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

                           CONDUCT OF MONETARY POLICY

                Report of the Federal Reserve Board pursuant to

                     Section 2B of the Federal Reserve Act

                         and the State of the Economy

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

                                    HEARING

                                   BEFORE THE

                                  COMMITTEE ON
                               FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 27, 2002

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 107-56

    78-399              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2002
    ____________________________________________________________________________
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    Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

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

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

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

                                   WITNESSES
                          Wednesday, February 27, 2002

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

                                    APPENDIX

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

                  Additional Material Submitted for the Record

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

                           CONDUCT OF MONETARY POLICY

                                  ----------

                          WEDNESDAY, FEBRUARY 27, 2002

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

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

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

                                A P P E N D I X

                               February 27, 2002
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