[Senate Hearing 108-852]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-852


                      NOMINATION OF ALAN GREENSPAN

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

     the nomination of alan greenspan, of new york, to be chairman
        of the board of governors of the federal reserve system

                               __________

                             JUNE 15, 2004

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

               Peggy R. Kuhn, Senior Financial Economist

             Martin J. Gruenberg, Democratic Senior Counsel

                  Aaron D. Klein, Democratic Economist

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         TUESDAY, JUNE 15, 2004

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Bunning..............................................     4
    Senator Schumer..............................................     5
    Senator Crapo................................................     5
    Senator Bayh.................................................     6
    Senator Dole.................................................     6
    Senator Miller...............................................     7
    Senator Hagel................................................     7
    Senator Stabenow.............................................     8
    Senator Chafee...............................................     8
    Senator Sununu...............................................     9
    Senator Allard...............................................     9
    Senator Reed.................................................    26
    Senator Carper...............................................    28
    Senator Corzine..............................................    28
    Senator Bennett..............................................    31

                                NOMINEE

Alan Greenspan, of New York, to be Chairman of the Board of 
  Governors of the Federal Reserve System........................    10
    Biograhpical sketch of the nominee...........................    35
    Response to written questions of:
        Senator Sarbanes.........................................    48
        Senator Carper and Senator Miller........................    49

                                 (iii)

 
                      NOMINATION OF ALAN GREENSPAN
                     OF NEW YORK, TO BE CHAIRMAN OF
                       THE BOARD OF GOVERNORS OF
                       THE FEDERAL RESERVE SYSTEM

                              ----------                              


                         TUESDAY, JUNE 15, 2004

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby, Chairman of 
the Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    This morning, we will consider the nomination of Alan 
Greenspan to serve his fifth term as Chairman of the Federal 
Reserve System. If confirmed, and we expect that will happen, 
Chairman Greenspan will be only the second Federal Reserve 
Governor to serve beyond his fourth term, equaling the record 
held by the distinguished William McChesney Martin.
    Chairman Greenspan, you have led the Federal Reserve System 
since August 1987, a period of nearly 15 years. During that 
time, the U.S. financial system has withstood a number of 
significant challenges, including economic disruptions in 
Mexico, Russia, and the currency crisis which engulfed much of 
South Asia. Your tenure also includes the 1991 to 2001 economic 
expansion, the longest in American history. This Committee has 
benefited from your wisdom in crafting a number of significant 
pieces of legislation, including the Financial Institutions 
Reform, Recovery and Enforcement Act of 1989, the Federal 
Deposit Insurance Corporation Improvement Act of 1991, and most 
recently, the Gramm-Leach-Bliley Act. I know that my colleagues 
will further remark on your successful track record.
    Chairman Greenspan, I would like to note your recent 
remarks at the Federal Reserve Bank in Chicago on financial 
literacy. In your speech, among other things, you noted that as 
a young man, it was music that grabbed your interest and that 
you visualized yourself someday playing with the likes of the 
Glenn Miller Orchestra or becoming another Benny Goodman. 
Obviously, your career path ultimately took another direction 
and for that, Mr. Chairman, the United States and the world 
financial markets I believe are grateful. The music world will 
never know what it may have missed, but this Committee and this 
Senator express our thanks for your extraordinary public 
service.
    Chairman Greenspan, we look forward to your testimony and 
at the proper time I would get back to you on the oath.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I join you in welcoming Chairman Greenspan back before the 
Banking Committee this morning as we review his nomination to 
another term as Chairman of the Board of Governors of the 
Federal Reserve System.
    Let me start by congratulating Chairman Greenspan on his 
nomination to a fifth term as Chairman of the Federal Reserve 
Board. If confirmed, as I fully expect he will be, Chairman 
Greenspan would join William McChesney Martin, as you noted, as 
the only Fed Chairman to be confirmed for five terms. In terms 
of longevity of service, he is currently second only to 
Chairman Martin.
    Over the years, I have both agreed and disagreed with 
Chairman Greenspan over the conduct of monetary and fiscal 
policy. That is what a democracy is all about, and I understand 
that. I believe the relationship Chairman Greenspan formed with 
the then-Secretary of the Treasury Robert Rubin during the 
1990's led to the conduct of fiscal and monetary policies which 
complemented one another and which helped achieve high growth 
and employment with low inflation and served the country well.
    As I look back, I think with respect to monetary policy, my 
sharpest disagreement with Chairman Greenspan was probably in 
1994 when the Fed raised rates in a preemptive manner that I 
thought was not warranted by inflationary pressures. In regard 
to fiscal policy, my strongest disagreement with Chairman 
Greenspan came in the beginning of 2001 when we were told that 
the debt was being paid down at such a rapid rate that we had 
to slow the trajectory otherwise we would pay it off too 
quickly. That took the lid off the punch bowl as far as tax 
cuts were concerned. Of course, now we are experiencing very 
large deficits and they are projected well out into the future.
    I do want to underscore the agreement I have had with the 
Chairman and the Fed on issues of bank regulation, particularly 
in regard to the need for vigorous holding company supervision, 
and in maintaining the separation of banking and commerce.
    Let me say though, Chairman Shelby and my colleagues, that 
even when I found myself disagreeing with Chairman Greenspan, I 
have always enjoyed our public exchanges. They have always been 
focused on the substance of the issues. I found them thought-
provoking and informative. Chairman Greenspan has carried out 
the responsibilities of his office with great skill and 
dedication, and has sustained the tradition of outstanding 
economic statesmanship provided by such former Fed chairmen as 
Marriner Eccles, William McChesney Martin, Arthur Burns, and 
Paul Volcker.
    I would like to take a moment to commend Chairman Greenspan 
for what I believe will be an important legacy of his 
chairmanship of the Federal Reserve. That is the movement by 
the Federal Open Market Committee of the Fed to be more open 
and transparent in its conduct of monetary policy. That 
movement began in November of 1993 when the Federal Reserve 
decided to release all historic transcripts of meetings of the 
FOMC, and the decision in January 1995 to release transcripts 
of FOMC meetings going forward with a 5-year lag.
    Perhaps most significantly, in February 1994 the Federal 
Reserve decided that changes in monetary policy by the FOMC 
would be accompanied by an immediate public announcement of the 
change with an explanation of a reason for the change. Now that 
was followed by the decision in January 2000 to release an 
announcement after every meeting of the FOMC whether or not a 
change in monetary policy was made, with a brief statement 
assessing the balance of the risks. And most recently, they 
have added the recorded votes of the individual members of the 
FOMC on the conduct of monetary policy.
    I also should mention that, in 2000, the Congress, with the 
support of the Fed, amended the Federal Reserve Act to make the 
Federal Reserve Chairman's Congressional testimony on the Semi-
Annual Monetary Policy report a statutory requirement. Until 
then the testimony was customary but not required by law.
    For those who have followed the conduct of monetary policy 
by the FOMC over the years and advocated greater transparency 
in its decisionmaking, these steps taken during Chairman 
Greenspan's tenure were meaningful and significant changes 
which have made the deliberations more transparent. I think it 
has made the members of the FOMC more accountable for the 
conduct of their responsibilities. Chairman Greenspan deserves 
great deal of credit for these positive changes.
    In fact it has been my perception that members of the FOMC, 
both Governors of the Fed and the Federal Reserve Bank 
Presidents have become more open in their public discussions of 
the work of the FOMC and have made greater efforts to explain 
their deliberations to the public. I believe the Fed has also 
developed a greater appreciation of how important communication 
to the public and to the markets is to the conduct of monetary 
policy. I regard these as positive developments with lasting 
consequences.
    Finally, let me note, Mr. Chairman, that while this 
nomination is for a 4-year term as Chairman, Chairman Greenspan 
has to cease to serve as a governor in February of not next 
year but the following year, 2006.
    Chairman Greenspan. January 31, 2006.
    Senator Sarbanes. We have the date exactly, January 31, 
2006--because of the limitation on the length of term a 
governor can--you can have one 14-year term, but you can have 
part of a term and then all of a 14-year term, which is the 
situation Chairman Greenspan would find himself in. At that 
point he would, of course, have to leave the board. That would 
help to get the chairmanship and the presidential elections 
back on what I regard as a more preferable track, which would 
be a new President would be able to appoint a chairman about a 
year after he came into office. So you would have some removal 
from the political process but not a total exception to it. I 
think that is a better synchronization on which to have the 
process work.
    But again, I close by congratulating Chairman Greenspan on 
this nomination to a fifth term as Chairman of the Federal 
Reserve. I look forward, as always, to his testimony this 
morning and, Mr. Chairman, I look forward to supporting you as 
you move through this nomination process.
    Chairman Shelby. Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman.
    Chairman Greenspan, I appreciate your service to our 
country, especially over the last 12 years, and I have no doubt 
that you will be reconfirmed as Chairman to serve the last 2 
years of your 14-year term. Many are afraid of what will happen 
when your term expires in 2006. There is much fear and 
trepidation. But both you and I remember that there was much 
fear and trepidation when your predecessor, Paul Volcker, left. 
But our economy survived, and when you step down and decide to 
play tennis full-time, our economy will survive again.
    I think it is obvious to everyone by now that I disagreed 
with you many times on your monetary policy decisions. As you 
know, I have already stated that I will not be able to support 
your renomination. I am quite sure that I will be the only 
Member this Committee not to support your renomination, and 
that there is a good chance that I will be the only Member of 
the U.S. Senate not to support your renomination. But that is 
okay. This is a democracy. We both know what it is like to take 
unpopular stands.
    There have been many things you have done right in your 
tenure as Chairman. Since January 2001, I think you have done a 
pretty good job on monetary policy. I think that the Fed has 
done a very good a job on working with our financial 
institutions on combating terrorism. I also think that the Fed, 
under your leadership, has done a good job about briefing 
Congress on your antiterrorism activities and other initiatives 
the Fed has undertaken. And you have let sunshine into the Fed. 
Though I believe more can be done in that area.
    But you know my problems, I have pointed them out to you on 
many occasions. I do not think that you have always moved 
aggressively enough to cut rates in the past, especially in 
1992 and 2000, and I think you have involved yourself in many 
things outside the Fed's charter. Believe me, I know that you 
are asked to comment all the time on things that have nothing 
to do with monetary policy or banking regulations. Quite often, 
it is a Member of Congress asking those questions that have 
nothing to do with your job. I just wish you would be more 
respectful in declining to answer those type of questions.
    Your words matter, Mr. Chairman. You know that. You know 
what happens when you use the term ``irrational exuberance.'' 
You know what happens when you use the term ``wealth effect.'' 
And you know how violent and volatile the markets can be. You 
knew that deleting the phrase, ``for a considerable period'' 
from the FOMC statement back in February, what it would do. I 
am sure there are times that you wish your words did not matter 
as much as they did. But people pay attention to what you say. 
Sometimes that is very good. Sometimes that is very bad. The 
job of the Fed is to set monetary policy. And I believe that 
when the Fed strays from that into other areas that we get into 
trouble.
    I look forward to continuing working with you in the 
future. And hopefully the good people of Kentucky will decide 
to send me back here so we can work together for the last 2 
years of your term. With monetary policy, I hope you will act 
aggressively. You have over the last three-and-a-half years. I 
would very much like to see you be the Chairman you have been 
since January 2001, not the Chairman of the summer and fall of 
2000. Remember, if our questions, even today, do not have 
anything to do with your job, you do not have to answer them.
    Thank you for time, Mr. Chairman.
    Chairman Shelby. Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. I am pleased to 
be here. As a New Yorker, I am particularly proud. New York has 
made countless contributions to our Nation, and you are not the 
least of them, Mr. Chairman, so thank you for the good work 
that you do. Your longevity is testament to your excellence. 
Markets and the Nation breathed a sigh of relief when you 
agreed to serve another term, and with good reason. Your 
integrity, your intelligence, and your ability to balance 
prosperity and inflation, a very difficult thing to do, are 
second to none. I, for one, am delighted that you are going to 
serve another term and am enthusiastic about your renomination.
    I would just make one point in disagreement, and that is, 
it seems to mean that as I think your role in the bully pulpit 
is a good role. I must respectfully disagree with my colleague. 
I think we have few people who look out for the long-term 
health of the Nation. If the Federal Reserve Chairman does not 
do that, who will?
    But in those pronouncements, my one concern here is that 
your voice against too much spending that creates deficits 
seems to be a lot stronger than your voice against tax cuts 
that threaten the deficit. I hope that in your next term you 
will strengthen your voice against unbalanced tax cuts that 
threaten the viability of our recovery through overwhelmingly 
large deficits.
    Having said that, my view is you have been an A-plus 
chairman and I am glad you will continue to be.
    Chairman Shelby. Senator Crapo.

