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





                       CONDUCT OF MONETARY POLICY



            Report of the Federal Reserve Board pursuant to


                 Section 2B of the Federal Reserve Act


                     and the State of the Economy

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 18, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-35

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
74-156                     WASHINGTON : 2001

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

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

             Terry Haines, Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 18, 2001................................................     1
Appendix:
    July 18, 2001................................................    43

                                WITNESS
                        Wednesday, July 18, 2001

Greenspan, Hon. Alan, Chairman, Board of Governors, Federal 
  Reserve System.................................................     6

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    44
    Greenspan, Hon. Alan.........................................    46

              Additional Material Submitted for the Record

Greenspen, Hon. Alan:
    Board of Governors of the Federal Reserve System, Monetary 
      Policy Report to Congress, July 18, 2001...................    59
    Written response to questions from Hon. Ken Bentsen..........    89
    Written response to questions from Hon. Julia Carson.........    91
    Written response to questions from Hon. Barbara Lee..........    93
    Written response to questions from Hon. Doug Ose.............   101
Paul, Hon. Ron:
    ``An Interest Rate Target With No Bull's-Eye,'' Copley News 
      Service, 2001..............................................   102
Toomey, Hon. Patrick J.:
    ``Our Economy Needs A Golden Anchor,'' The Wall Street 
      Journal, June 28, 2001.....................................   103

 
                       CONDUCT OF MONETARY POLICY

                              ----------                              


                        WEDNESDAY, JULY 18, 2001

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:00 a.m., in room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley, 
[chairman of the committee], presiding.
    Present: Chairman Oxley; Representatives Roukema, Bereuter, 
Baker, Bachus, Castle, King, Royce, Ney, Paul, Weldon, Ose, W. 
Jones of North Carolina, Biggert, Cantor, Hart, Capito, 
Ferguson, Rogers, Tiberi, Miller, Grucci, LaFalce, Kanjorski, 
Waters, Sanders, C. Maloney of New York, Watt, Bentsen, 
Sherman, J. Maloney of Connecticut, Hooley, Carson, Meeks, Lee, 
Mascara, Inslee, 
Gutierrez, S. Jones of Ohio, Capuano, Ford, Hinojosa, Israel, 
and Crowley.
    Chairman Oxley. The Financial Services Committee will come 
to order.
    Good morning, Mr. Greenspan. Chairman Greenspan, it is good 
to have you back before the committee; I note that you were the 
first and only witness at the very first hearing held by the 
then new Financial Services Committee, and then, as now, you 
were here to share with us your views on the state of the 
economy.
    I am proud to note for the record that since you were here 
on February 28, this committee has been hard at work and has 
compiled a long record of hearings and legislation with plenty 
more to come. I may note also that the Fed has been busy in 
that same period, cutting interest rates four more times since 
you were here last.
    Chairman Greenspan, we have seen a number of heartening 
signs for the economy. Energy prices, particularly gasoline 
prices, are lower. We no longer have daily crisis reports from 
California about blackouts. The markets, while still volatile, 
also are up over their levels of 4 months ago, and consumer 
confidence remains high.
    Looking at those indicators and others, it is tempting to 
think that we have turned the corner, that two or three 
quarters of slow growth were enough to reverse the economy, and 
that we are in recovery. However, I sense in all of the 
economic reporting, continued uncertainty and potential 
potholes ahead in the road to recovery. That is why I am glad 
you are here to share with us your insight, some of what 
William Greider once referred to as ``The Secrets of the 
Temple.''
    Since you were here, Mr. Chairman, Congress has passed and 
the President has signed a tax cut aimed at stimulating the 
Nation's economy. The first vestiges of that tax cut will 
arrive in taxpayers' mailboxes within 2 weeks in the form of 
rebate checks. The last taxpayers should have these checks 
before the end of September. The committee would be interested 
in hearing how you think those checks and the rate cuts enacted 
will affect the economy in the third quarter and the second 
half and beyond.
    I am sure Members also are interested to learn if you 
believe any other tax changes, targeted or broadly based, would 
be useful to get economic growth back on track, keep it there 
or stimulate productivity. For example, at a hearing in March, 
Majority Leader Dick Armey and economists Larry Kudlow and Jim 
Glassman endorsed the idea of allowing companies to expense 
technology purchases. The idea seems to hold the promise of 
increasing and maintaining productivity, and we would be 
interested in your opinion. Perhaps you have other suggestions 
as well.
    I also hope you will have time while you are here to 
address ways we might better direct the flows of capital to 
companies, particularly the newer and smaller ones that are the 
engines of both job growth and often of innovation in our 
economy. When capital is not directed efficiently to the 
companies that need it, in my view, the whole economy suffers.
    Also, Mr. Chairman, I think the committee will be 
interested in hearing your views on trade, on the balance of 
payments and on the value of the dollar in foreign exchange 
markets. I, for one, would be especially interested in your 
views on efforts to increase trade, particularly the 
Administration's focus on gaining Trade Promotion Authority and 
developing a Free Trade Area of the Americas.
    Most of Latin America, except for Mexico, is suffering 
economically to one extent or another, though not as badly as 
Argentina at this moment. It seems to me that its free trade 
agreement with the United States has helped insulate Mexico 
from the current slowdown while benefiting the U.S. at the same 
time. I am sure we will all be interested in your views on 
creating a hemispheric free trade zone.
    In particular, I think we would be interested in hearing 
your thoughts on currency boards and dollarization of other 
countries' economies in view of the ravages Argentine currently 
is suffering. And I imagine many would like to hear your views 
on why the current level of the dollar has been sustained 
through this recent round of rate cuts, and whether the level 
may change naturally next year after the introduction of the 
euro is complete.
    And finally, Mr. Chairman, I think all of us on the 
committee would like to hear some direct predictions about when 
you believe the economy will have finally turned the corner. I 
don't imagine you are carrying any predictions of a return to 
``dot.com''-level stock market returns any time soon, but I 
think we would all like to hear some reassurance that you see a 
return to strong, steady growth sooner rather than later, and 
can give us some suggestions about how to get there and how to 
sustain it. I know I will look forward to your comments with 
interest.
    And, again, we thank you for your appearance, and I now 
recognize the Ranking Member, the gentleman from New York, Mr. 
LaFalce.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 44 in the appendix.]
    Mr. LaFalce. Thank you very, very much, Mr. Chairman. I was 
about to open up my remarks by saying, Chairman Greenspan, I 
know you are reluctant to comment on fiscal policy, but because 
it is so important to the conduct of monetary policy and our 
economy, I was going to go ahead and ask you to comment anyway.
    And then I heard Chairman Oxley also ask you to comment on 
a few things such as the desirability of expensing for 
technological equipment or investments, fast track authority 
for the Presidency, the hemispheric trade agreement, and so 
forth. So I decided, no, I shouldn't even be a little bit 
reluctant to ask you to comment on fiscal policy.
    I do believe, returning to that issue, that your support 
for substantial tax cuts earlier this year was critical to the 
quick passage of the massive tax cut package this spring. As a 
matter of sound fiscal policy, not to mention sound public 
policy, I was deeply troubled by the tax cut package, and I 
believe we now expect that the Congressional Budget Office is 
going to be revising their Federal revenue estimates downward 
as a result of the slowing economy. And you, in your testimony, 
are going to say there is going to be a slowing economy in 
comparison to what we initially were projecting. And lower 
revenue projections also exacerbate the budget problems created 
by the tax package. In short, we will have too little revenue 
to achieve the twin goals of meeting current spending 
requirements and, in my judgment, anticipated future needs.
    To address the anticipated budget crunch, I believe the 
Administration is laying the groundwork for what I think is 
going to constitute a raid on the Social Security and Medicare 
Trust Funds. And Secretary O'Neill has already, in a sense, 
dismissed the trust funds as an accounting fiction, and OMB 
Director Daniels has been equally almost contemptuous of the 
concept.
    I believe that good fiscal policy requires a balance of 
revenues and desired spending, and also an adequate preparation 
for future needs. This could mean maintaining budget surpluses, 
but it surely means protecting the Social Security and Medicare 
Trust Funds in anticipation of the baby boomers' retirement. 
And on this basis I believe we have failed to achieve sound 
fiscal policy so far this year.
    Now, these are not simply my views. The International 
Monetary Fund had this to say in its latest article for 
consultation with the United States. Are you familiar with 
this, Chairman Greenspan?
    Mr. Greenspan. I am, Congressman.
    Mr. LaFalce. OK. Good. And I will quote from it. The IMF 
said, quote: ``The trust funds for Social Security and Medicare 
were established originally as part of reform plans to 
partially prefund these programs to allow them to meet their 
long-term obligations. To achieve this purpose, the surpluses 
of these trust funds actually have to be saved in order to put 
aside real resources to meet the programs' future 
liabilities.''
    In this context, the IMF goes to question the wisdom of the 
Administration's apparent willingness to raid these trust 
funds.
    In the same statement the IMF questions the sustainability 
of the tax cuts in the face of spending pressures and suggests 
that policymakers should be flexible in implementing the tax 
cut package.
    I am concerned that we might be watching a train wreck 
proceed in slow motion as the tax cut package is phased in, and 
you have expressed considerable optimism in the past about our 
ability to accommodate the tax cuts based on expectations for 
sustained strong productivity growth. I will be interested to 
hear if you continue to have such optimism, or whether you have 
any reason to be at least less comfortable about that prospect.
    It seems clear to me that we have thrown fiscal caution to 
the wind this year. We have rolled the dice, and I am troubled 
that we have seen some signs that the gamble will not pay off.
    I thank you, Chair.
    Chairman Oxley. The Chair now recognizes the Chairman of 
the Subcommittee on Domestic Monetary Policy, Technology and 
Economic Growth, the gentleman from New York, Mr. King.
    Mr. King. Thank you, Chairman Oxley.
    Chairman Greenspan it is a pleasure to welcome you here 
this morning, and I, on behalf of the entire panel, thank you 
for coming in and giving us of your time and your knowledge. 
And I think it is a tribute to the clout that you have that you 
will find Members of this committee trying to attach you to 
whatever views they might have on issues that even go far 
beyond your own. So I wish you well as the morning goes by as 
you bob and weave the thrusts and parries of Members of this 
committee.
    I am not going to bore you with a long statement. I would 
just like to say there were several things on my mind as we are 
entering this state of the economy. One is, as far as the 
reduction of interest rates, when do you think that one could 
reach a point of diminishing returns, when the maximum benefit 
that could be obtained from cutting interest rates will have 
been reached? Second, another one is what the continuing 
strength of the dollar means in the face of the continued 
reduction of interest rates; but also, second, whether or not 
it is impairing our export markets to an extent that it is 
having a negative impact on the economy? And I guess the 
logical question from that is, is it time to consider perhaps 
ways of weakening the dollar to help us as far as our trade 
deficit is concerned?
    Another point is I know that over the past several months 
you seem to put a lot of stock in consumer confidence; that 
with all the variables out there, maybe the one most important 
is the maintenance of consumer confidence. And I would be 
interested in your thoughts as to where you think consumer 
confidence is going, and, again, how integral is that to the 
ultimate recovery that we are all hoping for?
    And also, I guess, one final thing, and I will leave it at 
that, is the Trade Promotion Authority. If we are talking about 
long-term growth of the economy, how essential do you believe 
it is that something such as TPA is enacted and the President 
is given that power to negotiate? What impact would that have 
here and also in world markets and in our relation to world 
markets?
    So with that I will yield back the balance of my time. And 
again, thank you for your time and interest. Thank you. I yield 
back.
    Chairman Oxley. The gentleman yields back.
    The Chair is now pleased to recognize the Ranking Member of 
the subcommittee, the gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman.
    And welcome, Chairman Greenspan.
    I truly hope that the Chairman will tell us this morning 
that he believes that we have turned a corner, and that better 
economic conditions are ahead. Unfortunately, in my opinion, 
the single most dramatic change for Members of the committee to 
consider since the Chairman's last visit is the worsening 
fiscal situation of the Federal Government. With the rosy 
budget forecasts at the beginning of the year, Chairman 
Greenspan took the position that tax cuts and the relaxing of 
the Federal Government's decade-long fiscal discipline was the 
appropriate course for Congress to follow. Since February, 
economic forecasters have had to dramatically reduce their 
growth estimates downward. As a result, many budget forecasters 
are estimating that any remaining surplus outside of the Social 
Security and Medicare Trust Funds may have been fully committed 
already to the Bush tax plan.
    This situation could be further worsened, given reports in 
today's Wall Street Journal and other newspapers, that Majority 
Whip DeLay and other Republicans are urging additional 
emergency spending this year. Also, since the Chairman's last 
visit, the Fed continued its dramatic interest rate 
corrections. First, the Fed raised rates six times through May 
of 2000, and then sharply reversed the course and lowered rates 
on six separate occasions this year for a total of 275 basis 
points.
    Despite these efforts to correct for past actions, the Fed 
has thus far been unable to spur much of a reaction in long-
term interest rates. The interest rate on the 10-year Treasury 
note averaged 5.3 percent for the week ending on July 11, as 
compared to 5 percent the week ending January 3. I hope the 
Chairman will address this issue in his testimony as the impact 
of static long-term interest rates is felt by all Americans. 
Some market observers believe investors may be reacting to 
fears that our worsening Federal fiscal situation--they may be 
threatening a return to deficits in the next few years.
    Finally, I would like to comment on one other issue in 
which the Fed is heavily involved. I have recently begun to 
hear complaints that the forthcoming revisions to the Basel 
Capital Accord that suggests that the new accord could 
unnecessarily raise capital requirements at U.S. banks. While 
this issue may sound arcane, it has a major impact on the 
amount of loans that U.S. banks can make to individual 
borrowers. I am closely monitoring the work of the Basel 
Committee, and I urge the Fed to use U.S. influence on the 
committee to oppose any proposal that increases capital 
requirements on U.S. institutions that are already considered 
today to be well capitalized. This is an especially bad 
proposal given the current weakness in the economy.
    I look forward as always to the Chairman's comments. Thank 
you.
    Chairman Oxley. The gentlelady's time has expired.
    We now turn to the distinguished Chairman of the Fed. And 
again, Mr. Chairman, welcome to the Financial Services 
Committee.

