[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 15, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-48



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                            WASHINGTON : 2003
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          CHARLES A. GONZALEZ, Texas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           ARTUR DAVIS, Alabama
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 15, 2003................................................     1
Appendix:
    July 15, 2003................................................    43

                                WITNESS
                         Tuesday, July 15, 2003

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

                                APPENDIX

Prepared statements:
    Baca, Hon. Joe...............................................    44
    Emanuel, Hon. Rahm...........................................    45
    Greenspan, Hon. Alan.........................................    47

              Additional Material Submitted for the Record

Greenspan, Hon. Alan:
    Monetary Policy Report to the Congress.......................    59
    Written response to questions from Hon. Spencer Bachus.......    90
    Written response to questions from Hon. Ruben Hinojosa.......    92
    Written response to questions from Hon. Barbara Lee..........    94
    Written response to questions from Hon. Edward R. Royce......    97
    Written response to questions from Hon. Brad Sherman.........    99
    Written response to questions from Hon. Patrick Tiberi.......   100

 
                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

                              ----------                              


                         Tuesday, July 15, 2003

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:02 a.m., in Room 
2128, Rayburn House Office Building, Hon. Sue W. Kelly 
presiding.
    Present: Representatives Leach, Bachus, Castle, King, 
Royce, Lucas of Oklahoma, Kelly, Paul, Gillmor, Ryun, Manzullo, 
Ose, Biggert, Green, Shays, Shadegg, Miller of California, 
Hart, Capito, Tiberi, Kennedy, Feeney, Hensarling, Murphy, 
Brown-Waite, Barrett, Harris, Frank, Kanjorski, Waters, 
Sanders, Maloney, Velazquez, Watt, Hooley, Carson, Sherman, 
Meeks, Lee, Inslee, Moore, Gonzalez, Capuano, Ford, Lucas of 
Kentucky, Crowley, Clay, Ross, McCarthy, Baca, Matheson, Miller 
of North Carolina, Emanuel, Scott, and Davis.
    Mrs. Kelly. This hearing of the committee will come to 
order.
    And good morning, Mr. Chairman. We welcome you back to the 
Financial Services Committee. You have been good enough to 
share your views on the state of the economy and your expertise 
on the conduct of monetary policy three times this year. And I 
am certain I speak for the other members of this committee when 
I say that we really appreciate it.
    Mr. Chairman, it appears that all signs point toward a 
solid and controlled recovery spreading through the economy, 
which has become increasingly more evident as the latter half 
of this year rolls out. We already have seen the signs of 
improvement. The economy has just finished one of its best 
quarters in years. The weaker dollar especially against the 
euro should be good for the economy in the long run. This 
should turn consumption upward through retarding imports and 
increasing exports and other world economies also begin 
recovering, and we will be interested in your comments about 
that.
    Even though the unemployment numbers released at the 
beginning of the month contain some news, good news, the 
overall unemployment--the overall employment was up, and more 
people are moving from the ranks of resigned-to-not-working, 
looking for a job, not working and not looking for a job; they 
are moving into the ranks now, I believe, of looking for those 
jobs. I think that confidence that there will be a job out 
there if one looks hard enough is the best indicator that there 
is a recovery in this economy.
    Mr. Chairman, there are, however, some atypical aspects of 
this nascent recovery, and I hope you will shed some light on 
those today. Why, for example, have manufacturing inventories 
again headed down? Why has the balance of payments inched up, 
even with a weaker dollar?
    And when the rest of the world economy begins to show the 
signs of recovery, what do we see in our own economy? Without a 
recovery overseas, will we see a recovery in our own economy? I 
don't know that our economy can fully rebound without that 
recovery around the rest of the world.
    I am also hoping that you can discuss some other 
indecipherable aspects of the way the economy is reacting. We 
are managing to go quite a long time with higher unemployment 
numbers. Has the economy changed in a fundamental way that the 
real natural rate of unemployment is sustainable at a lower 
point than it was a couple of years ago?
    We all hope there will be no need to cut the target Federal 
funds rate any more. Lots of people have watched the rate inch 
down towards zero--it is 1 percent now--and wonder what sorts 
of tools you would or--would have used or we will still have to 
use as the targets drop further? I hope you will be able to 
spend a little time discussing that also today.
    Mr. Chairman, with the busting of the tech bubble you 
warned us about, the terrorist attacks in late 2001, the 
corporate scandals and the uncertainty in the run-up to the war 
in Iraq, I think we can agree that this economy has displayed 
tremendous resiliency. And with the swift passage of 
legislation like the PATRIOT Act and Sarbanes-Oxley and a 
successful war behind us, I think we are all ready for some 
sustained good news.
    So today I am hoping you can tell us that you see no 
deflation on the horizon; instead, you see strong growth ahead 
without inflation. This way, businesses may begin to plan for a 
predictable future, including increased hiring and investing in 
equipment and technology, so that investors can begin to see a 
little bit of a recovery in their portfolios or their 401(k)s, 
and retirees and parents with children entering college can 
lose a certain sense of anxiety.
    Given indicators we see now, I am hopeful that the next 
time you visit us, we can also talk about all of the elements 
that led to a strong recovery and not just when a recovery is 
coming. I think you will agree with me, Mr. Chairman, that 
would be a welcome hearing.
    I thank you again, Mr. Chairman, for appearing before this 
committee. I look forward to hearing your testimony.
    And with that, I yield back the balance of my time and 
recognize the gentleman from Massachusetts, Mr. Frank.
    Mr. Frank. Thank you, Madam Chair. I want to begin by 
apologizing to the Chairman of the Federal Reserve. Apparently, 
I broke the embargo by quoting from the report this morning. I 
apologize. It is entirely my fault. It is not my staff's fault, 
it is not George Tenet's fault, the British didn't make me do 
it. It is my fault, and I am sorry. I will be more careful in 
the future.
    Mr. Chairman, what I talked about were two things in both 
your statement and in the report that seem to me to put us in a 
very troubling box. And let me say at this point, I was asked, 
Well, what are you going to sort of blame the Chairman for this 
morning? The answer is nothing.
    These are not meant to be accusatory to you and the FOMC or 
the Federal Reserve in any way, but they are dilemmas that we 
have to address. On page 8 of your statement you note--it is a 
fairly stark paragraph which says, ``One consequence of the 
improvements in efficiency is, in effect, much higher 
unemployment than one would expect at this stage.'' We have to 
talk about--obviously, we all want productivity, but do we have 
a new kind of structural problem we have to address and what do 
we do about it?
    I will say this: I also read, as I was reading this 
Saturday's Boston Globe, the State of Massachusetts has just 
reached a point where people who are in a prolonged state of 
unemployment lost their second 13-week eligibility. We had a 
big debate in this Congress recently about whether or not to 
extend unemployment benefits additionally for people who are 
unemployed. People on the other side who won and did not want 
the extension that we wanted said, Well, we don't want to give 
people a disincentive to find work.
    To the extent that we have got a problem in the economy, 
which you mentioned, to the extent that increased productivity 
and cost-cutting needs from the previous period lead to 
unemployment that is not the fault of the unemployed, I think 
we have a serious problem. How do we address that?
    One way to address that, of course, is through stimulus. We 
have this problem, but it now looks as if to some extent 
stimulating the economy as a whole gives us less of a bang for 
unemployment than we were hoping. But then we run into this 
very troubling problem.
    On page 12 of the Monetary Report it says, ``With little 
change, on balance, in non-Federal domestic saving over this 
period''--the period is 2000 to 2003--``the downswing in 
Federal saving showed through into net national saving, which 
was equal to less than 1 percent of GDP in the first quarter, 
compared with the recent high of 6-1/2 percent of GDP in 1998. 
If not reversed over the longer haul, such low levels of 
national saving could eventually impinge on the formation of 
private capital that contributed to the improved productivity 
performance of the past half-decade.'' .
    That is a very stark statement. That is a statement that 
says, in the first place, the swing has been from 6-1/2 percent 
to less than 1 percent in national savings caused, according to 
this statement, entirely by the reversal in the Federal budget, 
not in non-Federal savings, but the budget deficit.
    Take now that we are told by OMB that we are going to get a 
trillion dollars in debt over the next two years, this year and 
next year. The new OMB figures if you round them give us a 
trillion dollars in debt, well over 900 billion; those are 
probably optimistic. You say here that if this trend is, quote, 
``not reversed over the longer haul, such low levels could 
impinge on the formation of private capital.''
    So we are not now talking about the earlier debate only--
maybe that was a proxy for this, do bigger deficits cause 
higher interest rates, et cetera--we are talking about a severe 
depletion of national saving.
    So here is our dilemma. We have higher unemployment which 
would--and persisting not just in number, but as we have all 
noted, the length of unemployment for some people, unemployment 
of a particularly socially corrosive nature that hits 
teenagers, hits African Americans, the most vulnerable people 
in the economy. And we have this problem, we are getting this 
high unemployment despite, as you note in here, an enormous 
amount of fiscal stimulus and the lowest interest rates in a 
long time. So this economy is troubled.
    We are troubled by the persistence of high unemployment, 
and we are constrained by deficits, a trillion dollars about to 
be added in deficits in the next year, and we are constrained 
by this trend which, if not reversed, will impinge on the 
formation of private capital.
    So I appreciate the chance to hear your responses today. I 
will, in my questions, suggest some things that we ought to be 
doing. But dealing with prolonged and persistent unemployment, 
constrained as we are by a deficit trend that your Monetary 
Report says has reached a point where it could impinge on the 
private capital formation, this is not a happy time for the 
economy and we need to address that.
    I thank you, Madam Chair.
    Mrs. Kelly. Thank you very much. Mr. King.
    Mr. King. Thank you, Madam Chairlady. I want to join with 
the others in welcoming Chairman Greenspan back before our 
committee and thank him for the tremendous job he does for our 
country. And I think both Mrs. Kelly and Mr. Frank have touched 
on a number of the points that I intend to make, so I will keep 
my opening remarks brief.
    But I would, Mr. Chairman, ask you if during the course of 
your testimony today you could expand upon the point that, as 
Mr. Frank said, is on page 78 of your testimony this morning; 
and that is the fact that increased productivity may at least 
for the short term result in not a growth in jobs even if the 
economic indicators are otherwise up.
    For instance, I think over the last quarter the economy has 
done very well. I think most of the indicators are positive. 
But there also appears to be the strong possibility that this 
may well, in fact, be a recovery without any significant 
increase in jobs. And it is difficult to go up to someone on 
the street and tell them, The economy is doing great, but you 
are still out of work. So I am just wondering whether or not 
this is a result of a built-in productivity which is--I guess 
there is a cloud in every silver lining--and whether or not 
that productivity is going to keep job growth from expanding. 
That is number one.
    Number two: Whether or not you do believe that the spectre 
of deflation has been removed from our economy. Or do you think 
it is still something that we have to be concerned about? And 
also if could you just expand on the idea of how much you do 
think the economy is going to grow, whether or not the 
indicators are in place, whether or not we have turned the 
corner; and have we, in effect, removed the possibility of a 
double-dip recession?
    So with all of that, I know that the millions of people 
watching are more interested in what you have to say than what 
I have to say. So with that, I yield back the balance of time. 
Thank you.
    Mrs. Kelly. Ms. Maloney.
    Mrs. Maloney. Thank you.
    And good morning, Chairman Greenspan. Your testimony today 
comes at a historic time. At the last meeting of the Federal 
Open Market Committee the Fed lowered the Federal funds rate by 
25 basis points to 1 percent; even with some observers 
expecting a 50-basis-point cut, the 1 percent Federal fund rate 
is still the lowest since 1954. And the reduction marked the 
thirteenth time the Fed has lowered rates since January of 
2001.
    While the Fed has managed monetary policy to a point where 
interest rates are at record lows, the Federal Government has 
suffered the largest Federal fiscal reversal in the history of 
the United States. In just two years, a projected 10-year 
budget surplus of 5.6 trillion has turned into a projected 
deficit of 4 trillion.
    Also, two years ago, the Administration projected a 246 
billion surplus for fiscal year 2003. We now know, by the 
Administration's own admission, the deficit this year will 
exceed 450 billion, the largest in history and a massive 
liability on America's families.
    The cause for this fiscal reversal lies squarely with the 
Administration's policy. A July report by the Center for Budget 
and Policy Priorities pointed out that the cost of the 
Administration's enacted tax cuts, and I quote, ``is almost 
three times as great as the cost of the war in Iraq, 
Afghanistan and homeland security,'' end quote.
    These deficit numbers are stunningly large and incredibly 
troubling because of the missed opportunities that they 
represent. In the short term, over two years of the 
Administration's economic policies have provided minimal 
stimulus at a huge, huge cost. Despite the price tag of the tax 
cuts, many Americans are experiencing prolonged unemployment. 
The 6.4 percent June unemployment number is the highest since 
1994. African American unemployment is even higher at 11.8 
percent. In the long term, the tax cuts represent a missed 
opportunity to prepare for the looming retirement of the baby 
boom generation, funding for education, environment and 
homeland security.
    Chairman Greenspan, despite my concern over the cost and 
inefficiency of the Administration's attempts to stimulate the 
economy, I do hope you have good news for us today. The 
government has irresponsibly run up our Nation's credit cards, 
and I hope the American people will get some benefit.
    Thank you for appearing before us. It is always a pleasure 
to hear you.
    Mrs. Kelly. Thank you very much, Ms. Maloney.
    Mr. Greenspan, Mr. Chairman, we are delighted to have you 
here. Will you please begin your testimony?

 STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Greenspan. Thank you very much, Madam Chairman and 
members.
    Mrs. Kelly. Mr. Greenspan, would you please push the button 
on that microphone so we can all hear what you have to say.
