[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 20, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-47


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 20, 2005................................................     1
Appendix:
    July 20, 2005................................................    49

                               WITNESSES
                        Wednesday, July 20, 2005

Greenspan, Hon. Alan, Chairman, Federal Reserve Board............     7

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    50
    King, Hon. Peter T...........................................    52
    Greenspan, Hon. Alan.........................................    53

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    ``The Problem of Executive Compensation,'' April 18, 2005....    66
Neugebauer, Hon. Randy:
    Written letter to Hon. Alan Greenspan........................    74
Greenspan, Hon. Alan:
    Written response to questions from Hon. Randy Neugebauer.....    75
    ``Monetary Policy Report to the Congress,'' July 20, 2005....    77

 
                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY

                              ----------                              


                        Wednesday, July 20, 2005

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:04 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Leach, Pryce, Bachus, 
Castle, Royce, Lucas, Kelly, Paul, Gillmor, Shays, Miller of 
California, Kennedy, Hensarling, Garrett, Brown-Waite, Barrett, 
Gerlach, Pearce, Neugebauer, Fitzpatrick, McHenry, Frank, 
Waters, Maloney, Velazquez, Watt, Ackerman, Hooley, Carson, 
Sherman, Lee, Moore of Kansas, Crowley, Clay, Matheson, Miller 
of North Carolina, Scott, Davis of Alabama, Green, Cleaver, 
Bean, Wasserman Schultz, and Moore of Wisconsin.
    The Chairman. [Presiding.] The committee will come to 
order.
    The chair recognizes himself for an opening statement.
    Chairman Greenspan, once again, we welcome you back to the 
Financial Services Committee for now your 35th appearance 
before this committee and our predecessor, the House Banking 
Committee, for the Monetary Policy Report.
    I know I speak for all of our 70 members when I say that 
your economic analysis and our discussion with you is the 
highlight of our calendar year here at the Financial Services 
Committee.
    Welcome once again, in what will likely be your final 
appearance here before the Financial Services Committee. To 
that end, we have enjoyed the opportunity to work with you in a 
number of capacities over the years, and I know I speak for the 
entire committee when I say that.
    We can report to the nation today that our U.S. economic 
growth is steady and strong. While we face some uncertainty 
abroad, and we can be assured of the likelihood that there will 
always be uncertainty abroad, our national economic performance 
is the envy of the world. More Americans are working than ever 
before.
    We recently received the news that 146,000 jobs were 
created in June, achieving a 5 percent unemployment rate, the 
lowest since the fateful month of September 2001.
    Not so long ago, many economists believed that there was a 
structural unemployment floor of 6 percent or 7 percent. They 
did not believe that our economy had the ability to reach the 
goal of 5 percent unemployment, and yet it has done so this 
month, with a total of 1.1 million jobs created this year 
alone.
    An important leading indicator, durable goods, increased 
5.5 percent in May, and U.S. manufacturing continues to expand 
at rates that exceed expectations.
    Our GDP is growing at a good clip of nearly 4 percent, and 
the important non-manufacturing sector has been increasing each 
month now for over 2 years.
    The markets have risen nicely, recovering from their post-
bubble and post-9/11 declines and selloffs, with the Dow now 
just 500 points shy of its historic high.
    These positive economic conditions mean that more Americans 
than ever before have reached the goal of home ownership. With 
President Bush's housing policies and the American Dream 
Downpayment Act, home ownership will soon be within reach for 
even more American families.
    With 14 consecutive quarters of economic growth, there is 
further good news for American consumers, and that is, 
inflation has remained in check. The prices of goods and 
services did not go up during the month of June. Prices for 
businesses, the producer price index, actually went down 
slightly, indicating that businesses have been able to handle 
recent high energy prices.
    Americans are well aware of the economy's steady growth, 
low inflation, and strong housing markets. Consumer confidence 
numbers are optimistic, and economic predictions show annual 
growth in the 3 percent to 4 percent range.
    A thriving economy, growing businesses, and working 
Americans are the components of a healthy tax base and strong 
revenues. President Bush's tax cuts have been an important 
factor in the recent projection that the federal budget deficit 
will be far lower than previously expected, perhaps up to $100 
billion lower, and that will help to keep interest rates as low 
as possible.
    Over the long term, the president's programs to make the 
tax cuts permanent, to restrain government spending, to ensure 
retirement security, and to expand U.S. exports through free 
trade will further enhance our economic success.
    Mr. Chairman, according to the Federal Reserve Web site, 
its objectives include ``economic growth in line with the 
economy's potential to expand, a high level of employment, 
stable prices, and moderate long-term interest rates.''
    It is an immense achievement that all of those objectives 
have been met, and we congratulate you and your colleagues at 
the Fed.
    You have the distinction of having served the Council of 
Economic Advisers under President Ford and serving as the Fed 
chairman under every president since Reagan. Certainly the 
confidence of five presidents is also a testament to the 
nation's faith in your economic leadership.
    We thank you for your extraordinary service to our country, 
for the stalwart policies that have guided us to many years of 
prosperity. This success has advanced American businesses, has 
increased American influence throughout the world, and has 
created economic conditions in which American families thrive.
    I again thank you for your service.
    I now yield to the gentleman from Massachusetts for an 
opening statement.
    Mr. Frank. Thank you, Mr. Chairman.
    Mr. Chairman, I was reading your statement this morning and 
I had an ``a ha!'' moment and realized that I could from now 
on, to some extent, preach the gospel according to Greenspan, 
with some reservations--the revised standard version.
    On Page 11, you state something really quite profound, that 
I hope people will take to heart. You and I will differ about 
how to respond to it, but I thank you for stating it. ``We 
collectively confront many risks,'' then I skip. This is the 
chairman's testimony.
    ``Another prominent concern is the growing evidence of 
antiglobalization sentiment and protectionist initiatives, 
which, if implemented, would significantly threaten the 
flexibility and resilience of many economies.
    ``This situation is especially troubling for the United 
States, where openness and flexibility have allowed us to 
absorb a succession of hard shocks. That flexibility is, in 
large measure, a testament to the industry and resourcefulness 
of our workers and business. But our success has also been 
aided importantly by more than 2.5 decades of bipartisan effort 
aimed at reducing unnecessary regulation and promoting the 
openness of our market economy.
    ``Going forward, policymakers will need to be vigilant to 
preserve this flexibility, which has contributed so 
constructively to our economic performance.''
    I agree with you, Mr. Chairman.
    I am going to solicit later your opinion of the bill 
dealing with trade with China, which is apparently going to be 
put forward as part of the price of winning CAFTA, and I will 
be interested in your evaluation of that particular piece of 
legislation--which has been the subject of a marvelous 
conversion on the part of many of the Republican leaders.
    I agree with you that we face these attitudes, and I agree 
with you that they can have negative consequences. But I hope 
you will agree--and I think, from previous statements, you 
would--this is not simply perversity on the part of American 
citizens; this is not just the workers getting into a bad mood.
    The problem is that the very growth that these policies 
have fostered, the growth that you believe to be endangered by 
the rise in these sentiments and the opposition to these 
measures, has increasingly been unfairly shared.
    You said--and I salute you for it--a little over a year ago 
to the Joint Economic Committee that virtually all of the gains 
from increased productivity were going to corporate profits, 
the owners of capital; very few, if any, were going to real 
wages.
    In the report this year, the Monetary Report, on Page 16, 
you do say, ``Measures of labor compensation suggest that the 
remaining slack in labor markets continued to restrain 
increases in base wage rates.''
    You do note, ``Large increases in some of the more flexible 
components have added to labor costs.''
    What are those? Stock options and bonuses, as you say.
    In other words, if you are eligible for a stock option, you 
are doing okay. If you get a bonus, you are doing okay. If you 
are an owner of capital, you are doing super okay. And then, to 
make it even better, we have reduced the tax rates on all 
those.
    But if you are working for straight wages or salary, you 
are not doing very well. Certainly you are not participating in 
the increased prosperity. Real wages, as you have acknowledged, 
leaving aside stock options, leaving aside bonuses--real 
wages--have not increased. Inflation has eaten them up.
    It is true that some workers have been told by their 
employer, ``We are giving you more in compensation.'' To some 
extent, that means the employer is paying more for their health 
care benefits, or perhaps putting more into the pension fund; 
but the worker is not taking home another penny.
    And working people--and I want to go back. I think you are 
right about these sentiments, and I think you are right that 
they could lead to some negatives.
    We have on a bipartisan basis in this committee--as you 
know, with the support and advice from your institution--
allowed the financial institutions to take advantage of 
information technology. We have done things to try and help 
them modernize.
    There is growing consumer resistance to many of those. 
There is resistance to trade, so that they are going to have to 
make this bargain, they are going to try and buy CAFTA with 
this China deal. I do not know if it will work or not.
    The point I am making is this, you have got to connect the 
dots. The fact is that increasingly average workers do not see 
that the prosperity that results from these policies is 
benefiting them. And in fact fewer Americans are getting health 
benefits. They are paying more for them.
    And so this combination of increased growth--and the 
economy is growing--and job stagnation does not help.
    I would just say, finally, I was struck by the hosannas--to 
stay with the religious motif--which greeted the fact that we 
created 146,000 new jobs last month. That is way below every 
projection this administration had made.
    I am giving out a sheet here called ``The Evolution of 
Diminishing Expectations.'' And what it shows is, the 
administration has finally met its job projection figures--by 
lowering them.
    The Council of Economic Advisers in 2003 said we would get 
305,000 jobs a month. Secretary Snow in October of 2003 said we 
would get 200,000. He was lowballing. Then the council went 
back up to 325,000. That was the last one before the election. 
They projected 325,000 jobs a month. Then it dropped to 175,000 
jobs a month.
    In fact we have never made, over any prolonged period, any 
of those projections. We have not hit 200,000 jobs a month.
    So job creation has been stagnated. Unemployment has 
dropped largely, as Paul Krugman pointed out----
    And I ask unanimous consent to put his Monday column in the 
record.
    The Chairman. Without objection.
    Mr. Frank.--largely because the participation rate is 
declining in the economy.
    So, as you say in the report, there is still slack in the 
labor market. That is holding down wage costs; i.e., people are 
not getting increases in wages, health care for those who are 
employed is eroding.
    And so people see this growth and do not see that they are 
getting a part of it, and that is why you get this 
``resistance'' that you mentioned.
    So when we get to the question period I will ask you what 
you think we can do about that.
    The Chairman. The gentleman's time has expired.
    The gentlelady from New York, Ms. Maloney, is recognized 
for 3 minutes for opening statement.
    Mrs. Maloney. Welcome, Mr. Greenspan.
    As always, it is a pleasure to hear your testimony--all 35 
times.
    You have served, more than any other person, as our 
country's captain of monetary policy. You have guided us 
through economic growth, recession, and into globalization.
    In serving our country, you have often spoken out strongly 
against positions that you disagree with. So I find it very 
surprising that you are not strongly criticizing the ballooning 
deficits this administration has foisted on the American 
people.
    The Bush legacy is the largest national debt in history. 
The Republican Congress and president inherited a surplus, yet 
they have voted three times to raise the debt ceiling.
    We now have a record debt of over $7.5 trillion, the 
largest in history; and this breaks down to each citizen's 
share being over $26,000.
    We also have the largest trade deficit in our history, 
supported by the willingness--at least so far--of foreign 
investors and governments to keep extending us credit. We have 
the largest percentage of foreign holders of U.S. debt ever.
    We keep being told that the administration is going to fix 
this, but nothing is happening. Just last week the 
administration announced that the federal budget deficit for 
this year will not be as large as they were predicting it would 
be in January.
    Republicans are taking this as some kind of evidence of a 
supply-side miracle in which the president's tax cuts are 
actually creating large increases in revenue.
    And surely a man of your reputation, or anyone who actually 
read the OMB Mid-Session Review, is not going to take it as 
evidence of any real change in the structural budget deficit 
picture.
    As analysts at Goldman Sachs and in other places have 
pointed out, this year's large increase in tax receipts stems 
from temporary factors that are unlikely to be repeated, 
including the expiration of the tax cut on business investment.
    CBO Director Holtz-Eakin, a former Bush administration 
economist, has made the same point about the temporary nature 
of the revenue surge, saying that once you go out to 2008 and 
2010, things look about the same as they did before we found 
out about this year's jump in revenues.
    The administration, in my opinion, is trying to distract us 
from the long-term budget problems they have created with 
irresponsible policies.
    But the American people deserve to know the truth, and 
surely you, of all people, Mr. Greenspan, should be speaking 
out about this.
    You were part of the team that helped the Clinton 
administration balance the budget, you were part of the team 
that helped build the surplus, and you know it can be done.
    The American people are absolutely being skewered with this 
crushing debt that will affect them and the lives of their 
children, their grandchildren, their quality of life.
    I really would hope that today and in the future you will 
take a stand against spending the American people into a hole 
that is very difficult to get out of and very painful to get 
out of, and I wish that you would speak out as strongly on this 
issue and as forcefully on this issue as you have on others.
    The Chairman. The gentlelady's time has expired.
    The gentlelady from Ohio, Judge Pryce?
    Ms. Pryce. Thank you, Chairman Oxley.
    Welcome, Chairman Greenspan. Thank you for taking time to 
discuss with us your insightful thoughts on monetary policy and 
the state of our economy.
    I am pleased to read in your testimony that you believe 
overall the economy remains steady. Many financial analysts 
have credited the strong, vibrant housing market as a vital 
segment of the health of our economy.
    Recent studies have found that housing accounted for more 
than one-third of economic growth during the previous 5 years.
    Many observers, including yourself, have noted that 
mortgage refinancing provided crucial support to the economy 
during the past recession, enabled homeowners to reduce their 
debt burdens and maintain adequate levels of consumer spending 
by tapping into the equity of their homes. I for one took great 
advantage of that.