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

    Mr. Greenspan. Well, thank you very much, Mr. Chairman and 
Members of the committee. I will be excerpting from my prepared 
remarks and request that the full text be prepared for the 
record.
    Chairman Oxley. Without objection.
    Mr. Greenspan. I appreciate the opportunity this morning to 
present the Federal Reserve's Semiannual Report on Monetary 
Policy.
    Monetary policy this year has confronted an economy that 
slowed sharply late last year and has remained weak this year, 
following an extraordinary period of buoyant expansion.
    By aggressively easing the stance of monetary policy, the 
Federal Reserve has moved to support demand and, we trust, help 
lay the groundwork for the economy to achieve maximum 
sustainable growth. Our accelerated action reflected the 
pronounced downshift in economic activity, which was 
accentuated by the especially prompt and synchronous adjustment 
of production by businesses utilizing the faster flow of 
information coming from the adoption of new technologies. A 
rapid and sizable easing was made possible by reasonably well-
anchored inflation expectations, which helped to keep 
underlying inflation at a modest rate, and by the prospect that 
inflation would remain contained as resource utilization eased 
and energy prices backed down.
    In addition to the more accommodative stance of monetary 
policy, demand should be assisted going forward by the effects 
of the tax cut, by falling energy costs, by the spur to 
production once businesses work down their inventories to more 
comfortable levels, and, most importantly, by the inducement to 
resume increases in capital spending. That inducement should be 
provided by the continuation of cost-saving opportunities 
associated with rapid technological innovation. Such innovation 
has been the driving force raising the growth of structural 
productivity over the last half-dozen years. To be sure, 
measured productivity has softened in recent quarters, but by 
no more than one would anticipate from cylical influences 
layered on top of a faster long-term trend.
    But the uncertainties surrounding the current economic 
situation are considerable, and until we see more concrete 
evidence that the adjustments of inventories and capital 
spending are well along, the risks would seem to remain mostly 
tilted toward weakness in the economy. Still, the Federal Open 
Market Committee opted for a smaller policy move at our last 
meeting, because we recognized that the effects of policy 
actions are felt with a lag, and, with our cumulative 2\3/4\ 
percentage points of easing this year, we have moved a 
considerable distance in the direction of monetary stimulus. 
Certainly, should conditions warrant, we may need to ease 
further, but we must not lose sight of the prerequisite of 
longer-run price stability for realizing the economy's full 
growth potential over time.
    Despite the recent economic slowdown, the past decade has 
been extraordinary for the American economy. The synergies of 
key technologies markedly elevated prospective rates of return 
on high-tech investments, led to a surge in business capital 
spending, and significantly increased the growth rate of 
structural productivity. Capitalization of those higher 
expected returns lifted equity prices, which in turn 
contributed to a substantial pickup in household spending on a 
broad range of goods and services, especially on new homes and 
durable goods. This increase in spending by both households and 
businesses exceeded even the enhanced rise in real household 
incomes and business earnings. The evident attractiveness of 
investment opportunities in the United States induced 
substantial inflows of funds from abroad, raising the dollar's 
exchange rate while financing a growing portion of domestic 
spending.
    By early 2000, the surge in household and business 
purchases had increased growth of the stocks of many types of 
consumer durable goods and business capital equipment to rates 
that could not be sustained. Even though demand for a number of 
high-tech products was doubling or tripling annually, in some 
cases new supply was coming on even faster. Overall, capacity 
in high-tech manufacturing industries, for example, rose nearly 
50 percent last year, well in excess of its already rapid rate 
of increase over the previous 3 years. Hence, a temporary glut 
in these industries and falling short-term prospective rates of 
return were inevitable at some point. This tendency was 
reinforced by a more realistic evaluation of the prospects for 
returns on some high-tech investments, which, while still quite 
elevated by historical standards, apparently could not measure 
up to the previous exaggerated hopes. Moreover, as I testified 
before this committee last year, the economy as a whole was 
growing at an unsustainable pace, drawing further on an already 
diminished pool of available workers, and relying increasingly 
on savings from abroad. Clearly, some moderation in the pace of 
spending was necessary and expected if the economy was to 
progress along a more balanced growth path.
    In the event, the adjustment occurred much faster than most 
businesses anticipated, with the slowdown likely intensified by 
the rise in the cost of energy that until quite recently had 
drained businesses and households of purchasing power. Growth 
of outlays of consumer durable goods slowed in the middle of 
2000, and shipments of non-defense capital goods have declined 
since autumn.
    Moreover, weakness emerged more recently among our trading 
partners in Europe, Asia, and Latin America. The interaction of 
slowdowns in a number of countries simultaneously has magnified 
the softening each of the individual economies would have 
experienced on its own.
    Because the extent of the slowdown was not anticipated by 
businesses, some backup in inventories occurred, especially in 
the United States. Innovations, such as more advanced supply-
chain management and flexible manufacturing technologies, have 
enabled firms to adjust production levels more rapidly to 
changes in sales. But these improvements apparently have not 
solved the thornier problem of correctly anticipating demand. 
Although inventory-sales ratios in most industries rose only 
moderately, those measures should be judged against businesses' 
desired levels. In this regard, extrapolation of the downward 
trend in inventory-sales ratios over the past decade suggests 
that considerable imbalances emerged late last year. Confirming 
this impression, purchasing managers in the manufacturing 
sector reported in January that inventories in the hands of 
their customers had risen to excessively high levels.
    As a result, a round of inventory rebalancing was 
undertaken, and the slowdown in the economy that began in the 
middle of 2000 intensified. The adjustment process started late 
last year when manufacturers began to cut production to stem 
the accumulation of unwanted inventories. But inventories did 
not actually begin falling until early this year as producers 
decreased output levels considerably further.
    The rate of liquidation appears to have been especially 
pronounced this winter, and the available data suggest that it 
continued, though perhaps at a more moderate pace, this spring. 
A not inconsequential proportion of the current liquidation 
undoubtedly is of imported products, and thus will presumably 
affect foreign production, but most of the adjustment has 
fallen on domestic producers.
    At some point, inventory liquidation will come to an end, 
and its termination will spur production and incomes. Of 
course, the timing and force with which that process of 
recovery plays out will depend on the behavior of final demand. 
In that regard, the demand for capital equipment, particularly 
in the near term, could pose a continuing problem. Despite 
evidence that expected long-term rates of return on the newer 
technologies remain high, growth of investment in equipment and 
software has turned decidedly negative. Sharp increases in 
uncertainty about the short-term outlook have significantly 
foreshortened the timeframe over which business are requiring 
new capital projects to pay off. The consequent heavier 
discounts applied to those long-term expectations have induced 
a major scaling back of new capital spending initiatives, 
though one that presumably is not long-lasting, given the 
continuing inducements to embody improving technologies in new 
capital equipment.
    In addition, the deterioration in sales, profitability and 
cash flow has exacerbated the weakness in capital spending. 
Pressures on profit margins have been unrelenting. Although 
earnings weakness has been most pronounced for high-tech firms, 
where the previous extraordinary pace of expansion left 
oversupply in its wake, weakness is evident virtually across 
the board, including most recently in earnings of the foreign 
affiliates of American firms.
    Much of the squeeze on profit margins of domestic 
operations results from a rise in unit labor costs. Gains in 
compensation per hour picked up over the past year or so, 
responding to a long period of tight labor markets, the earlier 
acceleration of productivity, and the effects of an energy-
induced run-up in consumer prices. The faster upward movement 
in hourly compensation, coupled with the cylical slowdown in 
the growth of output per hour, has elevated the rate of 
increase in unit labor costs. In part, fixed costs, non-labor 
as well as labor, are being spread over a smaller production 
base for many industries.
    The surge in energy costs has also pressed down on profit 
margins, especially in the fourth and first quarters. In fact, 
a substantial portion of the rise in total costs of domestic 
non-financial corporations between the second quarter of last 
year and the first quarter of this year reflected the increase 
in energy costs. The decline in energy prices since the spring, 
however, should be contributing positively to margins in the 
third quarter. Moreover, the rate of increase in compensation 
is likely to moderate, with inflation expectations contained 
and labor markets becoming less taut in response to the slower 
pace of growth in economic activity. In addition, continued 
rapid gains in structural productivity should help to suppress 
the rise in unit labor costs over time.
    Eventually, the high-tech correction will abate, and these 
industries will reestablish themselves as a solidly expanding, 
though less frenetic, part of our economy. When they do, growth 
in that sector presumably will not return to the outsized 50 
percent annual growth rates of last year, but rather to a more 
sustainable pace.
    Of course, investment spending ultimately depends on the 
strength of consumer demand for goods and services. Here, too, 
longer-run increases in real incomes of consumers engendered by 
the rapid advances in structural productivity should provide 
support to demand over time. And thus far this year, consumer 
spending has indeed risen further, presumably assisted in part 
by a continued rapid growth in the market value of homes, from 
which a significant amount of equity is being extracted. 
Moreover, household disposable income is now being bolstered by 
tax cuts.
    But there are also downside risks to consumer spending over 
the next few quarters. Importantly, the same pressure on 
profits and the heightened sense of risk that have held down 
investment have also lowered equity prices and reduced 
household wealth despite the rise in home equity. We can expect 
the decline in the stock market wealth that has occurred over 
the past year to restrain the growth of household spending 
relative to income, just as the previous increase gave an extra 
spur to household demand. Furthermore, while most survey 
measures suggest consumer sentiment has stabilized recently, 
softer job markets could induce a further deterioration of 
confidence and spending intentions.
    While this litany of risks should not be downplayed, it is 
notable how well the U.S. economy has withstood the many 
negative forces weighing on it. Economic activity has held up 
remarkably in the face of a difficult adjustment toward a more 
sustainable pattern of expansion.
    The economic developments of the last couple of years have 
been a particular challenge for monetary policy. Once the 
financial crises of late 1998 that followed the Russian default 
eased, efforts to address Y2K problems and growing optimism--if 
not euphoria--about profit opportunities produced a surge in 
investment, particularly in high-tech equipment and software. 
The upswing outstripped what the Nation could finance on a 
sustainable basis from domestic saving and funds attracted from 
abroad.
    The shortfall of saving to finance investment showed 
through in a significant rise in average real long-term 
corporate interest rates starting in early 1999. By June of 
that year, it was evident to the Federal Open Market Committee 
that to continue to hold the funds rate at the then-prevailing 
level of 4\3/4\ percent in the face of rising real long-term 
corporate rates would have required a major infusion of 
liquidity into an economy already threatening to overheat.
    Chairman Oxley. Mr. Chairman, if I could just interrupt 
briefly to announce to the Members that there is a vote on the 
floor of the House. I plan to continue the hearing and the 
Chairman's statement, so if the Members want to go over to the 
floor and vote and then come back, and then we will obviously 
have that opportunity for questioning when the Chairman is 
completed with his statement.
    Thank you, Mr. Chairman.
    Mr. Greenspan. The increase of our target Federal funds 
rate of 175 basis points through May of 2000 barely slowed the 
expansion of liquidity, judging from the M2 measure of the 
money supply, whose rate of increase declined only modestly 
through the tightening period.
    By summer of last year, it started to become apparent that 
the growth of demand finally was slowing, and seemingly by 
enough to bring it into approximate alignment with the 
expansion of potential supply, as indicated by the fact that 
the pool of available labor was no longer being drawn down. It 
was well into autumn, however, before one could be confident 
that the growth of aggregate demand had softened enough to 
bring it into a more lasting balance with potential supply. 
Growth continued to decline to a point that by our December 
meeting, the Federal Open Market Committee decided that the 
time to counter cumulative economic weakness was close at hand. 
We altered our assessment of the risk to the economy, and with 
incoming information following the meeting continuing to be 
downbeat, we took our first easing action on January 3. We 
viewed the faster downshift in economic activity, in part a 
consequence of the technology-enhanced speed and volume of 
information flows, as calling for a quicker pace of policy 
adjustment. Acting on that view, we have lowered the Federal 
funds rate 2\3/4\ percentage points since the turn of the year, 
with last month's action leaving the Federal funds rate at 3\3/
4\ percent.
    Most long-term interest rates, however, have barely budged 
despite the appreciable reductions in short-term rates since 
the beginning of the year. This has led many commentators to 
ask whether inflation expectations have risen. Surely, one 
reason long-term rates have held up is changed expectations in 
the Treasury market, as forecasts of the unified budget surplus 
were revised down, indicating that the supplies of outstanding 
marketable Treasury debt are unlikely to shrink as rapidly as 
previously anticipated. Beyond that, it is difficult to judge 
whether long-term rates have held up because of firming 
inflation expectations or a belief that economic growth is 
likely to strengthen, spurring a rise in real long-term rates.
    One measure often useful in separating the real interest 
rates from inflation expectations is the spread between rates 
on nominal 10-year Treasury notes and inflation-indexed notes 
of similar maturity. That spread rose more than three-fourths 
of a percentage point through the first 5 months of this year, 
a not insignificant change, though half of that increase has 
been reversed since. By the nature of the indexed instrument, 
the spread between it and the comparable nominal rate reflects 
expected CPI inflation. While actual CPI inflation has picked 
up this year, this rise has not been mirrored uniformly in 