    Mr. Greenspan. Madam Chairman, members of the committee, 
when, in late April, I last reviewed the economic outlook 
before this committee----
    Mrs. Kelly. If you will pull the mike closer to you--pull 
it forward; there is enough cord there.
    Mr. Greenspan. I am used to speaking out of both sides of 
my mouth.
    Mrs. Kelly. That is going to change the markets terribly by 
tomorrow.
    Mr. Greenspan. Just to repeat, when, in late April, I last 
reviewed the economic outlook before this committee, full-scale 
military operations in Iraq had concluded, and there were signs 
that some of the impediments to brisker growth in economic 
activity in the months leading up to the conflict were 
beginning to lift. Many, though by no means all, of the 
economic uncertainties stemming from the situation in Iraq had 
been resolved, and that reduction in uncertainty had left an 
imprint on a broad range of indicators.
    Stock prices had risen, risk spreads on corporate bonds had 
narrowed, oil prices had dropped sharply, and measures of 
consumer sentiment appeared to be on the mend. But, as I noted 
in April, hard data indicating that these favorable 
developments were quickening the pace of spending and 
production were not yet in evidence, and it was likely that the 
extent of the underlying vigor of the economy would become 
apparent only gradually.
    In the months since, some of the residual war-related 
uncertainties have abated further, and financial conditions 
have turned decidedly more accommodative, supported in part by 
the Federal Reserve's commitment to foster sustainable growth 
and to guard against a substantial further disinflation. Yields 
across maturities and risk classes have posted marked declines 
which, together with improved profits, boosted stock prices and 
household wealth. If the past is any guide, these domestic 
financial developments, apart from the heavy dose of fiscal 
stimulus now in train, should bolster economic activity over 
coming quarters.
    To be sure, industrial production does appear to have 
stabilized in recent weeks after months of declines. Consumer 
spending has held up reasonably well, and activity in housing 
markets continues strong. But incoming data on employment and 
aggregate output remain mixed. A pervasive sense of caution 
reflecting, in part, the aftermath of corporate governance 
scandals appears to have left businesses focused on 
strengthening their balance sheets and, to date, reluctant to 
ramp up significantly their hiring and spending. Continued 
global uncertainties and economic weakness abroad, particularly 
among some of our major trading partners, also have extended 
the ongoing softness in the demand for U.S. goods and services.
    When the Federal Open Market Committee met last month with 
the economy not yet showing convincing signs of a sustained 
pickup in growth, and against the backdrop of our concerns 
about the implications of a possible substantial decline in 
inflation, we elected to ease policy another quarter-point. The 
FOMC stands prepared to maintain a highly accommodative stance 
on policy for as long as needed to promote satisfactory 
economic performance. In the judgment of the Committee, policy 
accommodation aimed at raising the growth of output, boosting 
the utilization of resources, and warding off unwelcome 
disinflation can be maintained for a considerable period 
without ultimately stoking inflationary pressures.
    The prospects for a resumption of strong economic growth 
have been enhanced by steps taken in the private sector over 
the past couple of years to restructure and strengthen balance 
sheets. These changes, assisted by improved prices in asset 
markets, have left households and businesses better positioned 
than they were earlier to boost outlays as their wariness about 
the economic environment abates.
    Nowhere has this process of balance sheet adjustment been 
more evident than in the household sector. On the asset side of 
the balance sheet, the decline in longer-term interest rates 
and diminished perceptions of credit risk in recent months have 
provided a substantial lift to the market value of nearly all 
major categories of household assets. Most notably, 
historically low mortgage interest rates have helped to propel 
a solid advance in the value of the owner-occupied housing 
stock. And the lowered rate at which investors discount future 
business earnings has contributed to the substantial 
appreciation in broad equity price indexes this year, reversing 
a portion of their previous declines.
    On the liability side of the balance sheet, despite the 
significant increase in debt encouraged by higher asset values, 
lower interest rates have facilitated a restructuring of 
existing debt. Households have taken advantage of new lows in 
mortgage interest rates to refinance debt on more favorable 
terms, to lengthen debt maturity, and in many cases, to extract 
equity from their homes to pay down other higher-cost debt. 
Debt service burdens, accordingly, have declined.
    Significant balance sheet restructuring in an environment 
of low interest rates has gone far beyond that experienced in 
the past. In large measure, this reflects changes in technology 
and mortgage markets that have dramatically transformed 
accumulated home equity from a very illiquid asset into one 
that is now an integral part of households' ongoing balance-
sheet management and spending decisions. This enhanced capacity 
doubtless added significant support to consumer markets during 
the past three years as numerous shocks--a stock price fall, 9/
11, and the Iraq war--pummeled consumer sentiment.
    We expect both equity extraction and lower debt service to 
continue to provide support for household spending in the 
period ahead, though the strength of this support is likely to 
diminish over time.
    In addition to balance sheet improvements, the recently 
passed tax legislation will provide a considerable lift to 
disposable incomes of households in the second half of the 
year, even after accounting for some state and local offsets. 
At this point, most firms have likely implemented the lower 
withholding schedules that have been released by the Treasury, 
and advance rebates of child tax credits are being mailed 
beginning later this month. Most mainstream economic models 
predict that such tax-induced increases in disposable income 
should produce a prompt and appreciable pickup in consumer 
spending. Moreover, most models would also project positive 
follow-on effects on capital spending. The evolution of 
spending over the next few months may provide an important test 
of the extent to which this traditional view of expansionary 
fiscal policy holds in the current environment.
    Much like households, businesses have taken advantage of 
low interest rates to shore up their balance sheets. Most 
notably, firms have issued long-term debt and employed the 
proceeds to pay down commercial paper and bank loans and to 
roll over maturing high-cost debt. The net effect of these 
trends, to date, has been a decline in the ratio of business 
interest payments to net cash flow, a significant increase in 
the average maturity of liabilities, and a rise in the ratio of 
current assets to current liabilities.
    With business balance sheets having been strengthened and 
with investors notably more receptive to risk, the overall 
climate in credit markets has become more hospitable in recent 
months. Specifically, improvements in forward-looking measures 
of default risk, a decline in actual defaults, and a moderation 
in the pace of debt-rating downgrades have prompted a marked 
narrowing of credit spreads and credit default swap premiums. 
That change in sentiment has extended even to the speculative-
grade bond market, where issuance has revived considerably, 
even by lower-tier issuers that would have been hard pressed to 
tap the capital markets over much of the last few years. Banks, 
for their part, remain well capitalized and willing lenders.
    In the past, such reductions in private yields and in the 
cost of capital faced by firms have been associated with rising 
capital spending. But as yet there is little evidence that the 
more accommodative financial environment has materially 
improved the willingness of top executives to increase capital 
investment. Corporate executives and boards of directors are 
seemingly unclear, in the wake of the recent intense focus on 
corporate behavior, about how an increase in risk-taking on 
their part would be viewed by shareholders and regulators.
    As a result, business leaders have been quite circumspect 
about embarking on major new investment projects. Moreover, 
still-ample capacity in some sectors and lingering uncertainty 
about the strength of prospective final sales have added 
reluctance to expand capital outlays. But should firms begin to 
perceive that the pickup in demand is durable, they doubtless 
would be more inclined to increase hiring and production, 
replenish depleted inventories, and bring new capital on line. 
These actions, in turn, would tend to further boost both 
incomes and output.
    Tentative signs suggest that this favorable dynamic may be 
beginning to take hold. Industrial production, as I indicated 
earlier, seems to have stabilized, and various regional and 
national business surveys point to a recent firming in new 
orders. Indeed, the backlog of unfilled orders for nondefense 
capital goods, excluding aircraft, increased, on net, over the 
first five months of this year. Investment in structures, 
however, continues to weaken.
    The outlook for business profits is, of course, a key 
factor that will help determine whether the stirrings we 
currently observe in new orders presage a sustained pickup in 
production and new capital spending. Investors' outlook for 
near-term earnings has seemed a little brighter of late.
    The favorable productivity trends of recent years, if 
continued, would certainly bode well for future profitability. 
Output per hour in the nonfarm business sector increased 2-1/2 
percent over the year ending in the first quarter. It has been 
unusual that firms have been able to achieve consistently 
strong gains in productivity when the overall performance of 
the economy has been so lackluster. To some extent, companies 
under pressure to cut costs in an environment of still tepid 
sales growth and an uncertain economic outlook might be 
expected to search aggressively for ways to employ resources 
more efficiently.
    However, one consequence of these improvements in 
efficiency has been an ability of many businesses to pare 
existing workforces and still meet increases in demand. Indeed, 
with the growth of real output below that of labor productivity 
for much of the period since 2000, aggregate hours and 
employment have fallen, and the unemployment rate rose last 
month to 6.4 percent of the civilian labor force.
    Although forward-looking indicators are mostly positive, 
downside risks to the business outlook are also apparent, 
including the partial rebound in energy costs and some recent 
signs that aggregate demand may be flagging among some of our 
important trading partners.
    Inflation developments have been important in shaping the 
economic outlook and the stance of policy over the first half 
of the year. With the economy operating below its potential for 
much of the past two years and productivity growth proceeding 
apace, measures of core consumer prices have decelerated 
noticeably. Allowing for known measurement biases, these 
inflation indexes have been in a neighborhood that corresponds 
to effective price stability--a long-held goal assigned to the 
Federal Reserve by the Congress. But we can pause at this 
achievement only for a moment, mindful that we face new 
challenges in maintaining price stability, specifically to 
prevent inflation from falling too low.
    This is one reason the Federal Open Market Committee has 
adopted a quite accommodative stance of policy. A very low 
inflation rate increases the risk that an adverse shock to the 
economy would be more difficult to counter effectively. Indeed, 
there is an especially pernicious, albeit remote, scenario in 
which inflation turns negative against a backdrop of weak 
aggregate demand, engendering a corrosive deflationary spiral.
    Until recently, this topic was often regarded as an 
academic curiosity. Indeed, a decade ago, most economists would 
have dismissed the possibility that a government issuing a fiat 
currency would ever produce too little inflation. However, the 
recent record in Japan has reopened serious discussion of this 
issue. To be sure, there are credible arguments that the 
Japanese experience is idiosyncratic. But there are important 
lessons to be learned, and it is incumbent on a central bank to 
anticipate any contingency, however remote, if significant 
economic costs could be associated with that contingency.
    The Federal Reserve has been studying how to provide policy 
stimulus should our primary tool of adjusting the target 
Federal funds rate no longer be available. Indeed, the Federal 
Open Market Committee devoted considerable attention to this 
subject at its June meeting, examining potentially feasible 
policy alternatives. However, given the now highly stimulative 
stance of monetary and fiscal policy and well-anchored 
inflation expectations, the Committee concluded that economic 
fundamentals are such that situations requiring special policy 
actions are most unlikely to arise.
    Furthermore, with the target funds rate at 1 percent, 
substantial further conventional easings could be implemented 
if the Federal Open Market Committee judged such policy actions 
warranted. Doubtless, some financial firms would experience 
difficulties in such an environment, but these intermediaries 
have exhibited considerable flexibility in the past to changing 
circumstances. More broadly, as I indicated earlier, the 
Federal Open Market Committee stands ready to maintain a highly 
accommodative stance of policy for as long as it takes to 
achieve a return to satisfactory economic performance.
    Thank you very much. I trust the remainder of my remarks 
will be included in the record, and I look forward to answering 
your questions.
    Mrs. Kelly. Without objection.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 47 in the appendix.]
    Mrs. Kelly. The Chair will now recognize herself for 
questions, but first noting that because of the constraints on 
Chairman Greenspan's time and the desire to get as many members 
as possible able to ask questions, the Chair will strictly 
enforce the 5-minute rule. Please take note of that.
    Mr. Frank. I want to associate myself with your strictness.
    Mrs. Kelly. Thank you very much, Mr. Frank.
    Mr. Frank. In this context.
    Mrs. Kelly. Mr. Chairman, your statement contains a 
recitation of both household and business balance sheet 
restructuring. To the extent that you make the overall 
restructuring of the economy sound nearly as dramatic as that 
of the late 1970s, which led to a long period of expansion in 
the U.S. economy and a clear advantage over our foreign trading 
competitors, is this comparison, in your view, an accurate one?
    Mr. Greenspan. Madam Chairperson, the evolution of trends 
within the economy, especially one as dynamic as that of the 
United States, are almost always different; that is, we do draw 
on analogies in the past, but it is very rarely that we 
replicate any close convergence patterns which have prevailed 
in long periods over the past.
    But it is certainly the case that, confronted with a period 
of low inflation and low-risk premiums and quite favorable 
financial conditions, we could very well be embarking on a 
period of extended growth, especially when, as I indicated in 
earlier testimony, it appeared as though the sharp market 
declines and decline in economic activity in the year 2000 and 
into 2001, largely reflected a break in the pattern of capital 
investment expansion which had not been completed in the sense 
that a considerable amount of networking had been developed 
during the 1990s which, according to recent surveys, suggests 
that it has not been completed.
    So if we can ever return to a state of business confidence, 
there is, in my judgment, as I have indicated previously, a 
fairly substantial backlog of unexploited profitable investment 
opportunities in the capital goods markets. And that should, if 
it occurs, be a signal of fairly sound economic performance 
and, doubtless, long-term growth.
    Mrs. Kelly. Thank you.
    Were you disappointed that the 10-year yields backed up so 
much after the June Open Market Committee meeting? And to what 
do you attribute that, and what effect has it had and will it 
have on our recovery?
    Mr. Greenspan. Well, we clearly expected that because, you 
may recall, just prior to that meeting there was an expected 
probability, as reflected in the Federal funds futures market, 
of a fairly good chance of a 50-basis-point cut rather than the 
one we chose, namely 25 basis points. So we clearly expected 
that the markets would adjust. How much they would adjust was 
very difficult to anticipate in advance, especially since 
interest rates had been firming in the days immediately before 
the meeting as well.