               STATEMENT OF SENATOR MICHAEL CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman.
    Chairman Greenspan, I welcome you back. I am one of those 
who will be supporting your confirmation. I appreciate the 
visit that we had when we discussed your confirmation. And 
frankly, I appreciate your strong leadership in the country.
    There are a number of issues on which your voice has helped 
people to gain the confidence to take very important steps we 
needed to take. I am sure you do not appreciate it, but you are 
always going to get pulled into this tax cut fight. I 
appreciate the voice you have had in that tax cut debate with 
regard to the question of whether we should focus on spending. 
I think we all agree with your strong comments about not 
spending ourselves into deficit. Those of us up here on the 
Hill will probably continue to debate forever the question of 
whether tax relief is helpful and stimulative to the economy, 
or whether it is harmful, and the circumstances in which it 
should be utilized and which it should not be.
    But I frankly just wanted to let you know that you have 
taken some shots here today from different perspectives. You 
are used to taking those shots, but you are universally 
recognized as one of those who has made a difference in America 
and I appreciate your service. Thank you.
    Chairman Shelby. Senator Bayh.

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Mr. Chairman, welcome. I must remark upon the 
differences among our institutions of governance. Your 17 years 
as head of the Fed rank you second in the history of our 
republic, and yet I look around the Senate and you would be a 
relative newcomer in this institution, or at least it seems to 
me that way. But I compliment you on your years of devotion to 
our country and your capable service and would only add--I am 
going to save most of my remarks for our question period. But I 
would only add that I think the only potential stumbling block 
to your reconfirmation is the victory margin I would anticipate 
and the professional jealousy that might engender in some of us 
up here.
    So, I thank you for your service and look forward to its 
continuation.
    Chairman Shelby. Senator Dole.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Mr. Chairman.
    Today, I certainly want to lend my voice in strong support 
of the renomination of Alan Greenspan. Senators on both sides 
of the aisle have long admired the wisdom, the leadership, the 
integrity of Alan Greenspan since he first took office under 
President Reagan in 1987.
    He has repeatedly demonstrated that a cool head and keen 
understanding of the markets can lessen the dangers when events 
panic the markets and capital crisis ensues. While it may seem 
obvious today, Chairman Greenspan has repeatedly had to remind 
us all that the fundamentals of the U.S. economy remain strong. 
Within 2 months of assuming the chairmanship of the Board of 
Governors, Alan Greenspan reassured investors and brought the 
necessary liquidity into the market when a panic caused the 
loss of more than 23 percent of the stock market value in 
October 1987. Then again, Chairman Greenspan demonstrated his 
considerable skills in the 1987-1988 global financial crisis 
when, with considerable finesse and three rate cuts, he was 
able to avert problem after problem as the world markets 
panicked. It is for these reasons, and many more, that I have 
full confidence in Chairman Greenspan's ability to continue as 
the head of the Federal Reserve System.
    While many would expect an economist to simply see the 
numbers before him, Chairman Greenspan is also keenly aware of 
the people most affected by the numbers he analyzes. For 
example, he understands the growing wage difference between 
skilled and unskilled labor, and for that reason he has been a 
strong advocate for the continuing education of our workforce.
    I share Chairman Greenspan's admiration for the excellent 
work of our community colleges, which is so important to North 
Carolina as we strive to retrain displaced workers due to 
enormous job losses in manufacturing. I am proud to be working 
with my colleagues Senators Enzi and Alexander to write 
legislation which provides additional assistance to our 
community colleges and other institutions of higher learning 
for training and retraining students in high-growth job 
markets. We are currently working on this bill with the Senate 
HELP Committee and I look forward to its introduction later 
this year.
    In the past year, we have witnessed an economy that 
continues to grow stronger. Over 1.1 million jobs have been 
added since last August, with 8 consecutive months of gains. 
The Nation's unemployment rate is 5.6 percent, below the 
average of the 1970's, the 1980's, and the 1990's. Economic 
growth over the last three quarters has been the fastest in 20 
years. American companies are reporting record productivity 
with growth between the years 2000 and 2003 at the fastest 3-
year rate in half a century. All of this is thanks to both the 
excellent efforts of Chairman Greenspan and tax relief that 
clearly works.
    I look forward to the swift consideration of Chairman 
Greenspan's nomination and its quick passage by the full 
Senate.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Miller.

                STATEMENT OF SENATOR ZELL MILLER

    Senator Miller. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for your years of service to this 
country. Thank you for being willing to continue to serve and 
work in the arena; not always the quietest and most comfortable 
place to work. But your wisdom and your integrity are 
especially needed today. Thank you for your willingness to 
serve and thank you for your long and distinguished career.
    Chairman Shelby. Senator Hagel.

                STATEMENT OF SENATOR CHUCK HAGEL

    Senator Hagel. Mr. Chairman, thank you. I too welcome 
Chairman Greenspan and I strongly support his leadership and 
his renomination. I do that, Mr. Chairman, because I think 
Chairman Greenspan has been one of the most effective leaders 
in monetary policy that we have had in this country, during 
some very difficult and challenging times. He has provided 
steady, common sense, and strong leadership. I have 
particularly appreciated his wider lens view of these issues, 
understanding that the fabric is a weave of many dynamics: 
trade, monetary and fiscal policy, foreign policy, and 
geopolitical issues. He has done that extremely well and I 
think has presented his case in that wider lens context which 
has been helpful to this country and to the world.
    Mr. Chairman, thank you.
    Chairman Shelby. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman.
    I also would begin by welcoming Chairman Greenspan. I 
appreciate your leadership, your service to the country over 
the past 16 years, and I am proud to support your efforts and 
willingness to continue to do that.
    Chairman Greenspan has clearly steered monetary policy for 
our country through good times and bad, as colleagues have 
indicated today on the Committee. He has seen difficult 
recessions and boom times, and he has been an outspoken voice 
for question and reason when we have needed it.
    For example, he warned us, when many did not want to hear 
it, that the dot.com boom period could be fueled in part by 
irrational exuberance, and the subsequent correction in the 
market proved him right. Exponential growth in many market 
stock portfolios was indeed not based on sound market pricing.
    Chairman Greenspan has also not been afraid to aggressively 
fight off inflationary pressures when he thought the economy 
was overheating. During my time in the House and the Senate, I 
have appreciated his willingness to warn policymakers about the 
danger of out-of-control deficits. I believe that we should be 
more responsible about both how we spend money and how we 
approach our revenue needs and our tax policy.
    I had the opportunity to visit with Chairman Greenspan a 
few weeks ago and we discussed many important issues. I 
reiterated my concern to him at the current difficult economic 
environment with the Federal deficit is simply not sustainable 
or responsible. We are going to have to rethink our current 
fiscal policies if we are going to honor our promise to the 
baby-boom generation as they retire. I am glad that as we 
consider how to take care of our aging population, Chairman 
Greenspan has been willing to repeat his support for budget 
triggers.
    Chairman Greenspan and I also recently discussed the 
important issue of financial literacy, and the Federal 
Financial Literacy Commission that I worked with Senator 
Sarbanes, Enzi, and Chairman Shelby to set up. I know of the 
Chairman's personal commitment to financial literacy, which I 
appreciate. Financial literacy creates more efficient markets. 
It also helps people to make financial decisions that are in 
their personal best interests, and I am glad that we have a 
Federal Reserve Chairman who believes financial literacy should 
be a priority.
    Chairman Shelby, thank you for calling today's important 
nomination hearing. I intend to support Chairman Greenspan's 
nomination to another term. And, again, I thank you for your 
service, Mr. Greenspan.
    Chairman Shelby. Senator Chafee.

             STATEMENT OF SENATOR LINCOLN D. CHAFEE

    Senator Chafee. Thank you, Mr. Chairman, and 
congratulations on your nomination for a fifth term. You are 
one of the few in this town that has served under Presidents of 
both political parties. I particularly want to salute the work 
you did prior to coming to the Federal Reserve in the early 
1980's on the Social Security Commission. Successful at raising 
the age of eligibility on a slow glide path from 65 to 67; 
something we have not been able to do on Medicare. So 
congratulations.
    Chairman Shelby. Senator Sununu.

              STATEMENT OF SENATOR JOHN E. SUNUNU

    Senator Sununu. Thank you, Mr. Chairman.
    Mr. Greenspan, my staff was hoping that I would ask you 
upon which piece of U.S. currency you would most like to see 
your portrait, but I pointed out to them that your modesty and 
sense of fairness would preclude you from singling out one 
denomination over another.
    [Laughter.]
    So instead I simply want to welcome your testimony, of 
course, and your appearance here, but ask that in your 
testimony and any written submissions to the Committee you 
focus on those areas that I think are most pertinent to the 
Fed, areas of capital market regulation, and banking 
regulation, and monetary policy. As I look through the issues 
that we dealt with this year, just this session of Congress, 
whether it is regulatory issues or legislative issues, market 
structure, mutual fund regulation, terrorism risk insurance, 
the structure of public boards and their liability, hedge fund 
regulation, GSE legislation, all of these issues I think have 
the potential to really change the structure of our capital 
markets, their operation, their efficiency, and public 
confidence in the capital markets.
    I would very much like to see, whether it is a 
resubmission, a restatement, or clarification of the guiding 
principles that you believe should shape both regulation and 
legislation in these areas affecting the efficiency of the 
capital markets and public confidence in the capital markets, 
because most of the issues that I just mentioned are not going 
to go away at the end of this year. We are going to be taking 
them up again next year, and I think any perspective that you 
can provide to us to help guide and shape our views as 
policymakers would be welcome. Thank you very much.
    Chairman Shelby. Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, again I would like to thank 
you for holding this hearing on the renomination of Dr. 
Greenspan to be the Chairman of the Board of Governors of the 
Federal Reserve System. I look forward to his testimony and the 
opportunity to have the Chairman come before this Committee and 
share his expertise on economic issues and factors that are 
driving and hindering economic growth.
    Today, I want to extend my appreciation for his unfettered 
commitment to analyzing and interpreting the peaks and valleys 
of our U.S. economy. His contribution to this country has been 
exemplified by his constant vigilance to the factors that play 
such an influential role in the direction and success of our 
economic system. Dr. Greenspan has served on the Board of 
Governors of the Federal Reserve System since August 1987 and 
as Chairman of the Board of Governors since June 2000. He has 
witnessed, obviously, a great deal of uncertainty and change in 
those years as the heightened impact on our economy of 
technological advances, competition, and robust productivity 
have become evident.
    Accordingly, Dr. Greenspan and the other members of the 
Board of Governors have altered the framework in which they 
analyze the economic system so that they may gain a more 
accurate depiction of what the economy looks like and how 
better to formulate monetary policy in light of those changes.
    Dr. Greenspan, I appreciate your commitment to this 
Committee and to this country, and look forward to supporting 
your nomination for a fifth term as Chairman of the Federal 
Reserve Board.
    Thank you, Mr. Chairman.
    Chairman Shelby. Chairman Greenspan, I ask now that you 
stand and take the oath. Would you raise your right hand?
    Do you swear that the testimony that you are about to give 
is the truth, the whole truth, and nothing but the truth, so 
help you God?
    Chairman Greenspan. I do.
    Chairman Shelby. Do you agree to appear and testify before 
any duly-constituted committee of the Senate?
    Chairman Greenspan. Mr. Chairman, I do.
    Chairman Shelby. Chairman Greenspan, we welcome you to the 
Committee. You may proceed as you wish.

