Congressional Testimony

MONETARY POLICY AND THE STATE OF THE ECONOMY HEARING BEFORETHE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED NINTH CONGRESS FIRST SESSION JULY 20, 2005 Printed for the use of the Committee on Financial Services Serial No. 109–47 ( U.S. GOVERNMENT PRINTING OFFICE 23–738 PDF WASHINGTON : 2005 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 G:\DOCS\23738.TXT FIN1 PsN: MICAH HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania DEBORAH PRYCE, Ohio MAXINE WATERS, California SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER T. KING, New York NYDIA M. VELA´ZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana RON PAUL, Texas BRAD SHERMAN, California PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York JIM RYUN, Kansas BARBARA LEE, California STEVEN C. LATOURETTE, Ohio DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, JR., North Carolina HAROLD E. FORD, JR., Tennessee JUDY BIGGERT, Illinois RUBE´N HINOJOSA, Texas CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York VITO FOSSELLA, New York WM. LACY CLAY, Missouri GARY G. MILLER, California STEVE ISRAEL, New York PATRICK J. TIBERI, Ohio CAROLYN MCCARTHY, New York MARK R. KENNEDY, Minnesota JOE BACA, California TOM FEENEY, Florida JIM MATHESON, Utah JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama KATHERINE HARRIS, Florida AL GREEN, Texas RICK RENZI, Arizona EMANUEL CLEAVER, Missouri JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin, TOM PRICE, Georgia MICHAEL G. FITZPATRICK, Pennsylvania BERNARD SANDERS, Vermont GEOFF DAVIS, Kentucky PATRICK T. MCHENRY, North Carolina ROBERT U. FOSTER, III, Staff Director (II) VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 G:\DOCS\23738.TXT FIN1 PsN: MICAH C O N T E N T S Page Hearing held on: July 20, 2005 ..................................................................................................... 1 Appendix: July 20, 2005 ..................................................................................................... 49 WITNESSES WEDNESDAY, JULY 20, 2005 Greenspan, Hon. Alan, Chairman, Federal Reserve Board ................................. 7 APPENDIX Prepared statements: Oxley, Hon. Michael G. .................................................................................... 50 King, Hon. Peter T. .......................................................................................... 52 Greenspan, Hon. Alan ...................................................................................... 53 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Frank, Hon. Barney: ‘‘The Problem of Executive Compensation,’’ April 18, 2005 .......................... 66 Neugebauer, Hon. Randy: Written letter to Hon. Alan Greenspan .......................................................... 74 Greenspan, Hon. Alan: Written response to questions from Hon. Randy Neugebauer ..................... 75 ‘‘Monetary Policy Report to the Congress,’’ July 20, 2005 ............................ 77 (III) VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 G:\DOCS\23738.TXT FIN1 PsN: MICAH VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 G:\DOCS\23738.TXT FIN1 PsN: MICAH MONETARY POLICY AND THE STATE OF THE ECONOMY Wednesday, July 20, 2005 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The committee met, pursuant to call, at 10:04 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael Oxley [chair- man of the committee] presiding. Present: Representatives Oxley, Leach, Pryce, Bachus, Castle, Royce, Lucas, Kelly, Paul, Gillmor, Shays, Miller of California, Kennedy, Hensarling, Garrett, Brown-Waite, Barrett, Gerlach, Pearce, Neugebauer, Fitzpatrick, McHenry, Frank, Waters, Maloney, Velazquez, Watt, Ackerman, Hooley, Carson, Sherman, Lee, Moore of Kansas, Crowley, Clay, Matheson, Miller of North Carolina, Scott, Davis of Alabama, Green, Cleaver, Bean, Wasserman Schultz, and Moore of Wisconsin. The CHAIRMAN. [Presiding.] The committee will come to order. The chair recognizes himself for an opening statement. Chairman Greenspan, once again, we welcome you back to the Financial Services Committee for now your 35th appearance before this committee and our predecessor, the House Banking Com- mittee, for the Monetary Policy Report. I know I speak for all of our 70 members when I say that your economic analysis and our discussion with you is the highlight of our calendar year here at the Financial Services Committee. Welcome once again, in what will likely be your final appearance here before the Financial Services Committee. To that end, we have enjoyed the opportunity to work with you in a number of ca- pacities over the years, and I know I speak for the entire com- mittee when I say that. We can report to the nation today that our U.S. economic growth is steady and strong. While we face some uncertainty abroad, and we can be assured of the likelihood that there will always be uncer- tainty abroad, our national economic performance is the envy of the world. More Americans are working than ever before. We recently received the news that 146,000 jobs were created in June, achieving a 5 percent unemployment rate, the lowest since the fateful month of September 2001. Not so long ago, many economists believed that there was a structural unemployment floor of 6 percent or 7 percent. They did not believe that our economy had the ability to reach the goal of 5 percent unemployment, and yet it has done so this month, with a total of 1.1 million jobs created this year alone. (1) VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 2 An important leading indicator, durable goods, increased 5.5 per- cent in May, and U.S. manufacturing continues to expand at rates that exceed expectations. Our GDP is growing at a good clip of nearly 4 percent, and the important non-manufacturing sector has been increasing each month now for over 2 years. The markets have risen nicely, recovering from their post-bubble and post-9/11 declines and selloffs, with the Dow now just 500 points shy of its historic high. These positive economic conditions mean that more Americans than ever before have reached the goal of home ownership. With President Bush’s housing policies and the American Dream Down- payment Act, home ownership will soon be within reach for even more American families. With 14 consecutive quarters of economic growth, there is further good news for American consumers, and that is, inflation has re- mained in check. The prices of goods and services did not go up during the month of June. Prices for businesses, the producer price index, actually went down slightly, indicating that businesses have been able to handle recent high energy prices. Americans are well aware of the economy’s steady growth, low inflation, and strong housing markets. Consumer confidence num- bers are optimistic, and economic predictions show annual growth in the 3 percent to 4 percent range. A thriving economy, growing businesses, and working Americans are the components of a healthy tax base and strong revenues. President Bush’s tax cuts have been an important factor in the re- cent projection that the federal budget deficit will be far lower than previously expected, perhaps up to $100 billion lower, and that will help to keep interest rates as low as possible. Over the long term, the president’s programs to make the tax cuts permanent, to restrain government spending, to ensure retire- ment security, and to expand U.S. exports through free trade will further enhance our economic success. Mr. Chairman, according to the Federal Reserve Web site, its ob- jectives include ‘‘economic growth in line with the economy’s poten- tial to expand, a high level of employment, stable prices, and mod- erate long-term interest rates.’’ It is an immense achievement that all of those objectives have been met, and we congratulate you and your colleagues at the Fed. You have the distinction of having served the Council of Eco- nomic Advisers under President Ford and serving as the Fed chair- man under every president since Reagan. Certainly the confidence of five presidents is also a testament to the nation’s faith in your economic leadership. We thank you for your extraordinary service to our country, for the stalwart policies that have guided us to many years of pros- perity. This success has advanced American businesses, has in- creased American influence throughout the world, and has created economic conditions in which American families thrive. I again thank you for your service. I now yield to the gentleman from Massachusetts for an opening statement. Mr. FRANK. Thank you, Mr. Chairman. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 3 Mr. Chairman, I was reading your statement this morning and I had an ‘‘a ha!’’ moment and realized that I could from now on, to some extent, preach the gospel according to Greenspan, with some reservations—the revised standard version. On Page 11, you state something really quite profound, that I hope people will take to heart. You and I will differ about how to respond to it, but I thank you for stating it. ‘‘We collectively con- front many risks,’’ then I skip. This is the chairman’s testimony. ‘‘Another prominent concern is the growing evidence of antiglobalization sentiment and protectionist initiatives, which, if implemented, would significantly threaten the flexibility and resil- ience of many economies. ‘‘This situation is especially troubling for the United States, where openness and flexibility have allowed us to absorb a succes- sion of hard shocks. That flexibility is, in large measure, a testa- ment to the industry and resourcefulness of our workers and busi- ness. But our success has also been aided importantly by more than 2.5 decades of bipartisan effort aimed at reducing unnecessary regulation and promoting the openness of our market economy. ‘‘Going forward, policymakers will need to be vigilant to preserve this flexibility, which has contributed so constructively to our eco- nomic performance.’’ I agree with you, Mr. Chairman. I am going to solicit later your opinion of the bill dealing with trade with China, which is apparently going to be put forward as part of the price of winning CAFTA, and I will be interested in your evaluation of that particular piece of legislation—which has been the subject of a marvelous conversion on the part of many of the Republican leaders. I agree with you that we face these attitudes, and I agree with you that they can have negative consequences. But I hope you will agree—and I think, from previous statements, you would—this is not simply perversity on the part of American citizens; this is not just the workers getting into a bad mood. The problem is that the very growth that these policies have fos- tered, the growth that you believe to be endangered by the rise in these sentiments and the opposition to these measures, has in- creasingly been unfairly shared. You said—and I salute you for it—a little over a year ago to the Joint Economic Committee that virtually all of the gains from in- creased productivity were going to corporate profits, the owners of capital; very few, if any, were going to real wages. In the report this year, the Monetary Report, on Page 16, you do say, ‘‘Measures of labor compensation suggest that the remaining slack in labor markets continued to restrain increases in base wage rates.’’ You do note, ‘‘Large increases in some of the more flexible compo- nents have added to labor costs.’’ What are those? Stock options and bonuses, as you say. In other words, if you are eligible for a stock option, you are doing okay. If you get a bonus, you are doing okay. If you are an owner of capital, you are doing super okay. And then, to make it even better, we have reduced the tax rates on all those. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 4 But if you are working for straight wages or salary, you are not doing very well. Certainly you are not participating in the in- creased prosperity. Real wages, as you have acknowledged, leaving aside stock options, leaving aside bonuses—real wages—have not increased. Inflation has eaten them up. It is true that some workers have been told by their employer, ‘‘We are giving you more in compensation.’’ To some extent, that means the employer is paying more for their health care benefits, or perhaps putting more into the pension fund; but the worker is not taking home another penny. And working people—and I want to go back. I think you are right about these sentiments, and I think you are right that they could lead to some negatives. We have on a bipartisan basis in this committee—as you know, with the support and advice from your institution—allowed the fi- nancial institutions to take advantage of information technology. We have done things to try and help them modernize. There is growing consumer resistance to many of those. There is resistance to trade, so that they are going to have to make this bar- gain, they are going to try and buy CAFTA with this China deal. I do not know if it will work or not. The point I am making is this, you have got to connect the dots. The fact is that increasingly average workers do not see that the prosperity that results from these policies is benefiting them. And in fact fewer Americans are getting health benefits. They are pay- ing more for them. And so this combination of increased growth—and the economy is growing—and job stagnation does not help. I would just say, finally, I was struck by the hosannas—to stay with the religious motif—which greeted the fact that we created 146,000 new jobs last month. That is way below every projection this administration had made. I am giving out a sheet here called ‘‘The Evolution of Dimin- ishing Expectations.’’ And what it shows is, the administration has finally met its job projection figures—by lowering them. The Council of Economic Advisers in 2003 said we would get 305,000 jobs a month. Secretary Snow in October of 2003 said we would get 200,000. He was lowballing. Then the council went back up to 325,000. That was the last one before the election. They pro- jected 325,000 jobs a month. Then it dropped to 175,000 jobs a month. In fact we have never made, over any prolonged period, any of those projections. We have not hit 200,000 jobs a month. So job creation has been stagnated. Unemployment has dropped largely, as Paul Krugman pointed out—— And I ask unanimous consent to put his Monday column in the record. The CHAIRMAN. Without objection. Mr. FRANK.—largely because the participation rate is declining in the economy. So, as you say in the report, there is still slack in the labor mar- ket. That is holding down wage costs; i.e., people are not getting increases in wages, health care for those who are employed is erod- ing. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 5 And so people see this growth and do not see that they are get- ting a part of it, and that is why you get this ‘‘resistance’’ that you mentioned. So when we get to the question period I will ask you what you think we can do about that. The CHAIRMAN. The gentleman’s time has expired. The gentlelady from New York, Ms. Maloney, is recognized for 3 minutes for opening statement. Mrs. MALONEY. Welcome, Mr. Greenspan. As always, it is a pleasure to hear your testimony—all 35 times. You have served, more than any other person, as our country’s captain of monetary policy. You have guided us through economic growth, recession, and into globalization. In serving our country, you have often spoken out strongly against positions that you disagree with. So I find it very sur- prising that you are not strongly criticizing the ballooning deficits this administration has foisted on the American people. The Bush legacy is the largest national debt in history. The Re- publican Congress and president inherited a surplus, yet they have voted three times to raise the debt ceiling. We now have a record debt of over $7.5 trillion, the largest in history; and this breaks down to each citizen’s share being over $26,000. We also have the largest trade deficit in our history, supported by the willingness—at least so far—of foreign investors and govern- ments to keep extending us credit. We have the largest percentage of foreign holders of U.S. debt ever. We keep being told that the administration is going to fix this, but nothing is happening. Just last week the administration an- nounced that the federal budget deficit for this year will not be as large as they were predicting it would be in January. Republicans are taking this as some kind of evidence of a supply- side miracle in which the president’s tax cuts are actually creating large increases in revenue. And surely a man of your reputation, or anyone who actually read the OMB Mid-Session Review, is not going to take it as evi- dence of any real change in the structural budget deficit picture. As analysts at Goldman Sachs and in other places have pointed out, this year’s large increase in tax receipts stems from temporary factors that are unlikely to be repeated, including the expiration of the tax cut on business investment. CBO Director Holtz-Eakin, a former Bush administration econo- mist, has made the same point about the temporary nature of the revenue surge, saying that once you go out to 2008 and 2010, things look about the same as they did before we found out about this year’s jump in revenues. The administration, in my opinion, is trying to distract us from the long-term budget problems they have created with irrespon- sible policies. But the American people deserve to know the truth, and surely you, of all people, Mr. Greenspan, should be speaking out about this. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 6 You were part of the team that helped the Clinton administra- tion balance the budget, you were part of the team that helped build the surplus, and you know it can be done. The American people are absolutely being skewered with this crushing debt that will affect them and the lives of their children, their grandchildren, their quality of life. I really would hope that today and in the future you will take a stand against spending the American people into a hole that is very difficult to get out of and very painful to get out of, and I wish that you would speak out as strongly on this issue and as forcefully on this issue as you have on others. The CHAIRMAN. The gentlelady’s time has expired. The gentlelady from Ohio, Judge Pryce? Ms. PRYCE. Thank you, Chairman Oxley. Welcome, Chairman Greenspan. Thank you for taking time to discuss with us your insightful thoughts on monetary policy and the state of our economy. I am pleased to read in your testimony that you believe overall the economy remains steady. Many financial analysts have credited the strong, vibrant housing market as a vital segment of the health of our economy. Recent studies have found that housing accounted for more than one-third of economic growth during the previous 5 years. Many observers, including yourself, have noted that mortgage re- financing provided crucial support to the economy during the past recession, enabled homeowners to reduce their debt burdens and maintain adequate levels of consumer spending by tapping into the equity of their homes. I for one took great advantage of that. Despite these latest gains in home ownership, I am concerned about the recent surge in home prices in many metropolitan areas. In most countries, the recent surge in home prices has gone hand in hand with a much larger jump in household debt than in pre- vious booms. Not only are new buyers taking out bigger mortgages, but exist- ing owners have increased their mortgages to turn capital gains into cash that they can spend. So I hope to hear your views on the current status of this coun- try’s housing market and whether a nationwide bubble exists, also what effect a measured rise in inflation will have on the housing market. As we have seen in the Australian economy, they experienced a surge and were able to slowly raise rates and control real estate speculation, keeping that economy healthy after the market peaked. So I look forward to talking more about that with you. Shifting gears, I would also like to know—and I will ask later— whether you feel the recent string of data security breaches has af- fected consumer confidence in our payment systems. As you know, Mr. Chairman, I, along with many of my colleagues on both sides of the aisle here, are working hard on some legisla- tion that will provide uniform national standards for consumer pro- tection and data breach notification, and we would appreciate any insights you care to share. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 7 Data security breaches are something that all of us are con- cerned with, as we see more and more instances of breaches in the headlines every day. I am pleased to be working with many members, Congressman Castle and LaTourette, Moore, Hooley, even Mr. Frank, on these important issues. And we appreciate the leadership of Chairman Oxley and Chair- man Baucus as well. But under Gramm-Leach-Bliley, financial services firms already have an obligation to keep consumer information secure and con- fidential, and we need to extend those safeguards to information brokers and others. When a breach occurs that could lead to financial fraud or mis- use of sensitive financial identity information, customers have the right to be informed about the breach and what steps they should take to protect themselves. I believe there should be one federal standard for data security and for notification. Disparate standards that vary from state to state are an administrative nightmare and make compliance very difficult. Varying standards can cause consumer confusion, and customers should be assured that when their information is breached, they re- ceive the same notification no matter where they live. So, thank you, Mr. Chairman, for your appearance today. I look forward to your testimony. And thank you, Chairman Oxley. I yield back. The CHAIRMAN. The gentlelady yields back. We now turn to our distinguished chairman of the Fed. Chairman Greenspan, again, welcome back to the committee. STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE BOARD Mr. GREENSPAN. Thank you very much, Mr. Chairman. I have a rather extended formal presentation and would request that it be included for the record, and I will excerpt from that. The CHAIRMAN. Without objection. Mr. GREENSPAN. Mr. Chairman and members of the committee, I am pleased to be here to present the Federal Reserve’s Monetary Policy Report to the Congress. I am surprised to hear it is the 35th time. In recent weeks, employment has remained on an upward trend; retail spending has posted appreciable gains; inventory levels have been modest; and business investment appears to have firmed. At the same time, low long-term interest rates have continued to pro- vide a lift to housing activity. Although both overall and core consumer price inflation have eased of late, the prices of oil and natural gas have moved up again, on balance, since May and are likely to place some upward pressure on consumer prices, at least over the near term. Slack in labor and product markets has continued to decline. In light of these developments, the Federal Open Market Com- mittee raised the federal funds rate at its June meeting to further reduce monetary policy accommodation. That action brought the VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 8 cumulative increase in the funds rate over the past year to 2.25 percentage points. Should the prices of crude oil and natural gas flatten out after their recent runup, the forecast currently embedded in futures markets, the prospects for aggregate demand appear favorable. Household spending, buoyed by past gains in wealth, ongoing in- creases in employment and income, and relatively low interest rates, is likely to continue to expand. Business investment in equipment and software seems to be on a solid upward trajectory in response to supportive conditions in fi- nancial markets and the ongoing need to replace or upgrade aging high-tech and other equipment. Moreover, some recovery in non-residential construction appears in the offing, spurred partly by lower vacancy rates and rising prices for commercial properties. However, given the comparatively less buoyant growth of many foreign economies and the recent increase in the foreign exchange rate of the dollar, our external sector does not seem poised to con- tribute steadily to U.S. growth. A flattening out of the prices of crude oil and natural gas, were it to materialize, would also lessen upward pressure on inflation. Thus our baseline outlook for the U.S. economy is one of sus- tained economic growth and contained inflation pressures. In our view, realizing this outcome will require the Federal Re- serve to continue to remove monetary accommodation. This gen- erally favorable outlook, however, is attended by some significant uncertainties that warrant careful scrutiny. With regard to the outlook for inflation, future price performance will be influenced importantly by the trend in unit labor cost, or its equivalent, the ratio of hourly labor compensation to output per hour. Over most of the past several years, the behavior of unit labor costs has been quite subdued. But those costs have turned up of late, and whether the favorable trends of the past few years will be maintained is unclear. Hourly labor compensation as measured from the national in- come and product accounts increased sharply near the end of 2004. However, that measure appears to have been boosted significantly by temporary factors. Over the past 2 years, growth in output per hour seems to have moved off the peak that it reached in 2003. However, the cause, ex- tent and duration of that slowdown are not yet clear. Energy prices represent a second major uncertainty in the eco- nomic outlook. A further rise could cut materially into private spending and thus damp the rate of economic expansion. Judging from the high level of far-future prices, global demand for energy apparently is expected to remain strong, and market participants are evidencing increased concerns about the potential for supply disruption in various oil-producing regions. More favorably, the current and prospective expansion of U.S. ca- pability to import liquefied natural gas will help ease longer-term natural gas stringencies and perhaps bring natural gas prices in the United States down to world levels. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 9 The third major uncertainty in the economic outlook relates to the behavior of long-term interest rates. The yield on 10-year Treasury notes, currently near 4.25 percent, is about 50 basis points below its level of late spring 2004. This decline in long-term rates has occurred against the back- drop of generally firm U.S. economic growth, a continued boost to inflation from higher energy prices, and fiscal pressures associated with the fast-approaching retirement of the baby-boom generation. The drop in long-term rates is especially surprising given the in- crease in the federal funds rate over the same period. Such a pat- tern is clearly without precedent in our recent experience. Two distinct but overlapping developments appear to be at work: a longer-term trend decline in bond yields; and an acceleration of that trend of late. Some, but not all, of the decade-long trend decline in that for- ward yield can be ascribed to expectations of lower inflation, a re- duced risk premium resulting from less inflation volatility, and a smaller real-term premium that seems due to a moderation of the business cycle over the past few decades. This decline in inflation expectations and risk premiums is a sig- nal development. As I noted in my testimony before this Committee in February, the effective productive capacity of the global economy has substan- tially increased, in part because of the breakup of the Soviet Union and the integration of China and India into the global marketplace; and this increase in capacity in turn has doubtless contributed to expectations of lower inflation and lower inflation-risk premiums. In addition to these factors, the trend reduction worldwide in long-term rates surely reflects an excess of intended savings over intended investment. This configuration is equivalent to an excess of the supply of funds relative to the demand for investment. What is unclear is whether the excess is due to a glut of savings or a shortfall of investment. Because intended capital investment is to some extent driven by forces independent of those governing intended saving, the gap between intended saving and investment can be quite wide and variable. It is real interest rates that bring actual capital investment worldwide and its means of financing global savings into equality. We can directly observe only the actual flows, not the savings and investment tendencies. Nonetheless, as best we can judge, both high levels of intended savings and low levels of intended investment have combined to lower real long-term rates over the past decade. Since the mid 1990s, a significant increase in the share of world gross domestic product produced by economies with persistently above-average savings, predominantly the emerging economies of Asia, has put upward pressure on world savings. These pressures have been supplemented by shifts in income to- ward the oil-exporting countries, which more recently have built surpluses because of steep increases in oil prices. Softness in intended investment is also evident. Although cor- porate capital investment in the major industrial countries rose in recent years, it apparently failed to match increases in corporate cash flow. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 10 In the United States, for example, capital expenditures were below the very substantial level of corporate cash flow in 2003, the first shortfall since the severe recession of 1975. That development was likely a result of the business caution that was apparent in the wake of the stock market decline and the cor- porate scandals early this decade. Japanese investment exhibited prolonged restraint following the bursting of their speculative bubble in the early 1990s; and invest- ment in emerging Asia, excluding China, fell appreciably after the Asian financial crisis in the late 1990s. Whether the excess of global intended saving over intended in- vestment has been caused by weak investment or excessive sav- ings—that is, by weak consumption—or, more likely, a combination of both does not much affect the intermediate-term outlook for world GDP or, for that matter, U.S. monetary policy. What have mattered in recent years are the sign and the size of the gap of intentions and the implications for interest rates, not whether the gap results from a saving glut or an investment short- fall. That said, saving and investment propensities do matter over the longer term. Higher levels of investment relative to consumption build up the capital stock and thus add to the productive potential of an economy. The economic forces driving the global saving-investment balance have been unfolding over the course of the past decade, so the steepness of the recent decline in long-term dollar yields and the associated distant forward rates suggests that something more may have been at work over the past year. Inflation premiums in forward rates 10 years ahead have appar- ently continued to decline, but real yields have also fallen markedly over the past year. Risktakers apparently have been encouraged, by a perceived in- crease in economic stability, to reach out to more distant time hori- zons. These actions have been accompanied by significant declines in measures of expected volatility in equity and credit markets. History cautions that long periods of relative stability often en- gender unrealistic expectations of its permanence and at times may lead to financial excess and economic stress. Such perceptions, many observers believe, are contributing to the boom in home prices and creating some associated risks. And certainly the exceptionally low interest rates on 10-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of home building, home turnover, and particularly in the steep climb in home prices. Whether home prices on average for the nation as a whole are overvalued relative to underlying determinants is difficult to ascer- tain, but there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels. Among other indicators, the significant rise in purchases of homes for investment since 2001 seems to have charged some re- gional markets with speculative fervor. The U.S. economy has weathered such episodes before without experiencing significant declines in the national average level of VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 11 home prices. Nevertheless, we certainly cannot rule out declines in home prices, especially in some local markets. If declines were to occur, they likely would be accompanied by some economic stress, though the macroeconomic implications need not be substantial. Historically, it has been rising real long-term interest rates that have restrained the pace of residential building and have sup- pressed existing home sales, high levels of which have been the major contributor to the home equity extraction that arguably has financed a noticeable share of personal-consumption expenditures and home-modernization outlays. The trend of mortgage rates or long-term interest rates more generally is likely to be influenced importantly by the worldwide evolution of intended saving and intended investment. We at the Federal Reserve will be closely monitoring the path of this global development few, if any, have previously experienced. As I indicated earlier, the capital investment climate in the United States appears to be improving following significant headwinds since late 2000, as is that in Japan. Capital investment in Europe, however, remains tepid. A broad worldwide expansion of capital investment not offset by rising worldwide propensity to save would presumably move real long-term interest rates higher. Moreover, with term premiums at historical lows, further downward pressure on long-term rates from this source is unlikely. We collectively confront many risks beyond those I have men- tioned. As was tragically evidenced again by the bombings in Lon- don earlier this month, terrorism and geopolitical risk have become enduring features of the global landscape. Another prominent concern is the growing evidence of antiglobalization sentiment and protectionist initiatives, which if implemented would significantly threaten the flexibility and resil- ience of many economies. This situation is especially troubling for the United States, where openness and flexibility have allowed us to absorb a succession of large shocks in recent years with only minimal economic disrup- tion. That flexibility is, in large measure, a testament to the indus- try and resourcefulness of our workers and businesses. But our success in this dimension has also been aided impor- tantly by more than two and a half decades of bipartisan effort aimed at reducing unnecessary regulation and promoting the open- ness of our market economy. Going forward, policymakers will need to be vigilant to preserve this flexibility, which has contributed so constructively to our eco- nomic performance in recent years. In conclusion, Mr. Chairman, despite the challenges I have out- lined and the many I have not, the U.S. economy has remained on a firm footing, and inflation continues to be well contained. More- over, the prospects are favorable for a continuation of those trends. Accordingly, the Federal Open Market Committee in its June meeting reaffirmed that it believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects, as needed, to fulfill its obligation to maintain price stability. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 12 Thank you very much. I look forward to your questions. [The prepared statement of Hon. Alan Greenspan can be found on page 53 in the appendix.] The CHAIRMAN. Thank you, Mr. Chairman. And of course I think it is appropriate that your final appearance before the committee ended with price stability, because indeed, as you have indicated at least 35 times before this committee, that ul- timately is the charge of the Fed—and you have performed extraor- dinarily well. I mentioned in my opening statement the fact that it appears now that federal revenues for the first quarter of this year have caused a lowering of the expected size of the budget deficit, per- haps as much as $100 billion. The evidence would indicate that most of that revenue came from capital gains and dividend taxes—and, at least in most quarters, is greeted with a lot of favor. Has the Laffer Curve come back or is this a temporary phe- nomenon that may be different, say, in the current quarter? Mr. GREENSPAN. Well, certainly, Mr. Chairman, dividends are higher; and indeed, to that extent, the overall general outlook for profitability has clearly had a substantial impact on the revenues to which you allude. It is too soon to actually make judgments about exactly where those revenues are coming from. We do know it is non-withheld, we do know it is corporate taxes, and we are even getting some in the withheld area. So it is a fairly broad expansion which does relate directly to the level of economic activity, which does seem to be expanding at a reasonably good pace. Now, we will not know in full detail until we get the statistics of income—which is often, of course, quite late—to get the full de- tail of exactly what is happening. But I would say that, as I have indicated on many occasions, I do think that the particular characteristic of recent taxation, which has eliminated part of the double taxation of dividends, has con- tributed to economic growth. We do not know that yet, and we will not know that for a num- ber of years, because it is only in retrospect that we will be able to make that judgment fully. But at least I would say that is my impression, or at least I can- not see anything which contradicts that at this particular moment. The Laffer Curve is a much broader question, which I do not think I have time to discuss. But in general I must say I am pleased with the revenue increases that have occurred because it is a reflection of an economy which is doing well. The CHAIRMAN. I just threw that ‘‘Laffer Curve’’ in as kind of an enticement, to get your attention. [Laughter.] Let me ask you about this. When you were here in February you indicated the need to basically migrate our Social Security system toward individual accounts, particularly as it related to capital for- mation and giving us the ability to have the capital necessary to keep our economy strong and create jobs and growth. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 13 Have you had any different ideas or change of mind since Feb- ruary? Mr. GREENSPAN. No, but I think it is worthwhile reviewing where we are relative to this issue. We know, with as high a level of certainty as you ever can gath- er, that we are going to get a very substantial acceleration in the number of retirees in this country starting in 2008; but we also know that the next generation coming in behind the baby boomers is much smaller, which means that the working labor force is going to grow at a relatively small, a very small, rate. This means that we are going to have a very substantial amount of people not productive, in the way they had been when they were in the workforce, essentially being supplied with goods and services by a labor force which is growing rather slowly. It is very difficult to convey how important it is when you take as productive a group of people coming out of the baby-boom gen- eration—and they are now in their most productive years—and you move that group into retirement. Its impact is very substantial. But the major point I want to make is that Social Security has over the years, largely because of the demographics that we have observed in recent generations, been able to replace roughly 40 per- cent of the incomes that workers had prior to retirement. It strikes me that it is going to be very difficult to deliver that in real terms because of the extraordinary demographic shift which we are about to experience. But it is certainly also going to be the case that retirees are going to need something like 80 percent of their immediately pre- retirement income to maintain a reasonable standard of living, and that means a very substantial part of retirement resources is going to come from other than Social Security, of necessity; and that in- evitably means private pension funds, defined benefit, 401(k)s, per- sonal savings, other forms of income, and I suspect that we will re- quire fairly significant expanding forms of private savings initia- tives. And one of the reasons why I have been supportive of moving a significant part of Social Security toward private accounts is to de- velop that particular process. I have nothing, basically, new to say on the issue than what I discussed with you in February. The CHAIRMAN. Thank you, Mr. Chairman. My time has expired. The gentleman from Massachusetts? Mr. FRANK. Thank you, Mr. Chairman. I do have to note one further example, among many, of your dis- cretion, when the chairman asked you about the Laffer Curve. You said—it was fairly early in his 5 minutes—that you did not have the time to answer it. There is an old, crude joke: ‘‘Do you have the time?’’ ‘‘Well, if you have the inclination.’’ My inference, frankly, is that you had the time but not the incli- nation. I honor that, and I understand it. I think it is very discreet. I want to go back to the point I raised before, and that is—and I agree with you, we have this resistance to many of the measures that have been helpful, that I think would be helpful. I may dis- agree on some. And we have had a bipartisan cooperation in many VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 14 of these areas, going back to President Carter and others, who did deregulation. But people need to understand, people in the business commu- nity need to understand, that bipartisan cooperation is breaking down in the economic area—and I am not talking about bickering or squabbling; I am talking about profound philosophical dif- ferences. Many of us are convinced that we are in a situation now, because of information technology, globalization, and a lot of other factors which are, in many ways, benign, but they combine so that we are getting increased growth with increased inequality. You yourself have commented on this trend. You told the Joint Economic Committee over a year ago that a substantial part of the increased wealth and productivity was going to corporate profits. In fact, what you said was that—this is a little over a year ago: ‘‘The consequence was a marked fall in the ratio of employee com- pensation to gross non-financial corporate income to a very low level by the standards of the past 3 decades.’’ Now, we had unem- ployment, but people are celebrating a decline in unemployment. But reading Paul Krugman’s article in July, my attention was called to a policy paper done of the Boston Federal Reserve, by Katharine Bradbury. And you are justly proud, I know, of the high-quality work that is done by your analysts. I do not know if you have had a chance to look at this one. It is a fairly recent policy brief. But her point is very straightforward: ‘‘Decrease in unemploy- ment is substantially because of a decrease in the labor participa- tion rate. Improvements in the unemployment rate overstate the strength of the recovery, since the nation’s labor force participation rate has not rebounded to date.’’ Even after job counts began to rise and joblessness subside, how- ever, the fraction of the population that is employed did not in- crease, and it has not improved measurably to date. And that also, of course, is one of the reasons why we have not seen any increase in wages. And you noted in 2004 that wages were depressed. You have said yes, the wage sector is going up. But again, as your Monetary Report—and I am consistently grateful for the intellectual honesty and clarity of these reports— that is largely because of stock options and bonuses, so that people working for hourly wages—— And I am going to ask to put in the record here a chart that Mr. Morris on my staff has prepared from Department of Labor, De- partment of Commerce data. Real wages, average hourly earnings for production and non-supervisory workers, adjusted for inflation, 2001, $14.52. As of June of this year, $14.05: a 47-cent-per-hour de- crease. Now, it is one thing for people to experience a decrease when they read about bad economic times; it is another when they read celebrations of how well the economy is doing but they are not doing well. That, to me, is the explanation for the phenomenon you deplored in your statement, about the ‘‘growing resistance.’’ VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 15 Why do you think we are running into this growing resistance? Would you agree, or do you have some other explanation? I mean, do workers suddenly turn mean and surly or what? Mr. GREENSPAN. Congressman, first let me just say that we at the board do have some questions about that Boston Federal Re- serve study. Very specifically, it fails to take into consideration, in our judg- ment, certain important structural changes, such as the fact that in early years we had an extraordinarily rapid rise in participation in the labor force of adult women. We finally got to the point when it would flatten out—— Mr. FRANK. Let me withdraw that, then. But I would be interested, subsequently: Why do you think we are encountering this resistance, this potential threat to the bipar- tisan consensus for flexibility? What do you think the reason is? Mr. GREENSPAN. I think the reason is basically that we are de- veloping a bivariate labor market, as I have indicated in previous periods, and I think I did in February testimony here. We have an oversupply of high-skill jobs and an undersupply of people to fill them, the effect of which is to create a significant ac- celeration in average incomes of the highly-skilled segment of our labor force. And that, as you recall, I attribute to the fact that we have been unable in our educational institutions to move our younger people sufficiently quickly from grade 4 through high school, into college and beyond, at a pace which would create an adequate supply of the number of skilled workers which we need—which, incidentally, would bring the wage increases down—but also simultaneously re- move an excess of lesser-skilled workers, which are depressing—— Mr. FRANK. I understand. But we have got the people—as you and I understand, that is for the future. We have got tens of millions of people who are beyond the edu- cational stages. How do you deal with that? What is your—— Mr. GREENSPAN. Well, I was basically saying that the reason that a substantial part of our labor force feels as though it is not getting the benefits of the increased production is essentially a function, in my judgment, of problems in our educational system. Mr. FRANK. First of all, I would just quibble with ‘‘feels as though.’’ There has been a drop in their real wages. Secondly, though: We could agree on improving the educational system, but there are people in their 30s and 40s and 50s who are very, very unlikely to be affected by that. What do we do about them? Mr. GREENSPAN. No, I—— Mr. FRANK. Because if you do not do anything about them, you will continue to complain about this rise in resistance—because it is not that they ‘‘feel’’ it, it is that that they are in fact experiencing it. Mr. GREENSPAN. Yes. First of all, I do not envisage our education system as one which takes young people, graduates them, and they never see school again. As you well know, better than I, our community colleges have very substantial enrollment, and indeed they are the most rapidly VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 16 growing part of our educational system, and they are predomi- nantly people—— Mr. FRANK. Paid for with tax dollars, government entities—— The CHAIRMAN. The gentleman’s time has expired. The gentlelady from Ohio? Ms. PRYCE. Thank you, Mr. Chairman. Mr. Chairman, if you do not mind, let us talk about data breach for a little bit, and I would really appreciate your insight as to how it has been affecting consumer confidence and to what effect. As we pursue some legislation here in this committee, do you agree we should have a national standard? I would appreciate any thoughts or—— Mr. GREENSPAN. National standards on what? Ms. PRYCE. On what constitutes a breach or anything—a na- tional standard on any portion of legislation that would come out of this committee, what we should do, what we should not do. We do not want to make a situation that is pretty terrible, with implications that I believe are staggering, in terms of identity theft and misuse of other people’s credit and—we have to proceed cau- tiously, and I am just looking for you to help us here. Mr. GREENSPAN. Yes. It is a very tough and, frankly, discour- aging issue. We obviously have equivalent issues at the Federal Reserve in protecting our information, and what we have tended to do is cre- ate redundancies in our mechanisms and procedures so that in the event that certain structures fail, we have ones that can come up and create support. That is expensive, and the problem that we are always trading off on all of these types of issues is how much risk, how much loss, how much disruption are we willing to accept as a minimum? Be- cause we could eliminate that completely, but at a very significant cost. I am not sure I could add very much to your judgments with re- spect to what type of legislation, how it would be done. I am quite familiar with encryption capabilities and a variety of other issues that we employ. But when we are dealing with shipments of millions of names going all over the country, either electronically or in the back of trucks, something is going to drop off the back of the truck, and the only way to avoid that is to double up on efforts. There is no simple solution. There is probably no cost-free solu- tion. And I think it is a tough judgment to make, as to how far you want to bring that issue to the forefront. I cannot judge because I am not familiar with the individual na- tures of the problems that clearly show up in the newspapers peri- odically, to my chagrin. Ms. PRYCE. Well, as we go, you know, the payment system from cash and checks to more a credit base, credit cards and debit cards, I think we have to address this as a government, and we do want to proceed cautiously. The consumer confidence issue is one that I can see severely af- fecting our economy. Mr. GREENSPAN. Yes. Fortunately, we have not yet seen any im- pact on national consumer confidence from any of these issues. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 17 But it should not be an issue of consumer confidence; it should be an issue of doing something which is important for protecting consumers. Ms. PRYCE. That is correct. All right. I appreciate the gentleman’s candor on that and look forward to working with you. And I yield back. The CHAIRMAN. Gentlelady yields back. The gentlelady from California, Ms. Waters? Ms. WATERS. Thank you very much, Mr. Chairman and mem- bers. I would like to thank Mr. Greenspan for being here on this Mon- etary Policy Report to Congress. I know that when you come, we utilize this as an opportunity to ask you about all things we are concerned about, that we think you have some information on. As you know, we are going to be involved with a vote here in an- other week or so, perhaps, on CAFTA. The arguments for CAFTA are ones that, of course, you are very familiar with—may have even led on, I am not sure—that talk about how this will help us to reduce the trade deficit and how we can perhaps get the manufacture and production of cheap goods and products, that will cause our businesses to be able to profit be- cause of the reduction in costs, that some of us are concerned about the outsourcing or the jobs that go offshore because we think that these jobs are very important to our own citizens, and even those jobs that do not pay huge wages. There are some people, whom you correctly identified or alluded to, who may not have benefited from our educational system in ways that they should; but they deserve to have a job also, and to work, and to have a decent quality of life. I do not know where you stand on CAFTA. I would like to hear what you think. How do we benefit from the passage of CAFTA? Mr. GREENSPAN. CAFTA is part of a broader issue of the extent to which we, the United States, want to engage in globalization. Globalization has two aspects to it, as best I can judge. One, it undoubtedly enhances standards of living worldwide, and indeed those economies that engage in international trade have invariably been boosted—and this has been especially the case since the end of World War II, and the United States has probably been the econ- omy which has benefited the most. That process, however, of globalization is one of creative destruc- tion in the sense that we are continuously competing and, in the process, we increase standards of living by essentially moving the depreciation from obsolescent facilities to cutting-edge equipment. And in fact, it is the difference between the two’s productivity where standards of living come from. But that process is very dis- ruptive, and indeed it is associated with a very large turnover of the labor force. As I have mentioned here previously, we hire in this country 1 million workers a week, and indeed people lose jobs in very large volumes every week as well. There is a large churning that goes on. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 18 To the extent we wish to secure jobs, to the extent that we wish to secure businesses from this competition, it will increase a sense of security, but it will do so at the expense of a lower standard of living. And the choice the Congress has to make—because indeed it is the Congress which makes these valued choices for the American people—is: To what extent do we wish to engage in international trade—of which CAFTA is just merely one aspect of it—with its churning, with its insecurities, but with its higher standards of liv- ing, or to what extent do we prefer a more tranquil, protected type of a society? And this is a very difficult judgment. I personally have argued very strenuously that I think that the globalization route is by far the superior route, because protection may appear to be helpful in the short run, but over the long run you cannot protect industries or jobs which are obsolescent. And I think that what we have to do is to move forward, as best we can, in globalization but to recognize that those who are the in- evitable losers in this churning process be protected in some form— in other words, to address, either through retraining or other means, that there are losers in this process, and we should, as a civil society, endeavor to find means to recognize that fact. The CHAIRMAN. The gentlelady’s time has expired. Ms. WATERS. Thank you. The CHAIRMAN. The gentleman from Iowa, Mr. Leach? Mr. LEACH. Thank you very much. An analog to this discussion. Your former colleague at the Fed- eral Reserve, Mr. Bernanke, has emphasized that there is a sav- ings glut in the Far East and a savings paucity here. In your statement today you have noted that in the Middle East savings has gone up to about a third of GDP. So there implicitly is a savings glut in the Middle East. Do you have any advice to these two regions—and it could be quite separate—on what should be done with this savings?