
induce the CEO to make sure that that is done, gets to the 
question in his mind on the degree of D&O insurance, director 
and officer liability insurance. And that there's no doubt in 
my mind that there's no doubt in my mind that if you created 
some inability to get fully liability insurance under certain 
circumstances, it might be helpful. Although the law as I 
understand it now stipulates that deceptive certifications do 
not cover you under a particular insurance requirement.
    My general view is I think that Secretary O'Neill is 
definitely going in the right direction on this. There is a 
question that has arisen with respect to if you construct an 
issue of increased liability on the part of the CEO that you 
will engender a huge new flood of lawsuits which clearly will 
not be to the interests of either the company, the country and 
I do suspect it's something we ought to try to avoid. So there 
are possibilities of doing what the Secretary wants to do, but 
to delimit the way in which the individual CEO's liability is 
adjudicated.
    Chairman Oxley. Along those lines, some folks have 
suggested that corporate governance issues should be dealt with 
at the Federal level as opposed to the traditional State level. 
Do you have any comments in that regard?
    Mr. Greenspan. I really don't. I'm aware of the arguments. 
I don't feel myself sufficiently in control of the facts to 
make a judgment at this stage.
    Chairman Oxley. That hasn't deterred others from making 
those same suggestions.
    [Laughter.]
    Chairman Oxley. But I'll pass on that. Let me ask you a 
couple of questions on derivatives since they have been 
mentioned a number of times in several different areas. In the 
year 2000, Congress passed the Commodity Futures Modernization 
Act which exempted or excluded many types of derivatives 
transactions from the Commodity Exchange Act. Some have 
recently questioned this decision certainly in the wake of 
Enron. Is this still sound policy or is it in need of 
discussion?
    Mr. Greenspan. I think not, Mr. Chairman. I think that the 
legislation that you passed in the year 2000 strikes me as 
appropriate and still valid.
    Chairman Oxley. And why would you say that in light of a 
great deal of criticism that has come from a number of quarters 
that at least part of the reason for the Enron collapse was 
this, quote, ``deregulatory move'' by the Congress in 2000?
    Mr. Greenspan. That's not impression of what happened. I 
mean, what I sense happened is that they ran into losses which 
they basically endeavored to obscure. And there's nothing that 
they did which just could not have been done in 20 different 
ways, had nothing to do with derivatives except that 
derivatives happened to be one of the vehicles that were 
involved, but the issue that I'm aware of had nothing to do 
with the legislation that you passed in the year 2000.
    There is a question as to whether the specific issue of 
exempting over-the-counter energy derivatives from the 
Commodity Exchange Act. And the argument there is that somehow 
that Enron was not controlled and it should have been. But what 
that issue is is in the law that regulation of transactions 
between professionals is wholly inappropriate in that specific 
regard. And I see nothing that's changed from the discussions 
we all had when that particular Act was under review.
    Chairman Oxley. Mr. Chairman, some would say that in the 
case of Enron that the Enron collapse really began when the 
price of commodities, particularly oil and gas, declined. And 
as a matter of fact, you can look at some rather startling 
charts that indicate that Enron's stock went up almost equally 
with the commodity prices and then plunged at the same rate. Is 
that a valid trigger for the Enron collapse, or is there some 
other theory out there that's just as credible?
    Mr. Greenspan. Well, as far as I can see, there are two 
issues involved. One is the underlying earning power that Enron 
engendered. And I would presume that since they were very 
heavily in the issue of energy that the higher the price at any 
fixed margin, the higher would be their earnings. But I think 
the evidence will probably show when we finally know what all 
of the evidence is that the triggering point had nothing 
whatever to do with that. It had to do with the loss of I guess 
I would call it reputation capital.
    That is, as I indicated earlier on, Enron is a classic case 
of a company whose market value is very significantly dependent 
on the reputation of the firm. And when it became apparent that 
the data that they were putting forth as representing their 
earnings figures were indeed false and had to be recalculated, 
they lost a very large part of their reputational value and 
indeed, it was that that ultimately did them in. Had they, for 
example, recognized the losses that they actually had in these 
affiliates early on, I have no doubt it would have hit their 
stock some, but it would have had a negligible impact relative 
to what actually happened.