           STATEMENT OF ALAN GREENSPAN, OF NEW YORK,
            TO BE CHAIRMAN OF THE BOARD OF GOVERNORS
                 OF THE FEDERAL RESERVE SYSTEM

    Chairman Greenspan. First I want to express my gratitude to 
President Bush for his confidence in me, and to you, Mr. 
Chairman, and Members of the Committee, for expeditiously 
holding this hearing on my renomination for a fifth term as 
Chairman of the Board of Governors of the Federal Reserve 
System. The Federal Reserve has had a close and productive 
relation with this Committee over the years. If you and your 
Senate colleagues afford me the opportunity, I look forward to 
working with you in advancing our shared goal of strengthening 
the firm foundation upon which the American people have built a 
prosperous economy and a sound and efficient financial system.
    The performance of the U.S. economy has been most 
impressive in recent years in the face of staggering shocks 
that in years past would almost surely have been destabilizing. 
Economic policies directed at increasing market flexibility 
have played a major role in that solid performance. Those 
policies, aided by major technological advances, fostered a 
globalization which unleashed powerful new forces of 
competition, and an acceleration of productivity, which at 
least for a time has held down cost pressures.
    We, at the Federal Reserve, gradually came to recognize 
these structural changes and accordingly altered our 
understanding of the key parameters of the economic system and 
our policy stance. But while we lived through them, there was 
much uncertainty about the evolving structure of the economy 
and about the influence of monetary policy.
    The Federal Reserve's experiences over the past two decades 
make it clear that such uncertainty is not just a pervasive 
feature of the monetary policy landscape; it is the defining 
characteristic of that landscape. As a consequence, the conduct 
of monetary policy in the United States has come to involve, at 
its core, crucial elements of risk management. This conceptual 
framework emphasizes understanding the many sources of risk and 
uncertainty that policymakers face, quantifying those risks 
when possible, and assessing the costs associated with each of 
the risks.
    This framework entails devising, in light of those risks, a 
strategy for policy directed at maximizing the probabilities of 
achieving, over time, our goals of price stability and the 
maximum sustainable economic growth that we associate with it. 
In designing strategies to meet our policy objectives, we have 
drawn on the work of analysts, both inside and outside the Fed, 
who over the past half century have devoted much effort to 
improving our understanding of the economy and its monetary 
transmission mechanism. A critical result has been the 
identification of key relationships that, taken together, 
provide a useful approximation of our economy's dynamics. Such 
an approximation underlies the statistical models that we at 
the Federal Reserve employ to assess the likely influence of 
our policy decisions.
    However, despite extensive efforts to capture and quantify 
what we perceive as the key macroeconomic relationships, our 
knowledge about many of the important linkages are far from 
complete and, in all likelihood, will always remain so. Every 
economic model, no matter how detailed or how well-designed, 
conceptually and empirically, is a vastly simplified 
representation of the world that we experience with all its 
intricacies on a day-by-day basis. Policymakers have needed to 
reach beyond models to broader, though less mathematically 
precise, hypotheses about how the world works.
    A central bank needs to consider not only the most likely 
future path for the economy, but also the distribution of 
possible outcomes around that path. The decisionmakers then 
need to reach a judgment about the probabilities, costs, and 
benefits of the various possible outcomes under alternative 
choices for policy.
    As the transcripts of the Federal Open Market Committee 
meetings attest, faced with these abundant challenges, we find 
the making of monetary policy to be an especially humbling 
activity. In hindsight, the paths of inflation, real output, 
employment, productivity, stock prices, and exchange rates may 
seem to have been preordained, but no such insight existed as 
we experienced these 
developments at the time.
    Yet, during the past quarter-century, policymakers managed 
to defuse dangerous inflationary forces and to deal with the 
consequences of a stock market crash, a large asset price 
bubble, and a series of liquidity crises. These developments 
did not divert us from the pursuit and eventual achievement of 
price stability and the greater economic stability that goes 
with it.
    Going forward we must remain prepared to deal with a wide 
range of events. Particularly notable in this regard is the 
fortunately low, but still deeply disturbing, possibility of 
another significant terrorist attack in the United States. Our 
economy was able to absorb the shock of the attacks of 
September 11 and to recover, though remnants of the effects 
remain. We, at the Federal Reserve, learned a good deal from 
that tragic episode with respect to the impact of policy and, 
of no less importance, the functioning under stress of the 
sophisticated payment system that supports our economy. Our 
efforts to further bolster the operational effectiveness of the 
Federal Reserve and the strength of the financial 
infrastructure continue today.
    Each generation of policymakers has had to grapple with a 
changing portfolio of problems. So while we importantly draw on 
the experiences of our predecessors, we can be sure that we 
will confront different problems in the future.
    The Federal Reserve has been fortunate to have worked in a 
particularly favorable structural and political environment 
over the past quarter-century. But we trust that monetary 
policy has contributed meaningfully to the impressive 
performance in our economy in those year. I have been 
extraordinarily privileged to serve my country at the Federal 
Reserve during most of these years and would be honored if the 
Senate saw fit to enable me to continue this service.
    Thank you very much, Mr. Chairman.
    Chairman Shelby. Thank you, Chairman Greenspan.
    Chairman Greenspan, this morning the Commerce Department 
reported that the business inventories climbed 0.5 percent in 
April to $1.212 trillion, a record high and the eighth straight 
monthly increase. What do these increases tell us about any 
potential inflationary pressures?
    Chairman Greenspan. At the moment not too much, Mr. 
Chairman. The reason is that even though, as you point out, 
inventories have risen to record high levels, as a ratio to 
sales or production they are close to, and probably are at, 
record lows. Indeed, there is a very significant path of 
inventory reduction over the last couple of decades, the so-
called just-in-time inventory process. So, I would perceive 
that that is going to continue on, but there is no evidence at 
this stage that I can unearth that suggests to me that recent 
inventory patterns are contributing either to inflation or 
deflation.
    Chairman Shelby. Mr. Chairman, what can we expect, in your 
judgment, in terms of job growth in light of these heavy 
inventory numbers? Is there any correlation there at all?
    Chairman Greenspan. Strangely enough, I would reverse it 
and say that the fact that inventories in a general context of 
the level of sales being quite low leads me to conclude, indeed 
to those purchasing managers who try to evaluate the inventory 
position of their customers, that the next change in inventory 
policy, at least for the short-run, is probably going to be 
some element of either accumulation or at least, at a minimum, 
a temporary stabilization of the inventory-sales ratios before 
the long-term trend continues.
    What that suggests is that even flattening out of 
inventory-sales ratios creates a significant increase in the 
rate of increase in inventories during any particular period. 
And since inventory accumulation adds to final demand to get 
production and employment, I would presume that, if anything, 
the inventory picture today is probably more likely to be 
helpful in expanding employment than in contracting it.
    Chairman Shelby. The Federal Open Market Committee, you 
referenced that a minute ago, will be meeting at the end of 
this month. It is widely anticipated that the Federal Open 
Market Committee will move to increase short-term interest 
rates. You have noted any upward movement will be, your word 
``measured'' although you also noted that, ``the FOMC is 
prepared to do what is required'' to maintain price stability, 
which is important to everybody. In other words, to pursue a 
more aggressive interest-rate strategy there.
    What factors will you be looking at between now and the end 
of this month to determine whether or not a measured or an 
aggressive response is necessary?
    Chairman Greenspan. Mr. Chairman, as I said in the remarks 
which you are quoting from, our best judgment is that the 
economy is growing in a solid fashion. To be sure, underlying 
unit costs, having gone down for quite a long period, have now 
started to turn up modestly. But our general view is that 
inflationary pressures are not likely to be a serious concern 
in the period ahead.
    Therefore, we concluded in our policy statements that the 
removal of an increasingly unnecessary degree of accommodation 
in monetary policy is very likely to be measured over the 
quarters ahead. But clearly, this is our general view of the 
outlook and forecasts are subject to error. If our judgment as 
to how the economy is going to evolve and how inflation is 
going to evolve turns out to be mistaken we will change, 
because our fundamental goal is, as you point out, to maintain 
price stability over the longer-run as a means of creating 
maximum sustainable growth.
    Chairman Shelby. Do you believe that the economy will 
continue each month to add a significant number of jobs as we 
have seen in recent months?
    Chairman Greenspan. So far the pace of economic activity, 
and a slightly lessened pace of productivity increase compared 
to what it had been, numerically creates job growth, if I may 
put it in those terms. We see nothing in the immediate outlook 
to suggest any major change in the path of employment growth 
going forward.
    Chairman Shelby. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Chairman Shelby.
    Chairman Greenspan, the economy has now 1.9 million fewer 
private-sector jobs than it had when the recession began 38 
months ago in March 2001. Now in every other recession since 
World War II, the economy has recovered all of the private-
sector jobs that had been lost by this point in the cycle; 
generally well before this point. In fact when compared to a 
typical recovery, our economy has 5 million fewer private-
sector jobs at this point in the recovery period than under a 
typical recovery.
    Let me just show you this chart to make this point. The red 
line is the average of nine recessions since World War II in 
terms of the recovery of private-sector jobs. This dark line 
here is what has happened in this recovery. The thing that is 
interesting is that it started off and they pretty well tracked 
the same course going down. But then in previous recessions we 
got an upswing and we came back up here, then we pass the point 
of--now we are getting net gain in jobs. But this time we 
stayed down here on this trajectory so there is a gap here of 5 
million private-sector jobs short of a typical recovery.
    I find obviously that is a matter of great concern. What is 
your explanation for that? These are the amount of months. So 
we are out here now. We are at 37, 38 months out here in the 
period and we have not come back up. We are not even back up to 
recovering. We are still 1.9 million short, and we are 5 
million short of--when you compare it with the average of the 
nine recessions since World War II. What is your explanation 
for that or your theory on that?
    Chairman Greenspan. Senator, I think there are two 
explanations. First, and most important, is the extraordinary 
increase in the rate of productivity growth, which has been 
very unusual for a period of economic weakness such as 
prevailed since the peak of economic activity in the year 2000. 
Productivity growth has never, in my recollection, grown 
anywhere near as rapidly as it has grown during the period of 
comparable weakness that has been experienced in the last 
several years.
    What this means is that even though demand picked up, that 
increasing efficiencies have enabled businesses to meet that 
demand without hiring new people. This has been a fairly 
pronounced and significant trend over a large number of 
quarters.
     Second, the size of the upswing that you show in your 
chart is, in many respects, a function of the size of the 
downswing that preceded it. The fact that we have had a very 
shallow recession most recently, indeed, the shallowest 
recession that has occurred in the post-World War II period, 
means that even if the productivity gains were not there, or 
let us put it more exactly, with the same average of the nine 
recessions that you are pointing out on your chart, we would 
still have had a lag in employment, largely because there is 
not enough of a bounceback that ordinarily occurs out of a 
shallow recession as one which is far more deep. Indeed, I 
recall, for example, the 1975 recession most vividly when we 
had an extremely sharp decline. That was the spring of 1975. 
And by the first quarter of 1976 the economic growth rate was 
almost 10 percent at an annual rate and employment had come 
back very substantially.
    This is the other extreme that we are looking at today.
    Senator Sarbanes. On that second point, the job loss pretty 
well parallels. I think the GDP drop was shallower in 
comparison with previous recessions.
    Chairman Greenspan. Excuse me, what is the first date? Is 
that March 2001? I believe productivity was increasing fairly 
significantly at that point.
    Senator Sarbanes. Let me ask you this question in view of 
that answer. The long-term unemployed workers has not 
substantially improved over these last several months even 
though we are getting some job growth. There are 1.8 million 
long-term unemployed workers who constitute 22 percent of all 
unemployed workers today. That percentage has remained elevated 
above 20 percent for the past 20 months, the longest such 
streak with respect to a recovery. The average duration of 
unemployment today remains 20 weeks and 80,000 workers lost 
their benefits in April.
    It seems to me that this chart and what we are discussing 