—par- ticularly if it is different than is currently being managed. Mr. GREENSPAN. Well, you are sort of putting me in a position to advise large segments of the world about what they ought to do. I appreciate that. [Laughter.] Mr. LEACH. Well, the Federal Reserve has the capacity to bail out large segments of the world—— Mr. GREENSPAN. I would point out, however, in my prepared re- marks I do raise an issue—which I think is an important issue, sir—about the question of the geographical location of crude oil re- serves being relatively concentrated; and that means that the pro- ductive capacity—that is, the conversion of those reserves into the capability of lifting crude oil—requires a very significant amount of capital investment and that the vast majority of these oil-producing countries do not look favorably upon foreign investment because they consider their experiences in the past to be undesirable in that regard. And yet because these are growing populations in these oil-pro- ducing areas, they perceive the need for the revenues that are com- ing from the oil production to go to domestic needs and not in any substantial extent to be reinvested to increase crude oil capacity on VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 19 the reserves that they already have; and it strikes me that we are in a position where world oil demand is rising and is rising at a pace which is going to require significant amounts of capital invest- ment. And how that is essentially resolved, whether the resources of international oil companies or others to invest in productive capac- ity in these areas is allowed—I mean, for example, in Mexico, as I am sure you know, there is a constitutional amendment which prohibits international, foreign investors engaged in that resource, and Pemex, the national oil company in Mexico, is pressuring to see if that prohibition could be reduced, because they perceive the need for the capital and the expertise to drill in areas in deep wa- ters in the Gulf of Mexico where they know significant amounts of oil are available. So it is a very difficult question. So far as emerging Asia is con- cerned, they seem to be doing quite well, and in my judgment, will eventually resolve that question of their excess flow of savings. Mr. LEACH. Thank you, Mr. Chairman. The CHAIRMAN. The gentleman’s time has expired. The gentlelady from New York, Ms. Maloney? Mrs. MALONEY. Thank you, Mr. Chairman. Chairman Greenspan, last week the administration issued its Mid-Session Review of the budget, showing that the deficit in 2005 will be lower than we thought it would be back in January. My question is: Do you agree with analysts, like those at Gold- man Sachs, who point out that much of the improvement in 2005 comes from temporarily-high corporate profits and the expiration of the temporary tax cut on business investment? Mr. GREENSPAN. Oh, I think that is correct, but I think OMB rec- ognizes that as well. Mrs. MALONEY. And so then you do agree with the former CBO director, Holtz-Eakin, that once you go out a few years, the budget outlook is about the same as it was in January? Mr. GREENSPAN. I am not sure about that, and the reason, basi- cally, is that we can disaggregate revenues and we can make ad- justments for what we perceive to be the cause of this surge, at least on the individual side, which is increased bonuses and pre- sumably a significant increase in exercise of stock options as well as capital gains realizations. But even after you account for that, you have unknown changes that are going on, the so-called technical adjustment—which is what, for example, Treasury uses to translate its forecasts of tax- able income into taxable receipts. As I mentioned earlier, we really will not have a good insight into the sources of these revenue in- creases this year until we see the statistics of income, which are published, a couple of years from now. So we really will not know until we look backwards. I do think anybody who is projecting from here forward with re- spect to revenues is confronted with some significant elements of uncertainty. But I would not necessarily say that either the longer- term views that the most recent revenues are wholly temporary or those who believe that the revenues will continue at the same lev- els are probably correct. The answer is probably somewhere in the middle. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 20 Mrs. MALONEY. So your answer is: Yes, probably yes. Correct? Mr. GREENSPAN. I am sorry, ‘‘yes’’ is what? Mrs. MALONEY. Probably ‘‘Yes’’ for both the Goldman Sachs and the CBO director? Mr. GREENSPAN. No, not necessarily. I would say that yes, that it is probably in between where OMB is and Goldman Sachs, if I had to guess. But it is a guess. Mrs. MALONEY. Okay. Mr. Greenspan, is there sufficient strength in the labor market to justify the continued rate hikes? And I would like to cite that after the 2001 recession, this was followed by really the most protracted job slump we have seen since probably the 1930s. And was it not common in the expansion of the 1990s, for example, to see payroll employment growth of over 200,000 jobs per month, and has it not been rare to see that kind of job growth in this economy? And I am sure that you are familiar with the study that has been cited recently by Katharine Bradbury of the Federal Reserve Bank of Boston, calling attention to how the labor force participation rate has not recovered as it usually does in an economic expansion; and does not that raise questions about whether there is some hidden unemployment not being captured in the official unemployment rate? And finally, wage growth has not kept up with inflation, and most of the productivity gains achieved over this expansion have gone into profits and not into the wages of the working men and women of this country; and my main question is: Does the Fed take into account all this evidence that there may still be a considerable slack in the labor market when it decides whether or not to keep raising interest rates? Mr. GREENSPAN. Well, Congresswoman, let me say, as I was mentioning to Congressman Frank: That Boston study presumes that 1 to 3 percentage points of the decline in the participation rate is as a result implicitly of the conditions you are suggesting. We at the board, doing similar type of analysis but addressing it somewhat differently, believe that the number is actually less than a half a percent; and that is strictly a technical issue, that we think certain calculations that were made at the Boston Fed in- adequately captured what was going on. Having said that, let me just go further with respect to: It is the case that the 80 percent of our workforce which are production workers do have a very slow rate of growth in average hourly earn- ings, real and even nominal, in that respect. One of the reasons—other than the issue that I raised earlier; namely, the educational question and the skill and the imbal- ances—is that the benefit levels have gone up very substantially, and what tends to happen, as best that we can judge, is that ulti- mately benefits are paid by the employee and that if benefits go up the way labor market pressures tend to work, the aggregate pack- age is what is determined in the markets, and it is essentially the individual workers who, over the long run, determine what the mix is. I think that there is a really serious problem here, as I have mentioned many times before this committee, in the consequent VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 21 concentration of income that is rising as a result of what is a very obvious case of a major requirement to increase the skill level of the capital stock which we need to move forward and maintain high levels of productivity and the supply of workers that we create to essentially staff that capital stock. And the reason that we are getting this very disparate earning pattern is—and I will repeat again—where something is deficient, at least in an international context, of how we deal with our workforce as they come out of school or, more exactly, as they move through the educational sys- tem. The CHAIRMAN. The gentlelady’s time has expired. The gentleman from Alabama? Mr. BACHUS. I thank the chairman. Chairman Greenspan, on Page 5 of your report there is a chart on personal savings. I also read a recent report by the American Institute of Certified Public Accountants that says because of the decline in personal savings America is on a collision course with disaster. Is that an overstatement or—— Mr. GREENSPAN. Yes, sir. [Laughter.] Mr. BACHUS. All right. Good. How serious is it? And let me ask you this. We hear figures— the Department of Commerce recently made a statement that Americans are spending $1.22 for every dollar they earn; yet we hear that personal savings rates are 0.5 percent of disposable in- come, or 3 percent. They are obviously below the 8 percent or 12 percent or 10 percent rates. But how serious is the problem of decline in personal savings rates? Mr. GREENSPAN. It is difficult to tell. I think one of the issues here is to distinguish between what households perceive they are saving, and if you survey them, they are perfectly satisfied; and the reason that they are satisfied and these numbers look very low is that they are two different measures. The average household, when the value of their 401(k) goes up or they are holding stocks that go up, see their net worth go up, and as far as they are concerned, they are pleased by it; however, for national income accounting—which is basically what this per- sonal savings rate endeavors to capture—you have to extract all capital gains out of the system. While an individual who has just, say, sold a home or some stock and has got real cash, they do not distinguish between whether they got that from wages and salaries or from capital gains. It is purchasing power, and that is savings, as far as they are con- cerned. But, without getting into the economics of this, capital gains do not finance capital investment. Only savings, at its book value, if I may put it that way, do that. And as a consequence, we have rea- sonably high capital investment in this country, but we do not have enough domestic savings and personal savings as part of that to fi- nance it. A significant part of our investments are, as you know, financed by borrowing from abroad, and that is our current account deficit. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 22 So in the sense that we do not have adequate domestic savings and we cannot count indefinitely that we will be able to borrow at the rate we are borrowing from abroad, clearly, then, our savings rate is inadequate, and we must address that over the longer run. Mr. BACHUS. And you have said earlier today that the baby boomers beginning to retire is simply going to accelerate this de- cline in personal savings rate? Mr. GREENSPAN. I would think that will be the case, yes. Let me just say parenthetically: I do not expect that the personal savings rate will stay down this low indefinitely. Part of it is re- lated to the fact that there is a very significant amount of extrac- tion of equity from homes in this country financed by mortgage debt. Since the debt which is employed in doing that is a subtraction from savings, you will find that that is a major factor creating the low level of savings; and when equity extraction slows down, as eventually it will at some point, I think you will find this personal savings rate starting back up. Mr. BACHUS. Now, you mentioned some other concerns about this. One was federal spending and the amount of the federal def- icit. So obviously one thing that we in Congress could do would be: try to reduce federal spending. Is that—— Mr. GREENSPAN. That would be most helpful. And indeed I have testified before this committee on numerous occasions, as well as other committees in the House and Senate, that this is a critical aspect of the long-term planning of this country and that, unless we address that issue I think we are in potentially serious dif- ficulty as we move into the next decade. The CHAIRMAN. The gentleman’s time has expired. The gentlelady from New York, Ms. Velazquez? Ms. VELAZQUEZ. Thank you, Mr. Chairman. Chairman Greenspan, the recent suicide bombings in London highlight the growing threat that terrorism plays in our society. From an economic perspective, the London bombings will only add to the government’s investment in security. The federal government is set to spend over $30 billion on home- land security, while it is estimated that private sector expenditures for homeland security may double from pre-2001 levels to over $100 billion per year. The threat of terrorism has clearly changed the spending prior- ities of government at all levels and businesses across the country. No one can argue with the goals of this investment, as it is nec- essary to ensure the safety of our country. But from your perspective, what is the effect of this higher level of investment in homeland security; and do you have concerns that it will lead to lower economic growth as investment flows to less- productive sectors? Mr. GREENSPAN. Well, I would agree with the way you put the issue, Congresswoman. Obviously, to the extent that a society devotes part of its re- sources for protection, those resources cannot also be used to produce goods and services or increase productivity. We have been fortunate in this country that—I would have as- sumed, following 9/11/2001, that we would see some impact on pro- VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 23 ductivity as a consequence of the increased efforts that were de- voted, the diversion of resources, toward protection. It did not hap- pen that way. Indeed, as you know, our productivity actually accel- erated. But there is no question that the use of those resources are dis- placing resources that would otherwise be used for productive pur- poses, and this is one of the reasons that the Congress has to make the judgment as to: at what level do we try to insure ourselves against this sort of violence. Ms. VELAZQUEZ. Mr. Chairman, due to the job losses in manufac- turing and the sluggish hiring we are seeing in corporate America, many individuals are entering the growing ranks of the self-em- ployed. The most recent Labor data suggest that self-employed workers constitute a growing segment of the U.S. labor market. Many have become self-employed out of necessity, with no other option but to seek out any work they can locate on their own. While this helps keep corporate America’s expenses lean, the newly self-employed often must purchase health or retirement cov- erage, at great cost, or go without such benefits altogether. If this trend were maintained, what would be the long-term eco- nomic effect of this shift toward higher self-employment? Mr. GREENSPAN. Well, fortunately, Congresswoman, I think that the trend has changed. In other words, the very most recent data do suggest that there is an increasing return of self-employed to the corporate sector more generally. And incidentally, one of the reasons I suspect it is probably hap- pening is that medical costs being provided by corporate organiza- tions are attractive to a number who are not doing as well, self- employed, as they would like. Clearly, it is an issue here of: Do we like to have a lot of self- employed in the country? Of course we would. Do we want to have them because they lost jobs? The answer is, of course: not. But I think the facts are that this is not becoming an ever-in- creasingly difficult problem, and I trust that it will continue to be that way in the future. Ms. VELAZQUEZ. Thank you, Mr. Chairman. The CHAIRMAN. The gentlelady’s time has expired. The gentleman from the first state, Mr. Castle? Mr. CASTLE. Thank you, Mr. Chairman. Chairman Greenspan, I am also interested in some of the data security issues that I understand Mrs. Pryce spoke to you about. Unfortunately, I had to handle an amendment in another com- mittee, so I have just come back and missed some of that. But let me ask you, first and foremost, just to make sure this is clear. As you know, the various states have been dealing with this, passing legislation in a variety of ways. Is it your judgment that this is an issue in which federal preemp- tion is essential, at least in large part, or would you make excep- tions in certain areas, versus state legislation? Mr. GREENSPAN. I missed your point. What issue? Mr. CASTLE. I am sorry. The data security issue and the protec- tion of data. Mr. GREENSPAN. Yes. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 24 It is hard for me to answer that. In other words, the self-inter- ests of the people who handle data, and that those data be secured, is so extraordinarily high, I just balk at the notion that anyone has to tell them what their self-interest is. I cannot believe that we need regulations to tell people how to make a profit. And in this regard, unless they protect those data, they are going to have some very serious problems. Mr. CASTLE. Just as a matter of discussion—I agree with you, ob- viously, completely on that. I personally feel we do have to do something on the federal level. I do feel that you cannot have 50 different state laws on a variety of these issues. Mr. GREENSPAN. Okay. If you are asking whether it is better to have fewer laws than a proliferation of state laws on this issue, I would say, Of course. Mr. CASTLE. Right. Mr. GREENSPAN. But I just hesitate to accept the overall concept that this is something which is a federal issue or government issue, in the broadest sense, to the extent that we are making it. Mr. CASTLE. Right. I agree with you on that too, but unfortu- nately the media drives this to a degree. And I worry about over- notification. I worry about the fact we overreact, to a great degree, about these various things. So your concerns are legitimate. On the other hand, it seems to me, under Gramm-Leach-Bliley, that we did a lot to address this as far as financial institutions are concerned. But then you have a heck of a lot of other people, it turns out, who are dealing with data, companies—we hear their names, we do not even know what they do—who are not under any kind of a regulator at this point, and they are into the enforcement side of it, I guess, under the FTC. So as a result, I think that is where a lot of the breaches have been. I mean, some of the stuff is amazing to me. I mean, it is in transportation, it is in—— Mr. GREENSPAN. It is remarkable. Mr. CASTLE.