other broad price measures. For example, there has been little, 
if any, acceleration in the index of core personal consumption 
expenditure prices, which we consider to be a more reliable 
measure of inflation. Moreover, survey readings on long-term 
inflation expectations have remained quite stable.
    The lack of pricing power reported overwhelmingly by 
business people underscores the quiescence of inflationary 
pressures. Businesses are experiencing the effects of softer 
demand in product markets overall, but these effects have been 
especially marked for many producers at earlier stages of 
processing, where prices generally have been flat to down thus 
far this year. With energy prices now also moving lower and the 
lessening of tautness in labor markets expected to damp wage 
increases, overall prices seem likely to be contained in the 
period ahead.
    Forecasts of inflation, however, like all economic 
forecasts, do not have an enviable record. Faced with such 
uncertainties, a central bank's vigilance against inflation is 
more than a monetary policy cliche; it is, of course, the way 
we fulfill our ultimate mandate to promote maximum sustainable 
growth.
    In reducing the Federal funds rate so substantially this 
year, we have been responding to our judgment that a good part 
of the recent weakening of demand was likely to persist for a 
while, and that there were significant downside risks even to a 
reduced central tendency forecast. Moreover, with inflation low 
and likely to be contained, the main threat to satisfactory 
economic performance appeared to come from excessive weakness 
in activity.
    As a consequence of the policy actions of the Federal Open 
Market Committee, some of the stringent financial conditions 
evident late last year have been eased. Real interest rates are 
down on a wide variety of borrowing instruments. Private rates 
have benefited from some narrowing of risk premiums in many 
markets. And the growth of liquidity, as measured by M2, has 
picked up. More recently, incoming data on economic activity 
have turned from persistently negative to more mixed.
    The period of sub-par economic performance, however, is not 
yet over. We are not free of the risk that economic weakness 
will be greater than currently anticipated, and require further 
policy response. That weakness could arise from softer demand 
abroad, as well as from domestic developments. But we need also 
to be aware that our front-loaded policy actions this year, 
coupled with the tax cuts under way, should be increasingly 
affecting economic activity as the year progresses.
    The views of the Federal Reserve Governors and Reserve Bank 
presidents reflect this assessment. While recognizing the 
downside risks to their current forecast, most anticipate at 
least a slight strengthening of real activity later this year. 
This is implied by the central tendency of their individual 
projections, which is for real GDP growth over all four 
quarters of 2001 of 1\1/4\ to 2 percent. Next year, the 
comparable figures are 3 to 3\1/4\ percent. The civilian 
unemployment rate is projected to rise further over the second 
half of the year, with a central tendency of 4\3/4\ to 5 
percent by the fourth quarter and 4\3/4\ to 5\1/4\ percent four 
quarters later. This easing of pressures in product and labor 
markets lies behind the central tendency for PCE price 
inflation of 2 to 2\1/2\ percent over the four quarters of this 
year and 1\3/4\ to 2\1/2\ percent next year.
    As for the years beyond this horizon, there is still, in my 
judgment, ample evidence that we are experiencing only a pause 
in the investment in a broad set of innovations that has 
elevated the underlying growth and productivity to a rate 
significantly above that of the two decades preceding 1995. By 
all evidence, we are not yet dealing with maturing technologies 
that, after having sparkled for a half decade, are now in the 
process of fizzling out. To the contrary, once the forces that 
are currently containing investment initiatives dissipate, new 
applications of innovative technologies should again strengthen 
demand for capital equipment and restore solid economic growth 
over time that benefits us all.
    Thank you, Mr. Chairman. I look forward to your questions.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 46 in the appendix.]
    Chairman Oxley. Thank you, Mr. Chairman.
    Let me begin with some questions. I was reminded when you 
talked about the effects of the tax cut and the interest rate 
cuts, I was reminded back in 1981, my freshman year in the 
Congress, and my first major vote was on the Reagan tax cut. 
And I particularly remember in 1982 the Reagan tax cut, as you 
will remember, didn't take effect or didn't pass until August 
of 1981. And we heard some criticisms early in 1982 in the 
first quarter that the tax cut was not working. And indeed, 
there were different circumstances, obviously, and the economy 
was in far worse shape back then, particularly because of 
stagflation.
    What is your sense of the lag time or the time that it 
would take the effect of the lower interest rates and the lower 
tax rates to really have a stimulative effect on the economy?
    Mr. Greenspan. Mr. Chairman, the experience we have had 
over the years is that such a tax cut tends to impact over a 
number of quarters. And it is unlikely that we will see any 
immediate impact, and, indeed, it usually stretches out and 
accumulates over time. If past experience holds, I think we 
should be seeing the impact develop as we get into the latter 
months of this year and into the year 2002.
    Chairman Oxley. And indeed, if you look at the history, I 
guess the economy really started picking up in 1983, and by 
1984 it was rather substantial and initiated the longest--at 
that time, the longest period of economic growth that we had in 
a non-war situation. So obviously, I think all of us would 
caution patience in this regard.
    Let me ask you about the trade promotional authority, 
formerly known as Fast Track, that is currently before the 
Congress. How much weight do you attach to that initiative in 
terms of our ability to maintain competitive areas in trade and 
sustain our economic growth?
    Mr. Greenspan. Well, Mr. Chairman, I think the data are 
unequivocal that the extraordinary expansion in trade in recent 
decades has been a material factor in rising standards of 
living throughout the world and has been a major contributor to 
growth in the United States. I think that the increasing 
ability to interchange goods and services with our trading 
partners and the competition which that induces is an important 
and, in fact, an indisputable and necessary factor for 
continued cutting-edge growth, which this country is so well 
known for.
    My own impression is that while the overall international 
trading system would be assisted by Fast Track and the 
implications of a broader range of trade agreements, I think it 
is the United States which would benefit the most.
    Chairman Oxley. Thank you.
    Let me ask you about the dollar. There are many 
manufacturers in my home State of Ohio who have been affected 
by the strength of the dollar and their inability to export as 
much as they would like. As a matter of fact, since 1995, mid-
1995, the dollar appreciation has been about 33 percent in real 
terms. And indeed, the manufacturing sector has taken the 
biggest hit. The headlines today were clearly directed at the 
manufacturing sector and the continued softness in the 
manufacturing sector.
    Should the Fed, should the Treasury, should the Congress 
pursue policy that would soften the dollar? Or are you 
convinced that the marketplace ultimately will work in that 
regard?
    Mr. Greenspan. First, as I have said before this committee 
previously, there is a general agreement within the United 
States Government, I think for very good reasons, that the 
dollar's exchange rate is discussed only by the Secretary of 
the Treasury, and the purpose of that is that over the years it 
has been our experience that we need a single spokesman, and it 
has very clearly worked well.
    There is no question that econometric models do show that 
exchange rates obviously affect trade. In fact, trade is one of 
the factors which impacts on the exchange rate. But the data 
also show that the really major impact, both plus and minus, on 
trade is the economic growth or lack thereof of our trading 
partners. It is far more important to our exporters what is 
happening in the markets overseas than what is happening to the 
exchange rate per se.
    Chairman Oxley. Thank you, Mr. Chairman. My time has 
expired.
    I now recognize the gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you, Mr. Chairman.
    And, Mr. Greenspan, nice to see you again.
    Mr. Greenspan, I think many millions of Americans wonder 
why when issues come down the pike that on one hand affect the 
wealthy and multinational corporations and on the other hand 
effect working people, you always seem to side with the wealthy 
and the multinational corporations. I would like to ask you 
three questions that I think Americans would like to know the 
answer to.
    My understanding is, unless you have changed your view, 
that you are opposed to raising the minimum wage, which is 
today at a disastrously low $5.15 an hour. So I would like you 
to tell us if you think that a working person or a family can 
live on $5.15 an hour.
    The second question that I would like to ask you is about 
the recently passed tax bill in which the wealthiest 1 percent 
of the population received 38 percent of the tax benefits. And 
at a time when millions of Americans today are working longer 
hours for lower wages than they used to, why is it that you 
think it is good public policy the 38 percent of the tax 
breaks, hundreds and hundreds of billions of dollars, should go 
into the hands of the wealthiest people in this country?
    And my third question deals with the trade issue, as you 
know, and it doesn't get enough discussion, and, Mr. Chairman, 
I hope that this committee can get more involved in that issue. 
United States of America today has a record-breaking trade 
deficit of over $400 billion. Over the last 20 years we have 
lost millions of decent-paying manufacturing jobs. Young people 
who graduate high school who do not go to college, in fact, 
today, because of the decline in manufacturing, are earning 25 
percent less than was the case 20 years ago, because the 
manufacturing jobs are not there, and they are now working in 
McDonald's. We have an $84 billion trade deficit with China, 
and American workers are put in the position of having to 
compete against desperate people in China who make 20 cent an 
hour. And I suspect that you are supportive of our trade 
relations with China, would like to see Most-Favored-Nation 
status passed again tomorrow.
    Can you tell the American people why you think not raising 
the minimum wage, maintaining a disastrous trade policy, and 
giving huge tax credits for the rich works for the benefits of 
the average American?
    Mr. Greenspan. Certainly.
    Mr. Sanders. I and millions would love to hear it.
    Mr. Greenspan. First of all, I think you misclassify me by 
saying that I always come out on the part of multinational 
corporations.
    Mr. Sanders. I would love to hear you say something 
different today.
    Mr. Greenspan. I hope I come out in favor of the strength 
and growth and sustainability of the American economy.
    First, with respect to the minimum wage, the reason I 
object to the minimum wage is I think it destroys jobs, and I 
think the evidence on that, in my judgment, is overwhelming. 
Consequently, I am not in favor of cutting anybody's earnings 
or preventing them from rising, but I am against them losing 
their jobs because of artificial Government intervention, which 
is essentially what the minimum wage is.
    So it is not an issue of whether, in fact, I am for or 
against people getting more money. I am strongly in favor of 
real incomes rising, and, indeed, that is the central focus of 
where I would come out.
    Mr. Sanders. Are you for abolishing the minimum wage?
    Mr. Greenspan. I would say that if I had my choice, the 
answer is, of course.
    Mr. Sanders. You would abolish the minimum wage?
    Mr. Greenspan. I would, yes, because if what I say is 
accurate, then the minimum wage does no good to the level----
    Mr. Sanders. And you would allow employers to pay workers 
$2 an hour if the circumstances provided that?
    Mr. Greenspan. The issue is that they will not be paying $2 
an hour because they won't be able to get people.
    But let me go on to your next questions. We have had this 
argument before. The issue of the tax cut is that, as you may 
recall, I very studiously avoided committing myself to 
anybody's tax cut back earlier this year. I was for a tax cut 
in principle, but whether it was that which was being argued by 
the Democratic Minority at that time, or whether it was the 
President's, I never commented on. And therefore, I still don't 
comment on the structure of the tax cut per se.
    With respect to trade, the evidence that I have been able 
to gather suggests to me that there is no evidence that trade 
either adds or subtracts jobs. When we were dealing on the side 
of very strong labor markets and job creation, I never argued 
in favor of trade expansion because it would create jobs. I 
argued because it would increase productivity and standards of 
living. Consequently, I argued that it neither increases nor 
decreases jobs.
    Chairman Oxley. The gentleman's time has expired.
    The Chair now recognizes subcommittee Chair, Mr. King.
    Mr. King. Thank you, Mr. Chairman.
    Chairman Greenspan, I hope you didn't cover this while I 
was away. I am sorry. I would just like to ask you the extent 
to which you think the bad economic news out of Argentina will 
have an impact on the U.S. economy, if so, when and to what 
extent; and what measures do you think the United States can do 
to anticipate any of those deleterious impacts?
    Mr. Greenspan. Congressman, I think that the problems that 
Argentina is struggling with at this stage are largely 
domestic. Clearly, they have significant debt problems, and 
they are working with the International Monetary Fund and other 
international agencies to come up with a plan to resolve the 
problems with which they are dealing.
    It is evident that there is a slightly better tone in 
Argentine markets and international markets with respect to 
Argentine financial instruments, as is evidenced by the 
apparent agreements that are occurring between President de la 
Rua and the provincial leaders. That has had a clearly positive 
effect on markets, and for the moment, it looks as though 
things are improving. But they have got difficulties ahead of 
them, and I think they are working very hard to resolve them.
    The degree of so-called contagion, which is the effect on 
us and everybody else, is not very large at this particular 
point, and frankly, I don't expect it to become very large 
unless something which is wholly unexpected occurs. But, for 
the moment, it is a very difficult problem that they have. They 
are working on it, and we trust that they will resolve it in 
satisfactory fashion.
    Mr. King. Could I ask the same question about Japan, the 
sluggishness of the Japanese economy, the impact that would 
have on the overall Asian economy, and in fact, the congeneric 
effect on the United States.
    Mr. Greenspan. It is apparent the weakness in the Japanese 
economy is impacting on other economies because they are a 
major importer of goods and services, especially in the 
technological goods areas, and as a consequence, you can see 
some of the effects in Southeast Asian exports--especially the 
high-tech area, being impacted, because not only are we 
weakening in that area, but so are the Japanese.
    The Japanese problem, as I indicated on many occasions 
before this committee, is essentially that they have to come to 
grips with their so-called financial intermediation system, 
which is largely commercial banks, and the very substantial 
non-performing loans which have occurred as a result of the 
fairly dramatic decline in commercial real estate collateral, 
which is usually the backbone of the Japanese banking system.
    If that gets resolved--and Prime Minister Koizumi is 
clearly pushing on getting that resolved--they are going to 
have trouble moving forward, but Koizumi, as far as I can 