    It was a very expensive business mistake which they made. I 
do not think that had they a correct set of accounts that 
they'd still be in business. Their stock price would be lower. 
Their stock price would be lower because basically, energy 
prices are lower, and their margins presumably wouldn't have 
changed, so their earnings would have been less viable. But 
they would not be in Chapter 11.
    Chairman Oxley. One of the former officers stated publicly 
that he thought that the Enron situation was a classic run on 
the bank and that seems to be what you are referring to. 
However, I guess there are some differences as to what 
triggered that run on the bank. Your estimation is that it was 
this reputational capital that was depleted rapidly, which goes 
to the whole question of public confidence and the like in the 
system.
    Mr. Greenspan. As I said in my prepared remarks, Mr. 
Chairman, a company whose assets are substantially physical, 
real, and I used the example of an automobile assembly plant, 
could conceivably have the reputation of its management sullied 
considerably or come under a cloud and yet the company would 
still have sufficient physical assets to engender incomes which 
would give it a considerable capital value. But that was not 
the case of Enron. Their actual real assets--pipelines and 
various energy-related assets--were a relatively small part of 
the market value of the firm.
    Chairman Oxley. And finally, I couldn't let this pass by, 
and that is a question on netting. You and I have had these 
discussions numerous times. And as you know, the netting 
provisions are currently in the bankruptcy bill that's in the 
Conference Committee. Mr. LaFalce and I are both conferees, and 
as you know, Mr. Toomey of our Committee has introduced 
legislation also in that regard. I know you haven't changed 
your mind on this, but I'm wondering if you could help us and 
help the listening public understand the importance of enacting 
netting legislation this year.
    Mr. Greenspan. Mr. Chairman, as I indicated in my prepared 
remarks and later, I think that the extraordinary expansion of 
derivatives has been a major factor in creating an increased 
degree of flexibility and resiliency in our system and that 
they are a very effective tool that used for good is 
exceptionally effective and used for ill can be just the same. 
It's neutral with respect to that.
    But, because it's such a valuable potential tool, it's 
important that it function as efficiently as possible. The 
legal uncertainty that still exists on certain types of 
derivatives which did not appear in the original act which gave 
legal certainty to netting are a cloud over these markets 
which, if we can dissipate sooner rather than later, would be 
very helpful. There is no downside of which I am aware of in 
passing this legislation. And as you know, it was in the 
bankruptcy legislation there solely for the purpose of trying 
to integrate something which I presume has fairly broad support 
in a bill which had some conflicts associated with it.
    So I would just merely argue that unless I am mistaken 
about this issue of there being no downside, there's an awful 
lot of upside to its enactment.
    Chairman Oxley. Thank you. Let me yield to my friend from 
New York.
    Mr. LaFalce. I thank the Chair for yielding. Chairman 
Greenspan, I couldn't agree with you more on the issue of 
netting. And I don't think there's a controversy about that 
issue but there is great controversy about the bankruptcy bill. 
Now in the previous Congress, we separated the netting bill 
from bankruptcy and passed it independently.
    In light of the Enron, Global Crossing and other debacles, 
don't you think it is advisable to separate the netting bill 
from the banking conference, pass it separately in the House 
and separately in the Senate and send it to the President for 
his signature as soon as possible?
    Mr. Greenspan. I would agree completely with your remarks, 
Congressman.
    Mr. LaFalce. Thank you.
    Chairman Oxley. Mr. Chairman, we appreciate your appearance 
here today. And as always, most enjoyable. And your knowledge 
is exceeded only by your patience and good will. And we look 
forward to seeing you in July.
    The hearing now stands adjourned.
    [Whereupon, at 1:50 p.m. the hearing was adjourned.]

                            A P P E N D I X

                           February 27, 2002
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