    Despite these latest gains in home ownership, I am 
concerned about the recent surge in home prices in many 
metropolitan areas. In most countries, the recent surge in home 
prices has gone hand in hand with a much larger jump in 
household debt than in previous booms.
    Not only are new buyers taking out bigger mortgages, but 
existing owners have increased their mortgages to turn capital 
gains into cash that they can spend.
    So I hope to hear your views on the current status of this 
country's housing market and whether a nationwide bubble 
exists, also what effect a measured rise in inflation will have 
on the housing market.
    As we have seen in the Australian economy, they experienced 
a surge and were able to slowly raise rates and control real 
estate speculation, keeping that economy healthy after the 
market peaked.
    So I look forward to talking more about that with you.
    Shifting gears, I would also like to know--and I will ask 
later--whether you feel the recent string of data security 
breaches has affected consumer confidence in our payment 
systems.
    As you know, Mr. Chairman, I, along with many of my 
colleagues on both sides of the aisle here, are working hard on 
some legislation that will provide uniform national standards 
for consumer protection and data breach notification, and we 
would appreciate any insights you care to share.
    Data security breaches are something that all of us are 
concerned with, as we see more and more instances of breaches 
in the headlines every day.
    I am pleased to be working with many members, Congressman 
Castle and LaTourette, Moore, Hooley, even Mr. Frank, on these 
important issues.
    And we appreciate the leadership of Chairman Oxley and 
Chairman Baucus as well.
    But under Gramm-Leach-Bliley, financial services firms 
already have an obligation to keep consumer information secure 
and confidential, and we need to extend those safeguards to 
information brokers and others.
    When a breach occurs that could lead to financial fraud or 
misuse of sensitive financial identity information, customers 
have the right to be informed about the breach and what steps 
they should take to protect themselves.
    I believe there should be one federal standard for data 
security and for notification. Disparate standards that vary 
from state to state are an administrative nightmare and make 
compliance very difficult.
    Varying standards can cause consumer confusion, and 
customers should be assured that when their information is 
breached, they receive the same notification no matter where 
they live.
    So, thank you, Mr. Chairman, for your appearance today. I 
look forward to your testimony.
    And thank you, Chairman Oxley.
    I yield back.
    The Chairman. The gentlelady yields back.
    We now turn to our distinguished chairman of the Fed.
    Chairman Greenspan, again, welcome back to the committee.

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

    Mr. Greenspan. Thank you very much, Mr. Chairman.
    I have a rather extended formal presentation and would 
request that it be included for the record, and I will excerpt 
from that.
    The Chairman. Without objection.
    Mr. Greenspan. Mr. Chairman and members of the committee, I 
am pleased to be here to present the Federal Reserve's Monetary 
Policy Report to the Congress. I am surprised to hear it is the 
35th time.
    In recent weeks, employment has remained on an upward 
trend; retail spending has posted appreciable gains; inventory 
levels have been modest; and business investment appears to 
have firmed. At the same time, low long-term interest rates 
have continued to provide a lift to housing activity.
    Although both overall and core consumer price inflation 
have eased of late, the prices of oil and natural gas have 
moved up again, on balance, since May and are likely to place 
some upward pressure on consumer prices, at least over the near 
term. Slack in labor and product markets has continued to 
decline.
    In light of these developments, the Federal Open Market 
Committee raised the federal funds rate at its June meeting to 
further reduce monetary policy accommodation. That action 
brought the cumulative increase in the funds rate over the past 
year to 2.25 percentage points.
    Should the prices of crude oil and natural gas flatten out 
after their recent runup, the forecast currently embedded in 
futures markets, the prospects for aggregate demand appear 
favorable.
    Household spending, buoyed by past gains in wealth, ongoing 
increases in employment and income, and relatively low interest 
rates, is likely to continue to expand.
    Business investment in equipment and software seems to be 
on a solid upward trajectory in response to supportive 
conditions in financial markets and the ongoing need to replace 
or upgrade aging high-tech and other equipment.
    Moreover, some recovery in non-residential construction 
appears in the offing, spurred partly by lower vacancy rates 
and rising prices for commercial properties.
    However, given the comparatively less buoyant growth of 
many foreign economies and the recent increase in the foreign 
exchange rate of the dollar, our external sector does not seem 
poised to contribute steadily to U.S. growth. A flattening out 
of the prices of crude oil and natural gas, were it to 
materialize, would also lessen upward pressure on inflation.
    Thus our baseline outlook for the U.S. economy is one of 
sustained economic growth and contained inflation pressures.
    In our view, realizing this outcome will require the 
Federal Reserve to continue to remove monetary accommodation. 
This generally favorable outlook, however, is attended by some 
significant uncertainties that warrant careful scrutiny.
    With regard to the outlook for inflation, future price 
performance will be influenced importantly by the trend in unit 
labor cost, or its equivalent, the ratio of hourly labor 
compensation to output per hour.
    Over most of the past several years, the behavior of unit 
labor costs has been quite subdued. But those costs have turned 
up of late, and whether the favorable trends of the past few 
years will be maintained is unclear.
    Hourly labor compensation as measured from the national 
income and product accounts increased sharply near the end of 
2004. However, that measure appears to have been boosted 
significantly by temporary factors.
    Over the past 2 years, growth in output per hour seems to 
have moved off the peak that it reached in 2003. However, the 
cause, extent and duration of that slowdown are not yet clear.
    Energy prices represent a second major uncertainty in the 
economic outlook. A further rise could cut materially into 
private spending and thus damp the rate of economic expansion.
    Judging from the high level of far-future prices, global 
demand for energy apparently is expected to remain strong, and 
market participants are evidencing increased concerns about the 
potential for supply disruption in various oil-producing 
regions.
    More favorably, the current and prospective expansion of 
U.S. capability to import liquefied natural gas will help ease 
longer-term natural gas stringencies and perhaps bring natural 
gas prices in the United States down to world levels.
    The third major uncertainty in the economic outlook relates 
to the behavior of long-term interest rates. The yield on 10-
year Treasury notes, currently near 4.25 percent, is about 50 
basis points below its level of late spring 2004.
    This decline in long-term rates has occurred against the 
backdrop of generally firm U.S. economic growth, a continued 
boost to inflation from higher energy prices, and fiscal 
pressures associated with the fast-approaching retirement of 
the baby-boom generation.
    The drop in long-term rates is especially surprising given 
the increase in the federal funds rate over the same period. 
Such a pattern is clearly without precedent in our recent 
experience.
    Two distinct but overlapping developments appear to be at 
work: a longer-term trend decline in bond yields; and an 
acceleration of that trend of late.
    Some, but not all, of the decade-long trend decline in that 
forward yield can be ascribed to expectations of lower 
inflation, a reduced risk premium resulting from less inflation 
volatility, and a smaller real-term premium that seems due to a 
moderation of the business cycle over the past few decades.
    This decline in inflation expectations and risk premiums is 
a signal development.
    As I noted in my testimony before this Committee in 
February, the effective productive capacity of the global 
economy has substantially increased, in part because of the 
breakup of the Soviet Union and the integration of China and 
India into the global marketplace; and this increase in 
capacity in turn has doubtless contributed to expectations of 
lower inflation and lower inflation-risk premiums.
    In addition to these factors, the trend reduction worldwide 
in long-term rates surely reflects an excess of intended 
savings over intended investment. This configuration is 
equivalent to an excess of the supply of funds relative to the 
demand for investment.
    What is unclear is whether the excess is due to a glut of 
savings or a shortfall of investment. Because intended capital 
investment is to some extent driven by forces independent of 
those governing intended saving, the gap between intended 
saving and investment can be quite wide and variable.
    It is real interest rates that bring actual capital 
investment worldwide and its means of financing global savings 
into equality. We can directly observe only the actual flows, 
not the savings and investment tendencies.
    Nonetheless, as best we can judge, both high levels of 
intended savings and low levels of intended investment have 
combined to lower real long-term rates over the past decade.
    Since the mid 1990s, a significant increase in the share of 
world gross domestic product produced by economies with 
persistently above-average savings, predominantly the emerging 
economies of Asia, has put upward pressure on world savings.
    These pressures have been supplemented by shifts in income 
toward the oil-exporting countries, which more recently have 
built surpluses because of steep increases in oil prices.
    Softness in intended investment is also evident. Although 
corporate capital investment in the major industrial countries 
rose in recent years, it apparently failed to match increases 
in corporate cash flow.
    In the United States, for example, capital expenditures 
were below the very substantial level of corporate cash flow in 
2003, the first shortfall since the severe recession of 1975.
    That development was likely a result of the business 
caution that was apparent in the wake of the stock market 
decline and the corporate scandals early this decade.
    Japanese investment exhibited prolonged restraint following 
the bursting of their speculative bubble in the early 1990s; 
and investment in emerging Asia, excluding China, fell 
appreciably after the Asian financial crisis in the late 1990s.
    Whether the excess of global intended saving over intended 
investment has been caused by weak investment or excessive 
savings--that is, by weak consumption--or, more likely, a 
combination of both does not much affect the intermediate-term 
outlook for world GDP or, for that matter, U.S. monetary 
policy.
    What have mattered in recent years are the sign and the 
size of the gap of intentions and the implications for interest 
rates, not whether the gap results from a saving glut or an 
investment shortfall.
    That said, saving and investment propensities do matter 
over the longer term. Higher levels of investment relative to 
consumption build up the capital stock and thus add to the 
productive potential of an economy.
    The economic forces driving the global saving-investment 
balance have been unfolding over the course of the past decade, 
so the steepness of the recent decline in long-term dollar 
yields and the associated distant forward rates suggests that 
something more may have been at work over the past year.
    Inflation premiums in forward rates 10 years ahead have 
apparently continued to decline, but real yields have also 
fallen markedly over the past year.
    Risktakers apparently have been encouraged, by a perceived 
increase in economic stability, to reach out to more distant 
time horizons. These actions have been accompanied by 
significant declines in measures of expected volatility in 
equity and credit markets.
    History cautions that long periods of relative stability 
often engender unrealistic expectations of its permanence and 
at times may lead to financial excess and economic stress. Such 
perceptions, many observers believe, are contributing to the 
boom in home prices and creating some associated risks.
    And certainly the exceptionally low interest rates on 10-
year Treasury notes, and hence on home mortgages, have been a 
major factor in the recent surge of home building, home 
turnover, and particularly in the steep climb in home prices.
    Whether home prices on average for the nation as a whole 
are overvalued relative to underlying determinants is difficult 
to ascertain, but there do appear to be, at a minimum, signs of 
froth in some local markets where home prices seem to have 
risen to unsustainable levels.
    Among other indicators, the significant rise in purchases 
of homes for investment since 2001 seems to have charged some 
regional markets with speculative fervor.
    The U.S. economy has weathered such episodes before without 
experiencing significant declines in the national average level 
of home prices. Nevertheless, we certainly cannot rule out 
declines in home prices, especially in some local markets.
    If declines were to occur, they likely would be accompanied 
by some economic stress, though the macroeconomic implications 
need not be substantial.
    Historically, it has been rising real long-term interest 
rates that have restrained the pace of residential building and 
have suppressed existing home sales, high levels of which have 
been the major contributor to the home equity extraction that 
arguably has financed a noticeable share of personal-
consumption expenditures and home-modernization outlays.
    The trend of mortgage rates or long-term interest rates 
more generally is likely to be influenced importantly by the 
worldwide evolution of intended saving and intended investment.
    We at the Federal Reserve will be closely monitoring the 
path of this global development few, if any, have previously 
experienced.
    As I indicated earlier, the capital investment climate in 
the United States appears to be improving following significant 
headwinds since late 2000, as is that in Japan. Capital 
investment in Europe, however, remains tepid.
    A broad worldwide expansion of capital investment not 
offset by rising worldwide propensity to save would presumably 
move real long-term interest rates higher. Moreover, with term 
premiums at historical lows, further downward pressure on long-
term rates from this source is unlikely.
    We collectively confront many risks beyond those I have 
mentioned. As was tragically evidenced again by the bombings in 
London earlier this month, terrorism and geopolitical risk have 
become enduring features of the global landscape.
    Another prominent concern is the growing evidence of 
antiglobalization sentiment and protectionist initiatives, 
which if implemented would significantly threaten the 
flexibility and resilience of many economies.
    This situation is especially troubling for the United 
States, where openness and flexibility have allowed us to 
absorb a succession of large shocks in recent years with only 
minimal economic disruption. That flexibility is, in large 
measure, a testament to the industry and resourcefulness of our 
workers and businesses.
    But our success in this dimension has also been aided 
importantly by more than two and a half decades of bipartisan 
effort aimed at reducing unnecessary regulation and promoting 
the openness of our market economy.
    Going forward, policymakers will need to be vigilant to 
preserve this flexibility, which has contributed so 
constructively to our economic performance in recent years.
    In conclusion, Mr. Chairman, despite the challenges I have 
outlined and the many I have not, the U.S. economy has remained 
on a firm footing, and inflation continues to be well 
contained. Moreover, the prospects are favorable for a 
continuation of those trends.
    Accordingly, the Federal Open Market Committee in its June 
meeting reaffirmed that it believes that policy accommodation 
can be removed at a pace that is likely to be measured. 
Nonetheless, the Committee will respond to changes in economic 
prospects, as needed, to fulfill its obligation to maintain 
price stability.
    Thank you very much.
    I look forward to your questions.
    [The prepared statement of Hon. Alan Greenspan can be found 
on page 53 in the appendix.]
    The Chairman. Thank you, Mr. Chairman.
    And of course I think it is appropriate that your final 
appearance before the committee ended with price stability, 
because indeed, as you have indicated at least 35 times before 
this committee, that ultimately is the charge of the Fed--and 
you have performed extraordinarily well.
    I mentioned in my opening statement the fact that it 
appears now that federal revenues for the first quarter of this 
year have caused a lowering of the expected size of the budget 
deficit, perhaps as much as $100 billion.