—not encrypting it at all. I mean, it is just amazing that it happens. So I think that we need to do something. Mr. GREENSPAN. Yes. I would certainly say this, that this issue has to be resolved. I mean, it cannot fester, because I think we will have some serious consequences. It has not, really, yet, but it could. And I do not deny that where issues of legality are involved stat- utes are required for clarification and understanding whose rights are in what particular area. I have heard some incredibly complex stories of people who, for example, had outsourced certain types of projects with a huge number of names which they had collected which got lost, and they are responsible. So the question of ‘‘Who is legally responsible under those sorts of conditions?’’ is a critical issue which the law has to address. I am just basically saying what I am a little concerned about, is that we all of a sudden have this major advance in technology— which is the whole electronic system—and that it is making major incursions into many areas where huge progress is occurring, and I am a little worried that we will stifle the process if we overdo it. But if you are getting at the issue on responsibility, on who has responsibility in the event of event X—— Mr. CASTLE. Right. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 25 Mr. GREENSPAN.—which is a legal question, then anything that clarifies that, I think, is essential. Mr. CASTLE. Would be helpful, right. I think there are consumer issues as well, the consumer reaction. All of us here in this room are consumers, probably, of all this, and how would we react to different notices we get. I mean, that is a whole other area that is very, very difficult, in terms of what we do, credit freezes and stopping our credit cards and that kind of thing. So I think we have to do a lot of work there. But I appreciate your thoughts on it. I yield back to the chairman. The CHAIRMAN. The gentleman yields back. The gentlelady from Oregon, Ms. Hooley? Ms. HOOLEY. Thank you, Mr. Chairman. Thank you, Mr. Greenspan, for appearing today. According to a letter you wrote to the Joint Economic Committee of Congress, you said, ‘‘High energy costs are forecast to shave three-quarters of a percentage point off this year’s growth to the U.S. gross domestic product.’’ You also noted that ‘‘The U.S. econ- omy seems to be coping pretty well with the runup of crude oil prices, aside from these headwinds.’’ Well, I know many middle-income families making the decision of whether or not to take a vacation this summer might disagree with you. Rising gas costs of well over $2.50 a gallon certainly impacts a majority of family budgets. And in my state, of Oregon, we are suf- fering still a 6.5 percent unemployment rate, and many people would argue that impact is already being felt. My question is: If the economy is coping well and these are only headwinds, at what point do the rising gas prices pose a serious threat to our markets and economy; and at what price level will our economy no longer be able to cope? Mr. GREENSPAN. Well, Congresswoman, it depends not only on the level of prices but on the pace of change, and the reason I say that is, what we seem to do with gasoline consumption, and prob- ably diesel as well, is: When prices go up, we consume just the same amount of gasoline, largely because we do not curtail our travel very much. If you look at the aggregate amount of motor gasoline consump- tion in the face of this very sharp rise in price, you will be hard- pressed to find any reduction. Yet what we do know from experi- ence is that while people do not cut their mileages down very much, they do tend, when prices go up, to buy cars and trucks with much better fuel efficiency. And so over time, if prices stay up, what is going to happen is that the amount of gasoline consumed is going to go down, and in- deed it could go down quite considerably. People will be traveling in lighter cars, more fuel-efficient, maybe more hybrids. One thing about Americans is that our cars are critical to our day-by-day existence, and they do notice when gasoline prices go up; and it probably does curtail other forms of spending. Indeed you can see it in certain income groups, where high gasoline prices lead to less purchases elsewhere. But what they do not do is drive fewer miles. At least that is what the data suggests. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 26 Ms. HOOLEY. I would like to take just a different tact, very short- ly, and talk a little bit about the currency prices in China. Sixty percent of China’s economists think they should allow the country’s currency to increase in value sometime this year. Would you advocate a gradual increase in the value of Chinese currency; and what would be the impact on both the American and global economy; and if China refuses to increase the value of their currency significantly, would you advocate imposing punitive tariffs against China’s imports? Mr. GREENSPAN. Well, first of all, I have said previously that I believe it is in China’s interest to allow its currency to move up, largely because the procedures that it uses to support its currency requires that their central bank accumulate very large quantities of U.S. Treasury securities. Unless they sterilize that very substantial inflow, they create sig- nificant distortions in their financial system, and ultimately it could be very serious for the Chinese economy. They know that, and they have said that they intend to adjust the currency. The issue that seems to be on the table is when, and what is the nature of the change? I would not be in favor of a significant punitive tariff, so to speak, largely because I do not think, one, it will accomplish what a lot of people think it would—namely, significantly improve jobs and manufacturing in the United States. But also because the glob- al system is something which is terribly important, not only to the world at large but very specifically to the United States. And any- thing that we do which restricts world globalization, at the end of the day, redounds to our disadvantage. The CHAIRMAN. The gentlelady’s time has expired. Ms. HOOLEY. Thank you. The CHAIRMAN. The gentleman from California, Mr. Royce? Mr. ROYCE. Thank you, Mr. Chairman. Chairman Greenspan, it is nice to have you back before our com- mittee, and I hope we will continue to hear from you in the future. I hope you will be a visitor in years to come. I would like to also add that I am most appreciative of the many years of service you have given to the United States of America and the wise counsel that you have shared with us on so many oc- casions. I would like to ask you a question going to a bill that the com- mittee recently passed to strengthen oversight of the housing GSEs. In my view, the legislation has a number of positives in it; how- ever, I could not support it because the negatives outweigh the positives. And, unfortunately, as we considered this legislation in the committee, we did not seek the formal views of the Federal Re- serve. However, in your testimony to the Senate Banking Committee earlier this year, in April, you stated that: ‘‘To fend off possible fu- ture systemic difficulties, which we assess as likely if GSE expan- sion continues unabated, preventative actions are required sooner rather than later.’’ VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 27 Before we have a full vote in the House of Representatives, I wanted to ask you if you believe H.R. 1461 is sufficient reform. Does it fully address the concerns of the Federal Reserve? Mr. GREENSPAN. It does not, Congressman. I think that there are several aspects of the act passed by this committee which do not address the concerns that we at the Fed- eral Reserve have, most specifically the issue of the size of the port- folios which have been accumulated over the years by the GSEs, which concern us in ways which you just described. Unless and until we can address those issues, I do not think we have appro- priately removed what is a very significant threat to our financial system longer-term. Mr. ROYCE. Let me ask this, then. In your opinion, would no bill be better than moving the approach in 1461 at this time? Mr. GREENSPAN. That would be my opinion. Mr. ROYCE. Okay. Mr. Chairman, a number of people have criticized both the Fed- eral Reserve and the administration for moving the goal posts, as they say, on GSE reform. Essentially, the criticism is that the Fed was not talking about portfolio limits 2 years ago and now is say- ing, you know, that the limits are a much-needed step in the re- form of oversight; and I wondered if you could explain how and why the board of governors came to this conclusion. Mr. GREENSPAN. I think that is describing the situation quite correctly. It is called a learning process. It has taken us a considerable pe- riod to understand the internal mechanisms of how those GSEs function, what their structure is with respect to securitization and portfolio accumulation, how they make their profits, how they are a profit-making organization, primarily, and how they try to meld that with their housing GSE goals. It is a very complex system. I have been in the financial system for many, many decades, and when I first took a look at them, I did not understand how they worked, I mean what it is they were doing, and it took a while; and I must say that, with the help of Federal Reserve staff, we learned how they worked, and as we learned, we recognized the extent of the type of risks which they impose on the structure. And so our changing view is merely a learning curve, and we did not understand the significance 2 years ago, for example, of what was going on. Mr. ROYCE. Thank you very much, Chairman Greenspan. Thank you, Mr. Chairman. The CHAIRMAN. The gentleman yields back. The gentlelady from Indiana, Ms. Carson? Ms. CARSON. Thank you very much, Mr. Chairman. Thank you very much, Mr. Greenspan, for being here and for your public service, and also for the financial literacy workshop that you conducted for me. It has been very beneficial. Mr. GREENSPAN. Thank you very much. Ms. CARSON. Grants for downpayments, where we give money to people to buy homes, I noticed in your statement, on Page 10, you talk about the increase in the prevalence of interest-only loans and the introduction of more exotic forms of adjustable-rate mortgages. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 28 Would you consider the giving of a grant for a downpayment for a low-income family to be an exotic form of support? And then also I am concerned about the housing market, because I am the queen of predatory lending. And also I think Indiana still ranks highest among foreclosures. So that sort of relates to the question that I asked. But, anyway, I know you have taken steps to control inflation, but there is still a dearth of housing available to people with mod- est incomes, but I am afraid that the availability is pricing the moderate-income people out of the housing market. Thirdly, if you have time, can you comment on whether or not the oil prices that our consumers face are related to a war. It is not a political question. It is whether or not you believe that the fires in the oil fields and the drawing up of the oils has in fact got a direct correlation to the insurmountable inflation prices of oil. Thank you very much, Mr. Chairman. Mr. GREENSPAN. First of all, I do not consider that grants to low- income families for downpayments are a problem that is systemic to the financial system. That is not the issue that I was raising. I was raising the questions of the use of, say, for example, inter- est-only mortgages; which, incidentally, properly employed are per- fectly fine instruments, but not for those who need to find some new exotic form of mortgage to raise enough money to buy a house that they want to buy. In other words, if you need an exotic mortgage—and there are all sorts of odd types of mortgages, which essentially seem to cost little now but much more later, which you employ because you want to purchase a much higher-priced house—it is those types of mortgages that I am concerned about; in other words, that the safe- ty and soundness of banks requires that the mortgagor is able to repay the mortgage or the bank has got a problem. And so it is that type of issue, which I think is currently being addressed by supervisors in the Federal Reserve, in the OCC, and others. The general view of this issue is not that we want to ad- dress this huge expansion in homebuilding and home prices by using supervisory capabilities, that we have, to restrain the mar- kets. Our judgment is basically based on making certain that there are sound loans that are being made. If that is done, it will tend to con- strain excesses in the marketplace. But it is not the excesses which are essentially driving our supervisory activities as such. With respect to the oil issue, the oil price is up largely because demand has been rising and there is a shortage of capacity, or at least perceived excess capacity. I think that that would have oc- curred with or without the wars. Ms. CARSON. Thank you, Mr. Chairman. Yield back. The CHAIRMAN. The gentlelady yields back. The gentlelady from New York, Ms. Kelly? Mrs. KELLY. Thank you, Mr. Chairman. Chairman Greenspan, thank you so much for your patience in coming to report to us, this committee. You mentioned the London attacks in your testimony, and earlier this year we had a dialogue about the terrorism insurance area and VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 29 where you believe that government activity is needed; and you stat- ed at the time there was not an efficient market that was func- tioning in the area and it really probably cannot because violence is very difficult to quantify. I am wondering if the London attacks recently have done any- thing to change your view on this issue. Mr. GREENSPAN. Well, I think this is an extraordinarily difficult question. The issue that I have been concerned about is the difficulties that our system would have in meeting very large costs of a ter- rorist attack. The question is, you know: How does a civilized soci- ety, with a rule of law, deal with losses from violence? I mean, it is essentially a critical question. We socialize part of it in the sense that we substitute military and police power for individual protection, but I think we—cor- rectly—choose to leave the vast majority of risk to be absorbed by the private sector; and the reason for that is that, unless risk is essentially a private issue, the allocation of capital in a market economy is not optimized and that therefore standards of living are not optimized. So what we have got is the issue here of scale. To the extent that modest historic levels of violence occur, the private market has been wholly and fully capable of dealing with that. The type of terrorism that is arising in the context of increasing technologies which were not available before has created the possi- bilities of huge losses, and there is no way for a private system to handle that. Private markets presuppose an essentially nonviolent environ- ment where individual voluntary exchange can go on, people can deal with one another without fear. You throw a bomb in the mid- dle of that, and people withdraw, the division of labor goes down, the GDP goes down. It is very difficult for a free market society to deal with outsized levels of violence. As a consequence of that, I think what the Congress has got to do is to recognize that it is a tradeoff here. That is, so long as we have terrorism which has the capability of a very substantial scope of damage, there is no way you can expect private insurance sys- tem to handle that. But we have to be careful, in creating whatever we do in govern- ment insurance or reinsurance, to make certain that we do not go beyond the point which is necessary, because obviously everybody likes free goods, and the government can create them. To the extent that we socialize risk, we reduce our standard of living. And so it is a tradeoff. But as I indicated when this issue came up in the last committee meeting, I do not see how we can avoid the issue of a significant segment of government-backed reinsurance in this particular area. Mrs. KELLY. All things being equal, Mr. Chairman, if TRIA were modified to create a government-backed reinsurer that had access to capital markets and a Treasury window for borrowing, what kind of ownership structure provides the most discipline for owners and investors in the securities? VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 30 Mr. GREENSPAN. I do not know specifically, but I do know that we are already beginning to see private solutions to a lot of the types of problems that we have got; and I think it is important to recognize that if the government decides to move in and set up a large structure immediately, it will abort those activities which are effectively addressing the system. You know, there is another interesting question here, which is a very major question of tradeoffs: To what extent do you recognize the rise of terrorism as an element which should affect our lives? I mean, clearly it has to affect our lives, and does. And we are confronted with the issue of how we trade off the question of trying to change our way of life to minimize the losses that occur because terrorism exists, which means it tells us where we build, how high we build, what types of trophy buildings we construct. How much of that do we want to preserve and how much of that do we cut back on? These are