here--and let us accept the hypothesis about productivity, but 
that still leaves us with the fact that workers have lost their 
jobs and we are not creating jobs and they are not getting back 
to work. Yet the unemployment insurance system is geared to 
expire after 26 weeks unless you make extensions. It seems to 
me that poses a real problem for us, because workers run out of 
their benefits. The labor market has not strengthened 
sufficiently that they can move back into jobs. It seems to me 
to cry out for an extension of unemployment insurance benefits, 
which of course, we have done in the past. In fact, we have 
done it in the past in a more responsive way than I think we 
are doing it in this recession, even though we have this added 
factor that you have just detailed which has inhibited job 
growth.
    What is your view on temporarily extending unemployment 
insurance further?
    Chairman Greenspan. Senator, I have testified before that I 
thought that the extraordinarily high degree of exhaustions out 
of the unemployment insurance fund, which indeed is a 
reflection of the point you are making, namely, the fairly 
significantly longer average duration of unemployment in this 
period, creates a problem because, as I pointed out previously, 
these people in this type of labor market have lost their jobs 
through no fault of their own. And we have constructed an 
unemployment insurance system which is closely geared to the 
issue of trying to take care of those who lose their jobs from 
no fault of their own, and to a concern many people who 
construct such programs that a fairly generous unemployment 
insurance program will tend to create unemployment, as indeed 
the evidence does suggest.
    I think our system is very well-balanced and that is the 
reason why I have argued in the most recent past that under 
these conditions it is presumably appropriate to extend 
employment insurance.
    But I would say that given the increase in job growth that 
is in process, and my suspicion, although I do not have the 
evidence, that exhaustions most recently are beginning to fall 
away, should you go ahead with the extension of unemployment 
insurance I think you will find that a short-term extension 
will probably serve your concerns with respect to the 
exhaustees.
    Senator Sarbanes. The extension we are talking about is 13 
weeks, which is not a very lengthy period under the 
circumstances.
    Chairman Greenspan. I agree with that.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    You have ventured into some unusual places again. Thank 
you. Would you agree or disagree with this statement, a recent 
statement that has been made, that ``this economy is the worst 
economy since the Great Depression?''
    Chairman Greenspan. Senator Bunning, I would strongly 
disagree with that statement.
    Senator Bunning. Thank you.
    Have the high energy prices acted as a brake on the 
economy? In the absence of the high cost of energy, do you 
believe the Fed would have already been forced to raise the 
discount rate?
    Chairman Greenspan. I am not sure the energy changes that 
have occurred, while important and having fairly broad impacts 
on the world economy and the United States, are a material 
factor in monetary policy at this point. They could become a 
problem.
    I do not think we are there yet, but we are watching the 
situation, obviously, fairly closely because the cost of energy 
is a very important element in the underlying cost structure of 
American business, but also extraordinarily important amongst 
our trading partners. Because imports as a share of our economy 
and exports are very large relative to where they were a decade 
ago, and obviously even earlier, our interaction with the 
international economy is increasingly important to our 
prosperity. Therefore, anything which undermines the world 
economy, and very high oil prices would do that, would be a 
concern to us, and indirectly, should it impact on our economy, 
would therefore affect monetary policy. But it is the impact on 
our economy, not the energy prices changes themselves, which 
would induce us to respond.
    Senator Bunning. Mr. Chairman, if energy per barrel cost 
would escalate beyond $42 a barrel and maintain that cost over 
a year, or 2 years, would that not directly impact our economy?
    Chairman Greenspan. It would certainly have some impact. 
The question I think at issue, which we do not know the answer 
to, Senator, is how significant the impact would be. It is the 
answer to that question which essentially would determine how 
monetary policy would or would not respond.
    Senator Bunning. The Chairman of the Committee asked you 
about inflation and evidence of inflation in the economy. I 
always ask you the question when you come, besides energy costs 
and energy prices, are there other factors, like commodity 
prices and things, that are indicating to the Fed that we do 
have an escalation of inflation in the economy?
    Chairman Greenspan. Senator, I think the issue which would 
concern us most is the slowdown in the extraordinarily rapid 
rate of productivity, which I mentioned before. Because average 
hourly compensation has been edging up in recent months, the 
effect of the combination of a decline in the rate of increase 
of productivity growth and the slightly quickening pace of wage 
increase has caused unit labor costs, which had been going down 
for quite a number of quarters, to have turned up in most 
recent quarters. On a consolidated basis, that accounts for 
more than two-thirds of the costs of nonfarm, American 
business. While at the moment those increases are still modest, 
it is there where our central focus is likely to be because it 
is such a large part of the total cost area.
    But certainly, as you point out, commodity costs, prices of 
imported goods, capital costs, interest costs, and the like, 
all have impact on the underlying cost structure. It is 
essentially the package of costs which we focus on most 
closely, and on our ability to try to forecast in the direction 
in which they were going. In that regard, we spend a good deal 
of time trying to make judgments about what is the trend of 
average hourly earnings, what causes it to change, for example, 
the underlying depreciation cost is another item. It is in that 
pattern that we try to focus on the whole structure of prices 
and costs and profitability in making judgments as to whether 
individual price changes are significant and are expressing an 
underlying trend. It is the underlying trend which monetary 
policy endeavors to address.
    Senator Bunning. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman. And I thank you, 
Chairman Greenspan, for your good work. My concern is the 
deficits. It is interesting that when we get new economic news, 
the stock market does not go up, but goes down sometimes in the 
last few months. And even if we have a very strong recovery in 
the next several months, my worry is about longevity because of 
the large deficits that we have.
    Given the fact that the deficits are at large levels, we 
can debate how they compare historically. It is high, 
historically, some people say higher than in other times, some 
people say, well, about the same or a little less, but they are 
high or certainly higher than you thought or anyone thought 
they would be in 2001.
    Do you think we should make the tax cuts that were 
temporarily extended in the last tax bill permanent, as the 
President is seeking to do?
    Chairman Greenspan. Senator, let me answer that in two 
parts. First, I have always been strongly supportive of the 
elimination of the double taxation of dividends largely because 
I have always considered it a type of tax which probably 
impeded capital expansion and economic growth as a consequence. 
So, I was very strongly supportive and remained supportive of 
those types of tax cuts, including marginal tax-rate cuts. 
Second, I also have been consistently supportive of maintaining 
PAYGO and discretionary caps on spending, and I was very much 
concerned in September 2002, when the fairly effective caps and 
PAYGO were allowed to lapse.
    I would hope that the Congress will put them back in place 
as they were before. And, in that context, obviously, I am 
stipulating that, because the individual tax cuts which I found 
very important would lapse, they would, under the rubric which 
I am discussing, be required to go through a PAYGO evaluation 
in order to be passed.
    Senator Schumer. And as you know, we are debating this 
right now in the budget resolution, and there are many who want 
PAYGO for spending, but not for tax cuts. And my question to 
you is twofold: One, should PAYGO be enacted for both spending 
and for tax cuts; and, two, if Congress should fail to enact 
PAYGO legislation in this budget resolution, so we would be 
faced with the choice of making the tax cuts permanent without 
offsets in spending or in other taxes, would you be for making 
those permanent?
    Chairman Greenspan. Let me just say this. I believe that 
the legislation, which was in place prior to September 2002, in 
my judgment, was the correctly balanced legislation. As I have 
often stated, I think the real problem over the longer-term is 
constraining spending because I think there is a bias in the 
way our system functions. But I think, looking at the issue 
from the point of view of fiscal policy, a symmetry is required 
in the way one looks at that.
    So, I am not willing to acknowledge the fact that PAYGO 
would not be put back in place.
    Senator Schumer. Right. But if it was not? Because I will 
tell you the odds, and there are some people sitting around 
this room who are under big pressure not to do it. If it was 
not, would you--and this is an important question because of 
what was mentioned--if we did not enact PAYGO, the way we had 
it in 2002 on the tax side, should Congress enact permanent tax 
cuts without offsets on either the spending or tax side? 
Because that will increase the deficit even further if we do 
that.
    Chairman Greenspan. I am aware of that. I am reluctant to 
answer that question largely because I do not want to get 
involved into the details of negotiations beyond the positions 
that I have taken. There are lots of hypothetical questions 
which----
    Senator Sarbanes. Some of us think you have already 
answered it by your answer on the PAYGO question.
    Chairman Greenspan. Well, the Senator presumes otherwise.
    Senator Schumer. Yes. I just think this is an important 
issue, and your words are very important. They get interpreted 
in many different ways, and I am looking for as clear an answer 
as possible. I think I can read the same thing that Senator 
Sarbanes did, but there are going to be many who say, no, that 
is not the case. And if we end up at the end of this 
Congressional session with a further increase in the deficit, I 
think that will bode real trouble for the recovery. I guess you 
would agree with that.
    Chairman Greenspan. I actually am somewhat less concerned 
about the short-term budget deficit because I think, given what 
appears to be a fairly solid recovery, which seems to have legs 
to it, revenues are going to be reasonably good over the next 
fiscal year, and I think that that will contain the deficit. 
However, there is no way to look at the longer-term trends of 
our fiscal system without concluding that we will run into 
fairly serious difficulty in the next decade, say, 2011 and 
forward, as the very large numbers of baby-boom retirees leave 
the labor force and join retirement.
    The numbers I find very disturbing, and while I appreciate 
that that is seemingly a number of years off, it is not far 
enough into the future to say we can handle it at another time. 
The time for addressing the size of the commitments made for 
the next generation of retirees, relative to the economic 
resources we are likely to have to finance them, I find 
deficient and disturbing.
    Senator Schumer. I thank you, Mr. Chairman. My time has 
expired. I would just note that a lot of these permanent tax 
cuts would take effect in that 2010, 2011, 2012 timeframe when 
the crunch will occur.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Dole.
    Senator Dole. I would like to follow-up, Chairman 
Greenspan, on the response to Senator Bunning, when you spoke 
about wage growth. Let me ask about the reports of the 
stagnation of wages. In past years, we witnessed strong 
productivity growth, but that has not resulted in a real 
increase in wages. My question is do you believe that is a 
trend that will be corrected in the short-term or do you see 
that as something that will continue?
    Chairman Greenspan. Senator, I think it is in the process 
of changing. If you would just look back from an accounting 
point of view, the very significant increase in productivity 
from, say, the first quarter of 2003 to the first quarter of 
2004 is reflected wholly--almost wholly--in rising profit 
margins. In other words, very little spilled over into real 
wage increases.
    Now, the evidence suggests that is beginning to turn, as it 
always does in this regard, meaning that profit margins are now 
flattening out or are likely to flatten out, and the catch-up 
invariably is in real wages. This is a very typical pattern, 
where productivity gains are first picked up in rising profits 
and then, essentially, in part, are given back in the way of 
real wages because of competitive pressures that invariably 
occur when profit margins are large. In other words, companies 
try to increase production in a sense to harvest those profits, 
and by so doing, they bid up the wage structure. That seems to 
be occurring at this particular stage, although as I pointed 
out to Senator Bunning, not at a pace which, in our judgment, 
looks to be moving unit labor costs to an inflationary plateau.
    But I think that the sharp decline in the share of national 
income going to compensation of employees over this most recent 
period is now in the process of turning and is likely, through 
the next year or two, to go back to its normal level after this 
adjustment. It is not a long-term trend.
    Senator Dole. I have read recent reports stating that real 
disposable income is rising, up 11 percent since December 2000. 
In fact, Americans' real disposable income is at its highest 
level ever, I believe, and some have said that, well, this is 
because a lot of the new jobs that are being created are in 
industries that are paying higher-than-average amounts. Others 
have said it is due to the tax relief, putting more money in 
the pockets of Americans.
    I would be interested in what you attribute this rise to, 
this impressive rise in disposable income, and is this a trend 
that you believe is going to continue?
    Chairman Greenspan. It is very difficult to tell whether, 