    But surprised? No.
    Mrs. Kelly. There is going to come a time when the Open 
Market Committee is going to have to raise rates. Obviously, 
that is not soon, but what kind of concerns will you have about 
a fragile recovery at that point? And what kind of precautions 
do you intend to take?
    Mr. Greenspan. Well, if the recovery is indeed fragile, as 
you imply, I would suggest to you it is unlikely that we would 
be moving rates. As I indicated in my prepared testimony, we 
would seek a significant improvement in economic performance 
from what we currently see before that is even on the table.
    Mrs. Kelly. Mr. Chairman, natural gas prices are well off 
their historic highs, but your regular recent comments about 
the possibility of spiking--of pricing spikes have rattled the 
markets to some extent. I am wondering why you have been 
focusing on that issue, and I also wonder why prices are still 
so high. If there is anything that you would like to speak 
about that, I would appreciate hearing from you.
    Mr. Greenspan. The rise in natural gas prices, which I 
might say to you has essentially, over the long term, been in a 
significant upward trend, has been having obvious impacts on 
the economy, on profit margins, on costs of home heating, and a 
number of other uses, especially in the chemical industry.
    It is very clear to us that energy costs are a quite 
important factor in what is happening to the economy, and as a 
consequence, are a very important input into monetary policy. 
So we have been looking at the nature of pressures in energy 
markets, especially oil and gas, but others as well and as a 
consequence of that, have been somewhat concerned about what we 
see, namely, that the continued rise in demand for natural gas 
in the North American market is clearly putting significant 
pressure on the ability of production in Canada and in the 
United States, especially, to meet that demand. And the failure 
to be able to import significant amounts of additional gas--
which, incidentally, we can do in oil when we run into similar 
problems--has created severe problems with respect to both 
natural gas price volatility and price levels.
    The futures markets, which go out quite a long way, 
indicate that natural gas prices, as I indicated in my prepared 
remarks, are projected to go beyond $4.50 per million BTUs, 
which is a doubling from where the long-term expected price was 
several years ago. And what is even more remarkable is that it 
is selling at a premium to crude oil, which is very rare.
    Mrs. Kelly. Thank you. My time is up.
    Mr. Crowley.
    Mr. Crowley. I thank the gentlelady from New York.
    And, Mr. Chairman, good to have you back in front of our 
committee again. You made reference in your remarks to the fact 
that the jobless growth, the unemployment rate, has jumped to 
6.4 percent, nationwide, of the civilian population. So to sort 
of point out in my district, or at least the statistics that I 
have been able to gather from my district, in New York, Queens 
and the Bronx, Queens is at 6.6 percent and the Bronx is at 9.4 
percent; understand that some will be below that number and 
some will be above that number.
    Unfortunately for me, and for the rest of my city as well, 
we find that those numbers are above the 6.4 percent. And just 
yesterday the Department of Labor reported that the number of 
people filing for unemployment benefits for the first time rose 
by 5,000 new people to 439,000. But the overall number of 
people collecting unemployment benefits rose to a 20-year high.
    This morning, the White House will release its new deficit 
figures, showing the Nation running to over $450 billion this 
year--which, by the way, does not include in that equation the 
raiding of $150 billion from the Social Security Trust Fund.
    In response to the Administration's release--press release 
stating how the tax giveaways of this Administration have led 
to, and I quote, ``private forecasters are expecting a 
higher"--or ``expecting a return to higher growth, increased 
jobs and lower unemployment over the next year and a half.'' 
without tax cuts, job losses would continue. In fact, while 
many economists have been predicting the U.S. economy to grow 
in the second half of this year, these, in my opinion, awful 
job loss and unemployment numbers during of this recession have 
caused many to reconsider their once-positive outlooks on job 
growth.
    In fact, the Wall Street Journal quotes several economists 
who are looking at lowering their expected growth rates and job 
creation rates for the rest of the year because of this data. 
Even Secretary Snow has indicated he predicts that greater job 
loss should be--could be expected in the coming months.
    Seeing that recent economic policies have resulted in over 
3.1 billion private sector jobs disappearing, my questions are:
    Where is the momentum in this economy? For the past few 
sessions here, you have projected job growth and wealth 
creation and all we have seen, at least in my city, is more job 
loss and the loss of wealth. Will you revise your past 
statements of economic growth and job creation, or at least 
would you admit that they may have been mistaken in the past 
few sessions here?
    And secondly, seeing that you are Chair of the Fed now, 
during the tenure of several Presidents, including the previous 
Presidency, is this Presidency the weakest job--the weakest in 
job creation you have ever seen, especially compared with the 
last Administration?
    I will just point out to my colleagues that to escape the 
black hole of this recession, this Administration will have to 
create over 500,000 new jobs each month until the end of the 
year 2003 in order to avoid making this the most protracted 
period of job loss since the 1930s.
    Have the policies of this Administration been the killer to 
the economy and especially to American jobs?
    Mr. Greenspan. Well, first of all, Congressman, as I 
indicated in my prepared remarks and as Congressman Frank also 
suggested, a significant part in this equation is the 
productivity numbers. Growth in GDP has been really quite 
sluggish, but it has been growing. In other words, the economy 
has been growing.
    The problem is that productivity, which is generally a 
favorable economic factor, has enabled a significant part of 
the business community to meet rising sales requirements with 
lowered work forces. And obviously the only way to do that is 
improved efficiency. We are seeing that process going on. We 
have seen it going on for quite a good deal of time, and I will 
tell you it was not anticipated in the sense that with the 
presumed sluggish rate of growth that we have all been 
projecting, a weaker growth in productivity was projected and 
accordingly, a less adverse pattern of employment, 
arithmetically, naturally would arise from that.
    I strongly expect, the growth rate will be picking up in 
the months ahead and rising above the relevant rate of 
productivity, then clearly increased workforces will be 
required to meet the increased growth. That is our forecast 
that is what I expect to happen and, indeed, what I think the 
vast majority of economists examining the American economy 
expect to happen.
    Mr. Crowley. I appreciate the Chairman's response. I think, 
though, it does little to inspire those whom I and Mr. King 
represent in terms of their future of job loss.
    I would also like to ask later, in writing, on the 
deflation issue that you mentioned in your comments.
    Thank you, Madam Chair.
    Mrs. Kelly. Thank you.
    Mr. Kelly. Mr. Leach.
    Mr. Leach. Mr. Chairman, I have two questions. One you 
might answer based on prior press, one you might prefer not to.
    The first one: This committee has given a green light to 
expanding a little-known charter, the industrial loan charter, 
to become functionally equivalent to a bank charter and to 
allow expansion of this charter's use nationwide without 
Federal Reserve or OCC oversight. Is this sound public policy?
    The second question relates to currencies, and the major 
factor obviously in international trade is the competitive 
position of currencies. As the world has noted, you are in a 
flexible exchange rate environment that has strengthened vis-a-
vis the dollars; that is helping our exporters, but the Chinese 
currency remains locked in an unrealistically low, fixed 
relationship with the dollar. And shouldn't the Chinese 
currency be subject to market forces and allowed, presumably, 
in this kind of economic environment, to appreciate in value?
    Mr. Greenspan. They appear to be very significantly 
different questions. Let's see if I can join them.
    Mr. Leach. Go ahead.
    Mr. Greenspan. The industrial loan company issue is really 
a major problem with respect to commerce and banking in this 
country. I have always been of the opinion that over the very 
long run we are going to find that it is going to be very 
difficult to distinguish between commerce and banking with 
individual firms, and the issue of the notion of the current 
policies will become moot.
    But, well prior to that, we have a very significant problem 
which I think we need to address, namely, having now made a 
major expansion in banking and finance through Gramm-Leach-
Bliley and a number of other earlier activities, we have opened 
up our financial system very aggressively and we need to take 
time to begin to evaluate how significant those changes are in 
the world economy and in our own, and what type of regulatory 
structures are required and what type of risks are we running 
by our new, very expansionary regulatory initiatives.
    It is much too soon at this stage, in my judgment, to make 
an evaluation of what the consequences of our recent, very 
expansionary regulatory policies have been. If there is going 
to be a major change in policy, which, as you know, Gramm-
Leach-Bliley implied and indicated that commerce and banking 
were still to be separated, if we are going to make that very 
major change--and it is a major change in regulation it is a 
decision which this committee and your counterparts in the 
Senate, as well, both bodies, need to make, and it is a crucial 
decision and should not be determined by, in effect, a 
relatively small, presumably, act which is currently under 
discussion. And, indeed it is merely an amendment to a specific 
act which this committee is evaluating.
    Without going into the substance, which would take a while, 
I merely state to you that if this issue is on the table, what 
really is being discussed is a very much broader question, 
which is the issue of commerce and banking and I hope that this 
committee will not allow that decision to be made inadvertently 
through another discussion vehicle for which there have not 
been significant hearings, in my judgment.
    With respect to the question of currencies, as you know, 
there is an agreement within this Administration that with 
respect to the exchange rate only the Secretary of the Treasury 
should be discussing the issue. I would note, however, that in 
order to maintain the existing exchange rate, the People's Bank 
of China has been accumulating very significant quantities of 
U.S. dollars, as they are reporting currently and that does 
suggest that a monetary expansion, which occurs as a 
consequence of building up their monetary base by the 
accumulation of dollars, is creating a significant growth in 
money supply which, over the long run, they will have to 
address.
    Mr. Leach. Madam Chairman, just one minor comment. Let me 
suggest to the Chairman----
    Mrs. Kelly. Please finish your statement, Mr. Leach, but 
the time is finished.
    Mr. Leach. There is a separation of powers doctrine in 
America, but there is no such thing as a separation of economic 
judgment doctrine.
    As one of your greatest admirers, let me suggest, I think 
it is incorrect for the Fed to allow any economic policy set of 
judgments to be the exclusive province of an executive 
department. The Fed is an independent arm of the United States 
Government, and I hope you will review the issue of whether the 
Fed can opine on currency relationships. This is a fundamental 
economics issue for which the Congress and the American public 
deserve a full panoply of opinion.
    Mr. Greenspan. Well, I appreciate that, Mr. Leach. I did 
not say that we do not engage in discussions with the Treasury 
on the issue of exchange rates. I merely stipulated that in 
expressing the views of this government, we have found that it 
is far better to have a single voice expressing the consensus 
view of what the government's position is with respect to this 
policy.
    Mrs. Kelly. Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Madam Chairman.
    Mr. Chairman, the news reports of the last day indicate 
that the White House is about to increase its estimate of this 
year's Federal budget deficit to more than $450 billion, which 
exceeds by 50 percent their earlier projection. In President 
Bush's State of the Union address January 20th, 2003, he said, 
quote, ``This country has many challenges. We will not deny, we 
will not ignore, we will not pass along our problems to other 
Congresses, to other Presidents, or other generations. We will 
confront them with focus and clarity and courage.''
    First of all, did you get that portion of the State of the 
Union speech, Mr. Chairman?
    Mr. Greenspan. Yes.
    Mr. Kanjorski. Do you feel that in light of this unusual 
increase in our deficit projection that it will be able to be 
cleared up within this Presidency or within this Congress?
    Mr. Greenspan. Your previous question, had I heard that 
particular statement?
    Mr. Kanjorski. I said, Did you get that particular 
sentence?
    Mr. Greenspan. I am sorry, I missed the word that you were 
using.
    Mr. Kanjorski. Get. Get. Did you get that?
    Mr. Greenspan. In other words, did I look at the remarks 
before?
    Mr. Kanjorski. Did you look at it and approve it.
    Mr. Greenspan. Before they were given? The answer is no, I 
did not.
    But did I see them after? I did.
    Mr. Kanjorski. In light of that statement and the enormous 
increase in deficits and what others, particularly fiscal 
conservatives, would think, that we have a runaway Federal 
budget, if you look at, as Mr. Frank indicated, the deficit 
that will increase in just this year and next year will exceed 
the entire debt growth of the United States from its very 
beginning to when Mr. Reagan took office in 1980, well over a 
trillion dollars.
    And what I would like to know from you is, one, is this 
going to be cleared up in this Congress and in this Presidency, 
or are we passing something over to the next generation? And is 
that important? Or do deficits not matter anymore?
    Mr. Greenspan. Oh, on the contrary, it matters a great 
deal.
    Congressman, I haven't changed my views since I was here in 
April, on this issue. As you may recall, when the September 
deadline on extending PAYGO and discretionary caps were on the 
table, I strongly argued that they should be reinstituted; and 
indeed when the budgetary process, which I thought had created 
some fairly significant momentum to resolving long-term 
deficits, began to break down with the surpluses, I argued as 
best I could for a restoration of some semblance of fiscal 
responsibility. And I trust that the most recent numbers will 
push more and more of government in the direction of getting a 
far more stable long-term fiscal outlook.
    Mr. Kanjorski. Last year, as I think Mr. Crowley indicated, 
we lost 3,000 overall jobs in the economy. But what people 
aren't mentioning is that more than 10 percent of those jobs in 
the manufacturing industry have been lost, amounting to about 
two-thirds of the job loss in the last three years.
    One, I would like to know, is it unimportant for us to have 
manufacturing jobs to have a successful economy in the future? 
And if it is important, now that we are down below 15 million 
manufacturing jobs in our overall economy, where is the minimum 
that we can go to in manufacturing without losing added value 
and creation of wealth in our system?
    Mr. Greenspan. Well, first of all, manufacturing, in broad 
value sense, has been declining modestly relative to the GDP 
for quite a long period of time. The actual physical goods 
included in that manufacturing per real dollar of value has 
gone down quite appreciably, and what we used to call 
manufacturing heavy steel mills, big automotive assemblies, has 
very gradually moved toward impalpable types of values. The 
distinction between what is a manufactured good and a 
nonmanufactured good is becoming increasingly more tenuous.