    The evidence would indicate that most of that revenue came 
from capital gains and dividend taxes--and, at least in most 
quarters, is greeted with a lot of favor.
    Has the Laffer Curve come back or is this a temporary 
phenomenon that may be different, say, in the current quarter?
    Mr. Greenspan. Well, certainly, Mr. Chairman, dividends are 
higher; and indeed, to that extent, the overall general outlook 
for profitability has clearly had a substantial impact on the 
revenues to which you allude.
    It is too soon to actually make judgments about exactly 
where those revenues are coming from. We do know it is non-
withheld, we do know it is corporate taxes, and we are even 
getting some in the withheld area.
    So it is a fairly broad expansion which does relate 
directly to the level of economic activity, which does seem to 
be expanding at a reasonably good pace.
    Now, we will not know in full detail until we get the 
statistics of income--which is often, of course, quite late--to 
get the full detail of exactly what is happening.
    But I would say that, as I have indicated on many 
occasions, I do think that the particular characteristic of 
recent taxation, which has eliminated part of the double 
taxation of dividends, has contributed to economic growth.
    We do not know that yet, and we will not know that for a 
number of years, because it is only in retrospect that we will 
be able to make that judgment fully.
    But at least I would say that is my impression, or at least 
I cannot see anything which contradicts that at this particular 
moment.
    The Laffer Curve is a much broader question, which I do not 
think I have time to discuss. But in general I must say I am 
pleased with the revenue increases that have occurred because 
it is a reflection of an economy which is doing well.
    The Chairman. I just threw that ``Laffer Curve'' in as kind 
of an enticement, to get your attention.
    [Laughter.]
    Let me ask you about this. When you were here in February 
you indicated the need to basically migrate our Social Security 
system toward individual accounts, particularly as it related 
to capital formation and giving us the ability to have the 
capital necessary to keep our economy strong and create jobs 
and growth.
    Have you had any different ideas or change of mind since 
February?
    Mr. Greenspan. No, but I think it is worthwhile reviewing 
where we are relative to this issue.
    We know, with as high a level of certainty as you ever can 
gather, that we are going to get a very substantial 
acceleration in the number of retirees in this country starting 
in 2008; but we also know that the next generation coming in 
behind the baby boomers is much smaller, which means that the 
working labor force is going to grow at a relatively small, a 
very small, rate.
    This means that we are going to have a very substantial 
amount of people not productive, in the way they had been when 
they were in the workforce, essentially being supplied with 
goods and services by a labor force which is growing rather 
slowly.
    It is very difficult to convey how important it is when you 
take as productive a group of people coming out of the baby-
boom generation--and they are now in their most productive 
years--and you move that group into retirement. Its impact is 
very substantial.
    But the major point I want to make is that Social Security 
has over the years, largely because of the demographics that we 
have observed in recent generations, been able to replace 
roughly 40 percent of the incomes that workers had prior to 
retirement.
    It strikes me that it is going to be very difficult to 
deliver that in real terms because of the extraordinary 
demographic shift which we are about to experience.
    But it is certainly also going to be the case that retirees 
are going to need something like 80 percent of their 
immediately pre-retirement income to maintain a reasonable 
standard of living, and that means a very substantial part of 
retirement resources is going to come from other than Social 
Security, of necessity; and that inevitably means private 
pension funds, defined benefit, 401(k)s, personal savings, 
other forms of income, and I suspect that we will require 
fairly significant expanding forms of private savings 
initiatives.
    And one of the reasons why I have been supportive of moving 
a significant part of Social Security toward private accounts 
is to develop that particular process.
    I have nothing, basically, new to say on the issue than 
what I discussed with you in February.
    The Chairman. Thank you, Mr. Chairman.
    My time has expired.
    The gentleman from Massachusetts?
    Mr. Frank. Thank you, Mr. Chairman.
    I do have to note one further example, among many, of your 
discretion, when the chairman asked you about the Laffer Curve.
    You said--it was fairly early in his 5 minutes--that you 
did not have the time to answer it. There is an old, crude 
joke: ``Do you have the time?'' ``Well, if you have the 
inclination.''
    My inference, frankly, is that you had the time but not the 
inclination. I honor that, and I understand it. I think it is 
very discreet.
    I want to go back to the point I raised before, and that 
is--and I agree with you, we have this resistance to many of 
the measures that have been helpful, that I think would be 
helpful. I may disagree on some. And we have had a bipartisan 
cooperation in many of these areas, going back to President 
Carter and others, who did deregulation.
    But people need to understand, people in the business 
community need to understand, that bipartisan cooperation is 
breaking down in the economic area--and I am not talking about 
bickering or squabbling; I am talking about profound 
philosophical differences.
    Many of us are convinced that we are in a situation now, 
because of information technology, globalization, and a lot of 
other factors which are, in many ways, benign, but they combine 
so that we are getting increased growth with increased 
inequality.
    You yourself have commented on this trend. You told the 
Joint Economic Committee over a year ago that a substantial 
part of the increased wealth and productivity was going to 
corporate profits.
    In fact, what you said was that--this is a little over a 
year ago: ``The consequence was a marked fall in the ratio of 
employee compensation to gross non-financial corporate income 
to a very low level by the standards of the past 3 decades.'' 
Now, we had unemployment, but people are celebrating a decline 
in unemployment.
    But reading Paul Krugman's article in July, my attention 
was called to a policy paper done of the Boston Federal 
Reserve, by Katharine Bradbury.
    And you are justly proud, I know, of the high-quality work 
that is done by your analysts. I do not know if you have had a 
chance to look at this one. It is a fairly recent policy brief.
    But her point is very straightforward: ``Decrease in 
unemployment is substantially because of a decrease in the 
labor participation rate. Improvements in the unemployment rate 
overstate the strength of the recovery, since the nation's 
labor force participation rate has not rebounded to date.''
    Even after job counts began to rise and joblessness 
subside, however, the fraction of the population that is 
employed did not increase, and it has not improved measurably 
to date.
    And that also, of course, is one of the reasons why we have 
not seen any increase in wages. And you noted in 2004 that 
wages were depressed. You have said yes, the wage sector is 
going up.
    But again, as your Monetary Report--and I am consistently 
grateful for the intellectual honesty and clarity of these 
reports--that is largely because of stock options and bonuses, 
so that people working for hourly wages----
    And I am going to ask to put in the record here a chart 
that Mr. Morris on my staff has prepared from Department of 
Labor, Department of Commerce data. Real wages, average hourly 
earnings for production and non-supervisory workers, adjusted 
for inflation, 2001, $14.52. As of June of this year, $14.05: a 
47-cent-per-hour decrease.
    Now, it is one thing for people to experience a decrease 
when they read about bad economic times; it is another when 
they read celebrations of how well the economy is doing but 
they are not doing well.
    That, to me, is the explanation for the phenomenon you 
deplored in your statement, about the ``growing resistance.''
    Why do you think we are running into this growing 
resistance? Would you agree, or do you have some other 
explanation? I mean, do workers suddenly turn mean and surly or 
what?
    Mr. Greenspan. Congressman, first let me just say that we 
at the board do have some questions about that Boston Federal 
Reserve study.
    Very specifically, it fails to take into consideration, in 
our judgment, certain important structural changes, such as the 
fact that in early years we had an extraordinarily rapid rise 
in participation in the labor force of adult women. We finally 
got to the point when it would flatten out----
    Mr. Frank. Let me withdraw that, then.
    But I would be interested, subsequently: Why do you think 
we are encountering this resistance, this potential threat to 
the bipartisan consensus for flexibility?
    What do you think the reason is?
    Mr. Greenspan. I think the reason is basically that we are 
developing a bivariate labor market, as I have indicated in 
previous periods, and I think I did in February testimony here.
    We have an oversupply of high-skill jobs and an undersupply 
of people to fill them, the effect of which is to create a 
significant acceleration in average incomes of the highly-
skilled segment of our labor force.
    And that, as you recall, I attribute to the fact that we 
have been unable in our educational institutions to move our 
younger people sufficiently quickly from grade 4 through high 
school, into college and beyond, at a pace which would create 
an adequate supply of the number of skilled workers which we 
need--which, incidentally, would bring the wage increases 
down--but also simultaneously remove an excess of lesser-
skilled workers, which are depressing----
    Mr. Frank. I understand. But we have got the people--as you 
and I understand, that is for the future.
    We have got tens of millions of people who are beyond the 
educational stages. How do you deal with that? What is your----
    Mr. Greenspan. Well, I was basically saying that the reason 
that a substantial part of our labor force feels as though it 
is not getting the benefits of the increased production is 
essentially a function, in my judgment, of problems in our 
educational system.
    Mr. Frank. First of all, I would just quibble with ``feels 
as though.'' There has been a drop in their real wages.
    Secondly, though: We could agree on improving the 
educational system, but there are people in their 30s and 40s 
and 50s who are very, very unlikely to be affected by that. 
What do we do about them?
    Mr. Greenspan. No, I----
    Mr. Frank. Because if you do not do anything about them, 
you will continue to complain about this rise in resistance--
because it is not that they ``feel'' it, it is that that they 
are in fact experiencing it.
    Mr. Greenspan. Yes. First of all, I do not envisage our 
education system as one which takes young people, graduates 
them, and they never see school again.
    As you well know, better than I, our community colleges 
have very substantial enrollment, and indeed they are the most 
rapidly growing part of our educational system, and they are 
predominantly people----
    Mr. Frank. Paid for with tax dollars, government entities--
--
    The Chairman. The gentleman's time has expired.
    The gentlelady from Ohio?
    Ms. Pryce. Thank you, Mr. Chairman.
    Mr. Chairman, if you do not mind, let us talk about data 
breach for a little bit, and I would really appreciate your 
insight as to how it has been affecting consumer confidence and 
to what effect.
    As we pursue some legislation here in this committee, do 
you agree we should have a national standard?
    I would appreciate any thoughts or----
    Mr. Greenspan. National standards on what?
    Ms. Pryce. On what constitutes a breach or anything--a 
national standard on any portion of legislation that would come 
out of this committee, what we should do, what we should not 
do.
    We do not want to make a situation that is pretty terrible, 
with implications that I believe are staggering, in terms of 
identity theft and misuse of other people's credit and--we have 
to proceed cautiously, and I am just looking for you to help us 
here.
    Mr. Greenspan. Yes. It is a very tough and, frankly, 
discouraging issue.
    We obviously have equivalent issues at the Federal Reserve 
in protecting our information, and what we have tended to do is 
create redundancies in our mechanisms and procedures so that in 
the event that certain structures fail, we have ones that can 
come up and create support.
    That is expensive, and the problem that we are always 
trading off on all of these types of issues is how much risk, 
how much loss, how much disruption are we willing to accept as 
a minimum? Because we could eliminate that completely, but at a 
very significant cost.
    I am not sure I could add very much to your judgments with 
respect to what type of legislation, how it would be done.
    I am quite familiar with encryption capabilities and a 
variety of other issues that we employ.
    But when we are dealing with shipments of millions of names 
going all over the country, either electronically or in the 
back of trucks, something is going to drop off the back of the 
truck, and the only way to avoid that is to double up on 
efforts.
    There is no simple solution. There is probably no cost-free 
solution. And I think it is a tough judgment to make, as to how 
far you want to bring that issue to the forefront.
    I cannot judge because I am not familiar with the 
individual natures of the problems that clearly show up in the 
newspapers periodically, to my chagrin.
    Ms. Pryce. Well, as we go, you know, the payment system 
from cash and checks to more a credit base, credit cards and 
debit cards, I think we have to address this as a government, 
and we do want to proceed cautiously.
    The consumer confidence issue is one that I can see 
severely affecting our economy.
    Mr. Greenspan. Yes. Fortunately, we have not yet seen any 
impact on national consumer confidence from any of these 
issues.
    But it should not be an issue of consumer confidence; it 
should be an issue of doing something which is important for 
protecting consumers.
    Ms. Pryce. That is correct.
    All right. I appreciate the gentleman's candor on that and 
look forward to working with you.
    And I yield back.
    The Chairman. Gentlelady yields back.
    The gentlelady from California, Ms. Waters?
    Ms. Waters. Thank you very much, Mr. Chairman and members.
    I would like to thank Mr. Greenspan for being here on this 
Monetary Policy Report to Congress.
    I know that when you come, we utilize this as an 
opportunity to ask you about all things we are concerned about, 
that we think you have some information on.
    As you know, we are going to be involved with a vote here 
in another week or so, perhaps, on CAFTA.
    The arguments for CAFTA are ones that, of course, you are 
very familiar with--may have even led on, I am not sure--that 
talk about how this will help us to reduce the trade deficit 
and how we can perhaps get the manufacture and production of 
cheap goods and products, that will cause our businesses to be 
able to profit because of the reduction in costs, that some of 
us are concerned about the outsourcing or the jobs that go 
offshore because we think that these jobs are very important to 
our own citizens, and even those jobs that do not pay huge 
wages.
    There are some people, whom you correctly identified or 
alluded to, who may not have benefited from our educational 
system in ways that they should; but they deserve to have a job 
also, and to work, and to have a decent quality of life.
    I do not know where you stand on CAFTA. I would like to 
hear what you think.
    How do we benefit from the passage of CAFTA?
    Mr. Greenspan. CAFTA is part of a broader issue of the 
extent to which we, the United States, want to engage in 
globalization.
    Globalization has two aspects to it, as best I can judge. 
One, it undoubtedly enhances standards of living worldwide, and 
indeed those economies that engage in international trade have 
invariably been boosted--and this has been especially the case 
since the end of World War II, and the United States has 
probably been the economy which has benefited the most.
    That process, however, of globalization is one of creative 
destruction in the sense that we are continuously competing 
and, in the process, we increase standards of living by 
essentially moving the depreciation from obsolescent facilities 
to cutting-edge equipment.
    And in fact, it is the difference between the two's 
productivity where standards of living come from. But that 
process is very disruptive, and indeed it is associated with a 
very large turnover of the labor force.