in fact, the rise is attributable to differential gains within 
the wage and salary area. You can look at it in two ways. Let 
us go back to wages and salaries, from the beginning.
    If wages and salaries are growing per hour, as they are 
now, is it pretty broad-based? And the answer appears to be, 
yes, but we are not sure for the following reasons. It is 
certainly the case that the rise in wages that would have 
occurred, if the industry structure had frozen, is about 
exactly the wage rise we have actually perceived which suggests 
that the increases are across all industries. What we do not 
know, however, is that within industries, whether the trend of 
highly skilled versus lesser skilled is continuing to open up.
    My suspicion is that when we finally get the data, which 
are quite delayed in this respect, we are going to find that. 
But it is not an issue of industry, because we have those data, 
and there is no evidence, at least in the last 4 months, when 
the significant increase in disposable income has occurred, 
there is no evidence that it is the industry mix that is doing 
it. In other words, it looks that the gains are across the 
board in industry.
    With respect to the tax cut, that was very significant last 
year. It is a lesser issue this year. Most of the rise in 
income is that the economy is beginning to move, and as I 
indicated before, profit margins are no longer taking the 
lion's share of the big increase.
    Senator Dole. Mr. Chairman, my time has expired, but I have 
a number of other questions that I would like to submit for the 
record, if I could.
    Chairman Shelby. You may do that.
    Senator Dole. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Sarbanes. Mr. Chairman, could I be very clear on 
one thing, on the answer to this question? As I understand it, 
real disposable income could rise very substantially on the 
basis of tax cuts at the top end of the scale because that 
would bring very large increases in disposable income. That 
figure alone does not show what is happening to ordinary 
workers. Would that not be the case?
    Chairman Greenspan. I think that is correct. But I am 
saying that in the last 4 months of increase, it is basically 
the underlying economy which is moving the real wage rate.
    Senator Sarbanes. But before that.
    Chairman Greenspan. Before that, a significant part of the 
increase in disposable income was the result of tax cuts.
    Chairman Shelby. Senator Bayh.
    Senator Bayh. Mr. Chairman, I appreciated your focus in 
your statement about the importance of risk management and the 
inherent difficulty, ambiguity, ``unknowability'' of many of 
the forces that we must anticipate or contend with. You listed 
several things that have helped to reduce the level of systemic 
risk with which we have to contend. And then you said, going 
forward, we must remain prepared to deal with a wide range of 
events, and you specifically mentioned terrorism. I would like 
to ask you what other events you are concerned about or that we 
need to prepare for.
    Chairman Greenspan. We, at the Fed Reserve, as a general 
rule, obviously try to make an evaluation of where we think the 
most probable trend of events is going and construct our 
preliminary policy programs with respect to that path. But we 
also try to consider a whole series of alternates. I do not 
want to list them because one sounds scarier than the next. And 
even though the probabilities are very low, I am always 
hesitant to mention something.
    Senator Bayh. Let me suggest a couple then. I am not asking 
you to tell us what, if anything, keeps you up at night. I hope 
you sleep soundly, but a couple of things.
    There was a headline today, I am sure you saw, about the 
current figures in the balance of trade and the fact that the 
recent figures were not good, although there is some debate 
about whether they overstate the situation, in fact. What about 
the risk of some event triggering, rather than an orderly, a 
disorderly fluctuation in our currency?
    Chairman Greenspan. That is obviously one of the issues 
which we have focused on. We have done a number of studies of 
how developed countries have handled very large current account 
deficits, which is the larger version of the trade deficit. And 
what we have concluded is that international financial markets 
are sufficiently flexible to allow the inevitable adjustment of 
those outsized deficits to gradually lower in such a way which 
is not disruptive to economic activity.
    We have done a great deal of work in trying to evaluate how 
the current one is going to change. You cannot know, for 
certain, but what is reasonably clear, at least in my mind, is 
that if we maintain a high degree of flexibility in our economy 
and in the international economy, which indeed we have today, 
then market forces will gradually adjust the imbalances, but we 
cannot tell at this stage or in advance whether it is relative 
prices in various economies, whether it is the exchange rate, 
whether it is the relative different growths in various 
economies which will do it. But what these various studies of 
developed countries suggest is that those adjustments will, in 
some form or another, take place.
    Senator Bayh. A high degree of flexibility, Mr. Chairman, 
you said is a key to trying to deal with the unanticipated 
event? Is it not true that our twin deficits reduce our margin 
for error, reduce some of the flexibility that we have?
    Chairman Greenspan. Well, the flexibility is mainly 
institutional. In other words, for example, we have very 
flexible financial markets which adjust very quickly, and we 
have extraordinarily broad labor markets which are quite 
flexible as well, better than in most of the rest of the world. 
So, yes, indeed, the budget deficit and the current account 
deficit are problems, but I am saying there is a difference. 
The current account deficit is largely going to be adjusted one 
way or the other by market forces. The Federal budget deficit 
will be adjusted partly by market forces----
    Senator Bayh. Policy decisions.
    Chairman Greenspan. --but mainly policy.
    Senator Bayh. Before my time expires, Mr. Chairman, let me 
mention one of the risks that is popularly thrown out there, 
and we have asked you about it before, and you have responded, 
but things have changed some since your last response, and that 
is with regard to housing and the fact that housing prices have 
outstripped the growth incomes over the last several years.
    Now, the effect of that was ameliorated by the lower 
interest rates, which enabled people to afford these higher 
prices. Interest rates may now be in the process of adjusting 
some. And your response previously had been that immigration 
and that land scarcity would help to sustain these higher 
prices.
    Are you concerned about housing prices at this point and 
perhaps the effect that that will have on consumer spending if 
prices prove not to be justified at current levels?
    Chairman Greenspan. It is certainly the case, as you point 
out, Senator, that prices have been moving up faster than they 
had been. But remember that because productivity growth in 
residential construction has historically been moving more 
slowly than the average over the longer-run, largely because 
there is a good deal of custom house building--in other words, 
we would like our own idiosyncratic house--this means you 
cannot have mass production such as you can have in the general 
area of manufacturing, mainly. So that there is a gradual long-
term updrift in the price of homes relative to the price of 
everything else, but to be sure, there has been a faster pace 
today, but not enough, in our judgment, to raise major 
concerns.
    It could become a problem if it were to accelerate further. 
We see little evidence that that is likely to happen, largely 
because we perceive that the very strong expansion in new and 
existing home sales is now flattening out, and the really quite 
unexpected boom in home sales over recent years is unlikely to 
be continued. Our forecast is generally flat in aggregate 
volumes. Where house prices go, I am not sure, but I would be 
quite surprised if they showed continued acceleration on the 
upside.
    Senator Bayh. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Chafee.
    Senator Chafee. Thank you, Mr. Chairman.
    Chairman Greenspan, you were hopeful that with the 
improving economy, the added revenues would help address the 
deficit, but there are also some unknowns, particularly on the 
prescription drug benefit, what exactly that is going to cost 
and also what we are going to have to invest in stabilizing 
Iraq and the region there. If the deficits do continue to grow, 
I know there are some concerned that could produce a sharp 
devaluation of the U.S. dollar, something that did happen in 
1985, which would, in turn, undercut European exports, and that 
would affect European economies.
    Is that of a concern to you?
    Chairman Greenspan. Senator, it is an issue which a number 
of people have raised, and obviously we have looked at it. And 
there is very little evidence, at this particular stage, that 
the size of the Federal budget deficit and the point, or 
indirectly, relating to the fairly significant amount of our 
Government issuances to finance that deficit, which would be 
purchased by foreign central banks and, indeed, by others.
    We look at it fairly closely. The markets seem to be 
adjusting remarkably well, and a good part of those securities 
which are purchased by foreign central banks are shorter term. 
So that there is no real basic concern that a lot of people 
have argued in favor of, namely, that a major endeavor to 
disgorge those holdings could have a destabilizing effect back 
here. We do not think so.
    In other words, we think, as I pointed out earlier, that 
the degree of flexibility in our financial system is sufficient 
to absorb very considerable amounts of change. Remember that 
our financing system is huge relative to the rest of the world, 
and the demand to hold U.S. dollars by foreigners is a very 
high propensity which continues irrespective of these deficits 
which we are looking at.
    So could it become a problem in the future? It could, but 
there is no evidence of which I am aware which suggests any 
such problems are on the horizon.
    Senator Chafee. Last year, I believe we sold $208 billion 
of Treasury securities just to Japan, China, and other Asian 
countries, $208 billion just last year. But you are saying that 
is short term and not of concern?
    Chairman Greenspan. Well, $200 billion is not a small 
number, obviously. It is a big number. And as I think the 
Treasury pointed out the other day, that of marketable 
securities foreigners own somewhat more than half, currently.
    I think that if it were a significant problem, we would be 
seeing the forward edge of the problem already, but we do not. 
There is an unquenchable demand to hold claims against American 
residents largely because they are presumed to be safe, and 
they are presumed to have significantly higher rates of return 
adjusted for risk in most other areas in the world.
    Senator Chafee. I have heard some people rail against the 
fact that it is not in our best interests to have the Chinese 
buying our T-bonds, and that is all the fault of the deficit. 
If we did not have this deficit, the Chinese would not be 
buying our T-bonds. I guess that is the point I am making.
    Chairman Shelby. Thank you, Senator Chafee.
    Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    Chairman Greenspan, we have talked a little bit about PAYGO 
today. I am a very big supporter of PAYGO, both in terms of tax 
policy and spending policy. But when you were in my office a 
couple of weeks ago, we talked about another way of trying to 
keep that balance, which is a budget trigger. And as you know, 
Senator Bayh, Senator Snowe, and I, and others proposed back 
during the original debate on tax cuts earlier that we should 
have a trigger that covered both spending and tax cuts. And I 
believe we would not be where we are now if we had, in fact, 
been able to put that into place.
    Could you speak about your support for the notion of a 
trigger on these kinds of major tax and spending policies?
    Chairman Greenspan. Senator, 20, 30 years ago, certainly 50 
years ago, nobody was concerned about long-term budget problems 
in the United States because we never had commitments that 
lasted very long. Our Social Security system, for example, was 
relatively small at that point. The commitments in the military 
were sometimes for 3 to 5 years on some weapons system, but we 
never had any ability nor need to worry about what the budget 
deficit would look like 5, 8, or 10 years in the future, and we 
always had the capacity to adjust as time went on.
    As entitlements, specifically retirement entitlements, have 
grown to an ever-larger proportion of our budget, our ability 
and our necessity to have a sense of where fiscal balances will 
be 10 years from now have all of a sudden become a very crucial 
issue for determining what current fiscal policy should be.
    Because our ability to forecast 10 years out is very 
marginal, at best, I have always believed that we have to make 
the best judgment we can, but also put in place some mechanism 
in which, if our path of budget balance, whether surplus or 
deficit, goes significantly off-track that we have fiscal 
mechanisms to get us back on track. That is essentially what a 
trigger is. It is a vehicle which stipulates that if a 
particular program is not doing what it was projected to do, 
then certain adjustments would occur automatically or certain 
adjustments would require that the Congress revisit the 
program.
    There are lots of different triggers. But the main concept 
is to recognize that we no longer have year-by-year budget-
making as the process of fiscal policy. We are in a wholly 
different world, and part of that world, in my judgment, 
requires triggers because our capacity to forecast is so 
limited as we get out that far.
    Senator Stabenow. Thank you. I could not agree with you 
more, and I am hopeful, as we go forward, that we will have the 
opportunity to debate again and hopefully put in place some 
kind of a trigger.
    One other question, Mr. Chairman, that is particularly 
important to my home State of Michigan. I am extremely 
concerned about currency manipulation and how it is effectively 
creating an artificial tax on U.S. goods exported abroad and 
giving the Chinese and the Japanese an unfair advantage when 
they ship goods into our country. We know this is happening.
    The Chinese pegging of their currency to the dollar 
prevents an appropriate float of their currency, and the 
Japanese have been very aggressive and willing to intervene in 