judge, is moving in the right direction, and I trust that they 
are able to implement the types of policies which he has been 
promulgating for a while.
    Mr. King. On the question of inflation, these interest rate 
cuts that we have had over the past several months. Do you see 
a threat of that fueling inflation? I know last year you were 
concerned about inflation. Do you see now that the cuts are 
being made that inflation is being fueled?
    Mr. Greenspan. Congressman, there is very little evidence 
of inflation in our economy in the sense that, as you go from 
layer to layer, you may see some inevitable changes in prices, 
but if you extract out the very substantial direct and 
secondary effects of energy price increases, which have now 
crested and are turning down, it is very difficult to find 
inflationary pressures.
    But, as I said in my prepared remarks, forecasting is, at 
best, something which has a mixed record, and as a consequence, 
we as central bankers are always watching this process very 
closely.
    All I can say to you is that, at the moment, I see no 
evidence of it. But that is not the same thing as saying that I 
can project with great confidence that for the indefinite 
future it will remain that way.
    Mr. King. Thank you, sir.
    Chairman Oxley. Time has expired.
    I turn to Mr. LaFalce.
    Mr. LaFalce. Thank you, Mr. Chairman.
    I said I was really going to focus on broad monetary policy 
rather than other issues, but then you made some statements. 
Let me go to a statement you made in response to Mr. Sanders' 
questions, where you said there is no good evidence that 
suggests that trade either increases or decreases jobs, but 
that it is good because it increases standards of living.
    Mr. Greenspan. I should have said, jobs overall. It does 
obviously affect jobs within individual industries, certainly.
    Mr. LaFalce. But there is evidence that it does increase 
standards of living?
    Mr. Greenspan. Yes.
    Mr. LaFalce. Now, we can always argue for it, because it 
can open up economies, because it can improve the relations 
between countries; if you are trading goods, you are not 
trading armies, and so forth.
    But I want to focus on what you did say, there is evidence 
that it increases standards of living, because the question 
would be, for whom? I think I am reading between the lines that 
you are saying ``in the aggregate,'' because you are saying 
that there are no aggregate increases in jobs, but there may be 
an increase for some and a decrease for others.
    But, also, with respect to the standard of living, although 
there is an aggregate increase in the standard of living, is it 
disproportionate? Do the studies indicate that certain 
countries engaging in trade, for example, developing countries, 
would see an increase in their standard of living, whereas 
there may or may not be a causal relationship between that 
trade and an increase in the standard of living in a developing 
country?
    I don't know the answer. I am searching.
    Mr. Greenspan. No. The evidence, as best I can judge, is 
that trade very significantly increases the average level of 
real income in developing nations. But the analysis also 
suggests that there is no evidence that trade alters the 
distribution of income within a developing country, which 
suggests therefore, that if you can get the total level of real 
income to rise, which is another way of saying productivity to 
rise, you pull up the whole level of income in those societies.
    And as a consequence, I would say that the extent to which 
trade increases productivity--increases competition which 
generates the productivity--it is across the board.
    I do not deny that there are very significant differences 
that show up in a lot of different countries. But, as a broad 
general statement, what I have said, as far as I understand it, 
is what the data do show.
    Mr. LaFalce. I can accept that. But I think that also it 
indicates that there are going to be a number of pocket areas, 
or industries, or peoples that would not be beneficiaries that 
might be harmed. And I really think that public policy has to 
focus on the best means of dealing with them.
    And I don't think we have done a good job of that in the 
United States, or at least I think we can do a much better job.
    Mr. Greenspan. I agree with that, Congressman. I think 
that, as I have indicated before, if indeed we are getting, as 
a consequence of competition, a movement of capital from the 
less-productive industries in this country and abroad to the 
cutting-edge technologies, that is another way of saying that 
part of the industries in the country or some of the industries 
and some of the companies are going to be cutting back. And 
there are workers there, through no fault of their own, who are 
losing their jobs, and I think that we ought to address that. 
What I do not think we ought to do, however, is use 
protectionist legislation in order to prevent that adjustment 
process from occurring.
    Mr. LaFalce. OK.
    Let me switch to monetary policy. I am always troubled by 
what I draw to be the good news/bad news dichotomy. If there is 
bad economic news, well, this could be good news for investors, 
because it is an indication that the Fed is going to lower 
rates in the future. And if there is good economic news, well, 
this could be bad news for investors, because it is an 
indication that the Fed would be less likely to decrease rates 
and possibly, you know, increase them, and so forth.
    I don't know what, if anything, can be done about that.
    But to what extent--I mean, it is one thing to say that you 
will conduct monetary policy, not with an eye to the markets 
but with an eye to the economy. On the other hand, there is 
such a relationship between the markets and the economy that it 
is--I think not almost, it is impossible to conduct monetary 
policy without factoring in and giving great weight to what 
impact the market movements will have on the real economy.
    How do you deal with that?
    Mr. Greenspan. Well, Congressman----
    Mr. LaFalce. With great difficulty, I am sure.
    Mr. Greenspan. Of course. That is why monetary policy is a 
difficult activity. I don't deny that. What we do is focus on 
the economy, and clearly to the extent that financial factors 
in our judgment are affecting the economy or will affect the 
economy, clearly we focus on them.
    But remember that there are often occasions when financial 
activity will not affect the economy. So while it is true that 
there is a very close relationship, it is not airtight, and it 
is not the same as saying that if you target the financial 
variables rather than the economy, you will automatically 
obtain maximum sustainable economic growth, which is our 
fundamental goal.
    In a number of instances that does happen to be true, but 
you have to be very careful to make the distinction between 
what we are focusing on. So that we examine and evaluate 
financial factors only to the extent that they will impact on 
the American economy one way or the other.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from New Jersey, the Vice Chair of the 
committee.
    Mrs. Roukema. I thank the Chairman and Chairman Greenspan. 
We welcome you here today. And I have listened, tried to listen 
very intently. But Mr. LaFalce has preempted the focus of my 
question, which had to do with monetary policy and the rate 
cut; and I don't know if when I was over there voting, if you 
had any implications--or if there are any total implications 
about what your action may or may not be in August when you 
have the next Open Market Committee meeting.
    And I don't want to put you to the test here, but let me 
just say that I have strongly supported and think that you have 
been very well advised in the past on your rate cut proposals.
    That having been said, you can feel free to say what you 
wish or ignore the question in terms of the upcoming 
evaluation.
    Mr. Greenspan. I will scrupulously opt for ambiguity on 
that very specific question.
    Mrs. Roukema. I noted that. But we can come to some 
assurance or conclusion based on what you have said thus far, 
that is, that there is an improved economy here, that there are 
heartening signs in the economy. Yes?
    Mr. Greenspan. I do think that we are seeing signs that the 
bottom is beginning to structure itself. It is still tentative, 
and clearly the risks, as we put it in our official statements, 
are toward economic weakness, and indeed that is the case.
    But if you look at it in terms of the rate of 
deterioration, it is slowing, very clearly. In fact, as I put 
it in my prepared remarks, what is really quite remarkable is 
that with this extraordinary litany of negative elements that 
have been going on day by day, month by month, the economy is 
still standing, if I may put it that way.
    And that is suggestive of the fact that there is some 
monumental support in the system. And in that regard, while I 
would scarcely want to forecast the intermediate or short-term 
period, because there are a lot of negative factors throughout, 
there are the first signs that something of a positive nature 
seems to be developing. And as I said, the data that are coming 
in, which have been unrelentingly negative for quite a period 
of time, have now turned mixed.
    Mrs. Roukema. I am glad to hear you say that. It 
underscores what you did say in your formal statement. But I 
wanted to hear you say it in the context of a question of rate 
cuts in the future.
    Let me ask you this as the Chairwoman of the Housing 
Subcommittee--by the way, in terms of the overall tax bill, I 
voted for it, and I voted for it enthusiastically, although I 
would have had it more savings- and investment-oriented.
    But I wonder, on the housing front, if you would make any 
recommendation or have any opinions about how we not only make 
it more economical, but provide more incentives through the tax 
code or investment strategies to get more housing out there, 
and to make it very accessible to middle-income and low-income 
people, particularly with respect to mortgages, mortgage down 
payments, and so forth.
    We need that kind of help, and I wonder if you, from your 
perspective, could give us an insight or a recommendation.
    Mr. Greenspan. Well, I think it is important first to 
recognize that we are not doing a bad job on housing. I mean, 
the housing start figures this morning, for example, were 
reasonably good despite all of the negative elements involved 
in the various high-tech areas. If you look at the broad 
markets for certain consumer durable goods, like motor 
vehicles, which are still doing reasonably well, and housing, 
we have to say that the data are not bad.
    We can see by the extraordinarily high level of 
refinancings that are going on that people are beginning to 
lower their costs of servicing, and most remarkable is that 
despite all of the general weaknesses that we perceive in the 
economy, the underlying market value of one- to four-family 
homes is moving up significantly.
    Capital gains in this area have been really quite 
remarkable. And as I indicate in my prepared remarks, there is 
very evident strength that is coming into the consumer markets 
from the extraction of equity out of homes.
    What this suggests is that we have constructed a very 
sophisticated housing economy, and it is having a significant 
effect on consumer spending and indeed the rest of the economy, 
so that while I would certainly not disagree with the desire to 
improve upon it--and I think there are a lot of things we can 
do--I think it is important for us to recognize that it is in 
reasonably good shape at this stage, and that we have done an 
awful lot which has improved the system as a whole.
    Chairman Oxley. The gentlelady's time has expired.
    Mrs. Roukema. Thank you. I appreciate it.
    Chairman Oxley. Mrs. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Chairman Greenspan, it is widely held that the future of 
the economy is based on increased productivity from 
technological excellence. You yourself have said many times 
that the advances in technology were a primary force in the 
expansion of the United States economy in the 1990s.
    Unfortunately, many of the companies that drove the 
successes of the country in the last decade are facing dire 
circumstances today. As a result, people are losing jobs, 
investors have seen their savings depleted, and a recent report 
indicated that the average 401(k) retirement balances have 
fallen over a 1-year period for the first time. Our technology 
sector may take years to recover.
    It would appear that the Fed's policies may have 
contributed to this pattern of bubble-and-bust, raising 
interest rates six times from June of 1999 to May of 2000 and 
then sharply reversing course and cutting rates dramatically 
this year.
    My questions are about the Fed's actions of the last 2 
years and going forward, the impact of severe problems in the 
technology sector on the fiscal situation here in Washington.
    Looking back, why did the Fed continue to raise rates as 
technology companies were hemorrhaging workers and market cap 
through May of 2000 and going forward? What is the impact on 
the fiscal situation of the Federal Government if productivity 
does not increase but remains strong in the years ahead, 
especially since many of the increases in productivity of the 
last 10 years were powered by the technology sector that is 
suffering now so substantially in our economy.
    Mr. Greenspan. I tried to address that in some detail while 
you were out voting, so rather than take your time at the 
moment, I tried to explain some of that issue in my prepared 
remarks.
    Let me just say that the productivity data which are 
showing softness in the last two or three quarters have come 
down pretty much in line with what one would expect if the 
underlying productivity trend were rising. So it is not 
something which suggests that this is a bubble without any 
underlying fundamentals. Indeed, it is very likely that the 
second quarter data--which we don't have yet, so I am making 
very rough approximations--are very likely to be positive, 
reversing the negative number in the first quarter.
    But overall, I think that the budget outlook does depend on 
productivity increasing at a pace faster than it did in the 20 
years prior to 1995. I see no evidence to suggest that that has 
changed, that is, that the numbers being used by OMB or CBO for 
long-term projections have been compromised in any significant 
way.
    The important issue that I try to make--not in the remarks 
I made while you were out voting, but it is in my prepared 
remarks which I didn't deliver--is that it is to be expected 
that we will often, as central banks, move up rates and move 
them down as we confront significant changes in the business 
cycle, and what we were responding to in the last couple of 
years was a surge in investment--remember that we were getting 
increases in production, 50 percent at an annual rate, for all 
high-tech, on average. That is utterly unsustainable. We were 
leaning against it, as indeed the capital markets were. And 
then as the process came to a better adjustment, we reversed, 
which is precisely what you would expect us to do and what we 
have done in the past, and I would certainly expect we will do 
in the future. And the process of trying to address imbalances 
between investment and savings, which emerged in 1999, and the 
reverse, is a typical central bank policy process. And looking 
back, I think we did about as good as you could for that type 
of cyclical set of events.
    Chairman Oxley. The gentlelady's time has expired.
    The Chair is pleased to recognize the gentleman from Long 
Island, Mr. Grucci.
    Mr. Grucci. Thank you, Mr. Chairman.
    Mr. Chairman, it is great to have you with us again, and 
your insight is also helpful to Members here, certainly to me. 
In listening to the first part of your prepared text--and I 
apologize for having to step out to vote on the Journal, but I 
did hear that you talked about inventories as a function of the 
economy.
    My question goes along these lines: we have inflation at a 
low, and it is in check. We have interest rates at their lowest 
point in a long time. Access to capital seems to be fine, and 
the housing starts are strong, as you have indicated. So why 
are there still high inventories?
    And to the extent that you can answer this question, what 