    On top of that, the productivity rates in manufacturing are 
moving up faster than those for the Nation as a whole; and, as 
a consequence, what we find is that the share of total 
employment that is engaged in manufacturing is falling even 
further than the rate of decline in the gross product 
originating in manufacturing as a percent of total GDP.
    Is it important for an economy to have manufacturing? There 
is a big dispute on this issue. What is important is that 
economies create value. And whether value is created by taking 
raw materials and fabricating them into something consumers 
want, or value is created by various different services which 
consumers want, presumably should not make any significant 
difference so far as standards of living are concerned, because 
the income, the capability to purchase goods is there.
    If there is no concern about access to foreign producers of 
manufactured goods, then I think you can argue it does not 
really matter whether or not you produce them or not. The main 
issue here is the question of the security of supply, of those 
essential types of goods which will always be required by human 
beings, food, clothing, shelter and the like.
    Mr. Kanjorski. Well, it may matter to the 15 million people 
that are employed in manufacturing. Should we----
    Thank you, Mr. Chairman.
    Mrs. Kelly. Thank you, Mr. Kanjorski.
    Mr. Bachus.
    Mr. Bachus. Mr. Chairman, on page 5 of your testimony, you 
acknowledge that the President's recently-passed tax cuts are 
having a beneficial effect on consumer spending and are lifting 
the economy.
    Mr. Greenspan. That is correct, Congressman.
    Mr. Bachus. And you state, going forward, that it appears 
that will continue to be the case with lowering withholding 
rates and the child tax credit payments, that it will continue 
to lift consumer spending and actually have a spillover effect 
into capital goods spending. Or into----
    Mr. Greenspan. That is what most models project. I have 
nothing against cutting taxes. I would just like to be sure 
that a constituency arises eventually for cutting spending as 
well, and that has not been the case. And that is one of the 
reasons why over the longer run, we have had some difficulties 
in holding budget----
    Mr. Bachus. In other words, tax cuts are good if they are 
followed up by spending cuts or spending limitations or 
restrained spending?
    Mr. Greenspan. Correct.
    Mr. Bachus. So what you would advocate to this committee is 
that we focus not on--that we don't raise taxes, but that we 
focus on discipline in our spending habits.
    Mr. Greenspan. I would like to see the restoration of PAYGO 
and discretionary caps, which will restrain the expansion of 
the deficit and indeed ultimately contain it. It did that. Back 
in the early 1990s, I thought it was quite surprisingly 
successful in restraining what had been a budget which had 
gotten out of kilter. I would like to see these restraints 
reimposed, and by their very nature they will bring back fiscal 
balance.
    Mr. Bachus. Mr. Chairman, I am very optimistic, I hope you 
are. You have heard from this committee, members this morning 
that we are all concerned about the Federal deficit. And we 
realize we ought to do something about it. And I think that 
restraining spending and fiscal discipline is the answer.
    And I appreciate your cautionary remarks that we do engage 
in that. BASEL II, if it goes forward on schedule, we will be 
finalizing that agreement, or the world community, at the first 
of December. Do you have concerns about us adopting--agreeing 
to such agreements that will have some effect on our regulatory 
scheme?
    Mr. Greenspan. Well, Congressman, I would say that as our 
financial system, specifically our banking system, evolved 
fairly rapidly over the years, we have had significant changes 
in financial technology and in opening up markets, as I 
indicated earlier.
    And it is important that supervision and regulation keep up 
to date with the changes in banking practice. BASEL I, which as 
you know was initiated in 1988, is becoming increasingly 
obsolete and burdensome. We need to change where we are, but we 
certainly are not going to move the regulation in the United 
States until we have thoroughly vetted all various options that 
are required to get agreement amongst the regulatory 
authorities and a structure which looks to be viable, and 
indeed is a major improvement over BASEL I.
    Obviously we hope to do it in a time frame as expeditiously 
as possible. But, it is far more important to get it right than 
to do it quickly.
    Mr. Bachus. Thank you. I am not sure about my time.
    Mrs. Kelly. You have 36 seconds.
    Mr. Bachus. Okay. Mr. Chairman, every economic recovery 
since World War II has been proceeded by a stock market 
recovery. And we are in a stock market recovery now. And Wall 
Street pundits are saying that actually that is indication that 
we are having an economic recovery or it will come.
    Would you like to comment on that, whether you think that 
the stock market recovery is, in fact, predicting an economic 
recovery?
    Mr. Greenspan. Well, let me just say it is not, I think, 
wholly accurate that the stock market always predicts 
correctly. Indeed, there is an old saw that some skeptic once 
stated a number of years back that the stock market has 
predicted 10 of the last six recoveries.
    I am not saying that is the case at this particular moment. 
But, there is no question that it is not only an indicator, but 
more importantly, it changes the cost of capital, so the very 
rise in equity prices themselves, by lowering the cost of 
capital for capital investment will, in fact, be a factor in 
economic recovery.
    And indeed that is a view held, as I said, by pretty much 
most economists looking for economic expansion in the months 
immediately ahead.
    Mrs. Kelly. Thank you, Mr. Bachus. I want to remind members 
that while we are following the 5-minute rule, without 
objection all Members may submit written questions, and the 
hearing will be held open for 30 days following for written 
questions and responses from the Chairman.
    With that we turn to Mr. Frank.
    Mr. Frank. Thank you. Mr. Chairman, I was struck, as I 
indicated by the comments on page 12 of the monetary policy 
report, which does suggest fairly severe consequences if we 
aren't able to get on top of the budget situation. I know there 
was a suggestion that tax cuts are a good thing, as long as 
they are accompanied by spending cuts.
    I notice on page 13 you note: Federal spending, during the 
first 8 months of fiscal year 2003, was 6-1/2 percent higher 
than during the same period last year, and 7-1/2 percent, if 
you exclude the drop in interest costs because of the drop in 
interest rates. So what we have got is a situation where 
revenues have been cut, but spending has gone up significantly.
    And I really want to focus on this. What you are saying 
here is that if we don't reverse the trend that we are in now, 
and I say this for this reason. Previously there was some 
conversation, yourself and others, that the real crunch with 
the deficits would come 2010, 2011 when there is a reversal, 
and Social Security in particular begins to draw money out 
rather than put it in. But this does seems to me to suggest 
that there could be earlier consequences, particularly when we 
talk about a trillion dollars in two years, back-to-back 2-year 
deficits are going to be a trillion dollars now.
    And what you say here is that this has reduced the national 
savings, and this is quite striking. National savings down from 
6-1/2 percent of GDP to 1 percent of GDP, almost exclusively, I 
guess, because of the switch in the Federal situation from 
surplus to deficit, and you say if this continues, it will 
eventually impinge on the formation of private capital.
    When do we have to get this reversed for this to avoid what 
is a very severe consequence.
    Mr. Greenspan. Well, I would suggest to you that you can 
take, as we have over the years, several years of fairly large 
deficits provided that they turn around at some point within 
the----
    Mr. Frank. How much time do we have, do you think?
    Mr. Greenspan. I really, without seeing the details of the 
latest OMB sets of projections, don't have the feel of exactly 
what the patterns will be. But, I can say in principle, that it 
clearly has got to move down significantly from where it is 
now.
    Mr. Frank. I am not asking you to project the deficits. Mr. 
Bolten says they are going to drop after 2004. But he wasn't 
under oath. I am not asking you to project the deficits. I am 
asking you to tell me, in your view, based on this analysis 
here in the report, for how many years can we sustain multi 
hundred billion dollar deficits in a row before we being to get 
this impingement on private capital formation.
    Mr. Greenspan. First of all, ultimately you need private 
savings to finance private investment over the long run. And 
clearly without private investment, it is difficult to get 
economic growth.
    But, it is also the case that it is not only the amount of 
private investment that matters, but the nature of the 
investment itself. Because what we have found in recent years 
is that half of the productivity increases in this country have 
been unrelated to the amount of capital stock, meaning capital 
investment.
    It has basically been ephemeral technologies and the shift 
toward capital investment of a highly productive nature which 
has enabled these productivity numbers to----
    Mr. Frank. I understand that. But I don't want to swerve. I 
am quoting your report.
    Mr. Greenspan. I understand.
    Mr. Frank. Your report also clearly says that the Federal 
deficit is part of the problem. So let's focus on that part.
    Mr. Greenspan. I have acknowledged that is indeed the case.
    Mr. Frank. I know. But then you are trying to avoid talking 
about it. How many years of the deficits of the sort we now 
have can we sustain before what you say is, it could eventually 
impinge on the formation of private capital? How many years?
    Mr. Greenspan. I would say that the major issue, not on 
private capital, per se, because there are lots of different 
issues that are involved there, the basic issue--remember----
    Mr. Frank. I am just quoting your report.
    Mr. Greenspan. I understand. The major issue on fiscal 
policy is to make sure that the debt as a ratio to income is 
stable. The question of capital formation, remember, you can 
import a significant amount of----
    Mr. Frank. I am sorry. But I am disappointed, because I was 
trying to get you to talk----
    Mr. Greenspan. You are asking a question which is not 
answered in the form----
    Mr. Frank. Well, I am quoting--but, there is clearly an 
aspect of it, and your report documents it, that you are trying 
to avoid.
    Mr. Greenspan. You tell me that private savings are zero 
for a protected period of time, and that we cannot import 
significant amounts of capital from abroad, then I would say we 
are having difficulty.
    Mr. Frank. You don't say that in this report, and I think 
you are not facing up to the implications of your own report. 
Could I just ask unanimous consent, on behalf of Mr. Baca, to 
submit a question about unemployment, particularly with regard 
to Hispanics and African-Americans.
    Mrs. Kelly. Without objection, it is in the record. We go 
now to Mr. Castle.
    Mr. Castle. Thank you, Madam Chairwoman.
    Mr. Chairman, I actually share all of those concerns that 
everyone has asked you in terms of where we are going. I am 
afraid that we have not had spending restraint in this 
Congress, and we have more pending, such as the prescription 
drug bill, as well as the problems in Iraq, and we have not 
shown a lot of restraint in terms of tax cutting, and at some 
point, that is a serious issue. I know you have been asked a 
lot of questions about that, so I will forego that and go to 
something else.
    But, we are all vitally concerned about that, as it affects 
monetary policy and the economy of the country. The other area 
that I am somewhat concerned about today is the area of 
unemployment. As I always say, if someone is unemployed, their 
unemployed rate is 100 percent. That is a huge impact on 
families and individuals in the United States of America. And I 
have always been more or less a supporter of free trade. I 
realize that we are probably giving up low-paying jobs, if you 
like, at the history decade by decade of this country in our 
lifetimes, you see that has happened, lower income, lower 
skilled jobs, if you will.
    We have always filled it with higher paying, usually higher 
skilled type of jobs. But, recently, I have become increasingly 
concerned, not just with the manufacturing jobs, but that we 
are giving up more and more high skilled jobs, particularly in 
the computer area and in various other high tech areas that we 
had not before.
    One of the reasons that we are not back filling with new 
kinds of jobs and new jobs to get the unemployment rate down is 
that more of these jobs are going overseas with the use of 
instant communications, computers, et cetera, it is relatively 
simply to carry out these jobs in other countries other than 
the United States. And sometimes that proves a lot less 
expensive even for our own companies here in America.
    I would be interested in your viewpoint on that, and if 
that is the case, what new high skill industries do we see on 
the horizon that might be a fill for that loss of jobs which we 
have had?
    Mr. Greenspan. Well, the problem, Congressman, is that 
innovation by its nature is unforecastable. That is, there will 
be new jobs openings at some level of high tech, because what 
we observe is that originally we start losing jobs in low tech, 
high-commodity-type areas and then, we find that----
    Mr. Castle. If I may interrupt. What is your comfort level 
that if there are new high tech level jobs, it is unpredictable 
as to what they will be, and I do agree with that, that they 
will stay in America? It seems to me there is a much easier 
transition out of America than there used to be of these jobs.
    Mr. Greenspan. Well, that question has been coming up for 
generations, namely how are we going to maintain full 
employment when we continuously lose jobs, so to speak, abroad, 
and that has been going on for a very substantial period of 
time.
    The answer to the question is, it will happen. In other 
words, if anybody had projected 10 years ago that we would run 
an unemployment rate under 4 percent only several years later, 
they would have said that was not possible because we are 
losing jobs.
    It is a very difficult question to answer, because we 
cannot forecast technology effectively. But, what we do know is 
that if we have a sufficiently flexible labor market and a 
capital goods market which is functioning appropriately, that 
jobs will be created. They will be high tech, but we don't know 
exactly what they will be.
    Mr. Castle. Let me change subjects. I want to talk about 
stock options. I believe that you have indicated in the past 
that the expensing of stock options as a means of giving 
investors and analysts a way of really understanding the costs 
of companies was a good concept. And obviously, I think the 
Microsoft decision was very significant, because that is really 
a broad-based stock option plan, which they had as opposed to 
just top management, et cetera.
    I would be interested in your viewpoint on the Microsoft 
decision, and are you willing to make any kind of prediction as 
to the furtherance of the expensing of stock options. We have 
had a lot of it in recent months, but will this trigger another 
round of more companies going to the expensing of stock options 
voluntarily without the government, either Congress or any of 
our agencies interfering at all?
    Mr. Greenspan. Well, what the Microsoft decision did for 
the company is to lower the leverage of employees in the stock. 
In other words, obviously getting restricted stock does give 
you, after time, ownership rights. But the fluctuation in the 
value of the stock is a much smaller change than the implicit 
fluctuation in an option on that stock. So stock options have 
the capacity of very significantly leveraging a rise in stock 
prices, and they were a highly desirable vehicle when the 
overall stock market was rising and ceased to be thereafter.