currency markets when they feel that it is warranted, to their 
advantage.
    I have raised this issue with Treasury Secretary Snow in 
the past. The Administration, up to this point, has not been 
willing to take concrete steps to end the currency tax. I am 
wondering, Mr. Chairman, do you agree that currency 
manipulation is going on and is it having a detrimental impact 
on U.S. goods, in particular, in the manufacturing sector, 
which hits my State so heavily?
    Chairman Greenspan. Senator, first, the Japanese ceased 
their intervention in the yen-dollar market a while back, and 
they have not been involved since mid-March. In mid-March, they 
announced that intervention had ceased and that is indeed the 
fact.
    Senator Stabenow. And I would just say that we hope that 
they will not return to that policy.
    Chairman Greenspan. I think one issue here is that it is 
not to the advantage of foreign central banks to accumulate 
very large amounts of foreign currency after a certain point 
because it creates domestic problems of monetary stability. The 
issue is most relevant in this regard to China because they are 
acutely aware of the fact that their stabilization of the 
renminbi versus the dollar has required very large 
accumulations of dollar assets on the balance sheet of the 
People's Bank of China, the central bank, and this creates 
problems that are obviously exaggerating the difficulties they 
are currently having with respect to underlying inflationary 
pressures and boom conditions, which they are endeavoring and, 
apparently successfully, beginning to constrain.
    I think that over the longer-run it will become very 
apparent, as indeed it is increasingly becoming apparent, to 
the Chinese financial authorities that intervention of the type 
that they had been doing has not been helpful to them. So, I 
think in their own interest that is going to change, and I 
think that issue that you are concerned about will go away.
    Senator Stabenow. Mr. Chairman, I hope you are correct, 
because in the short-run, certainly in my State, we are seeing 
what I believe to be unfair incentives on the exporting of 
American jobs. So, I am hopeful that you are accurate and 
correct on that.
    Chairman Shelby. Senator Sununu.
    Senator Sununu. Thank you, Mr. Chairman.
    I have a number of areas of capital market regulation that 
I mentioned in my opening statement, and I will probably submit 
a list, hopefully not too long of a list, for the record. But, 
Mr. Greenspan, I did want to ask you about a couple of items, 
one of which you have addressed before, one which you may have 
not.
    First, we have had a series of hearings and discussion here 
in the Committee about market structure and market structure 
reform, and I would be curious to hear your assessment of what 
the impact on cost of capital, access of capital, or the 
efficiency of the capital markets would be of a modification or 
an elimination of the trade-through rule.
    Chairman Greenspan. Senator, which rule?
    Senator Sununu. The trade-through rule on the New York 
Stock Exchange.
    Chairman Greenspan. This is a highly complex issue which, 
as you know, is being debated up in New York, and it is a 
problem concerning trading procedures on the New York Stock 
Exchange and the large institutional investors who are 
endeavoring to get the best type of execution they can get.
    I have, as you pointed out, stayed out of this, largely 
because of rare good judgment on my part.
    [Laughter.]
    And I think I will probably endeavor to maintain that 
position.
    I do think it is a very interesting issue. I am not certain 
that it is not being properly handled in the debate, and I 
think the right issues are on the table and the people who are 
involved I trust will come to the most reasonable solution.
    Senator Sununu. Well, that is not a great deal of 
consolation to me, for a number of reasons, not least of all, 
you know, we have spent an hour here talking about PAYGO and 
housing prices and a whole list of Jim Bunning's pet peeves.
    [Laughter.]
    And this is obviously an issue that does, I think, have a 
direct impact on issues of capital market stability and access 
to capital and cost of capital and underlying economic 
performance.
    Chairman Greenspan. Let me cut through it. I will be very 
straightforward in this respect. I do not think that we at the 
Fed know as much as the participants involved in the 
negotiations to have a firm opinion which we think should 
override those of the Exchange and some of the major players on 
the Exchange. We are in contact with them. I have spoken to 
both sides at considerable length, and I am learning something 
from them, but I do not think that I have--and I am not sure my 
colleagues have--a great deal to present with respect to this 
issue.
    I would say that our real problem is we know where we would 
like it to all come out, namely, in a system which is stable, 
and has efficient execution. I am not sure we at the Fed know 
how to get there. If we did, I probably would find a way to 
communicate that to the parties involved.
    Senator Sununu. This is not by design, but that does 
provide a nice segue to my second and final question, which is 
about hedge fund regulations. You have spoken out against 
further regulation of hedge funds in the past. There are 
obviously some proposed rules and modification to existing 
regulation that have been put on the table. Has your thinking 
on this issue changed in any way substantively over the last 6 
or 12 months?
    Chairman Greenspan. It has not, Senator. Let me just repeat 
why I think it is so important that these types of 
organizations are left free to supply the extent of liquidity 
that they are, in fact, supplying to our financial markets. I 
have made a special point in my prepared remarks and in earlier 
questions that the degree of flexibility in our economy has 
been instrumental in enabling us to absorb the shocks which 
have been so extraordinary in recent years. And one of the most 
flexible parts of our system is financial and our ability to 
absorb financial shocks.
    If you start to inhibit the number of types of unregulated 
participants in the financial market from taking the types of 
risks and supplying the liquidity, I am fearful that we will 
remove some of the flexibility that we have in our overall 
system. I am certainly of the opinion that should hedge funds 
accept capital from retail investors, they should go under the 
same regulations as a mutual fund. But so long as their sources 
of equity funds are professional or large investors with net 
worths, say, exceeding $1 million or more, I see no purpose in 
regulation, and I see very significant potential loss in doing 
so.
    Senator Sununu. Thank you very much, Mr. Chairman. I see 
the time has expired, and I appreciate your patience.
    Chairman Shelby. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman. And, 
Chairman Greenspan, welcome.
    You spoke earlier with great insights about productivity 
growth and its impact on the economy, but one of the things 
that is interesting and, indeed, troubling is that even with 
this rapid growth in productivity, we have not seen a rapid 
growth in labor compensation to the extent we have seen in 
other periods of expanding productivity, which leads me to the 
conclusion that the expansion is now driven more by debt than 
by income. People are buying things not from increased wages in 
their paycheck but credit cards, which is not sustainable over 
a longer period of time.
    And I suspect there are some structural reasons for this, 
or let me just pose the question: Why is labor compensation not 
keeping up? Why is this expansion, as a result, a result of 
debt and credit cards rather than wages being devoted to 
consumption?
    Chairman Greenspan. First of all, I think that as I 
indicated to Senator Dole, a very substantial part of the 
increase over the last year in productivity has ended up in 
increasing profit margins. But that seems to have come to an 
end as margins have gone from a very low level to a very high 
level and, historically, they have stabilized at this point. 
And there is evidence that that is occurring.
    This will mean that productivity growth will feed into a 
fairly pronounced up-trend in real wages, and indeed, there is 
evidence that that is already in the process of occurring.
    The amount of income that is now moving into consumer 
markets is becoming an ever important factor in consumption, 
and even though it is the case that credit card debt has moved 
up significantly, it is not large enough to be a serious 
concern, and indeed, the delinquencies and the defaults are not 
particularly large relative to what one ordinarily expects in 
that type of business. And, indeed, delinquencies generally 
have been exceptionally low across the board in the consumer 
area, especially, for example, in mortgage and in home equity 
loans.
    So, I am not actually concerned at this point that we are 
looking at a really serious consumer debt problem, especially 
when one of the major factors in the growth of mortgage debt. 
In fact, 10 percent of the level of mortgage debt occurs: As a 
consequence of the fairly significant increase in the ratio of 
households who are homeowners, because if we had the 64-percent 
homeownership ratio that we had 10 years ago rather than the 
current 68, 69 percent, we would not have had a very 
significant number of renters buying homes, which has had two 
effects: One, it obviously increases the asset side of their 
balance sheet by the value of the home, but two, it increases 
almost to the same extent the liability side, which is mortgage 
debt. And as a consequence of that, what you have is a very 
significant part of the population which have gone from renter 
to homeowner, and in the process have statistically increased 
the amount of household debt, mortgage debt in this case, very 
substantially. But I would never argue that the renters by 
becoming homeowners had their financial situation significantly 
deteriorated.
    So part of this ratio of debt-to-income is not evidence of 
deterioration in household finances. It is the case, however, 
that if we continue to get very significant increases in the 
ratio of household debt-to-income, the debt service charges 
obviously will be going up. And there is a conceivable point 
out there which I would consider worrisome. I just do not think 
that we are anywhere near there yet, and I doubt if we will get 
there.
    Senator Reed. Mr. Chairman, you suggest that the wages are 
improving a bit, yet in May, according to the Labor Department, 
real wages fell by about 0.4 percent. And according to the 
Economic Policy Institute, over the past year hourly wages are 
up about 2.2 percent, just about the rate of inflation.
    Part of my question was the notion that there might be 
structural reasons here, the outsourcing of jobs, the threat of 
outsourcing putting pressure on the ability of employees to ask 
for money, decline of labor union participation, fewer and 
fewer workers are organized, they have, therefore, less ability 
to negotiate.
    Are any of these factors structural factors that will 
mitigate increases in wages going forward?
    Chairman Greenspan. I do not think that they are related to 
the average increase in wages. They are a problem on the 
distribution of wages. As I have pointed out many times in 
recent months, we are seeing, and probably are continuing to 
see even to this day, a continuing opening up of the wage 
spread between highly skilled and lesser skilled workers; and 
that this is in my judgment largely an educational problem that 
is confronting us, which I think has to be addressed. But the 
consequence is that the real wage below the median has been 
flat to declining, whereas in the upper quartile it has been 
rising. And that is largely reflected in skill differentials, 
but on average, what we are observing is now a fairly across-
the-board increase industry-by-industry, as I indicated to 
Senator Dole, but I suspect that within industries, we are 
getting this more skilled/lesser skilled spread continuing.
    So in that sense, it is a problem caused basically by our 
skill mix not keeping up with the technology that our capital 
stock requires. I guess that is a structural problem. But it is 
one that can be and must be addressed because I think that it 
is creating an increasing concentration of incomes in this 
country. And for a democratic society, that is not a very 
desirable thing to allow to happen.
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Carper.
    Senator Carper. Chairman Shelby----
    Chairman Shelby. Senator Carper, if I could go vote, and I 
do not know how long the Majority Leader will indulge us here, 
but if you will go ahead and if no one comes back, then Senator 
Corzine. Will that be okay?
    Senator Carper. Yes, sir.
    Chairman Shelby. Thank you.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Mr. Chairman, just a real quick question, 
and I will ask for a very brief response because I still have 
not voted either. But I want to ask this question. We are 
probably going to take up legislation on class action reform 
later this month, something that a number of us have pushed 
hard for for the last several years. And there will be a number 
of amendments offered to our class action bill. Some will be 
germane; some will be nongermane. One of the nongermane 
amendments that is likely to be offered to the bill is one 
dealing with an increase in the minimum wage, which you may 
recall has not been raised I think since 1997 at the Federal 
level. And I would appreciate it if you just take a minute or 
two and give us some things that we might want to keep in mind 
as we address that issue. I think there is a good likelihood 
that it will be raised, probably phased in over several years, 
I think it should be, but some things that we should keep in 
mind as we approach this decision.
    Chairman Greenspan. I am the wrong person to ask, Senator, 
because I am one of probably a few people whom you talk to who 
does not think the minimum wage is a good idea to begin with. 
And the reason is I think it destroys jobs. I think it prevents 
people who are of the lesser skill and are trying to work their 
way up the ladder of skill, from working because they cannot 
earn the minimum wage. I think that is a mistake.
    This is a very large and big debatable issue, and I think 
you are aware of both sides of the issue. So, I just want you 
to know I have nothing to suggest at this stage because I am 
not one of those who considers it a desirable policy.
    Senator Carper. Well, that was certainly a brief answer--
not the one I expected, but a brief one. Thank you very much.
    Senator Corzine.