are the inventory levels, and how long do you think it will 
take before we can bring them down so that we can get back into 
manufacturing--which I would assume is the message that will 
help stimulate the economy; and if indeed that isn't, are we 
missing something as a stimulus package, for example, omit a 
capital gains reduction?
    Mr. Greenspan. Congressman, I think the evidence suggests 
that inventories are still declining. In other words, the rate 
of liquidation, while it has slowed some, is still adjusting, 
and it is a reflection of the improvement in the technologies 
which has enabled rapid adjustments to take place. And I think 
it will go on for a while in the high-tech area where, for 
example, in communications equipment we are only now beginning 
to see the inventory rise come to a halt. In other areas of 
high-tech there is some liquidation, but just now beginning. In 
the first quarter, a very significant part of the adjustment 
was in motor vehicles, which had extended inventories to their 
days supply well in excess of normal, and with a few model 
problems now, inventories are reasonably well in place.
    The important issue is that you do not need an end to 
inventory liquidation before production starts to come back. 
What you need is a dramatic slowing in the rate of decline, 
because if consumption holds up and production is below 
consumption, which is inventory liquidation, just slowing the 
rate of liquidation raises the level of production and jobs.
    We have not yet got to that point, but that is the process 
which we expect to evolve, especially if overall final demand 
holds up reasonably well.
    Mr. Grucci. To the issue of capital gains, do you see that 
as a help to the economy at this point, capital gains 
reduction?
    Mr. Greenspan. Congressman, I have always been in favor of 
capital gains reductions as a general, overall policy. I have 
stipulated that I did not think that the capital gains tax as 
such was, from an economist's point of view, an effective means 
of raising revenue.
    I think it is a public policy issue, but from an economic 
point of view, I find it not a useful tax to raise revenue. So 
that I am obviously, other things being equal, and they rarely 
are, but other things equal, I am always in favor of addressing 
the capital gains tax in the effort to reduce it. I wouldn't 
say that I would be in favor under all conditions, but as a 
longer-term issue, if you could substitute other taxation for 
capital gains taxation, I would always be in favor of that.
    Mr. Grucci. Thank you.
    I yield back the remainder of my time.
    Chairman Oxley. The gentleman yields back the balance of 
his time.
    The gentleman from Pennsylvania, Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Chairman, welcome to the committee. I want to follow on 
something Mr. Sanders said. He gave you an opportunity to 
defend your purest position as a free marketer when you 
testified you were opposed to the minimum wage.
    That is a little disappointing. I understand your----
    Mr. Greenspan. Remember, it is not because it is a free 
market issue; it is because I think it destroys jobs, and I 
don't like to see people lose their jobs.
    Mr. Kanjorski. Mr. Chairman, we were down to about 4 
percent unemployment. We couldn't find hide nor hair of 
employees to work. There are still a great deal of American 
employees who are being paid the minimum wage.
    But not to argue that point with you, you may have provided 
the answer, too.
    In my area of Pennsylvania, in the last 3 weeks, we have 
lost about 1,500 highly prized manufacturing jobs to Mexico; 
and the statements of the companies that were leaving were that 
they can't pay $18 an hour in Pennsylvania, but they certainly 
could compete at $1 an hour in Mexico. And maybe by doing away 
with the minimum wage, we can save those jobs in Pennsylvania, 
because then we can compete with Mexico.
    If that is the policy, I would assume that would result. 
But I am not getting into that.
    I am going to give you the other side of the coin. Most 
recently, something troubling, a company that was losing money, 
significant loss of money and potentially going into 
insolvency, had just paid one of its CEOs a bonus of $16 
million. And then a health care company, which is in dire 
straits as a result of the entire health care field, announced 
as a salary for their CEO to be $40 million a year with stock 
options of $160 million a year.
    Obviously, he is not affected by the minimum wage. But I 
was wondering whether you think there are any policy 
considerations there that--if we can reduce the minimum wage, 
do we just set this economy afire and let hell be damned and 
anybody draw anything that they can support.
    Mr. Greenspan. Well, Congressman, I am disturbed by some of 
those numbers myself. I don't think that shareholders are 
essentially looking after their interests properly, and I think 
some of the reasons why some outsized payments are being made, 
especially under so-called ``golden parachutes'' or the like, 
are based on motives which I don't consider to be particularly 
sterling.
    Whenever you deal with an economy such as we are dealing 
with, which is effectively an open market, competitive economy, 
it is very difficult to find all forms of what appears to be 
cut-throat competition and egregious actions, I don't deny 
that. The problem basically is that the countries or the 
economies which try to eliminate that end up as stagnant 
economies, and I think that is inappropriate.
    But if you ask me whether I feel comfortable with some of 
those payments, I do not.
    Mr. Kanjorski. The final question is really more to policy, 
Mr. Greenspan. I looked at your statement and heard your 
testimony, and I would project that you are one of those 
economists that has seen an end-year turn, and the economy is 
OK.
    I am not as optimistic in that, particularly in light of 
the problems still continuing in Japan and now the potential in 
the EU of going under. From what I understand of the American 
economy, other than really housing and the auto industry and 
unusual consumer optimism, we could slowly be deteriorating 
into a recessionary problem.
    My question is, assuming things do not occur as you 
anticipate, is it time that we have a contingency plan, since 
we are facing a global economy without the institutions in 
place to necessarily put on the brakes or control the stimulant 
effect that Government could have on various economies around 
the world, even though we have a rather sophisticated way of 
doing it in the United States?
    Can you give me some assurances that the Federal Reserve is 
working with those people, if not the Congress, toward a 
contingency plan if, come December or January of this year, the 
downturn is continuing and the stabilizing base that you are 
talking about doesn't readily appear?
    Mr. Greenspan. Well, first of all, let me just say 
Congressman, that it is difficult to take our economy and take 
consumers and housing--consumer expenditures and houses--and 
say the rest is not doing well. If you have stable consumer and 
housing sectors, that is going to support the total system, 
because that is a very big part of the economy.
    Mr. Kanjorski. Do you believe that is going to continue and 
not deteriorate?
    Mr. Greenspan. I can't say that.
    Mr. Kanjorski. Well, I guess I am.
    Mr. Greenspan. All I can say to you is it has been 
remarkable.
    Mr. Kanjorski. Should we worry if housing starts to 
deteriorate and consumer confidence starts to fall in the next 
several months?
    Mr. Greenspan. Oh, sure. As I said in my prepared remarks, 
I think that we are not out of the woods, and there are clearly 
risks that a number of things that could go wrong could very 
well go wrong.
    But to respond to your question very specifically, we 
obviously are in continuous contact with our trading partners 
abroad. We have meetings periodically amongst central bankers 
in various different areas of the world. And there is, working 
through finance ministers and central bankers, especially for 
the G-7 and the G-10, a secretariat and infrastructure to 
effectively integrate all of our various different policies and 
discuss them one way amongst ourselves.
    So that the answer is, yes, we do obviously communicate. We 
are in constant communication in one sense, in that we know how 
to get in touch with somebody very quickly, and when we have 
to, we always do.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Welcome, Chairman Greenspan. We here in the United States 
have one of the lowest personal savings rates in the world, and 
in the past, that has been because we have run deficits in 
every year and because Americans just don't save.
    We have done something about the deficit situation; with a 
little bit of fiscal discipline, we have turned that around. 
But we are still down to the fact that Americans don't like to 
save and invest. We have got--in 1999, I think it was--a 2.2 
percent investment rate, which was the lowest savings rate 
since the Great Depression.
    Now, in order to affect that, one of the things we have 
tried to do in the past is to push the creation of IRAs, 401(k) 
plans, medical savings accounts, flexible spending accounts for 
health care, education savings accounts, items like this.
    I would argue that maybe that has done some good. But our 
support for these things has been half-hearted.
    For example, with medical savings accounts it is very, very 
difficult under the regulations that were set up to actually 
have those offered to many Americans with flexible spending 
accounts for medical care. They, in fact, can't be rolled over 
from year to year. So 70 percent of the employees that are 
offered that option don't do it because they will lose it at 
the end of the year because it is not a true health banking 
system.
    And I guess my question is, if we were to actually expand 
this type of savings incentive in the market for people, could 
the creation of true medical savings accounts and flexible 
savings accounts and so forth lead to a significant expansion 
of the economy, because you would have that savings and 
investment in the capital markets that would go on then to 
cause increasing production activity? And I would like your 
view of that.
    Mr. Greenspan. Well, first of all, let me just say that the 
average householder would not agree that they are saving less. 
The reason they would argue that is that when they think in 
terms of savings, they take all of their assets, and so that 
where our savings rate, the one that we publish, shows a very 
low savings rate, in fact, it is negative if you take it 
literally, it is partly a fiction in the sense that what we do 
is we exclude the capital gains that people perceive as a 
value. So that if you have, as indeed we do, a reduction in 
disposable income by including taxes on capital gains and 
indeed taxes on the capital gains of stock options, you 
actually reduce disposable income significantly, but don't take 
into consideration the fact that those taxes were paid on 
incomes or receipts which are not included in disposable 
income.
    So the average householder doesn't view it as a reduction. 
Their view is that despite the fact that their 401(k)s have 
gone down in the last year, as the Congresswoman mentioned 
before, they are up very sharply from where they were 5, 10 
years ago, and the average householder has a significant rise 
in net worth.
    Our statistics may show that they are not saving. They are 
saying, ``I don't understand what you are talking about.'' But 
having said that, I do think that the issue of 401(k)s and IRAs 
specifically have been very useful vehicles to enable the 
average householder to accumulate wealth, and, in my judgment, 
there is nothing more important for the stability of a society 
of our type than everybody believes that they have a piece of 
it, they are a part of it, they benefit from it. I think 
anything that can be done to increase wealth at all income 
levels is highly desirable.
    Mr. Royce. You spoke last year here of our tendency in the 
markets to rely increasingly on savings from abroad or on 
investments from abroad. Would the creation of true medical 
savings accounts and the expansion of flexible spending 
accounts for medical care and other health banking concepts, 
would that help in terms of accruing savings in the market?
    Mr. Greenspan. Congressman, I don't want to discuss any 
particular form of program as such.
    Mr. Royce. I see.
    Chairman Greenspan. All I can say is that what is crucial 
for this country going into a period when we are going to get a 
very significant increase in the ratio of retirees to workers, 
it is crucially important that we increase the savings rate 
generally and enable a pickup in investment which will 
accelerate productivity, because it is a necessary condition 
for producing an adequate amount of goods and services to 
essentially service both the retirees and the workers. Whatever 
financial system we construct to do that should focus on 
answering the question, does this enhance savings, and 
therefore does it assist in addressing this long-term problem 
that we have?
    Mr. Royce. Thank you.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from California, Ms. Waters.
    Ms. Waters. Thank you very much.
    I would like to welcome you to our committee today. We, as 
always, are very pleased to have you come, Chairman Greenspan.
    Before I focus on the question that has been most on my 
mind, I just would like to take exception to your description 
of housing in this country. We have been holding extensive 
hearings in this committee, and many people on this committee, 
many Members, believe there is a housing crisis. There 
certainly is a housing crisis in California, and I am very 
surprised at your description of housing and the fact that you 
believe that it is doing well in this country, and we shouldn't 
have to worry about it at this point in time.
    Having said that, we have to make public policy here to 
take care of all of our taxpayers. We are not only concerned 
about the middle class and the upper middle class and the way 
we have to take care of a lot of poor people, we have to do 
that, and we have to develop public policy to do that.
    You and I may disagree on a lot of what we have to do for 
poor people. We may disagree on minimum wage, subsidized 
housing, Federal intervention, capital creation for business. 
We disagree on all of that, but, at the same time, I and others 
have to be concerned about public policy to deal with all of 
these issues to make sure that we do what we can do to have a 
decent quality of life for Americans who may not fit into the 
middle-class or upper-middle-class model.
    Having said that, this tax cut that has been passed in this 
Congress is public policy. Based on the projections of the 
income, the revenue now that was supposedly going to be 
received by our Government, it was based on the generous 
surplus that was being projected over a period of time. Now, 
you have described more than once here today that there is a 
softening of the economy, that the money that went into the 
high technology sector of our society oftentimes may have been 
money that was taken away from other sectors of our society. 
But there is a free fall now in that sector, and the jobs are 
being lost. The layoffs are perhaps more than were expected.
    Given that and some of the problems that are being 
described here in Argentina and Brazil and other kinds of 
things that are impacting on this economy, how are we going to 
protect the programs and the services that many of us have 
worked very hard to provide for the average American, given the 
tax cuts? We are going to now have to take away from funding 
these programs and services to pay for this tax cut.
    Now, I know this is not politically popular to have to 
discuss this tax cut, but I would like to ask you again to 
reflect on housing, and what you said to us about housing being 
in good shape and the fact that there is a lot of refinancing 
going on, but talk to us a little bit about people who don't 
own housing, who are looking for a place to live who can't 
afford rents and can't afford down payments, and then talk to 
us about how we implement a tax cut and take care of the very 
basic programs that we have become accustomed to in this 
country to take care of the average person.
    Mr. Greenspan. Well, Congresswoman, let me say the reason 