    As I have mentioned here previously, we hire in this 
country 1 million workers a week, and indeed people lose jobs 
in very large volumes every week as well. There is a large 
churning that goes on.
    To the extent we wish to secure jobs, to the extent that we 
wish to secure businesses from this competition, it will 
increase a sense of security, but it will do so at the expense 
of a lower standard of living.
    And the choice the Congress has to make--because indeed it 
is the Congress which makes these valued choices for the 
American people--is: To what extent do we wish to engage in 
international trade--of which CAFTA is just merely one aspect 
of it--with its churning, with its insecurities, but with its 
higher standards of living, or to what extent do we prefer a 
more tranquil, protected type of a society? And this is a very 
difficult judgment.
    I personally have argued very strenuously that I think that 
the globalization route is by far the superior route, because 
protection may appear to be helpful in the short run, but over 
the long run you cannot protect industries or jobs which are 
obsolescent.
    And I think that what we have to do is to move forward, as 
best we can, in globalization but to recognize that those who 
are the inevitable losers in this churning process be protected 
in some form--in other words, to address, either through 
retraining or other means, that there are losers in this 
process, and we should, as a civil society, endeavor to find 
means to recognize that fact.
    The Chairman. The gentlelady's time has expired.
    Ms. Waters. Thank you.
    The Chairman. The gentleman from Iowa, Mr. Leach?
    Mr. Leach. Thank you very much.
    An analog to this discussion. Your former colleague at the 
Federal Reserve, Mr. Bernanke, has emphasized that there is a 
savings glut in the Far East and a savings paucity here.
    In your statement today you have noted that in the Middle 
East savings has gone up to about a third of GDP. So there 
implicitly is a savings glut in the Middle East.
    Do you have any advice to these two regions--and it could 
be quite separate--on what should be done with this savings?--
particularly if it is different than is currently being 
managed.
    Mr. Greenspan. Well, you are sort of putting me in a 
position to advise large segments of the world about what they 
ought to do. I appreciate that.
    [Laughter.]
    Mr. Leach. Well, the Federal Reserve has the capacity to 
bail out large segments of the world----
    Mr. Greenspan. I would point out, however, in my prepared 
remarks I do raise an issue--which I think is an important 
issue, sir--about the question of the geographical location of 
crude oil reserves being relatively concentrated; and that 
means that the productive capacity--that is, the conversion of 
those reserves into the capability of lifting crude oil--
requires a very significant amount of capital investment and 
that the vast majority of these oil-producing countries do not 
look favorably upon foreign investment because they consider 
their experiences in the past to be undesirable in that regard.
    And yet because these are growing populations in these oil-
producing areas, they perceive the need for the revenues that 
are coming from the oil production to go to domestic needs and 
not in any substantial extent to be reinvested to increase 
crude oil capacity on the reserves that they already have; and 
it strikes me that we are in a position where world oil demand 
is rising and is rising at a pace which is going to require 
significant amounts of capital investment.
    And how that is essentially resolved, whether the resources 
of international oil companies or others to invest in 
productive capacity in these areas is allowed--I mean, for 
example, in Mexico, as I am sure you know, there is a 
constitutional amendment which prohibits international, foreign 
investors engaged in that resource, and Pemex, the national oil 
company in Mexico, is pressuring to see if that prohibition 
could be reduced, because they perceive the need for the 
capital and the expertise to drill in areas in deep waters in 
the Gulf of Mexico where they know significant amounts of oil 
are available.
    So it is a very difficult question. So far as emerging Asia 
is concerned, they seem to be doing quite well, and in my 
judgment, will eventually resolve that question of their excess 
flow of savings.
    Mr. Leach. Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The gentlelady from New York, Ms. Maloney?
    Mrs. Maloney. Thank you, Mr. Chairman.
    Chairman Greenspan, last week the administration issued its 
Mid-Session Review of the budget, showing that the deficit in 
2005 will be lower than we thought it would be back in January.
    My question is: Do you agree with analysts, like those at 
Goldman Sachs, who point out that much of the improvement in 
2005 comes from temporarily-high corporate profits and the 
expiration of the temporary tax cut on business investment?
    Mr. Greenspan. Oh, I think that is correct, but I think OMB 
recognizes that as well.
    Mrs. Maloney. And so then you do agree with the former CBO 
director, Holtz-Eakin, that once you go out a few years, the 
budget outlook is about the same as it was in January?
    Mr. Greenspan. I am not sure about that, and the reason, 
basically, is that we can disaggregate revenues and we can make 
adjustments for what we perceive to be the cause of this surge, 
at least on the individual side, which is increased bonuses and 
presumably a significant increase in exercise of stock options 
as well as capital gains realizations.
    But even after you account for that, you have unknown 
changes that are going on, the so-called technical adjustment--
which is what, for example, Treasury uses to translate its 
forecasts of taxable income into taxable receipts. As I 
mentioned earlier, we really will not have a good insight into 
the sources of these revenue increases this year until we see 
the statistics of income, which are published, a couple of 
years from now. So we really will not know until we look 
backwards.
    I do think anybody who is projecting from here forward with 
respect to revenues is confronted with some significant 
elements of uncertainty. But I would not necessarily say that 
either the longer-term views that the most recent revenues are 
wholly temporary or those who believe that the revenues will 
continue at the same levels are probably correct.
    The answer is probably somewhere in the middle.
    Mrs. Maloney. So your answer is: Yes, probably yes. 
Correct?
    Mr. Greenspan. I am sorry, ``yes'' is what?
    Mrs. Maloney. Probably ``Yes'' for both the Goldman Sachs 
and the CBO director?
    Mr. Greenspan. No, not necessarily. I would say that yes, 
that it is probably in between where OMB is and Goldman Sachs, 
if I had to guess. But it is a guess.
    Mrs. Maloney. Okay.
    Mr. Greenspan, is there sufficient strength in the labor 
market to justify the continued rate hikes?
    And I would like to cite that after the 2001 recession, 
this was followed by really the most protracted job slump we 
have seen since probably the 1930s. And was it not common in 
the expansion of the 1990s, for example, to see payroll 
employment growth of over 200,000 jobs per month, and has it 
not been rare to see that kind of job growth in this economy?
    And I am sure that you are familiar with the study that has 
been cited recently by Katharine Bradbury of the Federal 
Reserve Bank of Boston, calling attention to how the labor 
force participation rate has not recovered as it usually does 
in an economic expansion; and does not that raise questions 
about whether there is some hidden unemployment not being 
captured in the official unemployment rate?
    And finally, wage growth has not kept up with inflation, 
and most of the productivity gains achieved over this expansion 
have gone into profits and not into the wages of the working 
men and women of this country; and my main question is: Does 
the Fed take into account all this evidence that there may 
still be a considerable slack in the labor market when it 
decides whether or not to keep raising interest rates?
    Mr. Greenspan. Well, Congresswoman, let me say, as I was 
mentioning to Congressman Frank: That Boston study presumes 
that 1 to 3 percentage points of the decline in the 
participation rate is as a result implicitly of the conditions 
you are suggesting.
    We at the board, doing similar type of analysis but 
addressing it somewhat differently, believe that the number is 
actually less than a half a percent; and that is strictly a 
technical issue, that we think certain calculations that were 
made at the Boston Fed inadequately captured what was going on.
    Having said that, let me just go further with respect to: 
It is the case that the 80 percent of our workforce which are 
production workers do have a very slow rate of growth in 
average hourly earnings, real and even nominal, in that 
respect.
    One of the reasons--other than the issue that I raised 
earlier; namely, the educational question and the skill and the 
imbalances--is that the benefit levels have gone up very 
substantially, and what tends to happen, as best that we can 
judge, is that ultimately benefits are paid by the employee and 
that if benefits go up the way labor market pressures tend to 
work, the aggregate package is what is determined in the 
markets, and it is essentially the individual workers who, over 
the long run, determine what the mix is.
    I think that there is a really serious problem here, as I 
have mentioned many times before this committee, in the 
consequent concentration of income that is rising as a result 
of what is a very obvious case of a major requirement to 
increase the skill level of the capital stock which we need to 
move forward and maintain high levels of productivity and the 
supply of workers that we create to essentially staff that 
capital stock. And the reason that we are getting this very 
disparate earning pattern is--and I will repeat again--where 
something is deficient, at least in an international context, 
of how we deal with our workforce as they come out of school 
or, more exactly, as they move through the educational system.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Alabama?
    Mr. Bachus. I thank the chairman.
    Chairman Greenspan, on Page 5 of your report there is a 
chart on personal savings. I also read a recent report by the 
American Institute of Certified Public Accountants that says 
because of the decline in personal savings America is on a 
collision course with disaster.
    Is that an overstatement or----
    Mr. Greenspan. Yes, sir.
    [Laughter.]
    Mr. Bachus. All right. Good.
    How serious is it? And let me ask you this. We hear 
figures--the Department of Commerce recently made a statement 
that Americans are spending $1.22 for every dollar they earn; 
yet we hear that personal savings rates are 0.5 percent of 
disposable income, or 3 percent. They are obviously below the 8 
percent or 12 percent or 10 percent rates.
    But how serious is the problem of decline in personal 
savings rates?
    Mr. Greenspan. It is difficult to tell. I think one of the 
issues here is to distinguish between what households perceive 
they are saving, and if you survey them, they are perfectly 
satisfied; and the reason that they are satisfied and these 
numbers look very low is that they are two different measures.
    The average household, when the value of their 401(k) goes 
up or they are holding stocks that go up, see their net worth 
go up, and as far as they are concerned, they are pleased by 
it; however, for national income accounting--which is basically 
what this personal savings rate endeavors to capture--you have 
to extract all capital gains out of the system.
    While an individual who has just, say, sold a home or some 
stock and has got real cash, they do not distinguish between 
whether they got that from wages and salaries or from capital 
gains. It is purchasing power, and that is savings, as far as 
they are concerned.
    But, without getting into the economics of this, capital 
gains do not finance capital investment. Only savings, at its 
book value, if I may put it that way, do that. And as a 
consequence, we have reasonably high capital investment in this 
country, but we do not have enough domestic savings and 
personal savings as part of that to finance it.
    A significant part of our investments are, as you know, 
financed by borrowing from abroad, and that is our current 
account deficit.
    So in the sense that we do not have adequate domestic 
savings and we cannot count indefinitely that we will be able 
to borrow at the rate we are borrowing from abroad, clearly, 
then, our savings rate is inadequate, and we must address that 
over the longer run.
    Mr. Bachus. And you have said earlier today that the baby 
boomers beginning to retire is simply going to accelerate this 
decline in personal savings rate?
    Mr. Greenspan. I would think that will be the case, yes.
    Let me just say parenthetically: I do not expect that the 
personal savings rate will stay down this low indefinitely. 
Part of it is related to the fact that there is a very 
significant amount of extraction of equity from homes in this 
country financed by mortgage debt.
    Since the debt which is employed in doing that is a 
subtraction from savings, you will find that that is a major 
factor creating the low level of savings; and when equity 
extraction slows down, as eventually it will at some point, I 
think you will find this personal savings rate starting back 
up.
    Mr. Bachus. Now, you mentioned some other concerns about 
this. One was federal spending and the amount of the federal 
deficit. So obviously one thing that we in Congress could do 
would be: try to reduce federal spending. Is that----
    Mr. Greenspan. That would be most helpful. And indeed I 
have testified before this committee on numerous occasions, as 
well as other committees in the House and Senate, that this is 
a critical aspect of the long-term planning of this country and 
that, unless we address that issue I think we are in 
potentially serious difficulty as we move into the next decade.
    The Chairman. The gentleman's time has expired.
    The gentlelady from New York, Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Greenspan, the recent suicide bombings in London 
highlight the growing threat that terrorism plays in our 
society. From an economic perspective, the London bombings will 
only add to the government's investment in security.
    The federal government is set to spend over $30 billion on 
homeland security, while it is estimated that private sector 
expenditures for homeland security may double from pre-2001 
levels to over $100 billion per year.
    The threat of terrorism has clearly changed the spending 
priorities of government at all levels and businesses across 
the country. No one can argue with the goals of this 
investment, as it is necessary to ensure the safety of our 
country.
    But from your perspective, what is the effect of this 
higher level of investment in homeland security; and do you 
have concerns that it will lead to lower economic growth as 
investment flows to less-productive sectors?
    Mr. Greenspan. Well, I would agree with the way you put the 
issue, Congresswoman.
    Obviously, to the extent that a society devotes part of its 
resources for protection, those resources cannot also be used 
to produce goods and services or increase productivity.
    We have been fortunate in this country that--I would have 
assumed, following 9/11/2001, that we would see some impact on 
productivity as a consequence of the increased efforts that 
were devoted, the diversion of resources, toward protection. It 
did not happen that way. Indeed, as you know, our productivity 
actually accelerated.
    But there is no question that the use of those resources 
are displacing resources that would otherwise be used for 
productive purposes, and this is one of the reasons that the 
Congress has to make the judgment as to: at what level do we 
try to insure ourselves against this sort of violence.
    Ms. Velazquez. Mr. Chairman, due to the job losses in 
manufacturing and the sluggish hiring we are seeing in 
corporate America, many individuals are entering the growing 
ranks of the self-employed.
    The most recent Labor data suggest that self-employed 
workers constitute a growing segment of the U.S. labor market. 
Many have become self-employed out of necessity, with no other 
option but to seek out any work they can locate on their own.
    While this helps keep corporate America's expenses lean, 
the newly self-employed often must purchase health or 
retirement coverage, at great cost, or go without such benefits 
altogether.
    If this trend were maintained, what would be the long-term 
economic effect of this shift toward higher self-employment?
    Mr. Greenspan. Well, fortunately, Congresswoman, I think 
that the trend has changed. In other words, the very most 
recent data do suggest that there is an increasing return of 
self-employed to the corporate sector more generally.