    As a general rule, if stock prices are going down or are 
flat, clearly, the restricted stock is a more significant 
incentive for employees than are options on that stock.
    Mr. Castle. Thank you, Mrs. Chairman.
    Mrs. Kelly. Thank you.
    Ms. Waters.
    Ms. Waters. Thank you very much. Welcome back, Mr. 
Greenspan. I have two questions I would like to try to get in. 
The first one continues this discussion about jobs and 
unemployment. Can you give us any specific examples of how the 
President's tax cut has created jobs? We know the supply side 
theory of make the tax cuts, the money will be put back into 
inventory and job expansion, et cetera.
    But, since we are experiencing this great unemployment in 
some portions of my district and other districts around the 
country, can you give us some specific examples of how the 
President's tax cuts have created jobs? No theory. Specifics. 
If you don't have any, you can just say that you don't have 
any.
    Mr. Greenspan. Well, the basic way in which tax cuts 
generally create jobs is by increasing capital investment, 
raising the level of economic growth----
    Ms. Waters. We know the theory.
    Mr. Greenspan.----and requiring people--and as a 
consequence, jobs get created in the process. You don't get 
specific examples except in issues where you have very specific 
things like accelerated depreciation, which is very important 
for a specific industry or a specific company, but, so far as 
general tax cuts are concerned, especially for individuals, 
their purpose is to broadly increase GDP and jobs generally, 
and are not focused by their very nature on any specific 
company or industry.
    Ms. Waters. So you don't have any specific examples. 
Because, as you said, the theory does not translate into 
reality.
    Mr. Greenspan. No, it translates into reality.
    Ms. Waters. Does any of you know that you have ever talked 
to, can tell you about a company that took its tax cuts and put 
them back into equipment and expanded job opportunities? Have 
you heard that in your travels anywhere?
    Mr. Greenspan. Yes, I have fairly recently.
    Ms. Waters. Could you give me an example of one of those 
companies?
    Mr. Greenspan. I don't wish to, largely because it was in 
private conversations.
    Ms. Waters. I see. Okay. So we don't have any examples 
today. Maybe we will just keep looking for some. Let me move 
from there to the deficit. We will probably get a supplemental 
appropriations bill at some point to deal with the ongoing 
costs of Iraq. Isn't the Administration low-balling the deficit 
by failing to include any figure for our ongoing Iraq 
involvement in its deficit projection? Has the Administration 
provided you with any information as to what they project the 
ongoing costs of our involvement in Iraq, what is our current 
monthly burn rate for our role in Iraq?
    If you were to include all of the costs connected with Iraq 
involvement in your deficit estimates, what would your deficit 
estimates be?
    Mr. Greenspan. Well, Congress----
    Ms. Waters. Well, first before you do that, the general 
question of--I am sorry to interrupt you--do you think we can 
get true figures about the deficit without having the costs of 
Iraq factored into it? And then, onto the other part of the 
question.
    Mr. Greenspan. I would assume, not having evaluated the OMB 
submission, which I presume we will get today----
    Ms. Waters. They don't have it as of today. It is not 
included.
    Mr. Greenspan. Clearly, the costs of the war in Iraq are in 
the Defense Department numbers. And one would presume that they 
are in the fiscal 2004 numbers as well. I would presume that 
the burn rate, what was it $4 billion a month which the 
Secretary----
    Ms. Waters. How much?
    Mr. Greenspan. $3.9 billion. The Secretary of Defense 
stipulated that, as I vaguely recall in some press conference 
or something of that nature, that particular number is the rate 
of that particular month. As he pointed out, it changes from 
month to month. But, implicit in the Defense Department's 
submission would be costs of Iraq.
    Ms. Waters. The Administration today will project funding 
your 2004 budget deficit of between 470 and $480 billion, even 
though the Bush Administration's funding year tool for budget 
submission in February projected a funding year 2004 deficit of 
307 billion. Are we to conclude--thank you.
    Mrs. Kelly. Thank you.
    Mr. Royce.
    Mr. Royce. Thank you, Madam Chair. Welcome, Chairman 
Greenspan. As you know, the robust housing market has been 
really the strength in the U.S. Economy over the last three 
years. And as a result, many financial institutions have grown 
their business models around financing the housing market. Are 
you at all concerned, Mr. Chairman, that these financial 
institutions have not hedged interest rate risk appropriately 
in the event of an increase in interest rates, and/or do you 
think that the financial system is prepared for such a move?
    Mr. Greenspan. Well, I think that sophisticated chief 
financial officers engage in various different types of 
hedging. As best I can judge, markets adjust accordingly. I 
can't comment on individual behavior, but the tools that 
various different companies have to adjust to the future are 
far more formidable than they ever have been. And I would 
suggest to you that is not a worry of mine.
    Mr. Royce. All right. Thank you, Chairman Greenspan. I have 
two other questions. The first would be, in the first quarter 
of this year, the current account deficit reached an annualized 
rate of 5.1 percent of our GDP. To finance these continual 
current account deficits, the United States economy must 
continue to attract overseas capital at record rates.
    In your view, what are the biggest challenges to attracting 
overseas capital in the United States?
    Mr. Greenspan. Well, Congressman, there have been very 
significant amounts of private and public capital, as you know, 
that have been employed to finance our current account deficit. 
In the last year or two, an increasing part has represented the 
accumulation of dollar assets by foreign central banks in an 
endeavor to stabilize their currencies. But, overall, we have 
had no difficulty attracting investment, and the flows have 
obviously been quite significant, because that is where the 
markets have balanced.
    Mr. Royce. The last question I was going to ask you is that 
there is more and more talk that the Fed will start buying 
longer term maturity Treasury securities to lower interest 
rates out the curve. And would the Fed consider such actions, 
and what circumstances would trigger such a policy?
    Mr. Greenspan. That is part of what we call nontraditional 
monetary policies, which would occur should we find that it is 
required in the months ahead to significantly ease conventional 
monetary policy, which, if necessary, we would do.
    But, it is also clear to us that with a 1 percent Federal 
funds rate, there is a downside limit, zero being the obviously 
ultimate lower bound. And if we got to a point where we found 
conventional policy left us very little room, we have the 
tools, as I have indicated before this committee before, to 
move in significant other ways to expand the balance sheet of 
the Federal Reserve. And one of the vehicles would be moving 
out on the maturity schedule and purchasing securities, which 
we might not otherwise be purchasing if our sole purpose was to 
address the overnight Federal funds rate.
    Mr. Royce. Thank you, Mr. Chairman. I will ask you one last 
question. A few years ago, many people were expecting Europe to 
take the lead in pulling the world economy out of the global 
slowdown. Instead, Europe has been slower to recover than East 
Asia or the United States. Are you encouraged by recent moves 
in European monetary policy and by the reform efforts in 
Germany, or does more need to be done?
    Mrs. Kelly. Mr. Royce, would you please submit that 
question for the record?
    Mr. Royce. I will be happy to do that, Madam Chair. Thanks 
again, Chairman Greenspan.
    Mrs. Kelly. Thank you.
    Mr. Sanders.
    Mr. Sanders. Thank you, Madam Chair and Mr. Greenspan, nice 
to see you again.
    Mr. Greenspan, I have long been concerned that you are way 
out of touch with the needs of the middle class and working 
families of our country, that you see your major function in 
your position as the need to represent the wealthy and large 
corporations, and I must tell you that your testimony today 
only confirms all of my suspicions, and I urge you, and I mean 
this seriously, because you are an honest person, and I think 
you just don't know what is going on in the real world.
    And I would urge you, come with me to Vermont. Meet real 
people. The country clubs and cocktail parties are not real 
America. The millionaires and billionaires are the exception to 
the rule.
    You talk about an improving economy, while we have lost 3 
million private sector jobs in the last two years. Long-term 
unemployment has more than tripled. Unemployment is higher than 
it has been since 1994. We have a $4 trillion national debt. 
1.4 million Americans have lost their health insurance. 
Millions of seniors can't afford prescription drugs. Middle 
class families can't send their kids to college because they 
don't have the money to do that.
    Bankruptcy cases have increased by a record breaking 23 
percent. Business investment is at its lowest level in more 
than 50 years. CEOs make more than 500 times what their workers 
make. The middle class is shrinking. We have the greatest gap 
between the rich and poor of any industrialized nation, and 
this is an economy that is improving. I hate to see what would 
happen if our economy was sinking.
    Now, today you may not have known this. I suspect that you 
don't. But you have insulted tens of millions of American 
workers. You have defended over the years, among other things, 
the abolition of the minimum wage, one of your policies, and 
giving huge tax breaks to billionaires. But today you reach a 
new low, I think, by suggesting that manufacturing in America 
doesn't matter. It doesn't matter where the product is 
produced.
    We lost 2 million manufacturing jobs in the last two years 
alone; 10 percent of our workforce. Wal-Mart has replaced 
General Motors as the major employer in America, paying people 
starvation wages rather than living wages, and all of that does 
not matter to you? Doesn't matter if it is produced in China 
where workers are making 30 cents an hour, or produced in 
Vermont, where workers can make 20 bucks an hour, it doesn't 
matter.
    You have told the American people that you support a trade 
policy which is selling them out, only working for the CEOs who 
can take our plants to China, Mexico and India. You insulted, 
Mr. Castle. Mr. Castle a few moments ago, a good Republican, 
told you that we are seeing not only the decline of 
manufacturing jobs, but white collar information technology 
jobs. Forrester Research says that over the next 15 years, 3.3 
million U.S. Service industry jobs and 136 billion in wages 
will move offshore to India, Russia, China and the Philippines. 
Does any of this matter to you? Do you give one whit of concern 
to the middle class and working families of this country? That 
is my question.
    Mr. Greenspan. Congressman, we have the highest standard of 
living in the world.
    Mr. Sanders. No, we do not. You go to Scandinavia, and you 
will find that people have a much higher standard of living in 
terms of health care and decent paying jobs. Wrong, Mr. 
Greenspan.
    Mr. Greenspan. May I answer your question?
    Mr. Sanders. You sure may.
    Mr. Greenspan. For a major industrial country, we have 
created the most advanced technologies, the highest standard of 
living for a country of our size. Our economic growth is 
crucial to us. The incomes, the purchasing power of our 
employees, our workers, our people, are by far more important 
than what it is we produce. I submit to you that--may I?
    Mr. Sanders. I am just making faces.
    Mr. Greenspan. I submit to you that the major focus of 
monetary policy is to create an environment in this country 
which enables capital investment and innovation to advance. We 
are at the cutting edge of technologies in the world. We are 
doing an extraordinary job over the years, and people flock to 
the United States. Our immigration rates are very high. And 
why? Because they think this is a wonderful country to come to.
    Mr. Sanders. That is an incredible answer.
    Mrs. Kelly. Mr. Paul.
    Mr. Paul. Thank you, Madam Chairman. Chairman Greenspan, I 
too am not pleased with the Fed. But, my approach will be 
slightly different. While here in the Congress, over the past 
several years, there has been several things that have been 
pointed out to me that we shouldn't bring up at committees. One 
is the Constitution and the other, of course, is dollar policy, 
before the Banking Committee.
    You explained earlier that the Secretary of Treasury speaks 
for the dollar. I find that interesting and a bit ironic, that 
you have the monopoly control over the money, creating new 
money and control over the interest rates. But you don't speak 
for the dollar, and that is deferred to the Treasury and we 
know that. But, I think that is sort of academic anyway, 
because ultimately, the number of dollars you create and the 
marketplace determines the value of the money.
    So no matter what you say or the Secretary of Treasury 
says, it won't matter a whole lot. But, dealing with the 
Constitution, I would like to point out to my colleagues and 
others, that the Constitution is I explicit on the type of 
monetary system that we have, or are supposed to have. For the 
past 3two years, we have been operating with a fiat monetary 
system, and it hasn't done well. And history has shown that 
fiat money never does well. It always ends badly. And we may be 
seeing the beginnings of the end of that system; not only 
nationally, but internationally.
    And I think that is something we should give consideration 
to, but not particularly today, because I have been told that 
these parts of the Constitution, such as declaring war, are 
anachronistic, and we just ignore them. I find that sort of 
sad. But that is the way it is around the Congress too often.
    But also I would like to point out that you are concerned 
about deflation. Of course, your definition of deflation is 
slightly different than the free market definition, because we 
believe deflation requires the shrinkage of the money supply, 
and the increase in the purchasing power of the dollar.
    But, anyway you show that decreasing prices are a threat, 
and therefore you have to print faster than ever, and you have 
been doing a pretty good job there. Since January of 2001 you 
have taken M3 from 6.5 trillion up to 8.2 trillion. That is a 
pretty hefty hunk of new money, $2.3 trillion of new money. It 
hasn't done a heck of a lot of good.
    So I think that it is interesting that you have this 
concern, and to address it, you plan to print whatever money is 
necessary. At the same time, you come to us and say your 
biggest concern, and this too is entertaining or interesting, 
that the Chairman of the Federal Reserve isn't talking so much 
about monetary policy, but he is talking about energy prices, 
because they are going down and they are deflationary? No, 
because they are going up and they are inflationary.
    So I don't know how we can have it both ways. First we 
worry about deflation. In the next breath we worry about 
inflation. Now, my concern and my question, or something I 
would like you to make a comment on, deals with the fairness of 
this system. For instance, I think this is very unfair to the 
elderly. In the old days, under the free market, we encouraged 
savings.
    The elderly have CDs. They used to make 6 percent. Now they 
make less than 1 percent sometimes. They have lost their 
purchasing power. At the same time, they are suffering from the 
increase in the cost of living because of the energy prices 
going up. And just because low interest rates might help the 
stock market, might help the housing market, doesn't seem to me 
to be fair to the elderly who have saved their money, suffered 
from the inflation that still exists, and at the same time, 
they lose their income.