why I say that housing is better than we talk in terms of, 
let's look at the positive side. We have had a significant 
increase in the proportion of families who own homes. A 
disproportionate part of that rise has been minorities and 
lower-income groups. Indeed, a goodly part of the reason why 
housing is doing as well as it is is immigrants buying homes. 
So the issue of merely saying what has to be done, and I don't 
disagree with you that a lot has to be done, should not blind 
us to the fact that there has been some fairly significant 
improvement. Indeed, all of the activities that have been under 
way for a number of years have actually done a lot of good.
    Let's acknowledge that, because if we are going to 
consciously say we have got a long way to go but we haven't 
made any progress, then people get discouraged. In other words, 
if you just keep saying, we are trying to move from A to B, but 
we never can get there, you lose confidence in what you are 
doing.
    I think it is important for us to say we have made progress 
in this area, but we have got a lot more to make, and that the 
actions that were taken previously with respect to housing 
affordability have paid off, have worked. If you are not going 
to say that, then you are basically saying new initiatives have 
no more reason to work than the old.
    So I think it is a question of whether or not you are 
looking at the glass half full or half empty. I am happy to 
think that there is a very positive story to be said--to be put 
out front here, and, frankly, I think it is a story which 
effectively stipulates that if we go forward, there is good 
reason to presume that we will succeed. That is good, not bad.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman.
    I agree with your statement that the housing market is 
extremely robust today. I have been in the industry for over 30 
years myself, but I go back to the early 1980s when, you 
recall, the prime rate reached close to 25 percent. People 
couldn't buy homes, they couldn't sell their homes, and it took 
until the mid-1980s for recovery to start. I built mainly in 
the California area, and when the recovery started, builders 
were basically building on foreclosed properties, and they had 
artificially lower market value on those properties than they 
should have normally paid if they had bought vacant land and 
gone through the entitlement process at that point in time.
    So prices were kept down fairly low through the mid-1980s. 
Late 1980s, though, you saw a huge, robust market similar to 
what we have today, especially 1989, first of 1990. Builders at 
that point in time were building on newly entitled property, 
but, as today, they could not keep up with the pace and demand 
based on the protracted process they had to go through to get 
entitlements to develop land.
    And then in 1991 a huge recession hit California. The State 
of California made it worse by increasing taxes, which drove 
many families out of California. So you did have some relief in 
the demand for housing, but, at the same time, many people 
owned homes that they owed more on the home than the house was 
worth based on market value, because they had bought homes in 
an artificially inflated market in 1989, first of 1990, because 
you could build a home; a line would stand in front of it to 
buy the home.
    It took through the middle 1990s for that to start to 
change, and even as 1996 and 1997 approached, many builders 
were still building on foreclosed properties that were taken 
back by lenders, and they were buying them at reasonable rates, 
and they were ready to go.
    In the last few years, though, specifically in California, 
where you have demand about five times the supply that is being 
provided in the marketplace, builders are having to go back and 
build on newly entitled property, and, as you know, the EIR 
process has completely eliminated any time line where in the 
Government has to respond to the entitlement process on maps.
    Today we are facing the same situation that we faced back 
in the late 1980s, is when you build a home, you build a 
subdivision, people are standing in line to buy it. They are 
buying at high prices. People today are able to refinance their 
properties and take a lot of money out of them because prices 
are high based on demand that is tremendous, yet the supply is 
not keeping up with the demand again.
    My question is specifically based on the historical 
perspective. Do you see us entering a problem like we did in 
the 1980s, like we did in the 1990s, when demand cannot keep up 
with the free market system because they are unable to entitle 
properties at the rate necessary to build?
    Mr. Greenspan. I think the issue varies very significantly 
by sectors of the country. That is, the problems that emerge in 
housing always seem as though they are unresolvable. I think 
that one of the things we have found is that the homebuilding 
industry in this country is really remarkable in the sense that 
it continues to come back, no matter what the problems are.
    Mr. Miller. But with different players, it comes back.
    Mr. Greenspan. Indeed. In fact, I was about to comment that 
I remember, I think it was back in the 1950s or the 1960s, I 
was in southern California, and everyone was bemoaning that the 
homebuilding industry was absolutely dead, all of the home 
builders had gone out of business, and 2 years later they 
couldn't build enough homes.
    It was a whole new set of players. But what has happened, 
as you well know, is that we have smoothed out the building 
cycle, and indeed, with the finance that has been built into 
the system, we have taken a lot of the movement out of the 
cycle. But there are very considerable problems--I don't want 
to get into them as you know them far better than I.
    Mr. Miller. We have taken the financing problem out; that 
is, rates going up tremendously like they did in the 1980s, 
which caused the recession to occur in housing. They have 
remained stable. But my concern, and I hear some friends of 
mine on the Democrat side, they are concerned about affordable 
housing. You cannot build homes rapidly enough to guarantee an 
affordable housing market, because there is such demand, we are 
artificially inflating the cost of housing again.
    That is my concern: if we can sustain a marketplace that is 
robust with Government processing artificially decreasing the 
amount of supply on the market.
    Mr. Greenspan. Clearly if that happens, then there is a 
problem. But we have had a very long period of very significant 
demand. It is unlikely to continue to grow. In other words, as 
you know, there has been a significant decline in building and 
in prices of very high-priced homes, especially in California, 
and, in fact, it is pretty much across the board so that we are 
going to see ups and downs. I don't deny that there is a 
problem, but you don't see it in the macro-data at this 
particular point, although I certainly acknowledge the fact 
that for individual areas or individual types of housing, there 
are difficulties.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Gutierrez.
    Mr. Gutierrez. Thank you very much, Mr. Chairman. I am from 
the city of Chicago, and I built a lot of the bungalow belt in 
the city of Chicago. So there is a lot of home ownership, but 
there is also a lot of renters.
    And let me just share with the Chairman my experience. My 
experience is that we have a market in which more and more 
people are put into poverty because more and more of them are 
paying in excess of 30 percent of their income for rent. It is 
not a question, Mr. Chairman, not even of people being able to 
own a home, it is the difficulty of people to pay rent. I have 
increasingly seen numbers of people who are paying 40, 50, up 
to 60 percent of their income in rent relative to their income.
    So I know the macro-picture. I want to share with you that 
in the inner cities, which I think is important to our national 
economy and to a robust economy that we don't have a Nation 
that is so divided, we are normally between those that are 
further and further put away from ever owning a home and are 
having difficulty every day in raising their rent.
    I want to go back, Mr. Chairman, to your comment on 
immigrants and the fact that home ownership has increased. I 
was hoping I could encourage you to speak again about the 
importance of immigrants to the Nation's economic health.
    The last time you were here, in fact, in front of the 
committee last year, in the midst of a relatively low 
unemployment, you, said, quote: ``There is an effective limit 
to new hirings unless immigration is uncapped.'' I was hoping 
that you could take a minute to speak a little bit more on that 
point and why it is important, what is the importance of 
immigration and its vitality to our economy, and, to take it a 
step further, what it would mean for U.S. businesses if the 
immigration population was rapidly reduced.
    Mr. Greenspan. What was the last part of it?
    Mr. Gutierrez. If the immigrant population was rapidly 
reduced in this country.
    Mr. Greenspan. Congressman, I have always argued that this 
country has benefited tremendously from the fact that we draw 
people from all over the world, and the average immigrant comes 
from a less benign environment. Indeed, that is the reason they 
come here. They appreciate the benefits of this country more 
than those of us who were born here, and it shows in their 
entrepreneurship, their enterprise, and their willingness to do 
the types of work that make this economy function.
    I would be very distressed if we were to try to shut our 
doors to immigration in this country. I frankly don't envision 
that happening, but I understand that there is always that 
tendency on the part of people who are here, having come here 
or having come here four generations earlier, to want to shut 
the door. I don't think that is a good idea.
    Mr. Gutierrez. Mr. Chairman, I agree. I have a 
congressional district that, when you look at per capita 
income, we rank the lowest of all of the congressional 
districts in the State of Illinois. We also have the lowest 
unemployment in my congressional district, which can only lead 
me to believe that incomes are low, but people are working. 
Obviously I have the highest immigration population in the 
State of Illinois or anywhere in the Midwest, so I agree with 
you.
    You also spoke about the necessity to increase savings and 
wealth so that as we have an older population, they can sustain 
themselves. Could you talk a little bit about immigrants and--
because I understand that in the 1950s, there might have been, 
I think it was 15-, 16-to-1 for every one that was on Social 
Security vis-a-vis our Social Security Trust Fund, and then in 
the next 10 to 15 years it may be 2-to-1, that is 2 people 
paying in to every one. And the relationship of immigrants 
being 70 percent of them are of working age--they tend to think 
that they are all children coming across the borders--and if 70 
percent of them are of prime working age, what that could do to 
our Social Security Trust Fund.
    And if you have any figures on what immigrants contribute 
to the trust fund vis-a-vis--I am talking about net, vis-a-vis 
what they receive, because a lot of people complain about 
immigrants, because they say they cost more than they 
contribute, but I once saw a study that said in the next 20 
years, they are going to contribute $500 million more net into 
the Social Security Trust Fund. That is immigrants, people who 
were not born in the United States, but are legally and 
lawfully here in this country.
    Mr. Greenspan. Well, I think the law stipulates that with, 
obviously several exceptions, you don't draw Social Security 
benefits until you are 62 at a minimum, but you contribute very 
substantially to it prior to that. To the extent that immigrant 
population on average is well below 62 years, it necessarily 
flows that you do build up the fund as a consequence of that.
    I wouldn't, however, argue for immigration on the grounds 
that it helps the Social Security system. It does. I grant you 
that. I think we ought to do it on the grounds that it is the 
right thing to do.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Florida, Dr. Weldon.
    Dr. Weldon. Thank you, Mr. Chairman. As always, it is a 
pleasure to hear your testimony. I apologize I had to run out.
    I did want to ask you, Chairman Greenspan, when do you 
expect the economy to rebound?
    Mr. Greenspan. Well, I think the best way to answer that is 
what we see at this stage is an economy which is still weak, 
and indeed in certain respects is still deteriorating. But the 
rate of deterioration is clearly slowing, and indeed there is 
considerable evidence to suggest we are approaching stability 
at a lower level.
    The next stage, of course, is as you put it, a rebound. I 
don't know whether or not you would describe what is going to 
occur as a rebound, but clearly, as things begin to coalesce in 
a positive manner, you get cumulative reduction in uncertainty 
and risk premiums, and people reach out, start to invest, and 
the economy starts coming back.
    Dr. Weldon. Let me press you a little further. Are we 
talking about the fourth quarter? Are we talking about the next 
calendar year?
    Mr. Greenspan. I purposefully don't want to answer that in 
a specific way, because I don't think that we know exactly. If 
I had to make a forecast, I would say that toward the end of 
this year we will see things improving, and clearly some next 
year, but you can't forecast that well, and I think is it a 
mistake to have a point estimate. Indeed, as I discuss in my 
prepared remarks, what we recognize is there are distributions 
of probabilities around a number of different forecasts, and we 
can't forecast that well. We can observe the process and make 
projections on how we think things are evolving, but other than 
saying what I just said, we can't go very much farther now. I 
know that there are probably people who will tell you that the 
economy is going to grow 6.25 percent over the next 3 years.
    Dr. Weldon. I wouldn't ask you to be that specific.
    Mr. Greenspan. What I am trying to get at is it is outside 
of the scope of anybody's capacity to be that specific.
    Dr. Weldon. Well, I appreciate your frankness. I just have 
one other quick question for you.
    As you know, GDP was growing back in 1995 at about a little 
over 2 percent, and then it bound up to a little over 4 percent 
in 1996, and then it went really high in 1999. My observation 
was that a certain portion of that was due to the tremendous 
amount of speculation in the dot.com community, and as we all 
know, many of those investment opportunities were built on 
business assumptions that didn't pan out.
    Would you say it is reasonable to assume that barring any 
further kind of robust speculation in an economic sector like 
that, we should not expect those levels of growth again? As you 
know, we have got up to 5 percent growth rate in GDP, and a lot 
of people were saying that, in so many words, it is impossible 
to sustain and that it was built on that speculative 
environment that existed.
    Mr. Greenspan. Congressman, the way we make that judgment 
is to look at whether or not both capital and labor resources 
are being strained. What we observed in 1999 was that the 
number of workers who were willing and able to work was going 
down, meaning we were draining our pool of people who had no 
jobs but wanted to work. And we observed that our excess 
facilities were being dissipated in the sense that we were 
putting pressure on both labor and capital resources.
    What that tells you is you cannot go on indefinitely at 
that growth rate. And whatever that growth rate is at that 
time, it is higher by definition, than what is sustainable.
    Dr. Weldon. If I understand you correctly, you look at 
those figures, employment levels more so than the percentage of 
growth in the economy per se.
    Mr. Greenspan. Yes. And the reason essentially is that the 
missing element is the rate of growth of productivity, output 
per hour growth. And if you really want to judge whether the 
economy is straining or not, meaning whether it is growing 
beyond its long-term capabilities, there are all sorts of 
signposts which can give you that type of evidence--whether it 
is the unemployment rate, whether it is those not in the labor 
force, but who would work if a job were available, whether or 