    And incidentally, one of the reasons I suspect it is 
probably happening is that medical costs being provided by 
corporate organizations are attractive to a number who are not 
doing as well, self-employed, as they would like.
    Clearly, it is an issue here of: Do we like to have a lot 
of self-employed in the country? Of course we would. Do we want 
to have them because they lost jobs? The answer is, of course: 
not.
    But I think the facts are that this is not becoming an 
ever-increasingly difficult problem, and I trust that it will 
continue to be that way in the future.
    Ms. Velazquez. Thank you, Mr. Chairman.
    The Chairman. The gentlelady's time has expired.
    The gentleman from the first state, Mr. Castle?
    Mr. Castle. Thank you, Mr. Chairman.
    Chairman Greenspan, I am also interested in some of the 
data security issues that I understand Mrs. Pryce spoke to you 
about. Unfortunately, I had to handle an amendment in another 
committee, so I have just come back and missed some of that.
    But let me ask you, first and foremost, just to make sure 
this is clear. As you know, the various states have been 
dealing with this, passing legislation in a variety of ways.
    Is it your judgment that this is an issue in which federal 
preemption is essential, at least in large part, or would you 
make exceptions in certain areas, versus state legislation?
    Mr. Greenspan. I missed your point. What issue?
    Mr. Castle. I am sorry. The data security issue and the 
protection of data.
    Mr. Greenspan. Yes.
    It is hard for me to answer that. In other words, the self-
interests of the people who handle data, and that those data be 
secured, is so extraordinarily high, I just balk at the notion 
that anyone has to tell them what their self-interest is. I 
cannot believe that we need regulations to tell people how to 
make a profit. And in this regard, unless they protect those 
data, they are going to have some very serious problems.
    Mr. Castle. Just as a matter of discussion--I agree with 
you, obviously, completely on that. I personally feel we do 
have to do something on the federal level. I do feel that you 
cannot have 50 different state laws on a variety of these 
issues.
    Mr. Greenspan. Okay. If you are asking whether it is better 
to have fewer laws than a proliferation of state laws on this 
issue, I would say, Of course.
    Mr. Castle. Right.
    Mr. Greenspan. But I just hesitate to accept the overall 
concept that this is something which is a federal issue or 
government issue, in the broadest sense, to the extent that we 
are making it.
    Mr. Castle. Right. I agree with you on that too, but 
unfortunately the media drives this to a degree. And I worry 
about overnotification. I worry about the fact we overreact, to 
a great degree, about these various things. So your concerns 
are legitimate.
    On the other hand, it seems to me, under Gramm-Leach-
Bliley, that we did a lot to address this as far as financial 
institutions are concerned. But then you have a heck of a lot 
of other people, it turns out, who are dealing with data, 
companies--we hear their names, we do not even know what they 
do--who are not under any kind of a regulator at this point, 
and they are into the enforcement side of it, I guess, under 
the FTC.
    So as a result, I think that is where a lot of the breaches 
have been. I mean, some of the stuff is amazing to me. I mean, 
it is in transportation, it is in----
    Mr. Greenspan. It is remarkable.
    Mr. Castle.--not encrypting it at all. I mean, it is just 
amazing that it happens. So I think that we need to do 
something.
    Mr. Greenspan. Yes. I would certainly say this, that this 
issue has to be resolved. I mean, it cannot fester, because I 
think we will have some serious consequences. It has not, 
really, yet, but it could.
    And I do not deny that where issues of legality are 
involved statutes are required for clarification and 
understanding whose rights are in what particular area. I have 
heard some incredibly complex stories of people who, for 
example, had outsourced certain types of projects with a huge 
number of names which they had collected which got lost, and 
they are responsible.
    So the question of ``Who is legally responsible under those 
sorts of conditions?'' is a critical issue which the law has to 
address.
    I am just basically saying what I am a little concerned 
about, is that we all of a sudden have this major advance in 
technology--which is the whole electronic system--and that it 
is making major incursions into many areas where huge progress 
is occurring, and I am a little worried that we will stifle the 
process if we overdo it.
    But if you are getting at the issue on responsibility, on 
who has responsibility in the event of event X----
    Mr. Castle. Right.
    Mr. Greenspan.--which is a legal question, then anything 
that clarifies that, I think, is essential.
    Mr. Castle. Would be helpful, right.
    I think there are consumer issues as well, the consumer 
reaction. All of us here in this room are consumers, probably, 
of all this, and how would we react to different notices we 
get. I mean, that is a whole other area that is very, very 
difficult, in terms of what we do, credit freezes and stopping 
our credit cards and that kind of thing. So I think we have to 
do a lot of work there.
    But I appreciate your thoughts on it.
    I yield back to the chairman.
    The Chairman. The gentleman yields back.
    The gentlelady from Oregon, Ms. Hooley?
    Ms. Hooley. Thank you, Mr. Chairman.
    Thank you, Mr. Greenspan, for appearing today.
    According to a letter you wrote to the Joint Economic 
Committee of Congress, you said, ``High energy costs are 
forecast to shave three-quarters of a percentage point off this 
year's growth to the U.S. gross domestic product.'' You also 
noted that ``The U.S. economy seems to be coping pretty well 
with the runup of crude oil prices, aside from these 
headwinds.''
    Well, I know many middle-income families making the 
decision of whether or not to take a vacation this summer might 
disagree with you.
    Rising gas costs of well over $2.50 a gallon certainly 
impacts a majority of family budgets. And in my state, of 
Oregon, we are suffering still a 6.5 percent unemployment rate, 
and many people would argue that impact is already being felt.
    My question is: If the economy is coping well and these are 
only headwinds, at what point do the rising gas prices pose a 
serious threat to our markets and economy; and at what price 
level will our economy no longer be able to cope?
    Mr. Greenspan. Well, Congresswoman, it depends not only on 
the level of prices but on the pace of change, and the reason I 
say that is, what we seem to do with gasoline consumption, and 
probably diesel as well, is: When prices go up, we consume just 
the same amount of gasoline, largely because we do not curtail 
our travel very much.
    If you look at the aggregate amount of motor gasoline 
consumption in the face of this very sharp rise in price, you 
will be hard-pressed to find any reduction. Yet what we do know 
from experience is that while people do not cut their mileages 
down very much, they do tend, when prices go up, to buy cars 
and trucks with much better fuel efficiency.
    And so over time, if prices stay up, what is going to 
happen is that the amount of gasoline consumed is going to go 
down, and indeed it could go down quite considerably. People 
will be traveling in lighter cars, more fuel-efficient, maybe 
more hybrids.
    One thing about Americans is that our cars are critical to 
our day-by-day existence, and they do notice when gasoline 
prices go up; and it probably does curtail other forms of 
spending. Indeed you can see it in certain income groups, where 
high gasoline prices lead to less purchases elsewhere. But what 
they do not do is drive fewer miles. At least that is what the 
data suggests.
    Ms. Hooley. I would like to take just a different tact, 
very shortly, and talk a little bit about the currency prices 
in China.
    Sixty percent of China's economists think they should allow 
the country's currency to increase in value sometime this year.
    Would you advocate a gradual increase in the value of 
Chinese currency; and what would be the impact on both the 
American and global economy; and if China refuses to increase 
the value of their currency significantly, would you advocate 
imposing punitive tariffs against China's imports?
    Mr. Greenspan. Well, first of all, I have said previously 
that I believe it is in China's interest to allow its currency 
to move up, largely because the procedures that it uses to 
support its currency requires that their central bank 
accumulate very large quantities of U.S. Treasury securities.
    Unless they sterilize that very substantial inflow, they 
create significant distortions in their financial system, and 
ultimately it could be very serious for the Chinese economy.
    They know that, and they have said that they intend to 
adjust the currency. The issue that seems to be on the table is 
when, and what is the nature of the change?
    I would not be in favor of a significant punitive tariff, 
so to speak, largely because I do not think, one, it will 
accomplish what a lot of people think it would--namely, 
significantly improve jobs and manufacturing in the United 
States. But also because the global system is something which 
is terribly important, not only to the world at large but very 
specifically to the United States. And anything that we do 
which restricts world globalization, at the end of the day, 
redounds to our disadvantage.
    The Chairman. The gentlelady's time has expired.
    Ms. Hooley. Thank you.
    The Chairman. The gentleman from California, Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Greenspan, it is nice to have you back before our 
committee, and I hope we will continue to hear from you in the 
future. I hope you will be a visitor in years to come.
    I would like to also add that I am most appreciative of the 
many years of service you have given to the United States of 
America and the wise counsel that you have shared with us on so 
many occasions.
    I would like to ask you a question going to a bill that the 
committee recently passed to strengthen oversight of the 
housing GSEs.
    In my view, the legislation has a number of positives in 
it; however, I could not support it because the negatives 
outweigh the positives. And, unfortunately, as we considered 
this legislation in the committee, we did not seek the formal 
views of the Federal Reserve.
    However, in your testimony to the Senate Banking Committee 
earlier this year, in April, you stated that: ``To fend off 
possible future systemic difficulties, which we assess as 
likely if GSE expansion continues unabated, preventative 
actions are required sooner rather than later.''
    Before we have a full vote in the House of Representatives, 
I wanted to ask you if you believe H.R. 1461 is sufficient 
reform. Does it fully address the concerns of the Federal 
Reserve?
    Mr. Greenspan. It does not, Congressman.
    I think that there are several aspects of the act passed by 
this committee which do not address the concerns that we at the 
Federal Reserve have, most specifically the issue of the size 
of the portfolios which have been accumulated over the years by 
the GSEs, which concern us in ways which you just described. 
Unless and until we can address those issues, I do not think we 
have appropriately removed what is a very significant threat to 
our financial system longer-term.
    Mr. Royce. Let me ask this, then. In your opinion, would no 
bill be better than moving the approach in 1461 at this time?
    Mr. Greenspan. That would be my opinion.
    Mr. Royce. Okay.
    Mr. Chairman, a number of people have criticized both the 
Federal Reserve and the administration for moving the goal 
posts, as they say, on GSE reform. Essentially, the criticism 
is that the Fed was not talking about portfolio limits 2 years 
ago and now is saying, you know, that the limits are a much-
needed step in the reform of oversight; and I wondered if you 
could explain how and why the board of governors came to this 
conclusion.
    Mr. Greenspan. I think that is describing the situation 
quite correctly.
    It is called a learning process. It has taken us a 
considerable period to understand the internal mechanisms of 
how those GSEs function, what their structure is with respect 
to securitization and portfolio accumulation, how they make 
their profits, how they are a profit-making organization, 
primarily, and how they try to meld that with their housing GSE 
goals.
    It is a very complex system. I have been in the financial 
system for many, many decades, and when I first took a look at 
them, I did not understand how they worked, I mean what it is 
they were doing, and it took a while; and I must say that, with 
the help of Federal Reserve staff, we learned how they worked, 
and as we learned, we recognized the extent of the type of 
risks which they impose on the structure.
    And so our changing view is merely a learning curve, and we 
did not understand the significance 2 years ago, for example, 
of what was going on.
    Mr. Royce. Thank you very much, Chairman Greenspan.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back.
    The gentlelady from Indiana, Ms. Carson?
    Ms. Carson. Thank you very much, Mr. Chairman.
    Thank you very much, Mr. Greenspan, for being here and for 
your public service, and also for the financial literacy 
workshop that you conducted for me. It has been very 
beneficial.
    Mr. Greenspan. Thank you very much.
    Ms. Carson. Grants for downpayments, where we give money to 
people to buy homes, I noticed in your statement, on Page 10, 
you talk about the increase in the prevalence of interest-only 
loans and the introduction of more exotic forms of adjustable-
rate mortgages.
    Would you consider the giving of a grant for a downpayment 
for a low-income family to be an exotic form of support?
    And then also I am concerned about the housing market, 
because I am the queen of predatory lending. And also I think 
Indiana still ranks highest among foreclosures. So that sort of 
relates to the question that I asked.
    But, anyway, I know you have taken steps to control 
inflation, but there is still a dearth of housing available to 
people with modest incomes, but I am afraid that the 
availability is pricing the moderate-income people out of the 
housing market.
    Thirdly, if you have time, can you comment on whether or 
not the oil prices that our consumers face are related to a 
war. It is not a political question. It is whether or not you 
believe that the fires in the oil fields and the drawing up of 
the oils has in fact got a direct correlation to the 
insurmountable inflation prices of oil.
    Thank you very much, Mr. Chairman.
    Mr. Greenspan. First of all, I do not consider that grants 
to low-income families for downpayments are a problem that is 
systemic to the financial system. That is not the issue that I 
was raising.
    I was raising the questions of the use of, say, for 
example, interest-only mortgages; which, incidentally, properly 
employed are perfectly fine instruments, but not for those who 
need to find some new exotic form of mortgage to raise enough 
money to buy a house that they want to buy.
    In other words, if you need an exotic mortgage--and there 
are all sorts of odd types of mortgages, which essentially seem 
to cost little now but much more later, which you employ 
because you want to purchase a much higher-priced house--it is 
those types of mortgages that I am concerned about; in other 
words, that the safety and soundness of banks requires that the 
mortgagor is able to repay the mortgage or the bank has got a 
problem.
    And so it is that type of issue, which I think is currently 
being addressed by supervisors in the Federal Reserve, in the 
OCC, and others. The general view of this issue is not that we 
want to address this huge expansion in homebuilding and home 
prices by using supervisory capabilities, that we have, to 
restrain the markets.
    Our judgment is basically based on making certain that 
there are sound loans that are being made. If that is done, it 
will tend to constrain excesses in the marketplace. But it is 
not the excesses which are essentially driving our supervisory 
activities as such.
    With respect to the oil issue, the oil price is up largely 
because demand has been rising and there is a shortage of 
capacity, or at least perceived excess capacity. I think that 
that would have occurred with or without the wars.
    Ms. Carson. Thank you, Mr. Chairman.