    And for that reason, I think the system that we work with 
now is very biased. It is biased toward those who want to 
consume. We have a system, both the Treasury and the Fed 
encourages the Fannie Mae/Freddie Mac program of increasing 
equities and borrowing against it and then suffering the 
consequences.
    Mr. Greenspan. And your question?
    Mr. Paul. I would like you to comment on the fairness of 
what you are doing to the elderly who lose their income.
    Mr. Greenspan. Well, we have lowered interest rates quite 
considerably since early 2001. As best we can judge, the 
consequence of that has been a fairly dramatic expansion in 
housing, house turnover, and market values of homes from which 
a significant amount of equity has been extracted. All of that 
has supported the economy and kept it from edging lower after 
the very significant shocks that we had as a consequence of the 
post 2000 period.
    As far as I can judge, we have had a really quite 
extraordinary period having suffered all of those shocks and 
still showed a resilience and an expansion, which, even though 
below our desires, has been positive.
    We had a very shallow recession, and as a consequence, the 
recovery has been quite modest. Now, we haven't have it both 
ways. In other words, you cannot both have high interest rates, 
which give significant incomes to those who hold interest 
instruments, and low interest rates, which will stabilize the 
economy and expand it.
    We at the Federal Reserve have chosen to lower the rate 
structure, because we judged that was the most appropriate way 
to stabilize what had been an unstable system, and in 
retrospect, the policy seems to have been quite effective.
    Mrs. Kelly. Mrs. Maloney.
    Mrs. Maloney. Thank you, Madam Chairwoman, and Mr. 
Greenspan. Following up on your statement, and your statement 
earlier today that you were willing to maintain a highly 
accommodative stance of policy for as long as needed, and you 
also said, ``with the target funds rate at 1 percent, 
substantial further conventional easings could be 
implemented.'' .
    Already this morning, Treasury notes have fallen in 
response to your statement. And my question is, do you have a 
concern that further rate decreases could have a negative 
impact on the money market fund industry, and when you 
reference conventional easings, do you refer only to interest 
rate reductions or other tools in the Fed's disposal?
    And, following up on Mr. Royce's question, how likely is 
this to occur this year? Do you think that there is a floor, 
that we will ever reach a floor, or can we just continue 
reducing down?
    Mr. Greenspan. Well, Congresswoman, remember that when you 
are dealing with financial intermediaries, they can expand and 
contract fairly quickly, because you are only dealing with 
financial instruments. We have a remarkably resilient financial 
intermediary system, which, if short term interest rates fall, 
undoubtedly will put compression on certain institutions. They 
have shown quite considerable flexibility to absorb that over 
reasonable periods of time.
    So I don't perceive that if it is necessary, there is a 
downside limit to what we can do conventionally. I don't 
envisage that that will be necessary. But, to presume that 
there is a certain level that has often been stated, say 75 
basis points, that that is as low as we can go, I think that is 
mistaken. I do think that we have far more flexibility than is 
implied in that question.
    Mrs. Maloney. Earlier, you testified that again in response 
to Mr. Royce's questions, that we have no difficulty attracting 
foreign investment. And that that has been true up to now. But, 
what about the future, given the growing deficit, now they are 
announcing it is 450 billion, the largest in the history of the 
United States. And what is the impact of the deficit on U.S. 
Credibility internationally, given that our debt exceeds 4 
percent of our GDP, which is higher than the 3 percent ceiling 
allowed by the European Union, and additionally, our current 
accounts deficit exceeds 5 percent of the GDP.
    In the past, we have had absolutely no difficulty. But, 
there have been some reports that possibly we could have 
difficulty in the future, given our economic situation.
    Mr. Greenspan. It is a relative issue. Remember that the 
rest of the world is not doing significantly better than we.
    Mrs. Maloney. That is true.
    Mr. Greenspan. We are still getting a considerable amount 
of foreign investment coming in because as tepid as our 
recovery has been, it is still perceived to be superior to most 
other alternatives. And, as a consequence, we have not 
experienced any really significant problem in financing what is 
admittedly a fairly large current account deficit.
    I have said in the past that I have always expected that 
eventually we would adjust, but I have been making that 
statement for five years, and we have been managing to sustain 
an ability to attract investment through an expansion period 
and through a contraction period.
    Mrs. Maloney. Thank you, Mr. Greenspan. But, the rest of 
the world is not putting massive structural deficits that they 
confront in the long term as we are putting into effect.
    Today they came out saying it is the largest in the history 
of the United States, the largest deficit they are projecting--
all types of economic indicators have projected that it will be 
much larger, that it doesn't even include the war in Iraq and 
Afghanistan and homeland security, as we have heard earlier.
    So I guess my question is, in relation to the rest of the 
world, if they are not putting on this massive deficit, and we 
are, will that not have some impact on their judgment in making 
their investments in the future?
    Mrs. Kelly. Mrs. Maloney, would you please submit that 
question for the record?
    Mrs. Maloney. Okay. Thank you.
    Mrs. Kelly. Mr. Ose.
    Mr. Ose. Thank you, Madam Chairman. Mr. Greenspan, first of 
all, I want--I wanted to welcome you. I do have a question. I 
want to first apologize for what I consider to be rude 
treatment of you by some members of this panel. And the manner 
in which you were addressed was rude. And I apologize for it.
    I am tempted to ask questions. You mentioned in your 
testimony, a discussion that the Board, of the alternatives for 
implementing monetary policy that were considered to be a low 
probability for adoption. I am tempted to ask about that. 
Perhaps I will do that in writing.
    I am also very appreciative of the comments you made about 
the importance of energy to the economy overall. And I do want 
to just briefly--I want to briefly mention in the context of 
perhaps the British withdrawing from Yorktown and playing how 
the world has turned upside down, a discussion of the condition 
of our economy relative to inflation, to the GDP, to the levels 
of productivity, to employment levels, to asset utilization 
rates and the like. I find it fascinating that when we have 
this inflation at 1 to 2 percent, interest rates at 1 to 2 
percent, productivity going through the roof, gross domestic 
product growing, albeit slowly, employment levels at 
significantly reduced rates from what we would have had say in 
the late 1970s or early 1980s, asset utilization rates creeping 
towards 80. These are all very strong economic indicators. And 
I compliment you and your colleagues for implementing these 
successes accordingly.
    My question has more of a regulatory nature. I have been 
following closely the issue of Credit Lyonnais, and its 
activities in California in the early 1990s, relatively, to 
buying the bond portfolio from Executive Life. I am curious as 
to the Federal Reserve's status of any investigation it has 
undertaken relative to Credit Lyonnais's eligibility to operate 
in the United States, in particular, the potential approval of 
the Credit Agricultural acquisition of Credit Lyonnais, and 
whether the Fed, in fact, intends to grant the new entity a 
bank license for operation in the United States?
    Mr. Greenspan. Congressman, I am not clear on what 
particular discussions are confidential or not. And I would 
much prefer to answer you for the record on that, if I may.
    Mr. Ose. I would be happy to put it to you in writing.
    Madam chair, that is all I have. Thank you.
    Mrs. Kelly. Thank you.
    Ms. Velazquez.
    Ms. Velazquez. Thank you, Mrs. Chairman.
    And, Chairman Greenspan, I am having some difficulty in 
understanding your perspective on budget deficits. I heard your 
answer to Mr. Kanjorski where you say that we have to deal with 
expenditures. But, that is one part of the equation.
    What about the fact that during this economic situation 
that we are facing in our economy, and the fact that the money 
that we are spending in the war with Iraq, that we, this 
Administration passed a huge tax cut. Can you tell me, do you 
believe that our Nation will run long-term deficits if we 
continue to cut taxes in the future?
    Mr. Greenspan. Well, I have commented on that in the past. 
I would just merely stipulate that my general view is that over 
the long run, it is essential to run a fiscal policy which is 
stable, meaning, effectively that the level of debt to the 
public, as a ratio to GDP, tends to be relatively flat.
    I have also stipulated that I do believe that tax cuts, 
properly constructed, can be a significant factor in long-term 
economic growth, but it obviously requires that if you cut 
taxes and maintain a viable long-term budget deficit or surplus 
policy, you have to address spending as well.
    And I have been most concerned that after having gained 
considerable control over spending a decade ago, we have 
allowed that to slip. And I think that that will be creating 
major problems for us in the future unless we turn it around, 
and I trust that the statement that will be forthcoming from 
the Office of Management and Budget I presume today, will 
address the longer term concerns that I have.
    Ms. Velazquez. What sort of long-term effects will these 
long-term deficits have on our economy?
    Mr. Greenspan. As I have indicated in testimony, back in 
April here, it is our view that changing long-term deficits do 
affect long-term interest rates. And accordingly, very 
substantial deficits projected, which are destabilizing--that 
is, create a rise in the level of debt relative to GDP--are 
also likely to be consistent with rising interest rates which 
would slow economic growth.
    Ms. Velazquez. Mr. Chairman, with the Federal funds rate at 
1 percent, many have argued that the Federal Reserve's ability 
to conduct monetary policy is hindered. What other tools can 
the Fed use to conduct monetary policy?
    Mr. Greenspan. Well, as I have indicated previously, should 
we get to the point, and as I want to emphasize we don't expect 
that to happen, that we run out of conventional monetary policy 
which we define as addressing the overnight Federal funds rate, 
we still have fairly significant expansion capabilities for our 
monetary base, well beyond what we would do if our sole purpose 
was addressing overnight interest rates.
    And indeed there are numerous ways which I and my 
colleagues have discussed in various speeches and other fora in 
recent months.
    Ms. Velazquez. What potential side effects are there of 
using these other policy tools?
    Mr. Greenspan. This is one of the issues which we focus on 
quite considerably. As I have indicated previously, our general 
evaluation is that inflation is exceptionally well controlled 
and extraordinarily unlikely, in our judgment, to create a 
problem in the future. The types of problems which would be 
created by those types of actions are all generally 
inflationary in nature, and that is not an issue which we 
perceived to be something which should be of concern to us at 
this stage.
    Ms. Velazquez. Thank you.
    Mrs. Kelly. Thank you.
    Ms. Biggert.
    Mrs. Biggert. Thank you, Madam Chairman. Mr. Chairman, I 
have two questions and a short period of time. First of all, I 
would like to ask your opinion about a matter that relates to 
the committee's efforts to permanently extend the Fair Credit 
Reporting preemptions. And the bill contains a provision that 
calls for a free credit report and another provision that calls 
for credit bureaus to provide credit scores and a summary of 
how the scores were derived as well as information as to how 
consumers can improve their credit score.
    As a policy matter, do you think--what do you think about 
the implications of federally mandating the free provision of 
products such as credit reports and credit scores?
    Mr. Greenspan. You mean to say that--to make available the 
credit scores?
    Mrs. Biggert. This is going to make them available, and the 
credit--the companies will have to provide these to consumers, 
at least one free. And this actually is somewhat of a mandate 
that we will be saying, that they should give their product 
free, at least one a year.
    Mr. Greenspan. Yes. We have developed, in part with the 
technology which we have managed to create, a really quite 
major consumer credit market which enables individual 
institutions to fairly well evaluate the credit status of the 
people to whom they lend.
    That has enabled interest rates to borrowers to be lower 
and credit access to be greater than it otherwise would be. 
Part of that ability is the development of credit scoring 
models, which are usually proprietary to individual 
institutions, and obviously, they are costly to create and 
function.
    And while I can't comment on the individual cases with 
respect to what the form of the legislation would make those 
available to various different individual borrowers, I will say 
to you that it is very important for us to maintain a system 
which enables those models and those technologies to advance 
because if they don't, we are probably going to find that 
interest costs are likely to rise and the availability of 
credit, to the average consumer is likely to fall.
    So we have got a trade off here of trying to improve the 
system, make it more transparent, remove the mistakes which is 
crucial, but yet maintain the structure which enables those 
systems to function in an effective way and in a profitable way 
so that people will have the incentive to develop still more 
sophisticated credit-scoring models.
    Mrs. Biggert. Thank you. Then my second question, in the 
last week the Administration has proposed shifting how 
companies calculate pension liabilities from a single interest 
rate to a yield curve idea. And my question is, what do you see 
as the macroeconomic effect of these increased contributions? 
This would be where I think companies are concerned about 
having to make greater contributions to their defined benefit 
plans if the Administration's yield curve is used instead of 
the 30-year Treasury bond.
    Mr. Greenspan. Yes, it is the developments in defined 
benefit plans and their accounting and the procedures by which 
companies make or don't make contributions, which I must say, 
have gotten unduly complex and in my judgment, are capable of 
very significant improvement. The suggestions of the Secretary 
of the Treasury I think do advance the process and would create 
a superior system, especially after the two year hiatus, than 
the one we have today. But I do think it is something which 
probably is capable of quite significant improvement. In other 
words, a number of the things which FASB employs with the 
accounting and the IRS strike me as more complex than we need, 
and I suspect that part of the problem is that the technologies 
which enable us to do a far more sophisticated process of 
evaluating the liabilities of workers and the ways of defeasing 
of those liabilities, have improved measurably, and I think 
major advances are possible in this area and I hope we proceed 
to do so.
    Mrs. Biggert. Thank you.
    Mrs. Kelly. Thank you, Mr. Chairman. The Chair will 
announce that the committee will stand in temporary recess 
pending these two votes, but that it intends to resume as 
quickly as possible after the votes. And we appreciate your 
patience, Mr. Greenspan.
    Mr. Greenspan. Thank you, Madam Chairman.
    [recess.]
    Mrs. Kelly. The committee will come to order. We go now to 
Mr. Watt.