              STATEMENT OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Senator Carper. It seems like 
we have control over here on the other side of the aisle for a 
change.
    [Laughter.]
    Maybe it is only temporary.
    Let me recommend that I put a statement in the record. I 
apologize for not being here for your opening statement, Mr. 
Chairman.
    In that statement, I give testimony to your tenure and 
efforts in leading us in one of the most important roles in our 
Nation, and I think our economy and our country is a lot better 
off because of your service, and I congratulate you on your 
nomination and I expect that I will be voting in the 
affirmative.
    That said, I have some concerns that a number of my 
colleagues--I was watching some of the questions and responses. 
Many of these come down to definition of statistics. We seem to 
focus on macro statistics and GDP growth, and we talk about 
averages as opposed to means and distributions. I am 
particularly pleased to hear you talk about the differential 
that it is occurring between highly skilled and low-skilled 
workers. But it does cover a lot of impact for middle-class 
America, in particular. We hear and will hear, I suspect, 
during the campaign about the middle-class squeeze. And it has 
some merit. I think it actually ties to this underlying issue 
that you have identified, skilled versus lower-skilled workers.
    Do you consider an auto worker at a Ford Motor plant in my 
home State who loses a job after 20 years a low-skill worker?
    Chairman Greenspan. I think it is relative to the demands 
of the job structure itself. I would put it this way: The 
requirements for the level of skills increase year on year 
because, as we get ever more sophisticated capital stock, the 
skills that are required to staff that structure are going up, 
on average. And if a certain person, say, 20 years ago had a 
specific skill which at that point in time was a highly skilled 
job, but did not change at all over a 20-year period, it is 
conceivable that in today's environment that could be 
considered a medium- or even a lower-skill job, which is the 
reason why I have argued the necessity for continuing education 
throughout one's life. You cannot stop. We have to have means 
by which skills are continuously upgraded.
    So the answer is, yes, it is possible that somebody who was 
high-skilled in an earlier period, did not lose any of those 
skills, could in a later context be designated as medium- or 
low-skilled.
    Senator Corzine. It might even be the pace at which they 
picked up those skills. They may even have trained themselves 
for an advancing economy, but not stayed with the pace.
    I think that there is concern--I certainly have concern 
about the erosion of the industrial base in the context of 
this. And I think you see that in these low-real-wage 
increases, whether it is 2.2 percent or other measurements that 
show jobs lost versus the job that replaces it for those 
individuals being sharply lower. And I think that has ended up 
undermining the broad health that is covered by the term 
``averages.'' I do not know whether the number is 400 times or 
500 times that corporate executives are receiving relative to 
lowest wage earners. There are different surveys and different 
statistics. But, quite obviously, if those numbers are very 
high and they are added together with those workers who are in 
these newly defined low-skill wages, we can have averages that 
are moving up and, in fact, broad swaths of our society are not 
where they are. I think this is one of the most important 
issues for us to debate. It does get to the long-term issue of 
education and retraining, which gets to the second element that 
I would like to talk about. That gets to having the ability for 
society to have the resources to be able to invest in education 
to help create that skill set as we go forward, whether it is 
investing in community colleges or it is investing in Pell 
grants that allow for many of those people who come from low-
skill families to access higher education.
    We have a serious budget problem in the country, and we are 
about to impose on ourselves or at least some think we are 
about to impose on ourselves PAYGO rules that work against 
spending but do not work against taxes. And I heard your 
response to Senator Schumer that you do not like answering 
hypotheticals. But this does not seem like a hypothetical. We 
have proposals on the table that would suggest that we must 
have PAYGO rules apply to spending and not with regard to 
making permanent tax cuts.
    How are we going to be able to deal with these most 
important broad social issues that I think you have talked 
about, high-skill, low-skill workers, and still deal with what 
I think is appropriately identified? You said we are okay. You 
can live with current deficits maybe in the immediate horizon, 
but you talked about 2011. How can we do that when all of these 
permanent tax cuts come at a later time and we still have great 
social needs in this country?
    Chairman Greenspan. Senator, I have indicated earlier in 
this testimony that I think because of the longer-term 
structural problems that are emerging in our budgets, we need 
new tools in order to make certain that we appropriately 
allocate our resources in a manner through the Federal budget 
in a way which we cannot do today. I have cited three sets of 
rules which I believe will be very helpful--I assume they may 
even be sufficient--which are a symmetrical PAYGO rule, 
discretionary caps, and triggers on both spending and on taxes.
    I think that it was a mistake to allow the fairly effective 
PAYGO rules, in place in September 2002, to expire. And in my 
judgment it would be very wise to take that structure which 
existed back then and reenact it.
    Senator Corzine. If the logical extension of that is 
dealing with the permanent tax cuts, then that is the logical 
extension.
    Chairman Greenspan. That is for the Congress to decide.
    Senator Corzine. But I am taking the logical extension.
    Chairman Greenspan. Okay, fine.
    Senator Corzine. You do believe, though--and I just 
reiterate--that we have a very serious structural fiscal 
problem in the out-years as we evolve.
    Chairman Greenspan. I do. As I have said on numerous 
occasions, Senator, I am most concerned because of our 
inability specifically to make a judgment of what resources 
will be required for Medicare in the next decade and beyond. 
Given the very large increase in retirees, because of the 
uncertainty, I think we have to be quite cautious because I am 
fearful we are on the edge of the possibility--I do not know 
what the probability is, but the possibility-- that we are 
making promises in real terms to the next generation that we 
may not be able to fulfill.
    Senator Corzine. Just one quick follow-up, and then I will 
have used up more than my fair share of time. Was it by choice 
that you left out Social Security when you said that our future 
obligations that we are laying down are ones that--you have 
primarily focused--you did focus on Medicare as opposed to 
Social Security, and then we just saw a recent CBO analysis 
that makes us feel at least somewhat more comfortable with----
    Chairman Greenspan. Social Security is a defined benefit 
program. There are ranges over which long-term estimates can 
occur, but relative to Medicare, they are extremely narrow.
    As CBO indicates, as the Social Security trustees indicate, 
Social Security is currently long-term unstable and requires 
adjustments. The adjustments, however, are far clearer and the 
size of the problem is far easier to get our hands on because 
it is a defined benefit program than is the case with Medicare. 
So there are lots of ways of solving Social Security, and we 
are not doing any of them, I must say, because every time 
somebody raises a way to do it, that is unacceptable.
    Social Security is far less of a problem than is Medicare. 
Medicare is the one that has the very large uncertainties 
associated with it. But even in the CBO report that came out 
yesterday, it has a range of probabilities for what the Social 
Security outlook is over the next 100 years, and it is a very 
wide range.
    Senator Corzine. Of course.
    Chairman Greenspan. But it still----
    Senator Corzine. A soluble problem.
    Chairman Greenspan. Yes, exactly.
    Senator Corzine. Thank you.
    Thank you, Mr. Chairman.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. [Presiding.] Thank you very much.
    Chairman Greenspan, I will be mercifully brief so you can 
get to lunch and the rest of us will as well. You said in your 
response to Senator Corzine that we cannot wait and we should 
be working on this long-term structural problem now. I felt we 
should be working on it when I came to Congress 10 years ago, 
and, unfortunately, we have not been able to do that.
    I think we have a cautionary tale for us in what is 
happening in Europe. Is it not true that their problems are 
substantially greater than ours with respect to these two, 
retirement pay and medical for the aged?
    Chairman Greenspan. I think that certainly the demographics 
in Europe are far more formidable a barrier to fiscal balance 
than in the United States. It varies by country, obviously. It 
is not the same everywhere. But I would say, in general, their 
problems are more difficult than ours, as you point out.
    Senator Bennett. Yes, that is my concern. One overall 
question--and, by the way, being unable to be here for an 
opening statement, let me just for the record thank you for 
your splendid service to the country, not only in your tenure 
as Chairman of the Federal Reserve but also your previous 
service in a variety of preparatory assignments. It is not 
everyone who is willing to give as much time to public service 
as you have, give as large a percentage of one's life to public 
service as you have. And the Nation should be very grateful, 
and expressions of appreciation are never too many. So let me 
add mine to those that you have received and make the record 
clear that I will vote for you with enthusiasm but, more 
importantly, with gratitude for the work that you have done.
    Chairman Greenspan. Thank you very much, Senator.
    Senator Bennett. Isn't it true--well, that is not the way 
to start it. That is the way lawyers start. I am not a lawyer.
    It is my conviction that the next President, whoever he may 
be, will enter office at a time of extremely strong economic 
growth and very robust--it will be almost too late speaking of 
it in terms of a recovery, because I think it will happen 
throughout all of 2004. I would like your reflections on that, 
if I am overly optimistic or if you think there are some soft 
spots we should worry about. But as I look forward, whoever the 
next President might be, he will be fortunate enough to take 
office at a time of extremely strong economic performance.
    Chairman Greenspan. I think that is right, Senator. The 
reason I hesitate is that forecasting even 6 months out is 
slightly precarious. But as I indicated in a presentation I 
made last week, there is something about this recovery which 
does not have underlying destabilizing momentum, in other 
words, of going too fast. And the way we know that is that, 
despite the fact that capital investment has been rising fairly 
appreciably, it has fallen behind the very significant rise in 
cashflow. And it is very rare in a recovery that you will find 
that capital investment at this stage of the recovery is not 
running well ahead of cashflow and that borrowing requirements 
accordingly are very significant.
    That is not the case today. The corporate bond markets are 
very slow. Indeed, in the month of May, the last time we had 
data, actual net bond issuance--that is, gross issuance minus 
retirements--was negative. So that is yet another shoe to drop 
in the expansion, if I may put it that way, which is an 
increasing sense of confidence in the business community to 
start moving up capital investment to still higher levels. And 
that is the reason why I think that this particular recovery 
has some momentum in it and does not look to be short-lived.
    Obviously, numbers of things can happen adversely, the oil 
price or any of a number of destabilizing events. But right now 
I tend to be fairly much in the same camp that you are with 
respect to the outlook.
    Senator Bennett. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Chairman, I have a number of questions 
for the record, but I will submit those for the record, a 
couple of things, and maybe we can go into the early 
afternoon--get out of here, in other words.
    Mr. Chairman, you have previously testified before this 
Committee about your concerns on the unrestrained growth of 
debt by the GSE's. With the current rise of long-term interest 
rates and the possibility of the Federal Reserve raising short-
term rates within the year, the housing market has seen a 
dramatic fall in mortgage refinancing. What effect, if any, 
would a potential slowdown of the housing market and asset-
backed securities industry have on the current health of 
Freddie Mac and Fannie Mae? Does that concern you at all?
    Chairman Greenspan. No, that doesn't, in the sense that I 
have no problem with the way they manage their structure, both 
their portfolio and the securitization parts of their business. 
I think it is rather well done. They do a fairly impressive 
job.
    My concern is the issue which I raised before this 
Committee previously namely, the subsidy. The size of the 
subsidy is debatable, but I am sure there is one. The subsidy 
creates the problem of expanding assets, mortgage assets--or, 
indeed, any set of assets--in a way which could become 
destabilizing if it continues on very much beyond where they 
are, because they have become very large financial 
institutions, and because of the subsidy, they do not have the 
automatic market adjustment forces constraining their growth.
    Now, to be sure, they have slowed their rate of growth 
fairly recently, and I trust that is the beginning of a 
conscious trend to slow things down. But if you have a subsidy, 
the initiation of which is wholly up to you--remember, this is 
not a subsidy that the Congress has given them. It is the 
market's perception that in the event of a serious problem, the 
U.S. Government will bail them out and that, therefore, the 
debentures should sell close to U.S. Treasuries. But there is 
no limit to how far that debt can expand because it is up to 
the companies, Fannie and Freddie, to determine how much. That 
is what concerns me.
    Chairman Shelby. Mr. Chairman, I do not have the exact 
figures before me now, but if you put Freddie Mac and Fannie 
Mae's debt together, they are way up there. They are 
approaching the public debt of the country, are they not?
    Chairman Greenspan. Indeed they are.
    Chairman Shelby. And that has to be----
    Chairman Greenspan. And in certain of the measures, they 
exceed it.
    Chairman Shelby. Yes. Thank you.
    Mr. Chairman, under your tenure at the Fed, what particular 
changes have been made in the system as an institution that you 
think were the most significant?
    Chairman Greenspan. You mean changes in the Federal Reserve 
System?
    Chairman Shelby. Yes, sir, while you have been there. As 
you reflect back.
    Chairman Greenspan. Yes. It is a very interesting question 
because you tend not to think in those terms. You are usually 
thinking above what have we done recently.
    I think that our technique of evaluating how the economy is 
functioning and our ability to understand how markets are 
operating and, most specifically, how we interface with the 
rest of the world are new initiatives in the last decade or so, 
in fact, being driven by the world economy, essentially.
    In response, we have built up technical capabilities that 
enable us to evaluate these things far better than I think we 
were able to earlier on.
    Technology has created a major improvement in the payment 
system in the United States and, indeed, in the world, and our 
interface with that payment system and our oversight of it has 
increased very significantly. And looking back at the overall 
efficiency of the American financial system and the extent 
where we, at the Fed, have been helpful along the way I think 
has been very important from our point of view.
    Then as Senator Sarbanes indicated very early on, we have 
also found that we interface with the markets better as we 
disclose more. There are limits to how far we can go. If we 
were to televise our FOMC meetings, I think we would find that 
disclosure became absolute, but our efficiency would not. So we 
have to trade off the ability of knowing how best we can manage 
our deliberations to fulfill the Congress' mandate, and I think 
we are gradually moving in that direction. I think we have a 
way to go. We are not there yet. But we have come a good way on 
the issue of getting optimum transparency.
    Chairman Shelby. What particular reforms or measures are 
you interested in achieving during your fifth term as Chairman? 
If you are at liberty to talk about it now. Maybe you are not. 
What would you like to do?
    Chairman Greenspan. The major focus that we are involved 
with is, as I have indicated earlier, the elimination of the 
increasingly unnecessary level of accommodation in monetary 
policy in order to restore financial balance in a manner which 
essentially leaves the American economy and financial system in 
a degree of stability. We seem to be on track, but as we duffer 
golfers like to say, it is not a gimme putt.
    Chairman Shelby. Sure. Mr. Chairman, we appreciate your 
patience here today, your appearance. We will move your 
nomination as expeditiously as possible, you can be assured. 
Thank you very much.
    Chairman Greenspan. I thank you very much, Mr. Chairman.
    Chairman Shelby. This hearing is adjourned.
    [Whereupon, at 1:16 p.m., the hearing was adjourned.]
    [Prepared statement, biographical sketch of the nominee, 
response to written questions, and additional material supplied 
for the record follows:]



      RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES 
                      FROM ALAN GREENSPAN

Q.1. The Federal Reserve recently issued for public comment 
proposed regulatory revisions to address concerns about bounced 
check protection programs. Rather than specify disclosures as 
required for all other extensions of credit by the Truth-in-
Lending Act (TILA) and Regulation Z, the Board instead proposes 
to make changes to Regulation DD which implements the Truth-in-
Savings Act. It is my understanding that the Board has referred 
to bounce protection loans as credit. In your letter to me 
explaining your reasons, you stated you exempted these programs 
from TILA, despite the fact that they are credit. The Board's 
action appears inconsistent with statutory requirements for 
exempting credit transactions from TILA coverage. Section 105 
of TILA appears to require the Board to go through an analysis 
before exempting credit transactions from coverage. Please 
explain why the Board did not undertake the evaluation outlined 
in subsections (a) and (f) of Section 105 before issuing 
proposed regulations that implicitly exempt such bounced 
transactions from TILA.

A.1. In recent years, some institutions have begun to market 
courtesy overdraft protection by disclosing the dollar limit 
that consumers may be allowed to overdraw their account if it 
is in good standing. Under these programs, when an institution 
pays an overdraft, a fee is imposed and the consumer is 
informed that the overdraft must be covered within a specified 
period, typically 5 to 30 days. You have asked for an 
explanation of how such transactions are exempt from Truth-in-
Lending Act (TILA) coverage if they constitute credit.
    The Board's Regulation Z, which was originally issued in 
1969, has never covered overdrafts on a deposit account when 
the institution has not previously agreed, in writing, to pay 
such items. Accordingly, banks' historical payment of 
overdrafts on an ad hoc basis has been exempt from TILA's 
coverage, while traditional overdraft lines of credit, which 
are generally subject to a written agreement, have been covered 
under TILA.
    Regulation Z applies only to a consumer credit transaction 
that is subject to a finance charge, or is payable by written 
agreement in more than four installments. In adopting 
Regulation Z in 1969, the Board determined that fees imposed by 
a financial institution for paying items that overdraw an 
account should not be deemed ``finance charges,'' unless the 
payment of such items and the imposition of the charge were 
previously agreed upon in writing. The Board's determination 
that such fees should not be disclosed as ``finance charges'' 
under TILA is consistent with the Board's general rulemaking 
authority under Section 105 of the statute. The Board's 
classification of overdraft fees under Regulation Z was 
designed to facilitate depository institutions' ability to 
accommodate consumers on an ad hoc basis.
    Although some depository institutions market courtesy 
overdraft protection as a feature of their deposit accounts, 
these institutions generally reserve the right to exercise 
discretion and to not pay any particular overdraft. Because 
there is no written credit agreement to cover overdrafts, the 
fees imposed are excluded from the finance charge that would be 
disclosed under Regulation Z (see 12 CFR Sec. 226.4(c)(3)). 
Institutions' overdraft protection programs generally do not 
provide for repayment in installments. Accordingly, these 
overdraft protection programs typically are not covered by 
Regulation Z.
    On May 28, the Board issued for public comment proposed 
revisions to Regulation DD, which implements the Truth-in-
Savings Act, to address concerns about disclosures for 
overdrawn accounts generally and, in particular, concerns about 
overdraft protection services. The proposed improvements in the 
disclosures provided to consumers under the Truth-in-Savings 
Act are intended to aid consumers in understanding the costs 
associated with overdrawing their accounts, and promote better 
account management. The Board's issuance of proposed revisions 
to Regulation DD did not entail any determination to issue an 
exemption under Section 105 of TILA. The proposal does 
recognize, however, that fees imposed in connection with 
overdraft protection services that do not involve written 
agreements have never been considered finance charges, and thus 
have never been subject to disclosure under Regulation Z. 
Accordingly, the Board's proposal under Regulation DD 
represents a decision not to amend Regulation Z to cover these 
transactions, although the Board also expressly noted that 
further consideration of the need for such coverage may be 
appropriate if concerns about these programs persist.

 RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER AND SENATOR 
                   MILLER FROM ALAN GREENSPAN

Q.1. Chairman Greenspan, you last appeared before the Senate 
Banking Committee on April 20 to discuss the ``Condition of the 
Banking Industry.'' During that hearing you entered into a 
discussion with Senator Carper regarding the dual banking 
system and you said . . . ``The dual banking system is a very 
unusual competitive structure for regulation, and it has served 
us well, and I am concerned that however we develop issues in 
the years ahead, that we be careful to be certain that we 
maintain the appropriate balance of regulation between State 
and Federal agencies.''
    It has also been reported to us that you have recently said 
that you believe that there is an imbalance in the dual 
chartering system right now particularly for larger multistate 
operators. This issue is a concern for several institutions in 
our States as well as our State banking commissioners.
    Do you think there is an imbalance between the charters 
currently? Can you clarify for us what your concern is? What 
should be done?

A.1. Under our ``dual'' banking system, banks may elect to be 
chartered by either the States or the Federal Government 
(acting through the Office of the Comptroller of the Currency). 
Congress historically has sought to maintain a competitive dual 
banking system, that is one in which both national and State-
chartered banks may compete effectively. Over time, a healthy 
dual banking system promotes diversity, flexibility, and 
inventiveness in the banking system. For these reasons, the 
Board has long supported the dual banking system and efforts to 
ensure the viability of both the State bank and national bank 
charters.
    For many years, there has been a rough equilibrium in the 
banking system between State-chartered and nationally chartered 
institutions as measured by both the percentage of banks that 
are State chartered and the percentage of banking assets 
controlled by State-chartered banks. As reflected in Table A, 
the percentage of insured commercial banks that are State-
chartered fluctuated only slightly between 1992 and 2003, 
rising from 69 percent in 1992 to 74 percent in 2003. Moreover, 
the percentage of banking assets held by State-chartered banks 
also remained relatively constant over this time period.
    Recently, a number of State-chartered banks have converted, 
or have announced their intention to convert, to a national 
charter. As a result, the percentage of banking assets held by 
all State-chartered banks is forecast to decline from 44 
percent to 33 percent and the percentage of banking assets held 
by State member banks, which are directly supervised by the 
Federal Reserve, would decline from 25 percent to approximately 
15 percent.
    Although this projected shift in assets controlled by State 
banks is significant and larger than seen in some time, it is 
too early to tell whether it reflects a temporary anomaly or an 
underlying imbalance between State and Federal charters that 
should be of concern to the Congress. Regarding the 
implications of these changes for supervision, the Federal 
Reserve has adapted and refined its supervisory programs and 
practices regarding bank and financial holding companies in 
response to changes in the financial industry and the statutory 
requirements established by the Congress. The Board believes 
that the Federal Reserve should continue to play a meaningful 
role in the supervision of banking organizations to assist in 
fulfilling its broader responsibilities for conducting monetary 
policy and managing and containing risk within the financial 
system.
    At this point, we do not believe that the recent 
developments have hampered the Federal Reserve's ability to 
maintain a ``hands-on'' role in the supervision of large 
banking organizations through our role as umbrella or 
consolidated supervisor of bank holding companies, financial 
holding companies, and the U.S. operations of foreign banks. 
Looking ahead, if these developments adversely affect the 
Federal Reserve's window into the banking system over time, the 
Board will bring the matter to the attention of the Congress to 
ensure that it retains the authority and access necessary to 
carry out the full range of its central bank responsibilities.



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