    Yield back.
    The Chairman. The gentlelady yields back.
    The gentlelady from New York, Ms. Kelly?
    Mrs. Kelly. Thank you, Mr. Chairman.
    Chairman Greenspan, thank you so much for your patience in 
coming to report to us, this committee.
    You mentioned the London attacks in your testimony, and 
earlier this year we had a dialogue about the terrorism 
insurance area and where you believe that government activity 
is needed; and you stated at the time there was not an 
efficient market that was functioning in the area and it really 
probably cannot because violence is very difficult to quantify.
    I am wondering if the London attacks recently have done 
anything to change your view on this issue.
    Mr. Greenspan. Well, I think this is an extraordinarily 
difficult question.
    The issue that I have been concerned about is the 
difficulties that our system would have in meeting very large 
costs of a terrorist attack. The question is, you know: How 
does a civilized society, with a rule of law, deal with losses 
from violence? I mean, it is essentially a critical question.
    We socialize part of it in the sense that we substitute 
military and police power for individual protection, but I 
think we--correctly--choose to leave the vast majority of risk 
to be absorbed by the private sector; and the reason for that 
is that, unless risk is essentially a private issue, the 
allocation of capital in a market economy is not optimized and 
that therefore standards of living are not optimized.
    So what we have got is the issue here of scale. To the 
extent that modest historic levels of violence occur, the 
private market has been wholly and fully capable of dealing 
with that.
    The type of terrorism that is arising in the context of 
increasing technologies which were not available before has 
created the possibilities of huge losses, and there is no way 
for a private system to handle that.
    Private markets presuppose an essentially nonviolent 
environment where individual voluntary exchange can go on, 
people can deal with one another without fear. You throw a bomb 
in the middle of that, and people withdraw, the division of 
labor goes down, the GDP goes down.
    It is very difficult for a free market society to deal with 
outsized levels of violence.
    As a consequence of that, I think what the Congress has got 
to do is to recognize that it is a tradeoff here. That is, so 
long as we have terrorism which has the capability of a very 
substantial scope of damage, there is no way you can expect 
private insurance system to handle that.
    But we have to be careful, in creating whatever we do in 
government insurance or reinsurance, to make certain that we do 
not go beyond the point which is necessary, because obviously 
everybody likes free goods, and the government can create them.
    To the extent that we socialize risk, we reduce our 
standard of living. And so it is a tradeoff.
    But as I indicated when this issue came up in the last 
committee meeting, I do not see how we can avoid the issue of a 
significant segment of government-backed reinsurance in this 
particular area.
    Mrs. Kelly. All things being equal, Mr. Chairman, if TRIA 
were modified to create a government-backed reinsurer that had 
access to capital markets and a Treasury window for borrowing, 
what kind of ownership structure provides the most discipline 
for owners and investors in the securities?
    Mr. Greenspan. I do not know specifically, but I do know 
that we are already beginning to see private solutions to a lot 
of the types of problems that we have got; and I think it is 
important to recognize that if the government decides to move 
in and set up a large structure immediately, it will abort 
those activities which are effectively addressing the system.
    You know, there is another interesting question here, which 
is a very major question of tradeoffs: To what extent do you 
recognize the rise of terrorism as an element which should 
affect our lives? I mean, clearly it has to affect our lives, 
and does.
    And we are confronted with the issue of how we trade off 
the question of trying to change our way of life to minimize 
the losses that occur because terrorism exists, which means it 
tells us where we build, how high we build, what types of 
trophy buildings we construct.
    How much of that do we want to preserve and how much of 
that do we cut back on? These are very tough judgments. And in 
the sense--the markets will do it.
    In other words, if Congress will enact a certain law, then 
the markets will adjust to that. It is an issue which is not 
going to be readily and easily resolved. Civilized societies 
have not had to deal with this type of technology of terrorism 
previously.
    The Chairman. The gentleman's time has expired.
    The gentleman from California, Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman.
    I ask unanimous consent that we all be given 5 days to 
submit additional questions for the record.
    The Chairman. Without objection.
    Mr. Sherman. Mr. Chairman of the Federal Reserve Board, so 
many have bemoaned the fact that this is your last appearance 
before us. I think they should be seeking solutions to this.
    First, I hope you will come back and share your wisdom with 
us, even if you are no longer drawing a government paycheck.
    But I will be introducing legislation to say that someone 
who has served a part of a term and then served a full 14-year 
term can still be appointed for another 5 years to the Federal 
Reserve, and I know my colleagues would begin chanting ``5 more 
years'' except they do not want to erode my 5 more minutes.
    Mr. Greenspan. Does my wife have a vote in this?
    [Laughter.]
    Mr. Sherman. Thank God she does not.
    I have got so many questions I will basically be submitting 
them for the record.
    We are heading eventually for a realignment of currency 
values such that our trade deficit is ameliorated, perhaps 
reversed. It is deferrable. But this realignment is not 
avoidable. It will have benefits. It will also have enormous 
harms, even if it is done smoothly. But if it is not smoothly, 
it could be a disaster.
    I will be asking in writing how we can work with other 
countries to assure that there is a smooth currency realignment 
and not a crash of the dollar.
    I will be submitting questions about the importance of 
subprime lending to our economy, particularly when those loans 
are not made by depository institutions that are insured by the 
federal government but do not pose those risks because they are 
made by private uninsured lenders; andd I will also be asking 
about the importance of the private auditing function to our 
capital markets.
    A recent op-ed in the American Banker notes that our 
committee and the House passed this--well, our committee passed 
this GSE reform bill, and we reported it out by an overwhelming 
vote, that it would establish a better regulator for the GSEs; 
and I will be asking whether you would concur in this 
assessment or whether you would agree that stronger capital and 
prompt corrective action authority as provided in the bill 
makes sense and just how important it is that Congress pass GSE 
reform legislation this year.
    One issue I have asked you about before is the issue of the 
regulations issued by the Treasury Department and the Federal 
Reserve Board allowing national banks to engage in real estate 
brokerage and real estate management.
    As you know, these regulations have been blocked by 
congressional action on an annual basis, which is hardly an 
efficient way to provide for a national system to regulate who 
can and cannot, and under what circumstances, engage in real 
estate brokerage activity.
    Now, you have consistently opposed mixing banking and 
commerce, and a commercial activity is a commercial activity 
even if it involves financing.
    For many of my working-class-family constituents, they are 
not even aspiring to buy a home, they are aspiring to buy a 
car, and the lending function who will make the loan is the 
most important part of selecting an automobile dealer. Wheat 
and steel, even this shirt, can be financed on a credit card, 
so just because something is financed does not mean it is not 
commerce.
    So I hope you would explain: Why is buying and selling of 
real estate a financial activity if buying and selling cars, 
steel, et cetera, is not?
    Perhaps you could respond orally to that question.
    Mr. Greenspan. You want me to respond----
    Mr. Sherman. Yes. I actually think I have some time.
    Mr. Greenspan. Yes.
    Let me just say that the broader question, which is finance 
and commerce, is one which will gradually erode in the sense 
that technology is making the distinction ever less obvious.
    Our general concern is not that mixing banking and commerce 
is inherently dangerous; it is that we do not wish to see it 
occur too quickly, because we are currently in the process, at 
this stage, of absorbing very significant changes in 
technology, globalization, structures in finance, and we have 
seen very major changes in the financial system.
    And it is very important, from the supervisory point of 
view, to be able to judge what is occurring; and, so far, we 
conceive of the way we, as umbrella supervisors of various 
institutions, have been able to interrelate with an evolving, 
fairly rapid, change in technology.
    If we were to break the bounds of banking and commerce at 
this stage, we would get some very discontinuous changes, 
which, we are fearful, would make it exceptionally difficult to 
supervise according to the statutes that we operate under.
    So it is not that we are saying that there is something 
fundamentally different about these activities, because they 
are not. I mean, finance gradually looks like commerce and 
commerce looks like----
    Mr. Sherman. If I can interject----
    The Chairman. The gentleman's time has expired.
    Mr. Sherman. I would just say ``5 more years.''
    Thank you.
    Mr. Paul. Thank you, Mr. Chairman.
    If indeed this is your last appearance before our 
committee, Mr. Greenspan, I would have to say that in the 
future I am sure I will find these hearings a lot less 
interesting.
    [Laughter.]
    But I do have a couple of parting questions for you.
    Keynes, when he wrote his general theory, made the point 
that he had a tremendous faith in central bank credit creation 
because it would stimulate productivity. But along with this, 
he also recognized that it would push prices and labor costs 
up. He saw this as a convenience, not a disadvantage, because 
he realized that in the corrective phase of the economic 
business cycle, that wages had to go down, and people would not 
accept a nominal decrease in wages; but if they were decreased 
in real terms, it would serve the economic benefit.
    Likewise, I think this same principle can be applied to our 
debt. To me, this system that we have today is a convenient way 
to default on our debt, to liquidate debt through the 
inflationary scheme.
    Even you, in the 1960s, described the paper system as a 
scheme for the confiscation of wealth. And in many ways I think 
this is exactly what has happened. We have learned to adapt to 
deficit financing, but in many ways the total debt is not that 
bad because it goes down in real terms. As bad as it is, in 
real terms it is not nearly as high.
    But since we went on a total paper standard in 1971, we 
have increased our money supply essentially 12-fold. Debt in 
this country, federal debt, has gone up 19-fold; but that is in 
nominal dollars, not in real dollars.
    So my question is this: Is it not true that the paper 
system that we work with today is actually a scheme to default 
on our debt? And is it not true that, for this reason, that is 
a good argument for people not--eventually, at some day--
wanting to buy Treasury bills because they will be paid back 
with cheaper dollars?
    And indeed in our lifetime we certainly experienced this in 
the late 1970s, that interest rates had to go up pretty high, 
and that this paper system serves the interests of big 
government and deficit financing because it is a sneaky way of 
paying for deficit financing. At the same time, it hurts the 
people who are retired and put their money in savings.
    And aligned with this question, I would like to ask 
something dealing exactly with gold: If paper money--today it 
seems to be working rather well, but if the paper system does 
not work, when will the time come, what will the signs be, that 
we should reconsider gold?
    Even in 1981, when you came before the Gold Commission, 
people were frightened about what was happening, and that was 
not too many years ago, and you testified that it might not be 
a bad idea to back our government bonds with gold in order to 
bring down interest rates.
    So what are the conditions that might exist for the central 
bankers of the world to reconsider gold? We do know that they 
have not given up on gold. They have not gotten rid of their 
gold. They are holding it there for some reason.
    So what is the purpose of the gold if it is not with the 
idea that someday they might need it? They do not hold lead or 
pork bellies; they hold gold.
    So what are the conditions that you might anticipate when 
the world may reconsider gold?
    Mr. Greenspan. Well, you say central banks own gold or 
monetary authorities own gold. The United States is a large 
gold holder. And you have to ask yourself: Why do we hold gold? 
And the answer is essentially implicitly the one that you have 
raise; namely, that over the generations, when fiat monies 
arose, and indeed created the type of problems, which I think 
you correctly identify, for the 1970s, although the implication 
that it was some scheme or conspiracy gives it a much more 
conscious focus than actually, as I recall it, was occurring, 
it was more inadvertence that created the basic problems.
    But as I have testified here before to a similar question, 
central bankers began to realize in the late 1970s how 
deleterious a factor the inflation was, and indeed since the 
late 1970s central bankers generally have behaved as though we 
were on the gold standard.
    And indeed the extent of liquidity contraction that has 
occurred as a consequence of the various different efforts on 
the part of monetary authorities is a clear indication that we 
recognize that excessive creation of liquidity creates 
inflation, which in turn undermines economic growth.
    So that the question is: Would there be any advantage, at 
this particular stage, in going back to the gold standard? And 
the answer is: I do not think so, because we are acting as 
though we were there.
    Would it have been a question, at least open, in 1981, as 
you put it? And the answer was: Yes. Remember, the gold price 
was $800 an ounce. We were dealing with extraordinary 
imbalances; interest rates were up sharply; the system looked 
to be highly unstable; and we needed to do something. Now, we 
did something.
    In the United States, Paul Volcker, as you may recall, in 
1979 came into office and put a very severe clamp on the 
expansion of credit, and that led to a long sequence of events 
here, which we are benefiting from up to this date.
    So central banking, I believe, has learned the dangers of 
fiat money, and I think as a consequence of that we have 
behaved as though there are indeed real reserves underneath the 
system.
    Mrs. Kelly. [Presiding.] The gentleman's time has expired.
    Ms. Lee?
    Ms. Lee. Thank you, Madam Chair.
    Hello, Mr. Greenspan. Good to see you again.
    Let me also thank you for your years of dedicated service. 
And I just want to also thank you for your very forthright 
interaction with many of our organizations around the country, 
especially in California, such as the Greenlining Institute, 
and I think that----
    Mr. Greenspan. They are good friends.
    Ms. Lee. And thank you very much for everything that you 
have done to help move this agenda forward, in terms of the 
fairness in our economic system.
    I wanted to ask you a couple of things. And we have been in 
touch with each other over the years with regard to CRA, and I 
want to thank you--the Community Reinvestment Act, and why and 
how banks can receive an A rating when in fact they are lending 
to African-Americans and Latinos, in terms of home lending, 
between 2 and 3 percent. As it relates to the Hispanic 
community in California, I think it is about 18 percent, when 
35 percent of the population is Latino.
    And your response, of course, was that CRA cannot, you 
know, deal with the ethnic composition of any lending 
transaction because they are not required to, but the 
enforcement of fair lending laws is what would allow for the 
insurance of nondiscrimination actions.
    But yet I have to ask you: The fair lending laws appear not 
to have been enforced, given the very dismal mortgage lending 
rates of these institutions. And so in going back and forth, 
over the years, I have been reading your responses, and I want 
to ask you today if it makes sense, then, that we ask you to 
look at how to conduct--or maybe the Federal Reserve could 
conduct--a disparity study, to really begin to look at what is 
taking place, because, for the life of me, I cannot understand 
why in fact the home lending rate is so low when in fact these 
institutions are getting such high ratings.