    Mr. Watt. Thank you, Madam chair. And Mr. Chairman, 
welcome. Let me deal with one thing quickly, I hope, and then 
ask you to comment on something that might take a little bit 
more time. On page 5 of your testimony, you, and you have said 
in general, that you think the tax cuts have been beneficial 
and stimulative. And on page 5 you say that most firms have 
likely implemented the lower withholding schedules that have 
been released by the Treasury and advance rebates of child tax 
credits are being mailed beginning later this month. I take it 
that you think those are stimulating the economy because they 
are getting right back into the economic flow, at least that is 
the short term stimulus that we were looking for?
    Mr. Greenspan. As I tried to indicate in my prepared 
remarks, Congressman, what they are in the process of doing is 
increasing disposal income.
    Mr. Watt. I take it then that the short term impact of 
that, the advance rebates and the child tax credits is to get 
money into people's hands quickly, they put it back into the 
economy, you are not looking so much at the longer term 
consequences, savings, investment, that is the stimulative 
impact that we are talking about.
    Mr. Greenspan. That is correct, sir.
    Mr. Watt. And would I then be correct in assuming that if 
we were to pass the balance of the refundable child tax credit 
and get that into the economy, you would think that would be 
consistent and stimulative also?
    Mr. Greenspan. That would have very much the same effect.
    Mr. Watt. Yes. Okay. The prepared report that Mr. Frank has 
referred to a couple of times has an interesting comment on 
page 13, that I am wondering if you could comment a little bit 
more on the significance of. It says in addition, the change in 
the distribution of income in the late 1990s which concentrated 
more income in the upper tax bracket may have been reversed 
during the past couple of years. There is no elaboration on the 
significance of this, but there has been a lot of discussion 
about the growing disparity between rich and poor, and I assume 
this has something to do with that. How do we effectively, in 
your opinion, address this growing disparity between rich and 
poor? And is it important, from your vantage point, to try to 
address that growing disparity?
    Mr. Greenspan. Congressman, there was a very significant 
surge in the latter part of the 1990s owing to a combination of 
realized capital gains and very significant increases in 
income, and as a consequence of the exercise of stock options. 
Indeed, that is one of the reasons why Treasury receipts went 
up significantly and contributed to the surplus that we 
experienced. With the stock market turning down after mid 2000, 
that process went 180 degrees in the other direction. There has 
been a significant decline in realized capital gains. There has 
been a marked decline in the incomes engendered by exercise of 
stock options. And that of course, is disproportionately 
concentrated in the upper income groups, and as a consequence, 
the shift toward income inequality which was so evident in the 
latter part of the 1990s has turned around.
    Indeed the actual tax receipts now are relative to incomes 
exceptionally low. And one must presume that a goodly part of 
that is coming out of the upper income groups and the lower 
incomes there, but we won't have those data complete for 
probably another year or so to get a good judgment as to what 
has actually occurred in the distribution of income.
    With respect to your second question, it has been my view 
that the less the concentration of income in a society, the 
more stable it will tend to be. But if there is a significant 
endeavor on the part of government beyond, say, the tax system 
that we have, for example, to try to markedly alter the 
distribution of income, history does tell us that it is often 
counterproductive. So I think that what we ought to endeavor to 
do is to move toward as much an equality of income as we can 
coming from enhanced education, enhanced capabilities, and 
removal of discrimination where we can in order to balance 
skills and, therefore, incomes. I think we have a mixed record 
on that, but that doesn't mean we should stop trying.
    Mr. Watt. Thank you, Madam Chairman.
    Mrs. Kelly. Mr. Green.
    Mr. Green. Thank you, Madam Chair. Mr. Chairman, you said 
earlier that there is a public debate over the value of 
manufacturing to our economy versus the service sector. Well, 
you are well known for your understatement. I think you could 
tell after that that a number of us feel very strongly that 
manufacturing is crucial, and I think you got a little flavor 
of that feeling in that debate. Assuming for the moment that 
manufacturing is crucial to our economic vitality in the long 
run, what economic policies, what monetary policies do you 
believe we should examine as we look for ways to add some 
energy to the manufacturing sector, to address some of the 
barriers that we believe are out there.
    Earlier on, it was alluded that many of us believe there 
are some problems with currency exchange rates. But what are 
some of the larger economic policies and monetary policies that 
we could examine that would help the manufacturing sector.
    Mr. Greenspan. Well, I think what we are doing in part is 
the right thing in that what we are trying to do is to 
concentrate in those areas of manufacturing which are growing 
fastest. They are essentially the high tech--I guess the proper 
word is ``marginally ephemeral'' parts of our manufacturing. As 
I have testified before this committee before, one of the most 
unusual things about our economy is that the weight of the GDP, 
and especially of manufacturing, is actually declining relative 
to the real value of what we turn out. In other words, we have 
got more economic value in a few pounds of high tech equipment 
than we will have, for example, with a ton of raw material of 
various different types. And what we have succeeded in doing in 
this country is that even though manufacturing as we measure it 
has been going gradually down relative to the economy as a 
whole, we have shifted our resources toward those most 
effective parts of manufacturing. And indeed, one is hard 
pressed today to find even in old line manufacturing 
establishments a lack of high tech equipment. You go into a 
textile weaving plant, and I used to go visit textile plants 50 
years ago, and I know they are producing the same product, but 
I can assure you they are producing it very differently with 
far more technology and wholly different infrastructure of 
production.
    And what we ought to be doing is more of the same. I don't 
think it requires incentives, but what it does require is a 
skilled workforce and an emphasis on meeting consumer demands, 
which are best met these days by employing a type of technology 
which virtually all of our manufacturers now, to a greater or 
lesser extent, are employing.
    Mr. Green. But you also indicated earlier, if you take a 
look and try to examine the value of manufacturing to our 
economy, there may be cases where depending upon the type of 
manufacturing, the type of goods that we are talking about, 
there may be a national interest in maintaining the vitality of 
that sector, nationality security reasons, for reasons of self-
sufficiency. We have seen the energy sector, the costs are 
being dependent upon foreign sources of energy. Isn't it true 
that it would be in our interest, then, not to simply hope that 
the shift to high value manufacturing sectors doesn't 
completely coincide with our national interest? What about the 
other types of manufacturing? I understand what you are saying 
over the long haul, but----
    Mr. Greenspan. This is the reason, Congressman, I mentioned 
earlier that if we feel secure in importing from broad of types 
of goods that we used to produce here, then from an economic 
point of view, it is irrelevant whether we produce it here or 
abroad. But clearly, that is not the case in certain 
circumstances, and it obviously is not the case for national 
security. I wouldn't say, however, self-sufficiency per se is a 
value because that is indeed counter to the division of labor 
and globalization, which has been extraordinarily valuable to 
us.
    But national security is. And to the extent that there are 
national security issues involved, then for much the same 
reason that we have special programs in the Defense Department 
and our procurement policies in DOD which recognize that, one 
can make that argument. But I would not make it for self-
sufficiency. I do think it is a valid argument for national 
security.
    Mr. Green. Thank you. And thank you, Madam Chair.
    Mrs. Kelly. Mr. Sherman.
    Mr. Sherman. Mr. Chairman, thank you for coming before us 
again. I know that the 5-minutes rule will be strictly enforced 
so I would like to lay out a number of questions and invite you 
and your staff to submit responses for the record, and maybe 
one or two of them will be worthy of an oral response.
    You talked about a quote, ``inflation rate'' being too low. 
And I know that in prior testimony to us maybe 3, 4 years ago, 
actually to the Budget Committee, you put forward the idea that 
the CPI overstates the rate of inflation by between half a 
point and 1-1/2 points. So I hope you would respond, for the 
record, and say okay with the CPI as our measure of inflation 
with all its flaws, but as to CPI measured inflation, what is 
the Fed's target rate of inflation, or what would be the best 
CPI measured inflation rate for us to have?
    Mr. Greenspan. I know there has been fears of deflation, 
and one way to deal with that to cut the Fed discount rate, but 
you are down to about 100 basis point of cutting left, maximum. 
So some of my constituents have asked what are the legal--well, 
they don't phrase it this way, but what are the legal and 
practical opportunities or impediments to simply printing more 
green backs and earning some signer and for the Fed and 
ultimately for the Federal Government?
    Mr. Greenspan. The lead story today is $450 billion deficit 
and we have had several exchanges in which you have talked 
about a world in which tax cuts are good because they lead to 
spending cuts. I look forward----
    Mr. Greenspan. I don't remember making that statement, 
Congressman.
    Mr. Sherman. Ah. Let's put it this way: You were not 
condemning tax cuts, but you believed in a reduced budget 
deficit--you were against deficits but you weren't against tax 
cuts.
    Mr. Greenspan. I am in favor of economic growth, and I do 
believe that over the long run, certain types of tax cuts do 
enhance economic growth.
    Mr. Sherman. Even if appropriations are fixed, and so those 
tax cuts do lead, at least in the scoring and in their initial 
impact, to an increased deficit?
    Mr. Greenspan. No. If they increase the long-term deficits, 
as I believe I testified before this committee in April, 
interest rates would rise and very likely limit, if not 
considerably diminish, any growth that might be achieved.
    Mr. Sherman. Well, do you know of any tax cut that does not 
increase the deficit, assuming spending remain fixed, assuming 
the majority party doesn't have us spend money today, except on 
the necessities? If spending is fixed, is there any tax cut 
that is good when a country is----
    Mr. Greenspan. You mean to say is there a tax cut which 
pays for itself?
    Mr. Sherman. Yes.
    Mr. Greenspan. I doubt it.
    Mr. Sherman. So if you oppose deficits and if 
appropriation--if appropriations and spending aren't going to 
decline, it is hard to find a tax cut that you would support?
    Mr. Greenspan. I would prefer to find the situation in 
which spending was constrained, the economy was growing, and 
that tax cuts were capable of being initiated without creating 
fiscal problems.
    Mr. Sherman. I would prefer to find a world in which Julia 
Roberts was calling me, but that is unlikely to occur. I want 
to focus, though, on the trade.
    Mr. Greenspan. She might now.
    Mr. Sherman. I think we are about equal likely. As long as 
we are at equal likelihoods, we are running a $35 billion trade 
deficit every month. We have talked about this several years in 
a row. Imagine the Rip van Winkle disease afflicts you and you 
do go to sleep and wake up 15 years later. Which would shock 
you more, waking up in an America that had just continued to 
run a $15 billion-a-month trade deficit, 400 billion a year, 
just things pretty much run for another 15 years the way they 
have now, or would you be more surprised to learn that the 
dollar had declined significantly in value 40, 50 cents to the 
euro? Which of these two scenarios would surprise you more 15 
years from now, a decline in the dollar of significant 
magnitude or a month-after-month continuation of our trade 
deficit with everybody happy?
    Mr. Sherman. Thank you, Madam Chair.
    Mrs. Kelly. Would you like to submit that?
    Mr. Sherman. I would like to submit that for the record. I 
have no further comment. I don't know if the Chairman does.
    Mrs. Kelly. Well, I have one comment to make and that is 
representing the district where Rip van Winkle was, I want to 
tell you we are very appreciative of your mentioning us today. 
Thank you very much.
    We go now to Mr. Kennedy.
    Mr. Kennedy. Thank you Madam Chairman, and thank you, Mr. 
Chairman for being here. My question deals with, in your 
opening testimony, you talked about the advantages of having 
households stretch out their maturities by paying off their 
credit debt and putting that on debt that is longer term. You 
also mentioned that firms were doing that as well. A key 
concern I have at a time period where we do have deficits 
projected, and we do have significantly lower rates than we 
have experienced recently, is this a time for us to consider 
bringing back a 30-year Treasury bond and moving towards more 
of a longer maturity for the governments, just as you mentioned 
its positives that households and businesses have?
    Mr. Greenspan. This is an issue which Treasury always has 
under consideration. And there are pros and cons to that. I am 
conflicted at this particular stage. And I would like to hear 
the arguments that Treasury is going to be bringing up with 
respect to that issue at some point. They do it on a continuing 
basis in the sense of reviewing what the distribution their 
issuance should be and at what maturity. There are pros to 
bringing the 30-year back but there is a serious question of 
whether it is desirable. And frankly, I have not myself come to 
a conclusion on that.
    Mr. Kennedy. I appreciate that, and I know from the risk 
protection perspective of an increasing interest rate 
environment certainly would put our budget in a stronger 
position. I think we should consider that. I just want to go 
back to the currency discussion and do it from a little bit 
different angle. That has to do, you mentioned foreign 
economies and their effect on our economic growth. We obviously 
have a significant current account deficit. What type of 
scenarios would the changes in say, Asian currencies have on 
the growth of the European economy and their ability to benefit 
us as well as our ability to get our current accounts more back 
in line?
    Mr. Greenspan. Well, it is fairly apparent that the 
emerging economies of east Asia have been the dynamic elements 
in everyone's trade balances. It is clear that, from the United 
States' point of view because of the fact that we have a much 
higher propensity to import relative to our incomes than our 
trading partners do, we tend to chronically go toward trade 
deficits in the sense that if all economies rose at the same 
rate, because of the disparity that we have with respect to our 
propensity to import, we would create a trade deficit which 
would be increasing through time matched obviously by 
equivalent trade surpluses in other economies.
    So the critical question is not only what happens to 
exchange rates and not only what happens to various growth 
rates in these various different regions, but what are changing 
propensities to import relative to incomes and they are very 
difficult to project. So all I can suggest is that the less 
restrictions that exist on trade in both goods and services, 
the better we all are because there is no doubt in my mind, 
looking at the advantages of globalization over the last 30, 40 
years, that we have all appreciably gained in standards of 
living owing to the successive reduction in tariffs and the 
opening up of trade barriers.
    And indeed I would argue that we in the United States have 
been the greatest beneficiaries of the most--of those changes. 