very tough judgments. And in the sense—the markets will do it. In other words, if Congress will enact a certain law, then the markets will adjust to that. It is an issue which is not going to be readily and easily resolved. Civilized societies have not had to deal with this type of technology of terrorism previously. The CHAIRMAN. The gentleman’s time has expired. The gentleman from California, Mr. Sherman? Mr. SHERMAN. Thank you, Mr. Chairman. I ask unanimous consent that we all be given 5 days to submit additional questions for the record. The CHAIRMAN. Without objection. Mr. SHERMAN. Mr. Chairman of the Federal Reserve Board, so many have bemoaned the fact that this is your last appearance be- fore us. I think they should be seeking solutions to this. First, I hope you will come back and share your wisdom with us, even if you are no longer drawing a government paycheck. But I will be introducing legislation to say that someone who has served a part of a term and then served a full 14-year term can still be appointed for another 5 years to the Federal Reserve, and I know my colleagues would begin chanting ‘‘5 more years’’ except they do not want to erode my 5 more minutes. Mr. GREENSPAN. Does my wife have a vote in this? [Laughter.] Mr. SHERMAN. Thank God she does not. I have got so many questions I will basically be submitting them for the record. We are heading eventually for a realignment of currency values such that our trade deficit is ameliorated, perhaps reversed. It is deferrable. But this realignment is not avoidable. It will have bene- fits. It will also have enormous harms, even if it is done smoothly. But if it is not smoothly, it could be a disaster. I will be asking in writing how we can work with other countries to assure that there is a smooth currency realignment and not a crash of the dollar. I will be submitting questions about the importance of subprime lending to our economy, particularly when those loans are not made by depository institutions that are insured by the federal gov- VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 31 ernment but do not pose those risks because they are made by pri- vate uninsured lenders; andd I will also be asking about the impor- tance of the private auditing function to our capital markets. A recent op-ed in the American Banker notes that our committee and the House passed this—well, our committee passed this GSE reform bill, and we reported it out by an overwhelming vote, that it would establish a better regulator for the GSEs; and I will be asking whether you would concur in this assessment or whether you would agree that stronger capital and prompt corrective action authority as provided in the bill makes sense and just how impor- tant it is that Congress pass GSE reform legislation this year. One issue I have asked you about before is the issue of the regu- lations issued by the Treasury Department and the Federal Re- serve Board allowing national banks to engage in real estate bro- kerage and real estate management. As you know, these regulations have been blocked by congres- sional action on an annual basis, which is hardly an efficient way to provide for a national system to regulate who can and cannot, and under what circumstances, engage in real estate brokerage ac- tivity. Now, you have consistently opposed mixing banking and com- merce, and a commercial activity is a commercial activity even if it involves financing. For many of my working-class-family constituents, they are not even aspiring to buy a home, they are aspiring to buy a car, and the lending function who will make the loan is the most important part of selecting an automobile dealer. Wheat and steel, even this shirt, can be financed on a credit card, so just because something is financed does not mean it is not commerce. So I hope you would explain: Why is buying and selling of real estate a financial activity if buying and selling cars, steel, et cetera, is not? Perhaps you could respond orally to that question. Mr. GREENSPAN. You want me to respond—— Mr. SHERMAN. Yes. I actually think I have some time. Mr. GREENSPAN. Yes. Let me just say that the broader question, which is finance and commerce, is one which will gradually erode in the sense that tech- nology is making the distinction ever less obvious. Our general concern is not that mixing banking and commerce is inherently dangerous; it is that we do not wish to see it occur too quickly, because we are currently in the process, at this stage, of absorbing very significant changes in technology, globalization, structures in finance, and we have seen very major changes in the financial system. And it is very important, from the supervisory point of view, to be able to judge what is occurring; and, so far, we conceive of the way we, as umbrella supervisors of various institutions, have been able to interrelate with an evolving, fairly rapid, change in tech- nology. If we were to break the bounds of banking and commerce at this stage, we would get some very discontinuous changes, which, we are fearful, would make it exceptionally difficult to supervise ac- cording to the statutes that we operate under. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 32 So it is not that we are saying that there is something fun- damentally different about these activities, because they are not. I mean, finance gradually looks like commerce and commerce looks like—— Mr. SHERMAN. If I can interject—— The CHAIRMAN. The gentleman’s time has expired. Mr. SHERMAN. I would just say ‘‘5 more years.’’ Thank you. Mr. PAUL. Thank you, Mr. Chairman. If indeed this is your last appearance before our committee, Mr. Greenspan, I would have to say that in the future I am sure I will find these hearings a lot less interesting. [Laughter.] But I do have a couple of parting questions for you. Keynes, when he wrote his general theory, made the point that he had a tremendous faith in central bank credit creation because it would stimulate productivity. But along with this, he also recog- nized that it would push prices and labor costs up. He saw this as a convenience, not a disadvantage, because he realized that in the corrective phase of the economic business cycle, that wages had to go down, and people would not accept a nominal decrease in wages; but if they were decreased in real terms, it would serve the eco- nomic benefit. Likewise, I think this same principle can be applied to our debt. To me, this system that we have today is a convenient way to de- fault on our debt, to liquidate debt through the inflationary scheme. Even you, in the 1960s, described the paper system as a scheme for the confiscation of wealth. And in many ways I think this is ex- actly what has happened. We have learned to adapt to deficit fi- nancing, but in many ways the total debt is not that bad because it goes down in real terms. As bad as it is, in real terms it is not nearly as high. But since we went on a total paper standard in 1971, we have increased our money supply essentially 12-fold. Debt in this coun- try, federal debt, has gone up 19-fold; but that is in nominal dol- lars, not in real dollars. So my question is this: Is it not true that the paper system that we work with today is actually a scheme to default on our debt? And is it not true that, for this reason, that is a good argument for people not—eventually, at some day—wanting to buy Treasury bills because they will be paid back with cheaper dollars? And indeed in our lifetime we certainly experienced this in the late 1970s, that interest rates had to go up pretty high, and that this paper system serves the interests of big government and def- icit financing because it is a sneaky way of paying for deficit fi- nancing. At the same time, it hurts the people who are retired and put their money in savings. And aligned with this question, I would like to ask something dealing exactly with gold: If paper money—today it seems to be working rather well, but if the paper system does not work, when will the time come, what will the signs be, that we should recon- sider gold? VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 33 Even in 1981, when you came before the Gold Commission, peo- ple were frightened about what was happening, and that was not too many years ago, and you testified that it might not be a bad idea to back our government bonds with gold in order to bring down interest rates. So what are the conditions that might exist for the central bank- ers of the world to reconsider gold? We do know that they have not given up on gold. They have not gotten rid of their gold. They are holding it there for some reason. So what is the purpose of the gold if it is not with the idea that someday they might need it? They do not hold lead or pork bellies; they hold gold. So what are the conditions that you might anticipate when the world may reconsider gold? Mr. GREENSPAN. Well, you say central banks own gold or mone- tary authorities own gold. The United States is a large gold holder. And you have to ask yourself: Why do we hold gold? And the an- swer is essentially implicitly the one that you have raise; namely, that over the generations, when fiat monies arose, and indeed cre- ated the type of problems, which I think you correctly identify, for the 1970s, although the implication that it was some scheme or conspiracy gives it a much more conscious focus than actually, as I recall it, was occurring, it was more inadvertence that created the basic problems. But as I have testified here before to a similar question, central bankers began to realize in the late 1970s how deleterious a factor the inflation was, and indeed since the late 1970s central bankers generally have behaved as though we were on the gold standard. And indeed the extent of liquidity contraction that has occurred as a consequence of the various different efforts on the part of mon- etary authorities is a clear indication that we recognize that exces- sive creation of liquidity creates inflation, which in turn under- mines economic growth. So that the question is: Would there be any advantage, at this particular stage, in going back to the gold standard? And the an- swer is: I do not think so, because we are acting as though we were there. Would it have been a question, at least open, in 1981, as you put it? And the answer was: Yes. Remember, the gold price was $800 an ounce. We were dealing with extraordinary imbalances; interest rates were up sharply; the system looked to be highly unstable; and we needed to do something. Now, we did something. In the United States, Paul Volcker, as you may recall, in 1979 came into office and put a very severe clamp on the expansion of credit, and that led to a long sequence of events here, which we are benefiting from up to this date. So central banking, I believe, has learned the dangers of fiat money, and I think as a consequence of that we have behaved as though there are indeed real reserves underneath the system. Mrs. KELLY. [Presiding.] The gentleman’s time has expired. Ms. Lee? Ms. LEE. Thank you, Madam Chair. Hello, Mr. Greenspan. Good to see you again. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 34 Let me also thank you for your years of dedicated service. And I just want to also thank you for your very forthright interaction with many of our organizations around the country, especially in California, such as the Greenlining Institute, and I think that—— Mr. GREENSPAN. They are good friends. Ms. LEE. And thank you very much for everything that you have done to help move this agenda forward, in terms of the fairness in our economic system. I wanted to ask you a couple of things. And we have been in touch with each other over the years with regard to CRA, and I want to thank you—the Community Reinvestment Act, and why and how banks can receive an A rating when in fact they are lend- ing to African-Americans and Latinos, in terms of home lending, between 2 and 3 percent. As it relates to the Hispanic community in California, I think it is about 18 percent, when 35 percent of the population is Latino. And your response, of course, was that CRA cannot, you know, deal with the ethnic composition of any lending transaction because they are not required to, but the enforcement of fair lending laws is what would allow for the insurance of nondiscrimination actions. But yet I have to ask you: The fair lending laws appear not to have been enforced, given the very dismal mortgage lending rates of these institutions. And so in going back and forth, over the years, I have been reading your responses, and I want to ask you today if it makes sense, then, that we ask you to look at how to conduct—or maybe the Federal Reserve could conduct—a disparity study, to really begin to look at what is taking place, because, for the life of me, I cannot understand why in fact the home lending rate is so low when in fact these institutions are getting such high ratings. And so I would like to ask for some specific solutions to this so that we can move forward to ensure more fairness in mortgage lending. Mr. GREENSPAN. Yes, this is a very difficult issue, which, of course, we have all been struggling with for quite a good deal of time. We, at the Federal Reserve—and indeed this is also true at our colleagues at the other banking regulatory agencies—enforce a statute which is passed by the Congress. We do it as best we can and indeed endeavor not only to capture the letter of the law but the spirit of the law as well. We cannot go beyond that. In other words, we do not create the laws. Ms. LEE. But, Mr. Greenspan, Mr. Chairman, let me just ask you, though: Should not we consider at this point an amendment, maybe, to the Community Reinvestment Act, to broaden, for exam- ple, the goal to at least gather this data so we will know? Mr. GREENSPAN. Well, I think there is an issue here which has to do with what type of data and what type of burdens you put on institutions in collecting the data, because it is not a costless oper- ation. Ms. LEE. Sure. Mr. GREENSPAN. I do think we, for example, have expanded HMDA over the years—I mean, we will be releasing HMDA data, VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 35 I believe, in a couple of months for the year 2004—and there are many new sources of information in those data systems. And in that regard, it is a very large data requirement that is involved here, and there are obviously going to be continuing dis- cussions of what types of information, what types of evidence of discrimination occurs, and how does one essentially pick it up. But it is not a simple solution. Ms. LEE. I understand, Mr. Greenspan. Before my time is up, let me just say I understand the fact that this would cost some money. But I think, long-term, the cost of dis- crimination and the costs of denying loans to minority potential homeowners far exceed the cost of gathering the data. When you look at small business lending, it is my understanding now—and we are looking to verify this information—that African- American-owned businesses receive less than 2 percent of the small business lending; Latino-owned businesses less than 2 percent also. And so at some point, in addition to trying to enforce fair lending laws, we have got to do something to make sure that there does not exist discrimination and that there is a level playing field in the future whether it costs the financial services industry a few dollars or not. Mr. GREENSPAN. Well, I agree with—— Mrs. KELLY. The gentlewoman’s time has expired. Ms. LEE. I will follow up with you—— Mr. GREENSPAN. I agree with what you stated. The issue basically is, how do we extricate the discriminatory forces which inevitably still exist in the system? It is an ongoing project, and I think we are making progress, but I certainly agree that there is more to be done. Ms. LEE. Thank you, Mr. Chairman. Mrs. KELLY. Mr. Gillmor? Mr. GILLMOR. Thank you, Madam Chairwoman. Mr. Greenspan, I want to commend you for the great job you have done over the years, and for your service to the country. You are going to be missed. I have a couple of questions regarding ILCs, industrial loan com- panies, I would like your views on. Could you give us your thoughts about the rapid expansion of commercial firms obtaining industrial loan company charters and what that means for the overall banking system? And in respect to that, are there any risks, or even systemic risk, to our banking sys- tem in the avoidance of Fed oversight that an ILC charter allows? Mr. GREENSPAN. This issue is related to the issue we discussed just a short while ago with respect to the question of the move from banking to commerce that is really an issue here. The ILC is, as you point out, not subject to umbrella supervision, as indeed other banking institutions are; and there is a concern on our part that an expansion in this particular area—especially if they are given additional powers, which create essentially commer- cial banks—that we have effectively made a decision to eliminate the distinction between banking and commerce, inadvertently; in other words, by basically creating an ILC which ultimately turns out to be a commercial bank which can be owned by a commercial interest. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 36 If that is indeed the case, Congress ought to do it directly. My reaction, however, is that if we do it—and we will eventually do it—it be done in a way which is measured and understood to be sufficiently sensitive to the supervisory adjustments that go along with that process. So I think that what our major concern is, is not, as I said before, the issue of breaching commerce and banking over the long run— which we think is probably inevitable and is something that can and should be handled—it is the way we are doing it. I think that is wrong. Mr. GILLMOR. Well, you indicate it might or might not be inevi- table. If I am reading your response fairly, I think you are saying it is not a good idea. Would that be accurate? Mr. GREENSPAN. Yes: It is not a good idea. I am sorry if I did not make that clearer. Mr. GILLMOR. Well, you probably did, but I just wanted to drive a nail through the board. Let me ask you another question—and maybe it has come up be- fore, but I had to be in another markup. House prices are up, obviously, a great deal, so for people to af- ford them you have got the use of ARMS, you have got no down- payment, you have got interest-only loans. It seems to me that a lot of people are kind of cutting it very thin financially. And so I guess my question is: If we do have a spike in long-term rates, sooner or later there are going to have to be payments on those no-interest loans; the adjustable-rate mortgages are going to go up. In your view, what would be the impact of a significant spike in rates on the people who have gotten into the housing market in that manner? Mr. GREENSPAN. Well, incidentally, one of the reasons why we have engaged in the type of monetary policy which we have over the past year is to reduce the probability of that occurring. And ob- viously, should that occur, we will have, obviously, adjustable-rate mortgages will be impacted. However, remember that most recent adjustable-rate mortgages, to a very large extent, begin with a fixed component. In other words, they are not immediately variable. So the actual level of mortgage debt which is interest-sensitive at this particular stage, including what we call adjustable-rate mortgages, is not very high. But it is certainly the case that, over time, if you get a spike in interest rates—and indeed by a spike I assume you mean they go up and they stay there—then their effects are quite significant. And I must say: It is basically a function of appropriate mone- tary policy to avoid such outcomes. Mr. GILLMOR. Thank you, Mr. Chairman. Mrs. KELLY. Thank you. Mr. Miller? Mr. MILLER OF NORTH CAROLINA. Thank you. Mr. Chairman, last July you testified before this committee that average hourly earnings of non-supervisory workers had been sub- dued in recent months and barely budged in June. I cannot find any reference in your testimony today to average hourly earnings with non-supervisory workers. Mr. Frank pointed VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 37 to the information in your report about earnings, or wages, but it does not seem to match that figure. It does say that the employment cost index for hourly compensa- tion had actually gone down about half a percentage point from what it had been the last couple of years. On the continuum from subdued to modest to exuberant to frothy, where do increases in average hourly earnings of non-super- visory workers fall? Mr. GREENSPAN. Well, I think what we do, basically, is we collect data from various different sources. The broadest coverage of wages and salaries in this country is the quarterly report that occurs as a consequence of companies reporting for unemployment insurance coverage, which is universal; and those numbers are probably cov- erage way up into the high 90s, and they are fairly complete. We have another set of data which essentially endeavors to pick up production workers as distinct from supervisory workers, and that is about 80 percent of the workforce. So we separate the wages and salaries into the production work- ers and into supervisory workers, essentially, the 20 percent, or the skilled management professional. What we find is the production workers’ average hourly earnings are rising very modestly; but because of the distribution of skilled worker supply and demand, we are finding that the increase im- plicitly in supervisory workers’ average hourly earnings is going up very much more rapidly. Mr. MILLER OF NORTH CAROLINA. I am sorry, say that again. Mr. GREENSPAN. It is going up very much more rapidly—— Mr. MILLER OF NORTH CAROLINA. For the supervisory employees? Mr. GREENSPAN.—for the supervisory workers, the 20 percent; the supervisory, professional, et cetera, the more skilled aspects of our labor force. So we are getting a bivariate income distribution. And as I have said many times in the past: For a democratic society, this is not healthful, to say the least; and as I have indicated on numerous oc- casions, I believe this is an education problem that requires us to get the balance of skills coming out of our schools to match the skills that our physical facilities require. So there is a reconciliation, and the reconciliation is that we are getting some really divergent trends. Mr. MILLER OF NORTH CAROLINA. Mr. Greenspan, Mr. Chairman, you did testify about home mortgages and about the concerns about exotic mortgages and said that home equity extraction was occur- ring, mortgage market finance withdrawals of home equity—in other words, people were borrowing against their homes—and it seems to be that homeownership, as Chairman Oxley said, is good news, but it is about the only good news in the American economy for most workers—about 80 percent—whose wages remain subdued or increasing modestly. All of your testimony appears to go to the effect this is having on the safety and soundness of lenders or on the effect on housing prices. Have you looked at what these exotic mortgages, particularly for refinancing, are doing to the economic status of most American families? VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 38 You pointed out we have a 1 percent savings rate. The latest fig- ure I have seen on credit card debt is $800 billion. Wages for 80 percent of American workers are very modest or subdued, and their increase—and the good news that 69 percent of American families own their homes but the equity in their homes is the bulk of their net worth. What are these exotic mortgages for refinancing doing to the fi- nancial position of American families? Mr. GREENSPAN. Well, fortunately, Congressman, not much yet, because they are still very small. In other words, it is the tip of an iceberg, that we are concerned about that it gets larger. In the total scheme of things, the aggregate amounts are small. But for individual cases, they could be disastrous, largely because there are a number of loans which require, for example, no equity early on; and if you have gotten your downpayment through a pig- gyback loan or something like that, you are essentially depending on the price of the home continuing to rise and your equity con- tinuing to rise—and that is a little bit tricky, because this type of expansion in prices historically does not go on very long. And indeed, while it is hard to forecast—and I am not sure that it is going to occur—there may be, and certainly will be, in certain local areas, price declines; and if you have some of these interest- only, very low downpayment, exotic mortgages, which essentially are issued by banking or other institutions on the expectation that prices will continue to go up and therefore the loan will always be good, if you are depending on that, there is potential individual dis- aster there. Fortunately, that is a very select and small group so far, and we very much would like to keep it that way. Mrs. KELLY. The gentleman’s time has expired. Mr. Shays? Mr. SHAYS. Thank you, Chairman Greenspan. I think that you, frankly, are one of the most important powerful individuals in the world and one of the most outstanding public servants, and I thank you for using your power well and for being such an outstanding public servant. I have a number of questions, and if the answers could be as brief as possible, I might get to a few. I look at the budget deficits, the trade deficits, the unfunded li- ability that the federal government has in Social Security and Medicare, I look at state budget deficits and their debt and their liabilities and pension funds and so on, and it seems pretty signifi- cant to me. And then I look at the low level of savings that Americans have, and I am wondering why—I am amazed that the economy does so well in spite of that. I would like the short version of why it does so well in spite of that. Mr. GREENSPAN. First of all, even though we have a very low level of savings, we use our savings exceptionally efficiently, and by that I mean we have a really quite sophisticated financial system which enables us to use the little savings that we have most pro- ductively, and that shows up in the increased productivity that we are able to function with. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 39 But the other issues that you present are long-term problems, and it is hard to imagine how we can continue on without address- ing those issues. Mr. SHAYS. Yes. I am surprised that it costs me $55 to put gasoline in my Jeep, that these incredibly significant increases in oil prices has not brought down our economies, and I do not understand why. Mr. GREENSPAN. Well, to a very large extent, it is the fact that following the oil shocks of the 1970s, there was a very dramatic de- cline in the intensity of the use of oil. In other words, oil in barrels divided by real GDP has been going down at a very dramatic pace. And indeed, it is only half of what it was 30 years ago, and it is still going down. And the basic reason, the answer, is that every- body is adjusting to the fact that oil prices are high. Mr. SHAYS. I hear that. But it seems to me that it has been such a—I mean, a dollar in- crease in prices per gallon would strike me as being a pretty big shock in spite of your point about the GNP. Mr. GREENSPAN. No, it is a shock. And indeed, as has been men- tioned before, we do estimate a three-quarters of a percentage point loss in real growth this year as a consequence of these prices. Mr. SHAYS. When I look at the housing market—first, let me ask you this. With the decline in manufacturing jobs, is it not true that we have actually increased the productivity—not productivity, but ac- tually increased output in manufacturing? Mr. GREENSPAN. Output as a ratio to GDP has gone down very gradually, and indeed the reason for that, that it is going down, is that we are an increasingly conceptual economy, that an ever-in- creasing proportion of what we create, values that others, other countries want, are non-material. And therefore we are seeing some gradual decline in goods pro- duction as a ratio to overall GDP, but the rest of the GDP being ideas. Mr. SHAYS. And that is a very important point for me to think about. But forget the ratio. Has not our output in manufacturing actu- ally gone up? Mr. GREENSPAN. It has, yes. Mr. SHAYS. And so I see the same analogy when I look at agri- culture. We have 3 percent in the marketplace now, whereas we used to have two-thirds in the early 1900s, but our production, you know, vastly increased. Is it wrong for me to think that that is a bit of a comfort, or should I be concerned about the lack of even greater growth in manufacturing? Mr. GREENSPAN. Well, I think the critical issue is that we produce something which would be accepted as value in trade by others. What it is we produce is less important, or how we do it. And what the United States has adjusted to over the generations is to somehow maintain our leadership in the world largely by pro- ducing most efficiently those goods which consumers, our own and others, perceived as most valuable. Mr. SHAYS. Thank you, Mr. Chairman. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 40 Thank you, Madam Chairman. Mrs. KELLY. Thank you. Mr. Scott? Mr. SCOTT. Thank you very much. Mr. Chairman, Chairman Greenspan, so good to have you again. And let me just also include with the chorus of praises that you rightfully deserve: We hate to see you go; and I am sure if your wife would give you the permission to stay another 5 years, we would all agree with that. Mr. GREENSPAN. Thank you. Mr. SCOTT. Your intellect is just extraordinary, and your con- tributions have been monumental. You are indeed one of the most powerful voices in the world. And I want to get to a series of questions, that I might, and if you could be brief with your responses. My first one is on the war on terror and our financial security here at home and around the world. The recent bombings in London produced some extraordinary new facts in this war, one of which is that these were basically homegrown young terrorists that were citizens of Great Britain. I am sure that Prime Minister Blair would say he went to Iraq to fight them there—as Mr. Bush has said—before they got home, but they are right there. That is a new phenomenon, that certainly raises our own concerns here at home—the homegrown cells. The second one is that there appears to be a very, very violent and radical interpretation of the Islamic religion, that is creating tremendous problems. I am concerned that the leaders of the Muslim world, leaders of the Muslim financial world, the Muslim world itself, is not taking its leadership and responsibility. There seems to be no way we are going to win this war on terror, solve this terror problem—and with these new revelations coming out of the London bombing—without intense and serious and cou- rageous leadership from the Muslim community. Do you see that forthcoming in the Muslim world? Is there lead- ership coming forward in financial markets that are controlled by Muslim countries to deal with this terrorism? It is not just a problem of the West. And with the religious factor coming into this, it is paramount, because one of the by-products could be extraordinary retaliation against the Muslim community, as we have seen in the numerous attacks in London and elsewhere, of Muslim communities. It is important that they step forward. And I wanted to know, do you see that? Mr. GREENSPAN. Well, I certainly see much the same things that you do, Congressman. I do think that many people of the Islamic faith whom I deal with in the international area are acutely aware of the importance of maintaining civil societies and they are not supporters of some of the interpretations, but I am not sufficiently knowledgeable about a number of the various areas that are involved here, to give a reasonable judgment as to where we all go from here. But I do think that issue of civility is critical to the growth of market economies, and I find that there is exactly the same view, VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 41 that those who are in Islamic countries, who are in central bank- ing, in areas of finance, in areas of economics, are all most con- cerned about the issue of what they are—I think appropriately— concerned about: backlashes against people of this Islamic faith in this country and elsewhere. Mr. SCOTT. Yes. One of the issues is in terms of terrorist financ- ing, that emanates and weaves its way through Muslim commu- nities, Muslim financial institutions: Are you familiar with such an endeavor that is known as ‘‘wahalas,’’ which have been known to be suspect—from our intelligence—of being ways and means in which terrorist financing has come through legitimate Muslim fi- nancial institutions? Are you aware—— Mrs. KELLY. The gentleman’s time has expired. Mr. SCOTT. Would you respond to that? Mr. GREENSPAN. Yes. Well, let me just say very quickly that they are a very effective and historic means of finance, and I think it is based on trust. And so to the extent that they are misused for purposes other than they were originally created for is most unfor- tunate, but we do, as you I am sure are well aware, have directed considerable amount of efforts at trying to identify sources of fi- nance that will support terrorist organizations. Obviously the U.S. Treasury Department is very acutely in- volved, and clearly we are aware of what, essentially, they are em- ployed in doing. Mr. SCOTT. Thank you. Mrs. KELLY. Mr. Hensarling? Mr. HENSARLING. Thank you, Madam Chair. Chairman Greenspan, I do not know if you feel like you are being eulogized this morning, but please allow me to add my voice to those thanking you for your service to your country. It has truly been a significant and positive impact on our nation’s history. Mr. Chairman, I have seen a report from CBO, dated January of 2005, that says that Medicare over the next 10 years will grow by 9 percent, Medicaid by 7.8 percent, and Social Security by 5.6 percent a year. I have also seen a GAO report, dated early March, entitled, ‘‘Budget Process: Long-Term Focus Is Critical.’’ It states that as of today, if we do nothing, that we are on a collision course to either double taxes or cut federal spending by 50 percent by the year 2040. Many of us may not be here in 2040, but we certainly hope and pray our children and grandchildren may be. There are many in this body who have shown no inclination for handling or dealing with the spending side of the equation. You testified before the House Budget Committee on March 2nd of this year, and you said, ‘‘Tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risk to the economic growth and the revenue base.’’ So I have a two-part question. If you were familiar with the GAO and CBO reports that I allude to, do you agree with their numbers? If you do not agree with their numbers, do they get the essential thrust and trend lines correct? And if so, what does the world look like in 2040 if we double taxes on the American people? What does that mean to housing? VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 42 What does it mean to job creation? What does it mean to standard of living? Mr. GREENSPAN. A lot, Congressman. Let me direct you to a footnote in my prepared remarks, in which I endeavor, essentially in short form, to address the instabilities that conceivably could occur as a consequence of the fact that we have in law already committed the allocation of resources implic- itly, in real terms—which, in my judgment, may very well be in ex- cess of what we have the capacity to deliver—and it is terribly im- portant for us, essentially for the retirees that will begin to retire in the next decade, to make sure that they know that what they are being promised will be delivered. I am not sure we have the capacity to do that, and this is indeed what the issue is. And CBO and GAO studies clearly come up with the same results. Mr. HENSARLING. In an attempt to deal with at least one facet of our long-term structural deficit, a number of members of Con- gress, including myself, have introduced budget process reform leg- islation. Many in this body hold PAYGO to be a panacea in that quest to deal with our long-term fiscal challenges, but as of today I believe that mandatory spending and interest accounts for 61 percent of the federal budget. According to the House Budget Committee, within a decade we will go from 61 percent of the budget to mandatory and interest, to 71 percent. I have personally introduced legislation that would include a ceil- ing on the growth of the federal budget. If spending is a significant part of the challenge, inasmuch as every PAYGO proposal I have seen does not deal with mandatory spending, does not deal with the automatic inflation included in baseline budgeting, and if our quest is to control spending, is not a ceiling on the growth of gov- ernment a superior alternative to traditional PAYGO? Mr. GREENSPAN. I think that there are numbers of ways you can address the question. For example, I have often advocated that all statutes be sunsetted, and that includes the Federal Reserve Act. The importance of that is: If you get into a situation where your entitlements or mandatory spending is moving out of line, you just merely cannot say, ‘‘Well, we will pass a law and require it to come down a certain amount,’’ because the Congress may not vote that law. In other words, what you basically need is a vehicle which will enable individual acts to be reevaluated, and indeed to get a major- ity, positive majority, to keep them going forward. I am not sure that even—I have often advocated triggers and various other vehicles which address this particular type of ques- tion. But it is a very serious issue. Mr. HENSARLING. Well, and I certainly agree with you that sunsetting would be a very important part of the mix in the legisla- tion. In the time I have remaining, allow me to switch subjects, back to an earlier subject of the recent GSE legislation. Part of that legislation includes an Affordable Housing Fund, which I believe you are acquainted with, has Fannie and Freddie VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 43 using 5 percent of their after-tax profits to fund this particular fund, on top of approximately 82 other government housing pro- grams, all ostensibly aimed at affordable housing. Given the duopoly nature of Fannie and Freddie, do you believe they have sufficient market power to essentially impose that cost upon the market, so that at the end of the day, perhaps, we are taking money out of one affordable housing dynamic and simply turning around and turning it over to another? Do they have suffi- cient power to impose that cost on the ultimate consumer? Mr. GREENSPAN. I do not know. And indeed, all I can say to you is that we at the Federal Reserve have not taken a position on this. It is interesting, I think, that the new CEO of Freddie Mac, Rich- ard Syron—as I remember reading somewhere recently—claimed that there is no longer a duopoly, that they no longer have the power they used to have. Mr. HENSARLING. Thank you, Mr. Chairman. My time has expired. Mrs. KELLY. Thank you. Mr. Davis? Mr. DAVIS OF ALABAMA. Thank you, Madam Chairwoman. Chairman Greenspan, I certainly—like, I think, every one of my colleagues today—wish you enormously well and a lot of good for- tune in the remaining part of your career and your life. For those of us new members who have been here, like Mr. Hensarling and myself, you have been a living seminar on eco- nomic policy, and we appreciate your playing that role. Mr. GREENSPAN. Thank you. Mr. DAVIS OF ALABAMA. I want to ask you about the phenomenon of globalization, because one of the things that strikes me is that when you have talked about it and when a lot of people in this room have talked about, it has been in terms of an either-or kind of dynamic. You have had people on the left, if you will, or even the extreme right, who have taken the position that globalization is counter- productive, is unfortunate; and you have taken the opposition posi- tion, I think the responsible position, that globalization is a good thing, that redounds in our favor. But it strikes me that, frankly, for those of us who were voting on these agreements, it is not an either-or proposition in terms of globalization or nonglobalization. There is a third place, and that third place is the kind of pro-trade policies we are going to have. It strikes me that there are two kinds of pro-trade policies that one could have. One kind would spur other countries toward re- form. One kind would spur other countries to allow the right to or- ganize or to adopt a regimen or regime that prevented child labor or to take discrimination against women more seriously. And, frankly, another kind of pro-trade policy essentially leaves these governments and these countries as they are. I have not heard you talk a lot about that kind of distinction. So I want you for just a moment—and I will have another ques- tion; I will ask you to respond to them both, one after the other. But I would like you for a moment to talk about whether or not it would be somehow detrimental to our economy and detrimental to the concept of globalization if we had included conditions in VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 44 some of these agreements that would deal with the absence of child labor laws, that would deal with the absence of sex discrimination laws, or would deal with the right to organize. Question number one. Second set of questions has to do with the phenomenon of tax cutting. It, too, has been advanced in terms of an either-or dy- namic: people on my side of this room, who say the tax cuts have been too big, they have been too outsized; you, and people on the other side of the room, have said that, ‘‘Well, the tax cuts have been good; they have been the right size to provide stimulus to our economy.’’ I am wondering again if there is not a third approach: if we could not have had a series of tax cuts that were distributed and aimed more toward the middle class, more toward the people whose wages have been stagnant the last several years, and I am wondering if we could have cut taxes much more dramatically for the middle class if we could have provided more tax relief for those Americans who are struggling day in and day out without imperiling the stim- ulative impact of the tax cuts as a whole. So can you comment on those two sets of questions? Mr. GREENSPAN. There is another aspect to this; namely, that you have to decide whether or not the purposes of tax cuts relate to the issue of the distribution of income or its production, and my focus has been on production. In other words, I have been focusing on how to establish a tax structure which increases level of economic growth, and therefore a tax base, and hence revenue. I have not been particularly focused on the question of the dis- tribution of tax for the purpose of redistributing income, because that is basically a function of the Congress, and I have no real view on that as such. And that is the reason, I might say, that I supported the issue of elimination of double taxation of dividends, as I have for many years, because I think that is a critical element in a tax structure which enables growth to be at its maximum. With respect to the first issue, with respect to applying our standards to others—— Mr. DAVIS OF ALABAMA. Well, not even our standards, but just standards that are different and would raise the—— Mr. GREENSPAN. Oh, okay. No, I take the correction. There is a cost in that. In other words, in a more general sense, are there people with whom we feel, for moral reasons, we should not trade? In other words, it is a more fundamental question about: What are the conditions which are necessary, voluntary, people or countries, to engage in trade? And it raises a fascinating question of: Is associating with a cer- tain group of people considered sufficiently morally offensive to your own values that you do not want to do it? The issue of imposing standards—not ours necessarily, but some standards—is a version of that. It is a very difficult question. There is no doubt that if you do it, you will have less trade; but that may be what you want. And it is a judgment that implicitly the Congress, again, makes. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 45 In other words, the one thing that I have learned over the years, especially being here 35 times, is that it is you who have to answer all of these extraordinary questions and decide what do you do when confronted with choice. And my only criticism would be that sometimes—like everybody else, ourselves included—when con- fronted with a choice, you would prefer somebody else to do it. But fortunately our system is such that we have to make these choices, and they are not easy. And the one that you raise, I think, is a very legitimate question, as to where your tradeoff is, basically, in that respect. Mrs. KELLY. The gentleman’s time has expired. Mr. Pearce? Mr. PEARCE. Thank you, Mr. Chairman. The problem with coming this late in the day, all the adjectives have been used and the questions have been asked, so I have had to resort to extreme measures. Mr. Shays finally did the last deal in declaring you powerful and outstanding, that took the last two words I could have used; so just let me add my voice to those of your admirers who find you also to be a handsome man. [Laughter.] Mr. GREENSPAN. Thank you. Mr. PEARCE. As far as my questions, I think that you have the concern I do about—you put it much better than I do—an over- abundance of highly-skilled jobs and an underabundance of highly- skilled workers. I saw that play out when my father retired from a major oil com- pany, and he was able to wring out, say, 100 barrels a day from certain wells, that the guy who was my age, that went on, could only get 50 barrels a day. And so we have incrementally seen a weakness in our economy because of an underperformance. And the next guy was paid exactly the same as my father was, and even more, and yet the productivity was not there. And so I am concerned about that. But I will tell you the concern that I have, that I do not hear many people speak of, is: If we take some of the tendencies to competition, say the ILCs, or large insti- tutions buying the smaller ones, I wonder how long our economy can go without the reinvestment in the rural parts of the country, because always capital is going to find the larger rates of return, and I will guarantee you that every rate of return on any project in Manhattan is going to quadruple or be 50 times’ the most attrac- tive project in the state of New Mexico. And so incrementally I see our economy consolidating into the large centers, and it looks good on paper but has an underlying strength. Would you care to comment on my concern, both a parochial con- cern, but then for the country overall. Can we support the nation’s economy from just the large power centers? Mr. GREENSPAN. Yes. Congressman, I am not sure I agree with you, and let me tell you why. What we do know is that the cutting edge of this economy is basically new companies which start from scratch, small business. Most of them fail. Those that really make it, do well. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 46 Now, it may very well be the case that after they make it, the entrepreneurs move to the big city. That may be true. But the real growth in this country is in the peripheral areas, where technology and innovation is the most pronounced. We do have an extraordinary advance that has occurred in the financial system in the United States in the last decade, which es- sentially has meant that we have carried technologies that would develop not in Manhattan Island, but they are most obviously ap- plied to Manhattan, so that the value added, in a good part of Man- hattan, is quite significant and growing, but the source of it is not fundamentally there. And I think what is so extraordinary about this country is the flexibility and the mobility. People move all the time. I mean, I think something like 20 percent of our households move every year. Mr. PEARCE. Let me address one piece of that, then, and I know we are trying to—— Mrs. KELLY. Mr. Pearce, we have been called—— Mr. PEARCE. Yes. Mrs. KELLY.—for a vote. Mr. PEARCE. All right. Thank you. Mrs. KELLY. I am sorry. I am going to try to get as many people in as possible. Mr. PEARCE. Thank you, Madam Chair. Mrs. KELLY. Let me go now to Ms. Wasserman Schultz. And please, Ms. Wasserman Schultz, do not take more than 2 minutes. I am going to try to get everybody in. Ms. WASSERMAN SCHULTZ. No problem. Thank you, Madam Chair. Mr. Greenspan, I just wanted to ask you to touch on health care. Yesterday the Financial Times reported that U.S. companies can expect about an 11 percent increase in health care costs over the next year. That will affect wage growth, it will affect their ability to hire more permanent workers and ask workers to share more of the ex- pense. Can you talk about the ever-rising effect on our economy, with the significant increase in costs for health care over the years. Mr. GREENSPAN. This is clearly a major issue in this country. As you know, per capita we spend considerably more on health care than anybody else in the rest of the world. We do so because we have extraordinary advances in technology, and we have a much more sophisticated—overall—medical system. But we do not seem, as a consequence, to be able to significantly get better morbidity or mortality rates than others. It is mainly a system which is becoming ever larger, in part be- cause pharmacological advances and technological advances have been so extraordinary that—especially with third-party subsidized payments, essentially, out of the Medicare system—you get huge demand; and my judgment is that because of this, we have a com- mitment to future retirees, under existing law, of medical services which could very well, as I indicated before, be a much larger de- mand on net real resources than we have the capacity to deliver. So I would say it is an extraordinary problem to have, because there is no question that we are making huge advances in medical VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 47 technology, and the changes have enhanced American life, unques- tionably, especially for the elderly. Mrs. KELLY. Thank you, Mr. Greenspan. Mr. Garrett? Mr. GARRETT. Yes. Thank you, Mr. Greenspan. I appreciate your being with us today, and also the times in the past. Just one question, which is a follow-up question with regard to the GSE reform. And I also appreciate your opening comment saying that when you first arrived, that you had a hard time getting your hands around exactly how they operate. So if you have that difficulty, then I feel a lot better myself, trying to figure out how they oper- ate. You had indicated already to one question with regard to the portfolio size your concerns about that and the concerns about this committee’s lack of passing legislation that would address the growth in portfolio size. And the question by Mr. Hensarling was regarding another sig- nificant portion of that bill, and that is that 5 percent portion, as far as adding to the housing stock in the country. My question to you is: How do these two issues dovetail? And that is to say, with that 5 percent provision in there, is that just going to exacerbate the portfolio problem by putting any pressure or impetus on the industry to grow their portfolios so they—— Mr. GREENSPAN. Well, there are some who argue that because it is a percent of profits—and profits are very clearly a function of the proportion of purchased mortgages which are put in portfolios, as distinct from securitized—then clearly one could argue, and indeed many have argued, that the incentive there is to increase the size of portfolios in order to create the income. But as I said before, we at the Federal Reserve have not taken a position on that particular aspect of the bill. That is not where our problems lie. Mrs. KELLY. Thank you, Mr. Greenspan. Mr. GARRETT. Your problems are in the portfolio side? Mr. GREENSPAN. Correct. Mr. GARRETT. Thank you. Mrs. KELLY. Ms. Moore? Ms. MOORE OF WISCONSIN. Thank you, Madam Chair. Thank you so much for all your years of service, Mr. Greenspan. You have indicated over and over again that you favor China re- evaluating its currency, and certainly in these halls there is huge debate about forcing them to do that. You said that they will do it for their own good. There are many people who think that we are darned if they do and we are darned if they do not, that if in fact they stop providing the cheap loans to us and in fact sort of call some of their loans in in order to buoy up their economy, because people are living very frugally over there, that there will be a huge burst in our housing market, that interest rates will rise, that consumer spend- ing will fall, and it will lead to a recession. VerDate 0ct 09 2002 15:30 Oct 07, 2005 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 G:\DOCS\23738.TXT FIN1 PsN: MICAH 48 Do you agree that we are at risk, you know, particularly as we find ourselves pressing and pushing them to do this, that we could be at risk of seeing our economy fail? Mr. GREENSPAN. Well, all I can say to you is that we have exam- ined the issue of the impact of purchases of foreigners’ of U.S. Treasury issues and the increase or decrease of those purchases on U.S. interest rates; and there is an effect, but it is not a very large effect, and the reason is that in the aggregate world markets, there are enough securities that compete with U.S. Treasuries, for exam- ple, that you do not get as large an impact as you would suspect. But we do get an impact, there is no question about that. Ms. MOORE OF WISCONSIN. And just very quickly, in terms of our low savings rate, do you think that a lot of thrust and call for these private accounts is based on sort of making up for the deficit—— Mrs. KELLY. The gentlewoman’s time has expired. Because of a prior agreement with Mr. Greenspan, and because we have been called for a vote, the chair is going to end this ses- sion with you, Mr. Greenspan. We are honored to have you with us. We thank you very much for, every time you have been here, your great patience. The chair notes that some members may have additional ques- tions for this panel, which they may submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses on the record. This hearing is closed. 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Alan Greenspan (2005, July 19). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20050720_chair_monetary_policy_and_the_state_of_the

@misc{wtfs_testimony_20050720_chair_monetary_policy_and_the_state_of_the,
  author = {Alan Greenspan},
  title = {Congressional Testimony},
  year = {2005},
  month = {Jul},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20050720_chair_monetary_policy_and_the_state_of_the},
  note = {Retrieved via When the Fed Speaks corpus}
}