    And so I would like to ask for some specific solutions to 
this so that we can move forward to ensure more fairness in 
mortgage lending.
    Mr. Greenspan. Yes, this is a very difficult issue, which, 
of course, we have all been struggling with for quite a good 
deal of time.
    We, at the Federal Reserve--and indeed this is also true at 
our colleagues at the other banking regulatory agencies--
enforce a statute which is passed by the Congress. We do it as 
best we can and indeed endeavor not only to capture the letter 
of the law but the spirit of the law as well. We cannot go 
beyond that. In other words, we do not create the laws.
    Ms. Lee. But, Mr. Greenspan, Mr. Chairman, let me just ask 
you, though: Should not we consider at this point an amendment, 
maybe, to the Community Reinvestment Act, to broaden, for 
example, the goal to at least gather this data so we will know?
    Mr. Greenspan. Well, I think there is an issue here which 
has to do with what type of data and what type of burdens you 
put on institutions in collecting the data, because it is not a 
costless operation.
    Ms. Lee. Sure.
    Mr. Greenspan. I do think we, for example, have expanded 
HMDA over the years--I mean, we will be releasing HMDA data, I 
believe, in a couple of months for the year 2004--and there are 
many new sources of information in those data systems.
    And in that regard, it is a very large data requirement 
that is involved here, and there are obviously going to be 
continuing discussions of what types of information, what types 
of evidence of discrimination occurs, and how does one 
essentially pick it up. But it is not a simple solution.
    Ms. Lee. I understand, Mr. Greenspan.
    Before my time is up, let me just say I understand the fact 
that this would cost some money. But I think, long-term, the 
cost of discrimination and the costs of denying loans to 
minority potential homeowners far exceed the cost of gathering 
the data.
    When you look at small business lending, it is my 
understanding now--and we are looking to verify this 
information--that African-American-owned businesses receive 
less than 2 percent of the small business lending; Latino-owned 
businesses less than 2 percent also.
    And so at some point, in addition to trying to enforce fair 
lending laws, we have got to do something to make sure that 
there does not exist discrimination and that there is a level 
playing field in the future whether it costs the financial 
services industry a few dollars or not.
    Mr. Greenspan. Well, I agree with----
    Mrs. Kelly. The gentlewoman's time has expired.
    Ms. Lee. I will follow up with you----
    Mr. Greenspan. I agree with what you stated.
    The issue basically is, how do we extricate the 
discriminatory forces which inevitably still exist in the 
system? It is an ongoing project, and I think we are making 
progress, but I certainly agree that there is more to be done.
    Ms. Lee. Thank you, Mr. Chairman.
    Mrs. Kelly. Mr. Gillmor?
    Mr. Gillmor. Thank you, Madam Chairwoman.
    Mr. Greenspan, I want to commend you for the great job you 
have done over the years, and for your service to the country. 
You are going to be missed.
    I have a couple of questions regarding ILCs, industrial 
loan companies, I would like your views on.
    Could you give us your thoughts about the rapid expansion 
of commercial firms obtaining industrial loan company charters 
and what that means for the overall banking system? And in 
respect to that, are there any risks, or even systemic risk, to 
our banking system in the avoidance of Fed oversight that an 
ILC charter allows?
    Mr. Greenspan. This issue is related to the issue we 
discussed just a short while ago with respect to the question 
of the move from banking to commerce that is really an issue 
here.
    The ILC is, as you point out, not subject to umbrella 
supervision, as indeed other banking institutions are; and 
there is a concern on our part that an expansion in this 
particular area--especially if they are given additional 
powers, which create essentially commercial banks--that we have 
effectively made a decision to eliminate the distinction 
between banking and commerce, inadvertently; in other words, by 
basically creating an ILC which ultimately turns out to be a 
commercial bank which can be owned by a commercial interest.
    If that is indeed the case, Congress ought to do it 
directly. My reaction, however, is that if we do it--and we 
will eventually do it--it be done in a way which is measured 
and understood to be sufficiently sensitive to the supervisory 
adjustments that go along with that process.
    So I think that what our major concern is, is not, as I 
said before, the issue of breaching commerce and banking over 
the long run--which we think is probably inevitable and is 
something that can and should be handled--it is the way we are 
doing it. I think that is wrong.
    Mr. Gillmor. Well, you indicate it might or might not be 
inevitable. If I am reading your response fairly, I think you 
are saying it is not a good idea. Would that be accurate?
    Mr. Greenspan. Yes: It is not a good idea. I am sorry if I 
did not make that clearer.
    Mr. Gillmor. Well, you probably did, but I just wanted to 
drive a nail through the board.
    Let me ask you another question--and maybe it has come up 
before, but I had to be in another markup.
    House prices are up, obviously, a great deal, so for people 
to afford them you have got the use of ARMS, you have got no 
downpayment, you have got interest-only loans. It seems to me 
that a lot of people are kind of cutting it very thin 
financially.
    And so I guess my question is: If we do have a spike in 
long-term rates, sooner or later there are going to have to be 
payments on those no-interest loans; the adjustable-rate 
mortgages are going to go up.
    In your view, what would be the impact of a significant 
spike in rates on the people who have gotten into the housing 
market in that manner?
    Mr. Greenspan. Well, incidentally, one of the reasons why 
we have engaged in the type of monetary policy which we have 
over the past year is to reduce the probability of that 
occurring. And obviously, should that occur, we will have, 
obviously, adjustable-rate mortgages will be impacted.
    However, remember that most recent adjustable-rate 
mortgages, to a very large extent, begin with a fixed 
component. In other words, they are not immediately variable. 
So the actual level of mortgage debt which is interest-
sensitive at this particular stage, including what we call 
adjustable-rate mortgages, is not very high.
    But it is certainly the case that, over time, if you get a 
spike in interest rates--and indeed by a spike I assume you 
mean they go up and they stay there--then their effects are 
quite significant.
    And I must say: It is basically a function of appropriate 
monetary policy to avoid such outcomes.
    Mr. Gillmor. Thank you, Mr. Chairman.
    Mrs. Kelly. Thank you.
    Mr. Miller?
    Mr. Miller of North Carolina. Thank you.
    Mr. Chairman, last July you testified before this committee 
that average hourly earnings of non-supervisory workers had 
been subdued in recent months and barely budged in June.
    I cannot find any reference in your testimony today to 
average hourly earnings with non-supervisory workers. Mr. Frank 
pointed to the information in your report about earnings, or 
wages, but it does not seem to match that figure.
    It does say that the employment cost index for hourly 
compensation had actually gone down about half a percentage 
point from what it had been the last couple of years.
    On the continuum from subdued to modest to exuberant to 
frothy, where do increases in average hourly earnings of non-
supervisory workers fall?
    Mr. Greenspan. Well, I think what we do, basically, is we 
collect data from various different sources. The broadest 
coverage of wages and salaries in this country is the quarterly 
report that occurs as a consequence of companies reporting for 
unemployment insurance coverage, which is universal; and those 
numbers are probably coverage way up into the high 90s, and 
they are fairly complete.
    We have another set of data which essentially endeavors to 
pick up production workers as distinct from supervisory 
workers, and that is about 80 percent of the workforce.
    So we separate the wages and salaries into the production 
workers and into supervisory workers, essentially, the 20 
percent, or the skilled management professional.
    What we find is the production workers' average hourly 
earnings are rising very modestly; but because of the 
distribution of skilled worker supply and demand, we are 
finding that the increase implicitly in supervisory workers' 
average hourly earnings is going up very much more rapidly.
    Mr. Miller of North Carolina. I am sorry, say that again.
    Mr. Greenspan. It is going up very much more rapidly----
    Mr. Miller of North Carolina. For the supervisory 
employees?
    Mr. Greenspan.--for the supervisory workers, the 20 
percent; the supervisory, professional, et cetera, the more 
skilled aspects of our labor force.
    So we are getting a bivariate income distribution. And as I 
have said many times in the past: For a democratic society, 
this is not healthful, to say the least; and as I have 
indicated on numerous occasions, I believe this is an education 
problem that requires us to get the balance of skills coming 
out of our schools to match the skills that our physical 
facilities require.
    So there is a reconciliation, and the reconciliation is 
that we are getting some really divergent trends.
    Mr. Miller of North Carolina. Mr. Greenspan, Mr. Chairman, 
you did testify about home mortgages and about the concerns 
about exotic mortgages and said that home equity extraction was 
occurring, mortgage market finance withdrawals of home equity--
in other words, people were borrowing against their homes--and 
it seems to be that homeownership, as Chairman Oxley said, is 
good news, but it is about the only good news in the American 
economy for most workers--about 80 percent--whose wages remain 
subdued or increasing modestly.
    All of your testimony appears to go to the effect this is 
having on the safety and soundness of lenders or on the effect 
on housing prices.
    Have you looked at what these exotic mortgages, 
particularly for refinancing, are doing to the economic status 
of most American families?
    You pointed out we have a 1 percent savings rate. The 
latest figure I have seen on credit card debt is $800 billion. 
Wages for 80 percent of American workers are very modest or 
subdued, and their increase--and the good news that 69 percent 
of American families own their homes but the equity in their 
homes is the bulk of their net worth.
    What are these exotic mortgages for refinancing doing to 
the financial position of American families?
    Mr. Greenspan. Well, fortunately, Congressman, not much 
yet, because they are still very small. In other words, it is 
the tip of an iceberg, that we are concerned about that it gets 
larger.
    In the total scheme of things, the aggregate amounts are 
small. But for individual cases, they could be disastrous, 
largely because there are a number of loans which require, for 
example, no equity early on; and if you have gotten your 
downpayment through a piggyback loan or something like that, 
you are essentially depending on the price of the home 
continuing to rise and your equity continuing to rise--and that 
is a little bit tricky, because this type of expansion in 
prices historically does not go on very long.
    And indeed, while it is hard to forecast--and I am not sure 
that it is going to occur--there may be, and certainly will be, 
in certain local areas, price declines; and if you have some of 
these interest-only, very low downpayment, exotic mortgages, 
which essentially are issued by banking or other institutions 
on the expectation that prices will continue to go up and 
therefore the loan will always be good, if you are depending on 
that, there is potential individual disaster there.
    Fortunately, that is a very select and small group so far, 
and we very much would like to keep it that way.
    Mrs. Kelly. The gentleman's time has expired.
    Mr. Shays?
    Mr. Shays. Thank you, Chairman Greenspan.
    I think that you, frankly, are one of the most important 
powerful individuals in the world and one of the most 
outstanding public servants, and I thank you for using your 
power well and for being such an outstanding public servant.
    I have a number of questions, and if the answers could be 
as brief as possible, I might get to a few.
    I look at the budget deficits, the trade deficits, the 
unfunded liability that the federal government has in Social 
Security and Medicare, I look at state budget deficits and 
their debt and their liabilities and pension funds and so on, 
and it seems pretty significant to me.
    And then I look at the low level of savings that Americans 
have, and I am wondering why--I am amazed that the economy does 
so well in spite of that. I would like the short version of why 
it does so well in spite of that.
    Mr. Greenspan. First of all, even though we have a very low 
level of savings, we use our savings exceptionally efficiently, 
and by that I mean we have a really quite sophisticated 
financial system which enables us to use the little savings 
that we have most productively, and that shows up in the 
increased productivity that we are able to function with.
    But the other issues that you present are long-term 
problems, and it is hard to imagine how we can continue on 
without addressing those issues.
    Mr. Shays. Yes.
    I am surprised that it costs me $55 to put gasoline in my 
Jeep, that these incredibly significant increases in oil prices 
has not brought down our economies, and I do not understand 
why.
    Mr. Greenspan. Well, to a very large extent, it is the fact 
that following the oil shocks of the 1970s, there was a very 
dramatic decline in the intensity of the use of oil. In other 
words, oil in barrels divided by real GDP has been going down 
at a very dramatic pace. And indeed, it is only half of what it 
was 30 years ago, and it is still going down. And the basic 
reason, the answer, is that everybody is adjusting to the fact 
that oil prices are high.
    Mr. Shays. I hear that.
    But it seems to me that it has been such a--I mean, a 
dollar increase in prices per gallon would strike me as being a 
pretty big shock in spite of your point about the GNP.
    Mr. Greenspan. No, it is a shock. And indeed, as has been 
mentioned before, we do estimate a three-quarters of a 
percentage point loss in real growth this year as a consequence 
of these prices.
    Mr. Shays. When I look at the housing market--first, let me 
ask you this.
    With the decline in manufacturing jobs, is it not true that 
we have actually increased the productivity--not productivity, 
but actually increased output in manufacturing?
    Mr. Greenspan. Output as a ratio to GDP has gone down very 
gradually, and indeed the reason for that, that it is going 
down, is that we are an increasingly conceptual economy, that 
an ever-increasing proportion of what we create, values that 
others, other countries want, are non-material.
    And therefore we are seeing some gradual decline in goods 
production as a ratio to overall GDP, but the rest of the GDP 
being ideas.
    Mr. Shays. And that is a very important point for me to 
think about.
    But forget the ratio. Has not our output in manufacturing 
actually gone up?
    Mr. Greenspan. It has, yes.
    Mr. Shays. And so I see the same analogy when I look at 
agriculture. We have 3 percent in the marketplace now, whereas 
we used to have two-thirds in the early 1900s, but our 
production, you know, vastly increased.
    Is it wrong for me to think that that is a bit of a 
comfort, or should I be concerned about the lack of even 
greater growth in manufacturing?
    Mr. Greenspan. Well, I think the critical issue is that we 
produce something which would be accepted as value in trade by 
others. What it is we produce is less important, or how we do 
it.
    And what the United States has adjusted to over the 
generations is to somehow maintain our leadership in the world 
largely by producing most efficiently those goods which 
consumers, our own and others, perceived as most valuable.