We have benefited more than anybody else. And therefore, I am 
very much strongly supportive of continuing the opening up of 
trade, which we have always been in the fore-front of, and I 
look forward to increased globalization which I think will be 
assisting all people with whom we trade but especially 
ourselves.
    Mr. Kennedy. Would this propensity to import more than 
others can we have a dollar policy that ultimately does allow 
the current account to get back in balance at the same time 
that we have rising economic growth?
    Mrs. Kelly. Mr. Kennedy, I would like to ask if you would 
submit that in writing. Mr. Greenspan has little time. We have 
agreed to let Mr. Greenspan go because he has things he must do 
at 1:00. If you would indulge, sir, with a few more minutes of 
your time, I would like to try to get a few more people who 
have been waiting patiently to speak. But I would ask members 
to please keep your questions short and we will try to fit as 
many of you in as we can. With that we go to you Mr. Meeks.
    [Chairman Greenspan subsequently provided the following 
response for the record.]
        [The Treasury Secretary speaks on U.S. dollar policy. 
        Over the long term, the U.S. current account deficit 
        may well have to adjust, although when or how is by no 
        means a certainty. The only thing that is clear is that 
        it cannot keep expanding relative to the size of the 
        economy indefinitely. Change in the foreign exchange 
        value of the dollar are just one mechanism for 
        adjustment; another key mechanism is stronger growth 
        abroad.
        I think the main insight with regard to the current 
        account balance and economic growth is the importance 
        of sound fundamental policies aimed at achieving the 
        maximum sustainable economic growth rate. Within a 
        sound fundamental policy framework, the value of the 
        dollar and the level of the current account are 
        determined by the operation of markets based on the 
        opportunities and preferences of individual consumers 
        and investors.]
    Mr. Meeks. Thank you, Madam Chair. Thank you, Mr. Chairman 
for being here. I will try to do just that. In fact, I will ask 
two questions and maybe leave one for you to answer on the 
record later. Previously you came before the committee, we 
talked about the war, pre war, we talked about how long we 
would be in Iraq, and what it would cost the economy, et 
cetera. We now know that you know, despite what I see that is 
in your statement that we are indefinite, if you listen to some 
of our Department of Defense, you say we will be there 4 to 5 
years, costing is now $4 billion a month and going up with the 
tax deficit.
    So it seems to me that literally, I don't claim to be an 
economist, but the little bit that I learned is that the 
greater the deficit, the more pressure that it puts on interest 
rates. And our deficits are now just mounting and mounting and 
mounting, and also there your testimony seeing that the only 
thing that has kept us afloat really has been the fact that we 
have had lower interest rates as far as mortgages are 
concerned, et cetera.
    Do you--my first question is, do you foresee a time where 
that pressure meets and interest rates will soon have to go up, 
thereby stemming that part of our economy that has kept us 
afloat? And so that is the first question. Do you see that 
happening? Do you see it happening any time in the near future?
    And my second question, basically, is an offshoot of what 
Mr. Sherman had asked, you know I have been talking to a number 
of foreign countries, and it seems to me as though the Euro is 
growing in strength. And looking at these countries, they are 
looking to maintain their Euros for their foreign currency 
accounts in place of a percentage of the dollars. I am 
interested in this from your perspective. Some say that is 
good, some say that is bad. Is the result in the decrease in 
the dollar strength more beneficial to our economy due to the 
potential rise in exports, or might it eventually challenge the 
stability and reliability of our dollar?
    Mr. Greenspan. Well, first with respect to the deficits and 
interest rates there is a relationship there. But it is long 
term and it is not something which is on the immediate horizon. 
What is on the horizon is not yet the period, say, 2011, 12, 13 
when we begin to see the major change in the retirement of the 
baby boomers and a very large pressure on the deficit. It is 
when that gets on the five-year horizon that history tells us 
it begins to probably impact on rates. It is something we 
should keep in mind and not keep leaving for another day 
because it will come up and get us. But now I would say 
probably not because one must presume that the current deficits 
are short term, and if normal extensions of programs are 
projected out, that deficit should be coming down as a percent 
of the GDP.
    With respect to the current account, as I said before, 
there is a long history of financing of this, and I think I 
have said about as much as I can say without getting into the 
exchange rate issue, which I find a little bothersome, in other 
words, to comment on the Euro, I can't. I can say this though 
with respect to your remarks relative to the distribution of 
currencies: there is no real strong evidence that there has 
been significant shift out of the dollar into Euros. I think 
there probably has been some percentage, but not a large run 
against the dollar. Indeed, if anything, central banks, in an 
endeavor to support their own currency vis-a-vis the dollar, 
have been reasonably heavy purchasers of American dollar 
instruments, and that is showing up in the stock of assets of 
the central banks.
    But there is no question that the complexity of what 
determines exchange rates and the allocation of assets is 
something we don't know as much about as we should. These 
markets are very complex, and a lot of them work in a very 
effective way without full knowledge on our part of exactly how 
they are doing that. There is an invisible hand here, which is 
obviously working to our advantage, but it is very frustrating 
because we can't figure out exactly how it is doing it.
    Mrs. Kelly. Thank you very much Mr. Chairman. I thought 
perhaps we could extend this to 1:15. If that is the case, we 
have 4 minutes.
    Mr. Greenspan. I can do that.
    Mrs. Kelly. Is that possible?
    Mr. Greenspan. Yes.
    Mrs. Kelly. Thank you. We have four people here. We have 10 
minutes. If you ask one question please do it and then get on 
with it. Because you can certainly submit any further 
questions.
    Mr. Shays. I will take 3 minutes. Cut me off in 3 minutes, 
but I have more than one question. Capital terms, long term, 
short term, you favor two separate tiers. Is it conceivable to 
move that short term down from a year to six months? Would that 
be good or bad?
    Mr. Greenspan. I have always thought that capital gains 
taxation, as you probably remember, was not something which I 
thought was very effective taxation for capital formation. So 
if you can move the short term from a year to 6 months in that 
context, I would think that would be a desirable thing to do.
    Mr. Shays. The Treasury and the Federal Reserve is looking 
at allowing banks to get into real estate. Is this a positive 
thing or somewhat dangerous, and would you have concern that 
they are kind of getting into an economic transaction that they 
shouldn't be?
    Mr. Greenspan. Well, as you know, the Federal Reserve has 
been looking somewhat favorably on the issue of increased 
competition in real estate brokerage and believes that 
commercial banking would create that. I am aware, however, that 
economics is not the sole criteria in determining that 
decision.
    Mr. Shays. One last area, I voted for free trade with 
China. I believe in free trade. I don't think you can repeal 
the law of gravity. But I am concerned that China has basically 
gotten into value-added type manufacturing. I thought it would 
be the cheap stuff. And with regard to their currency, I am 
told by our manufacturers it is 30 to 40 percent overvalued--
undervalued. If one, do you agree? And two, what kind of effort 
should we make to try to have them have a floating system that 
would more reflect the true value.
    Mr. Greenspan. Well, remember it is to our advantage for 
the Chinese economy to enter into the global system. It will be 
of huge advantage to the United States for even noneconomic 
reasons. And they are doing that. And there is a good deal more 
free trade and emerging property rights. If the exchange rate 
is significantly undervalued, and indeed a reflection of that 
would be, for example, their accumulation of dollar assets, if 
that is indeed the case, the accumulation of dollar assets will 
expand their money supply to a point which will create problems 
in managing monetary policy and it will be in their interest to 
change.
    Mr. Shays. Thank you. Madam Chairman, thank you for how 
have you conducted these meetings.
    Mrs. Kelly. Thank you.
    Mr. Moore.
    Mr. Moore. Thank you, Madam Chairwoman. Chairman Greenspan, 
can we tax cut our way out of this sluggish economy?
    Mr. Greenspan. There is no question that the tax cuts which 
are in place this month have been helpful. Can you tax cut a 
moribund economy? I doubt it. In other words, if an economy is 
truly moribund----
    Mr. Moore. I am talking about this economy.
    Mr. Greenspan. As I have said in my prepared remarks, we 
believe that we are at a turning point and that our best 
judgment is that things will be improving. So I wouldn't accept 
the view that it is a moribund economy. Obviously, the type of 
tax cuts that are in train at this particular moment will add 
to expansion if it is underway. So in that regard, is it 
helping? Yes, I think it is helping.
    Mr. Moore. My real question is will tax cuts by Congress in 
the next 6 months to 18 months have an appreciable effect on 
turning around this economy, additional tax cuts?
    Mr. Greenspan. It depends on the type of tax cuts and the 
timing and the extent that they affect the deficit.
    Mrs. Kelly. Mr. Manzullo.
    Mr. Manzullo. Thank you, Madam Chairman. Mr. Chairman, the 
National Association for Manufacturers in its white paper 
released 6 weeks ago made this statement: ``if the U.S. 
manufacturing base continues to shrink at its present rate and 
the critical mass is lost, the manufacturing innovation process 
will shift to other global centers. Once that happens, a 
decline in U.S. living standards in the future is virtually 
assured.'' Chinese manufacturing sector grew at 16.9 percent 
this past year. Their exports are up 32.6 percent. We have lost 
nearly 3 million manufacturing jobs at the rate of 54,000 a 
month for at least the past 34 months. The Congressional 
district I represent led the Nation in unemployment in 1981 at 
25 percent. We are now at 11 percent, but because of a huge 
manufacturing sector. Could you comment on that statement by 
the NAM?
    Mr. Greenspan. I think it is incorrect. There are 
difficulties when you get fast adjustments in structures within 
an economy. But we have been having a gradual decline in the 
intensity of manufacturing production in this country for many 
years. When I first started out as an economic assistant back 
in the late 1940s, manufacturing was the U.S. economic bulwark. 
We went through the 1990s with significant losses, and yet we 
had an unemployment rate under 4 percent. Jobs do get created, 
they do not get created in manufacturing.
    Mr. Manzullo. Where have they been created?
    Mr. Greenspan. They have been created in a vast variety of 
service industries. And obviously, we are not under 4 percent, 
now we are 6.4 percent. What I am trying to say is over the 
long run, the population shifts, and in the United States, it 
has been increasingly toward high tech activities whether in 
the service area, software, computer servicing and the like, or 
in high tech manufacturing, which has been growing quite 
significantly. I do not deny that some of the very impressive 
major old line technologies, which we in this country 
essentially developed, are sharply reduced.
    Mr. Manzullo. They are gone. And even in the engineering 
jobs associated with manufacturing, those are gone too. Very 
quickly.
    Mr. Greenspan. No, but that is in the nature of a dynamic 
economy, and we do have a dynamic economy.
    Mr. Manzullo. The dynamic economy has gone down the tubes, 
a recovery without jobs, especially if you lived in my 
district.
    Mr. Greenspan. That is a valid statement. I would say if it 
continued that way, I would find that distressing. I don't 
believe it will happen though.
    Mr. Manzullo. Roger Ferguson came out to our district to 
experience machine oil on his hands. Would you like to come 
out?
    Mrs. Kelly. Mr. Manzullo, if you would submit that in 
writing, we would appreciate that.
    Mr. Manzullo. Just yes or no, but I will send the 
invitation. Thank you. Thank you, Madam Chairman.
    Mrs. Kelly. Mr. Ford.
    Mr. Ford. What can we in the Congress do to help stipulate 
employment? Clearly, that is the theme of the day on both sides 
of the aisle. What would you recommend we do?
    Mr. Greenspan. I would say that the major thing to create 
employment in this country is to get economic growth. And over 
the years, what to me has been the most effective thing that 
created growth in this country is in the last quarter century--
--
    Mr. Ford. From a policy standpoint I agree sir. What can we 
do? I have only about 45 seconds and I have one last point. 
Just what can we do from here to the end of this session of 
Congress?
    Mr. Greenspan. So far as what can be done in the short run, 
I think it has already been done, and it is in train and it is 
presumably hopefully starting to work. Over the longer run, I 
would look at trying to find more ways to deregulate certain 
aspects of the technology industry and other aspects of the 
economy, which I think are bottlenecks in the creation of jobs.
    Mr. Ford. One of the things that I asked you over and over 
again is the predicament that States find themselves in. Do you 
think at some point it may be necessary, in light of the number 
of States that are cutting services and raising taxes, some 
States even releasing prisoners to meet budget shortfalls that 
we may have to provide some kind of relief package for the 
States? And, if so, when might you believe that is necessary?
    Mr. Greenspan. That is a decision on priorities which the 
Congress has to make. It is an issue which----
    Mr. Ford. State budget problems affecting the ability for 
the economy to grow?
    Mr. Greenspan. Well, the answer is yes. The contraction in 
budgets, the increase in not deficits but the equivalent in the 
State and local area has been negative for economic growth. 
There is no question about that. It is likely to be negative in 
the next year as well.
    Mr. Ford. As I close out, Madam Chair, I would like to 
submit to the record a unanimous consent request to enter into 
the record about 30 articles from across the country indicating 
the steep cuts that are being made by governors and tax 
increases. And I know there have been points here we have to 
balance our budget by cutting expenses. And the follow up 
question to you, when do spending cuts begin to affect economic 
growth in a detrimental way?
    I would love to get your thoughts on that at some point. 
Thank you for coming. Thank you Madam Chair for allotting us 
all time to ask questions.
    Mrs. Kelly. Without objection but I would like to discuss 
with the gentlemen about whether or not they all need to be 
inserted into the record.
    Mrs. Kelly. And with that caveat, so moved. We thank you 
Mr. Greenspan, Chairman Greenspan. We do thank you for your 
insights that you have offered us today and for your great 
indulgence. This committee now stands adjourned.
    [Whereupon, at 1:17 p.m., the committee was adjourned.]


                            A P P E N D I X



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