not operating facilities and plants are being pressed, or 
whether there are shortages of capacity in certain areas.
    There are all of those signals that we employ to determine 
whether, in fact, a specific rate of growth is sustainable. And 
back in 1999 it was not.
    Chairman Oxley. The gentleman's time has expired.
    Let the Chair announce that there is a vote on the floor. 
That is a second notice. We plan to keep the hearing going. Mr. 
Paul is going to go over to vote and then come back in the 
chair.
    So we will continue with recognition of the gentleman, Mr. 
Bentsen from Texas.
    I would advise the Members if they want now to go over and 
vote, and then come back, we will try to keep the same order of 
questions.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Chairman Greenspan, your testimony and also your semi-
annual report seem to me to be a little more bearish than what 
you told us when you were here in February. And obviously, 
since that time, we have had more experience with the economy. 
You and the Fed have had more opportunity to see things that we 
may not see, or more time to look at those things and think 
about them.
    But it seems, when you testified back in February, that 
while the Fed was concerned about the backup in inventories and 
the inventory sales ratio, there was a feeling that with this 
sort of new paradigm in the economy, that that would be able to 
correct itself--hopefully, be able to correct itself more 
quickly. And the bigger concern was consumer confidence and 
consumer behavior, which obviously, none of us can interpret.
    In your testimony today and looking at what the central 
tendency of the Board is, that the concern about inventory 
sales backup and the manufacturing sector of the economy is 
much more pronounced than perhaps it was in February; that as 
opposed to looking at maybe a third and fourth quarter 
recovery, we are seeing, if I quote you correctly, the 
structure of the bottom coming together at this point in time. 
And so the problem does seem to be more profound.
    What also concerns me is that based upon your report, you 
do not seem to indicate--contrary to some of the columnists in 
the Washington area--you don't seem to indicate that this is a 
liquidity issue necessarily, that there is still sufficient 
liquidity in the capital and credit markets, but that this is 
clearly a demand side problem.
    What I would like to ask you is--and I guess reading your 
testimony--obviously you give us no indication of where the Fed 
is going which is, of course, your primary role when you come 
here. But it does seem to me that you all appear to be still 
somewhat concerned about the lack of strength in the economy.
    At the same time, it appears, since you were here in 
February, the world economic condition has worsened as well, 
and we know that there continue to be problems in Turkey. 
Argentina is suffering problems. The European economy has not 
rebounded. The Japanese economy has fallen back into recession 
and the Asian economy, except for perhaps the Chinese, is 
appearing to be slack as well.
    At the same time, the dollar remains exceedingly strong to 
the other main foreign currencies, and what concerns me is a 
new round of contagion that doesn't necessarily affect just 
emerging economies, but has a negative impact on the U.S. 
economy. And I would be interested in your comments on that.
    Also, the fact that the Bush Administration has signaled 
that perhaps there will be a change in the U.S. approach to 
contagion and to how we address international economic 
meltdowns, although I don't think they know exactly what their 
policy is. And fine, I don't want to delve into the fiscal 
policy, and you may not want to answer this.
    But in your comments--which, again, if you read through 
them are very bearish, I think you do mention that you think 
that there is a potential for an uptick in the outlook, in part 
because of reducing energy prices and the tax cut. And I have 
to ask you, because again I know you are not a Keynesian, that 
the tax cut, as I see it, is rather back-loaded, and I find it 
hard to believe that you or the Fed would think that it is 
stimulative, as you might make it appear, unless you think it 
is stimulative from a psychological standpoint and not a 
quantitative standpoint.
    Mr. Greenspan. Congressman, let me just say that if you go 
back and you read the February testimony, you will find an 
awful lot of qualifications as to what was going on at that 
particular time. And in a certain sense, even though the actual 
point forecast is lower now than it was back then, if you want 
to take it literally, the risks were greater back then. In 
fact, you may recall I was talking about the possibility of the 
fabric of consumer confidence being breached by the weakening 
of the economy going on, which would have been a very 
significant downside contraction. That has not happened. And, 
indeed, in a certain sense, I would say I am far less concerned 
today about the type of breach in the structure that was 
emerging late last year and early this. And as I pointed out in 
my prepared remarks, it is important to recognize that despite 
all of the shocks that are involved in both the domestic and 
international economy, our economy is still doing, not well, 
but clearly far better, given what has happened, than I would 
have forecast 6, 8, 9 months ago.
    So let me just say that, yes, the forecast is lower, but 
the range around that forecast is much narrower than it was, at 
least from my point of view, going back 6 months ago. And I 
think that is a very important issue.
    I am not saying that we are about to recover in a strong 
way. In fact, in the remarks I have indicated the long litany, 
as I put it, of the negatives that are out there are things 
that we can't just push aside. But in a more important sense, 
we have come a long way through this adjustment process, and we 
are still standing. And that is good news as far as I am 
concerned.
    Chairman Oxley. The gentleman's time has expired.
    The Chair would announce a brief recess for the vote.
    We would expect that when Mr. Paul returns, he could take 
the chair and we could begin the questioning again.
    Mr. Bentsen. Mr. Chairman, the other issues, if he could 
answer for the record, I would appreciate that.
    [The information requested can be found on page 89 in the 
appendix.]
    Chairman Oxley. Absolutely.
    The hearing stands in recess for 5 minutes.
    [Recess.]
    Dr. Paul. [Presiding.] You mention about the Keynesian 
approach to economics of a few decades ago, believing that they 
could eliminate the business cycle; and your conclusion is, 
really you can't, because you can't control human nature. And I 
agree that you can't control human nature and I agree that 
human nature and subjectivity is very important.
    But I would also argue that businessmen are human beings 
and enjoy human nature--they are rational humans, and they 
react in a rational way to interest rates and the signals they 
get from you and the Federal Reserve. And therefore, when 
interest rates are artificially kept low, they will do 
precisely what they have done; they generate to overcapacity. 
And, of course, in a recession, this has to be liquidated and 
we are now in that stage.
    It doesn't surprise the hard money school that we are in 
this phase of liquidating this overcapacity, and it should be; 
but we would also argue that the Fed may be doing exactly the 
wrong thing.
    Everybody criticizes you. Nobody comes to you and says, 
``Oh, Mr. Greenspan, you print too much money; you generate too 
much credit; your interest rates are too low.'' But the 
argument from this other school is saying that, precisely the 
opposite.
    It says that because, in the past, you manipulated interest 
rates, you have caused the boom, therefore, you have made it a 
certainty that we would have a recession. And literally, by 
quickly resuming the inflation, the debasement of the currency, 
that sometimes works and sometimes it doesn't work and that we 
are now in a period where it isn't working.
    It didn't work in Japan, and this is part of human nature 
too, or the way the businessman responds. One time he responds 
the way you want and the next time he does not.
    So, is there a possibility that you recognize that maybe 
interest rates were manipulated in the wrong direction, and 
maybe if we had to live with a fiat currency, it would have 
been better, since 1990, to take the average rate of the 
overnight rate and just make it 4.5 percent, just left it 
there, rather than doing this and causing all these gyrations?
    I would like you to comment on this, these ideas about 
monetary policy, in the hopes that maybe we can avoid what we 
in the hard money school see as a very serious problem and one 
that could get a lot worse, where we do not revive our economy, 
just as Japan has not been able to revive theirs.
    Mr. Greenspan. Mr. Chairman, so long as you have fiat 
currency, which is a statutory issue, a central bank properly 
functioning will endeavor to, in many cases, replicate what a 
gold standard would itself generate.
    If you take the period in the United States where the gold 
standard was functioning as close as you can get to its ideal, 
which would be from probably 1879 probably through the turn of 
the century, you had a number of business cycles in that 
period. And in many respects, they had very much the same 
characteristics that we just observed in the last couple of 
years: the euphoria that builds up when the outlook improves 
and people overextend themselves and the markets shut them 
down.
    Well, what shut down the market was the very significant 
rise in real, long-term interest rates in 1999, and in that 
regard, that is the way a gold standard would have worked. So I 
would submit to you that the presumption that if you have a 
hard currency regime, you will somehow alter human nature any 
more than a fiat currency one will, I will suggest that that 
does not happen.
    I certainly agree with you that if we would just pump out 
liquidity indefinitely, the distortions that would occur in the 
system would be very difficult to pull back together. I submit 
that is not what we do, and indeed, I would argue that given 
the fact that we have a fiat currency and that is the law of 
the land, we do as good a job as one can do in the context of 
the issues that you raise.
    Dr. Paul. I would like to follow up, but I can't break the 
rules. I would like to recognize Mr. Inslee from Washington.
    Mr. Inslee. Well, Mr. Chairman, I ask unanimous consent to 
allow the Chair to break the rules and allow you to continue 
your testimony and your questioning.
    Dr. Paul. Oh, no. That's OK. Go ahead.
    Mr. Inslee. Thank you.
    Mr. Chairman, I noted several places in your testimony 
references to the high energy prices that we have experienced 
over the last several months. And it is at least some small 
comfort to my constituents--I am from the State of Washington--
that you and others recognize how we have been hammered, 
particularly with wholesale electrical rates on the western 
coast of the United States, to the extent that in the State of 
Washington the estimates are that we will lose 43,000 jobs as a 
result of that spike in energy prices that we really could not 
accommodate. We were not that flexible.
    And unfortunately, the Administration, despite our repeated 
requests, took absolutely no action to deal with this for at 
least 7 months. They now have encouraged, and the Federal 
Energy Regulatory Commission, as you are aware, has done 
something, at least modestly, to curtail some of this 
disproportionate pricing. But unfortunately, the FERC has still 
refused--although they have moved ahead to request refunds for 
some ratepayers in California, they have refused to do so for 
the Pacific Northwest. And that is of particular importance to 
us in the Northwest because, while prices are going down to 
some degree now, we had massive incursion of debt by a lot of 
outfits to try to stay solvent during this period of ramp-up in 
their rates, and we continue to have this hangover from this 
rapid escalation of rates.
    We are now trying to work to get some refunds for 
ratepayers in the Pacific Northwest. We hope that FERC 
eventually will be dragged, kicking and screaming, to that 
position to help out.
    I don't want to ask you for a specific comment on the 
propriety of refunds on the West Coast, but I would like to ask 
you, assuming that they are legal and practical and FERC can 
accomplish them, I just want to know if you can give us your 
comments as to whether that might have some beneficial effect 
on the demand side, that I know you are interested in.
    Mr. Greenspan. You mean on whether or not refunds will 
improve the supply and demand for energy in the Northwest?
    Mr. Inslee. Or whether it will perhaps bolster our 
confidence, which right now has been taking a real hit in the 
Pacific Northwest.
    Mr. Greenspan. Congressman, I think in your State one of 
the really very serious problems has been the drought and the 
obvious shortfall of potable water availability. And a part of 
the job loss you suggest is the aluminum reduction plants, 
which found, not to anybody's surprise, if you are talking 10-, 
20-, 30-cent kilowatt hour, you cannot make primary aluminum 
profitably in the world market at those prices. So what they 
did is they shut down and they sold their power contracts. The 
alternative would have been essentially to eat the costs, which 
would be very difficult.
    As you are well aware, there has been a fairly significant 
decline in wholesale prices, pretty much across the whole 
western grid. And indeed, in California, they have slumped to 
levels they haven't seen for a couple of years.
    I think that it is remarkable that you have the capacity to 
meet the demands, and we are a good way through the summer and 
have not really seen some of the awesome concerns materialize 
that a lot of people had. And I think quite legitimately, there 
has been a very significant amount of conservation that is 
going on of electric power, especially in the West. And for the 
moment, at least, the system seems to be working well.
    And I do think that we are seeing fairly dramatic declines, 
or will be seeing them, in spot prices for both natural gas and 
for electric power. In the Consumer Price Index that was 
released this morning, as I recall, there is a remarkable 
decline in natural gas residential prices, and that is 
reflecting the two-thirds decline in the spot price of natural 
gas since late last year. There was a surge in electric power, 
which was the big increase, especially in California, but I 
think if you take a look at the wholesale structure now, it is 
going to come down. And that is going to be a positive factor, 
not only, as I pointed out in my prepared remarks, to profit 
margins of corporations, but I do think it is going to be a 
factor, as you imply, in the consumer area, and I think it 
could be an important one.
    Dr. Paul. The gentleman's time has expired.
    Mr. Inslee. Thank you.
    Dr. Paul. The gentleman from North Carolina.
    Mr. Jones. Mr. Chairman, thank you very much.
    Dr. Greenspan, it is a privilege to hear you today. I was 
not able to be in attendance when you spoke in the spring, so 
my question will go back to a news article that I read at that 
time. But first, I would like to say, in your response about 
the capital gains tax to a couple of my colleagues, that among 
those who are retired or close to retirement, I sincerely 
believe as--not as an economist; I was a history major in 
college, so that tells you--but that the average person that 
has investments, I believe sincerely would start moving those 
investments around and actually, I think, helping the economy 
if we, as a Congress, could drop that capital gains tax 
anywhere from 3 to 5 points.
    But I did hear your answer on that, so I am not going to 
ask you to repeat yourself.
    My question is, back in February there was an article in 
U.S. News and World Report, and you might have covered this in 
your prepared remarks; I was not here at that time. But it is 
called ``A Debt Thing.'' And it says the recession could swamp 
consumers and companies. My question is, if over 34 percent of 
the average household income is going out into payments on 
installments such as loans, mortgage loans, home equity debt 
and vehicle leases and vehicle payments, at what point do you, 
as the Chairman, you as an economist, get concerned about the 
average debts of the household?
    Mr. Greenspan. It is difficult to say, because it will 
often vary depending on the type of debt that we are talking 
about. Debt service charges, for example, when you are dealing 
with short-term loans, are very high--in other words, you 
borrow and then you pay it off very quickly, and that will 
create a significant debt service charge, whereas long-term 
mortgages relative to the amount of debt do not.
    I think that you do, however, get concerned when you begin 
to see the overall charge against a weekly paycheck get to a 
level which begins to affect people's ability to function. And 
while that doesn't usually impact on the economy, as such, what 
it does do is put you in a position that in the event that you 
get a decline in income, you create some fairly significant 
retrenchment requirements on the part of consumers.
    So, as you point out, at the moment, the debt service 
burden, which is essentially the repayment of debt plus 
interest as a percent of cash incomes, at this stage is up to 
levels that have been pretty high in the past. So it is high at 
this stage. It is not at a level way beyond the experience of 
the last decade or two, but it is high, but not yet anywhere 
near the point given the level of assets which exist in the 
household sector--where it has moved to the edges of great 
concern. It could get there, but it has not gotten there yet.
    And judging from the delinquency rates that we see in the 
banks and in the finance companies which, while they have moved 
up a bit, are not of particular concern, we are not at a point 
where one has to worry materially about that. But should it 
continue and should we find that the process gets to a point 
where you are beginning to see the stretching of the borrowing 
capacity, then it would. It has not gotten there yet, but it 
could.
    Mr. Jones. Thank you, Mr. Chairman.
    Dr. Paul. The gentleman yields back.
    The gentlelady from California, Ms. Lee.
    Ms. Lee. Thank you.
    Good afternoon Mr. Chairman. Good to see you.
    First, I would like to follow up on Mrs. Roukema's and Ms. 
Waters' comments regarding housing; and I am, quite frankly, 
surprised at your response. At the same time that we have an 
increase in home ownership, Mr. Chairman, we also have a record 
increase in foreclosures. Also in California, of course, one of 
the highest cost areas in the country, 2 percent of all 
conventional loans were made to African Americans, only, and 2 
percent of our largest lenders made less than 2 percent of 
their home loans to African Americans.
    So I guess, just based on your view of the world, should we 
really assume that the Federal Reserve will not consider 
economic strategies actually to stimulate home ownership, 
especially for those making $40,000 or less?
    And you also indicated that you believe in the importance, 
actually, of increasing and accumulating wealth in our society, 
yet African American and Latino unemployment rates are still 
twice that of whites. And so I haven't heard, really, any 
investment strategies from the Federal Reserve to address these 
horrendous--and they are horrendous--economic disparities.
    Mr. Greenspan. I agree with you, Congresswoman, and we do 
have a law: it is called the Community Reinvestment Act, which 
presumably addresses precisely the issue that you are 
addressing. I think you have to distinguish between the 
Community Reinvestment Act and the overall macro-housing policy 
in this country, which addresses home ownership and new 
construction in markets generally. For everybody, on average, 
that is working well.
    It is not working well for a number of people, basically 
minorities, and we address that. In other words, we address 
that because if you could bring everybody up to the average or 
even just below the average, it would have a major, positive 
effect on the economy.
    And so what we endeavor to do, in the context of an overall 
policy which I think is working, is recognize that parts of it 
are not. That doesn't mean that you don't address the parts 
that are not.
    Ms. Lee. Sure. But what do we do for the parts that are 
not? I indicated home ownership. Fine. Great. We are moving in 
the right direction for some. But for those who are not part of 
that track----
    Mr. Greenspan. Well, this is the reason why I say you have 
to build up standards of living. You have to build up wealth. 
You have to build up productivity and you have to raise 
people's levels so that they can afford housing.
    I mean, when I was a kid, the thought of living in an owned 
home was so far remote from any conceivable notion that I had. 
We could not remotely consider purchasing a home.
    Ms. Lee. But if you don't support increasing the minimum 
wage----
    Mr. Greenspan. I don't support increasing the minimum wage, 
because I think it does precisely the opposite of what people 
think it does. And the facts are the facts. I have strongly 
argued this issue--and I grant you I am in a minority on this 
question--but I think the evidence is overwhelming that it does 
not do what a lot of people think it does in a positive 
direction. I think it is negative for the people at the lower 
end of the income structure.
    Ms. Lee. So then how do you increase the standard of 
living?
    Mr. Greenspan. You increase the standard of living by 
raising the overall level of productivity in the society and 
make certain that everyone has an opportunity to effectively 
engage in that economy. It is called ``opportunity,'' and I 
think that is the most important thing that we can do to 
eliminate discrimination, create opportunity, enable people to 
pull themselves up from the bottom wherever they are and engage 
in this fairly prosperous economy.
    So when I say that I think that the overall housing market 
is fine, which it is, that is not to say that I think that it 
is doing fine for everybody.
    Ms. Lee. Thank you very much for at least clarifying that 
fact.
    And finally, let me just ask you, with regard to Reg B, 
with regard to voluntary reporting, with regard to small 
business lending, are you going to schedule a vote on this 
sooner or later?
    Mr. Greenspan. Where are we on Reg B now?
    Mr. Mattingly. Congresswoman, I think the staff is still 
analyzing the----
    Dr. Paul. Could the gentleman identify himself at the mike 
appropriately?
    Mr. Mattingly. I am sorry, sir.
    My name is a Virgil Mattingly. I am General Counsel of the 
Federal Reserve Board.
    Congresswoman, the Board staff is still evaluating those 
proposals. We did get a lot of extensive comment, but I am not 
sure when it is going to be scheduled.
    Ms. Lee. Thank you very much.
    Chairman Oxley. [Presiding.] The gentlelady's time has 
expired.
    The gentlelady from the great city of Cleveland, Ohio.
    Mrs. Jones. Thank you, Mr. Chairman.
    Chairman Greenspan, good afternoon. I am going to follow up 
with some of the questions that my colleague, Ms. Lee from 
California, asked. If you don't raise the minimum wage, and you 
wait on rising levels of productivity, what are the people who 
are making less than minimum wage, with no health care, paying 
high gas taxes, high gas prices, $2 for a gallon of milk, $3 
for a loaf of bread, to do in the interim?
    Mr. Greenspan. Let me ask you this: If you raise the 
minimum wage, and they lose their jobs as a consequence, does 
that help them?
    Mrs. Jones. Mr. Greenspan, that is fear tactics. People 
have to have jobs, and I am suggesting to you that when we live 
in a community where the living standards are so low that 
people have no opportunity, what they do is they go to criminal 
enterprise in order to support their families.
    But don't ask me a question; you answer my question. My 
question was, what do you----
    Mr. Greenspan. Well, sometimes you can offer--look, I have 
expressed my view on this. I am in a minority on this. I 
acknowledge the fact that most people don't agree with me on 
this particular issue. But when the facts are what they are, I 
cannot but say what I believe. And I honestly do not believe 
that it helps the lower income.
    Mrs. Jones. You know, I heard that answer, and I don't mean 
to interrupt you.
    My question is, what do the people who are in that dilemma 
do in the interim while we are waiting for rising levels of 
productivity to occur?
    Mr. Greenspan. Well, if I believed that the minimum wage 
actually helped, I would support not only the minimum wage but 
to increase it because----
    Mrs. Jones. Do you support a living wage?
    Mr. Greenspan. Well, I don't know what that means. I 
support the highest wages that people can get in the 
marketplace. I started off making $35 a week when I was a kid. 
That was barely a living wage and I worked my way up. So the 
question really is, do we have levels in this country which I 
think are extraordinarily difficult? The answer is yes, I do.
    Do I think--I will ask myself the questions.
    Mrs. Jones. Well, that is not fair, Mr. Greenspan. Now, you 
may be the Chairman of the Federal Reserve, but at this point 
this is my 5 minutes.
    Mr. Greenspan. OK. Go ahead.
    Mrs. Jones. I think I ought to be able to ask you some 
questions, right?
    Mr. Greenspan. I am sorry.
    Mrs. Jones. And I don't mean that derogatorily in any way. 
Let me ask this question.
    We have high levels of household debt in the Nation 
currently. Do you favor some form of debt relief for highly 
indebted consumers at these interest rates or interest rate 
ceilings, or aggressive measures to curb predatory lending? All 
of these things come as a result of what I have said.
    Mr. Greenspan. Yes. We, as you know, have been strongly 
supportive of actions to eliminate predatory lending. I 
personally find the individual cases most distressing, and it 
is an aspect of our financial system which has not shown, I 
think, great status. I think it is a small issue, relatively 
speaking, but it should be eliminated.
    Mrs. Jones. It is a small issue. Let me stop you just for a 
moment, please.
    Mr. Greenspan. No, I am trying to say when you look in 
terms of 8,000 banks and a lot of other institutions, it is a 
small issue in the sense that subprime lending is a large part 
of the market, and subprime lending, I think, helps minorities. 
It is a very important part of our financial----
    Mrs. Jones. I can't disagree with you. But I only have 
probably 2 seconds and I want to take you just to one area. You 
say it is a small area, but when you are dealing with--most of 
the predatory lending occurs in minority and low-income 
communities that are already deeply in debt, and it is the only 
place by which they get some type of ability to build wealth 
through home ownership. It is a big problem, not a small 
problem.
    Mr. Greenspan. I agree with you. I think it is a big 
problem for particular groups of individuals, and the reason 
why the issue has difficulty moving forward is it is not a big 
enough issue in the total financial system to get the type of 
support that you need to eradicate this particular practice.
    Mrs. Jones. But I could get you to help me eradicate this.
    Mr. Greenspan. I am on your side on this one.
    Mrs. Jones. OK. I am going to call on you. I thank you, Mr. 
Chairman.
    I yield back the balance of my time.
    Chairman Oxley. The gentlelady's time has expired.
    The Chair is now pleased recognize the gentleman from 
California whether he is out of breath or not.
    Mr. Ose. Mr. Chairman, thank you.
    Mr. Chairman, thank you for joining us today. I want to 
specifically ask a prospective question dealing with the 
President's proposal on energy. I have been quite involved in 
the stuff with the FERC on the electricity and the like.
    The fact of the matter, what they did was based on 
something I put in about a month prior to that. But I would 
appreciate any comments you might wish to offer about the 
economic benefits of the President's energy policy, as 
proposed, particularly relating to increasing the supply of oil 
and gas, FERC the electricity grid or making it operate more 
efficiently--better gasoline, the issue of boutique fuels, 
natural gas distribution, issues of that nature.
    Mr. Greenspan. Well, Congressman, I think that because the 
world economy has slowed its rate of growth, the demand for 
energy overall has slackened and it has taken the pressure off 
what appeared to be capacity restraints in the system, which we 
know are there, and they are there, as you point out, in a 
number of different areas.
    We have had a very dramatic decline in natural gas prices 
in the last 6 months, in part because we have had a fairly 
marked pickup in drilling and the ability to find new sources, 
but also to a very large extent due to a decline in the rate of 
growth in consumption in a number of areas and actual declines 
in other areas.
    We have seen a fairly dramatic decline in gasoline prices 
because we had a shortage of refinery capacity late last year, 
or early this year, and even though inventories of crude oil 
were building up at refineries, you couldn't put it through the 
refinery system to create inventories of gasoline. But now that 
has happened, and the price of gasoline has come down a 
considerable degree.
    The same arguments are relevant to what has been going on 
in the electric power grid system and electric power use.
    That should not in any way alter our view that there are 
long-term infrastructure problems out there, and that we need 
to get significant new energy-generating facilities, improved 
energy grids, the ability to drill for natural gas very 
specifically, because while we can import crude oil, there is a 
limit to how much natural gas we can bring in. In fact, we 
really are getting it largely from Canada, and liquefied 
natural gas is a very tough thing to import from other 
countries, so that we have to focus on making certain that we 
have adequate supplies of natural gas. And when we begin to 
look at the longer term, I think we are going to find that 
long-term policy is going to be required to make certain that 
the energy supplies in this country are adequate to the long-
term needs of the economy.
    Mr. Ose. Is the President's willingness to at least engage 
on this subject a positive first step?
    Mr. Greenspan. I am sorry?
    Mr. Ose. Is the President's willingness to engage on this 
subject of energy policy, is that a positive first step?
    Mr. Greenspan. Oh, indeed. No question. I think that it is 
the type of issue which has importance in the longer term and 
can only be addressed in the longer term. And usually you have 
to come at issues when they are not perceived to be problems to 
get them appropriately addressed in that regard. I think it is 
important that we evaluate our whole, long-term energy needs 
and how they are going to be met.
    Mr. Ose. I appreciate, in particular, your last remark 
about focusing on issues of this nature when they are not 
problems.
    Given the abatement in pricing that we have all seen, both 
on the spot and the futures markets for natural gas and 
electricity, I think, Mr. Chairman, if there were one piece of 
counsel that we should share with our colleagues, it is that 
the way to avoid having problems is to address them before they 
are problems.
    Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman's time has expired.
    I would agree with the gentleman from California and also 
say that markets work.
    Mr. Chairman, we thank you again for providing us with your 
testimony and answers to our many questions. We appreciate it.
    And let me say on a personal note, we thank you for your 
help on the SEC rulemaking authorities that dealt with broker-
dealers and banks. And we are pleased to note that the SEC 
announced this morning that they would be extending that 
deadline till May of next year, which hopefully will give us 
all an opportunity to work in a concerted manner among the 
regulators to bring about the intent of Gramm-Leach-Bliley, and 
for that we thank you very much.
    Without objection, the record for this hearing will remain 
open for 30 days for Members to submit questions in writing to 
the Chairman and have his responses placed in the record. Thank 
you again.
    [Whereupon, at 12:45 p.m., the hearing was adjourned.]


                            A P P E N D I X

                             July 18, 2001

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