    Mr. Shays. Thank you, Mr. Chairman.
    Thank you, Madam Chairman.
    Mrs. Kelly. Thank you.
    Mr. Scott?
    Mr. Scott. Thank you very much.
    Mr. Chairman, Chairman Greenspan, so good to have you 
again.
    And let me just also include with the chorus of praises 
that you rightfully deserve: We hate to see you go; and I am 
sure if your wife would give you the permission to stay another 
5 years, we would all agree with that.
    Mr. Greenspan. Thank you.
    Mr. Scott. Your intellect is just extraordinary, and your 
contributions have been monumental. You are indeed one of the 
most powerful voices in the world.
    And I want to get to a series of questions, that I might, 
and if you could be brief with your responses.
    My first one is on the war on terror and our financial 
security here at home and around the world.
    The recent bombings in London produced some extraordinary 
new facts in this war, one of which is that these were 
basically homegrown young terrorists that were citizens of 
Great Britain.
    I am sure that Prime Minister Blair would say he went to 
Iraq to fight them there--as Mr. Bush has said--before they got 
home, but they are right there. That is a new phenomenon, that 
certainly raises our own concerns here at home--the homegrown 
cells.
    The second one is that there appears to be a very, very 
violent and radical interpretation of the Islamic religion, 
that is creating tremendous problems.
    I am concerned that the leaders of the Muslim world, 
leaders of the Muslim financial world, the Muslim world itself, 
is not taking its leadership and responsibility.
    There seems to be no way we are going to win this war on 
terror, solve this terror problem--and with these new 
revelations coming out of the London bombing--without intense 
and serious and courageous leadership from the Muslim 
community.
    Do you see that forthcoming in the Muslim world? Is there 
leadership coming forward in financial markets that are 
controlled by Muslim countries to deal with this terrorism?
    It is not just a problem of the West. And with the 
religious factor coming into this, it is paramount, because one 
of the by-products could be extraordinary retaliation against 
the Muslim community, as we have seen in the numerous attacks 
in London and elsewhere, of Muslim communities.
    It is important that they step forward. And I wanted to 
know, do you see that?
    Mr. Greenspan. Well, I certainly see much the same things 
that you do, Congressman.
    I do think that many people of the Islamic faith whom I 
deal with in the international area are acutely aware of the 
importance of maintaining civil societies and they are not 
supporters of some of the interpretations, but I am not 
sufficiently knowledgeable about a number of the various areas 
that are involved here, to give a reasonable judgment as to 
where we all go from here.
    But I do think that issue of civility is critical to the 
growth of market economies, and I find that there is exactly 
the same view, that those who are in Islamic countries, who are 
in central banking, in areas of finance, in areas of economics, 
are all most concerned about the issue of what they are--I 
think appropriately--concerned about: backlashes against people 
of this Islamic faith in this country and elsewhere.
    Mr. Scott. Yes. One of the issues is in terms of terrorist 
financing, that emanates and weaves its way through Muslim 
communities, Muslim financial institutions: Are you familiar 
with such an endeavor that is known as ``wahalas,'' which have 
been known to be suspect--from our intelligence--of being ways 
and means in which terrorist financing has come through 
legitimate Muslim financial institutions? Are you aware----
    Mrs. Kelly. The gentleman's time has expired.
    Mr. Scott. Would you respond to that?
    Mr. Greenspan. Yes. Well, let me just say very quickly that 
they are a very effective and historic means of finance, and I 
think it is based on trust. And so to the extent that they are 
misused for purposes other than they were originally created 
for is most unfortunate, but we do, as you I am sure are well 
aware, have directed considerable amount of efforts at trying 
to identify sources of finance that will support terrorist 
organizations.
    Obviously the U.S. Treasury Department is very acutely 
involved, and clearly we are aware of what, essentially, they 
are employed in doing.
    Mr. Scott. Thank you.
    Mrs. Kelly. Mr. Hensarling?
    Mr. Hensarling. Thank you, Madam Chair.
    Chairman Greenspan, I do not know if you feel like you are 
being eulogized this morning, but please allow me to add my 
voice to those thanking you for your service to your country. 
It has truly been a significant and positive impact on our 
nation's history.
    Mr. Chairman, I have seen a report from CBO, dated January 
of 2005, that says that Medicare over the next 10 years will 
grow by 9 percent, Medicaid by 7.8 percent, and Social Security 
by 5.6 percent a year.
    I have also seen a GAO report, dated early March, entitled, 
``Budget Process: Long-Term Focus Is Critical.'' It states that 
as of today, if we do nothing, that we are on a collision 
course to either double taxes or cut federal spending by 50 
percent by the year 2040.
    Many of us may not be here in 2040, but we certainly hope 
and pray our children and grandchildren may be.
    There are many in this body who have shown no inclination 
for handling or dealing with the spending side of the equation. 
You testified before the House Budget Committee on March 2nd of 
this year, and you said, ``Tax increases of sufficient 
dimension to deal with our looming fiscal problems arguably 
pose significant risk to the economic growth and the revenue 
base.''
    So I have a two-part question. If you were familiar with 
the GAO and CBO reports that I allude to, do you agree with 
their numbers? If you do not agree with their numbers, do they 
get the essential thrust and trend lines correct?
    And if so, what does the world look like in 2040 if we 
double taxes on the American people? What does that mean to 
housing? What does it mean to job creation? What does it mean 
to standard of living?
    Mr. Greenspan. A lot, Congressman.
    Let me direct you to a footnote in my prepared remarks, in 
which I endeavor, essentially in short form, to address the 
instabilities that conceivably could occur as a consequence of 
the fact that we have in law already committed the allocation 
of resources implicitly, in real terms--which, in my judgment, 
may very well be in excess of what we have the capacity to 
deliver--and it is terribly important for us, essentially for 
the retirees that will begin to retire in the next decade, to 
make sure that they know that what they are being promised will 
be delivered.
    I am not sure we have the capacity to do that, and this is 
indeed what the issue is. And CBO and GAO studies clearly come 
up with the same results.
    Mr. Hensarling. In an attempt to deal with at least one 
facet of our long-term structural deficit, a number of members 
of Congress, including myself, have introduced budget process 
reform legislation.
    Many in this body hold PAYGO to be a panacea in that quest 
to deal with our long-term fiscal challenges, but as of today I 
believe that mandatory spending and interest accounts for 61 
percent of the federal budget.
    According to the House Budget Committee, within a decade we 
will go from 61 percent of the budget to mandatory and 
interest, to 71 percent.
    I have personally introduced legislation that would include 
a ceiling on the growth of the federal budget. If spending is a 
significant part of the challenge, inasmuch as every PAYGO 
proposal I have seen does not deal with mandatory spending, 
does not deal with the automatic inflation included in baseline 
budgeting, and if our quest is to control spending, is not a 
ceiling on the growth of government a superior alternative to 
traditional PAYGO?
    Mr. Greenspan. I think that there are numbers of ways you 
can address the question. For example, I have often advocated 
that all statutes be sunsetted, and that includes the Federal 
Reserve Act.
    The importance of that is: If you get into a situation 
where your entitlements or mandatory spending is moving out of 
line, you just merely cannot say, ``Well, we will pass a law 
and require it to come down a certain amount,'' because the 
Congress may not vote that law. In other words, what you 
basically need is a vehicle which will enable individual acts 
to be reevaluated, and indeed to get a majority, positive 
majority, to keep them going forward.
    I am not sure that even--I have often advocated triggers 
and various other vehicles which address this particular type 
of question.
    But it is a very serious issue.
    Mr. Hensarling. Well, and I certainly agree with you that 
sunsetting would be a very important part of the mix in the 
legislation.
    In the time I have remaining, allow me to switch subjects, 
back to an earlier subject of the recent GSE legislation.
    Part of that legislation includes an Affordable Housing 
Fund, which I believe you are acquainted with, has Fannie and 
Freddie using 5 percent of their after-tax profits to fund this 
particular fund, on top of approximately 82 other government 
housing programs, all ostensibly aimed at affordable housing.
    Given the duopoly nature of Fannie and Freddie, do you 
believe they have sufficient market power to essentially impose 
that cost upon the market, so that at the end of the day, 
perhaps, we are taking money out of one affordable housing 
dynamic and simply turning around and turning it over to 
another? Do they have sufficient power to impose that cost on 
the ultimate consumer?
    Mr. Greenspan. I do not know. And indeed, all I can say to 
you is that we at the Federal Reserve have not taken a position 
on this.
    It is interesting, I think, that the new CEO of Freddie 
Mac, Richard Syron--as I remember reading somewhere recently--
claimed that there is no longer a duopoly, that they no longer 
have the power they used to have.
    Mr. Hensarling. Thank you, Mr. Chairman.
    My time has expired.
    Mrs. Kelly. Thank you.
    Mr. Davis?
    Mr. Davis of Alabama. Thank you, Madam Chairwoman.
    Chairman Greenspan, I certainly--like, I think, every one 
of my colleagues today--wish you enormously well and a lot of 
good fortune in the remaining part of your career and your 
life.
    For those of us new members who have been here, like Mr. 
Hensarling and myself, you have been a living seminar on 
economic policy, and we appreciate your playing that role.
    Mr. Greenspan. Thank you.
    Mr. Davis of Alabama. I want to ask you about the 
phenomenon of globalization, because one of the things that 
strikes me is that when you have talked about it and when a lot 
of people in this room have talked about, it has been in terms 
of an either-or kind of dynamic.
    You have had people on the left, if you will, or even the 
extreme right, who have taken the position that globalization 
is counterproductive, is unfortunate; and you have taken the 
opposition position, I think the responsible position, that 
globalization is a good thing, that redounds in our favor.
    But it strikes me that, frankly, for those of us who were 
voting on these agreements, it is not an either-or proposition 
in terms of globalization or nonglobalization. There is a third 
place, and that third place is the kind of pro-trade policies 
we are going to have.
    It strikes me that there are two kinds of pro-trade 
policies that one could have. One kind would spur other 
countries toward reform. One kind would spur other countries to 
allow the right to organize or to adopt a regimen or regime 
that prevented child labor or to take discrimination against 
women more seriously.
    And, frankly, another kind of pro-trade policy essentially 
leaves these governments and these countries as they are.
    I have not heard you talk a lot about that kind of 
distinction.
    So I want you for just a moment--and I will have another 
question; I will ask you to respond to them both, one after the 
other.
    But I would like you for a moment to talk about whether or 
not it would be somehow detrimental to our economy and 
detrimental to the concept of globalization if we had included 
conditions in some of these agreements that would deal with the 
absence of child labor laws, that would deal with the absence 
of sex discrimination laws, or would deal with the right to 
organize. Question number one.
    Second set of questions has to do with the phenomenon of 
tax cutting. It, too, has been advanced in terms of an either-
or dynamic: people on my side of this room, who say the tax 
cuts have been too big, they have been too outsized; you, and 
people on the other side of the room, have said that, ``Well, 
the tax cuts have been good; they have been the right size to 
provide stimulus to our economy.''
    I am wondering again if there is not a third approach: if 
we could not have had a series of tax cuts that were 
distributed and aimed more toward the middle class, more toward 
the people whose wages have been stagnant the last several 
years, and I am wondering if we could have cut taxes much more 
dramatically for the middle class if we could have provided 
more tax relief for those Americans who are struggling day in 
and day out without imperiling the stimulative impact of the 
tax cuts as a whole.
    So can you comment on those two sets of questions?
    Mr. Greenspan. There is another aspect to this; namely, 
that you have to decide whether or not the purposes of tax cuts 
relate to the issue of the distribution of income or its 
production, and my focus has been on production.
    In other words, I have been focusing on how to establish a 
tax structure which increases level of economic growth, and 
therefore a tax base, and hence revenue.
    I have not been particularly focused on the question of the 
distribution of tax for the purpose of redistributing income, 
because that is basically a function of the Congress, and I 
have no real view on that as such.
    And that is the reason, I might say, that I supported the 
issue of elimination of double taxation of dividends, as I have 
for many years, because I think that is a critical element in a 
tax structure which enables growth to be at its maximum.
    With respect to the first issue, with respect to applying 
our standards to others----
    Mr. Davis of Alabama. Well, not even our standards, but 
just standards that are different and would raise the----
    Mr. Greenspan. Oh, okay. No, I take the correction.
    There is a cost in that. In other words, in a more general 
sense, are there people with whom we feel, for moral reasons, 
we should not trade? In other words, it is a more fundamental 
question about: What are the conditions which are necessary, 
voluntary, people or countries, to engage in trade?
    And it raises a fascinating question of: Is associating 
with a certain group of people considered sufficiently morally 
offensive to your own values that you do not want to do it?
    The issue of imposing standards--not ours necessarily, but 
some standards--is a version of that.
    It is a very difficult question. There is no doubt that if 
you do it, you will have less trade; but that may be what you 
want. And it is a judgment that implicitly the Congress, again, 
makes.
    In other words, the one thing that I have learned over the 
years, especially being here 35 times, is that it is you who 
have to answer all of these extraordinary questions and decide 
what do you do when confronted with choice. And my only 
criticism would be that sometimes--like everybody else, 
ourselves included--when confronted with a choice, you would 
prefer somebody else to do it.
    But fortunately our system is such that we have to make 
these choices, and they are not easy. And the one that you 
raise, I think, is a very legitimate question, as to where your 
tradeoff is, basically, in that respect.
    Mrs. Kelly. The gentleman's time has expired.
    Mr. Pearce?
    Mr. Pearce. Thank you, Mr. Chairman.
    The problem with coming this late in the day, all the 
adjectives have been used and the questions have been asked, so 
I have had to resort to extreme measures.
    Mr. Shays finally did the last deal in declaring you 
powerful and outstanding, that took the last two words I could 
have used; so just let me add my voice to those of your 
admirers who find you also to be a handsome man.
    [Laughter.]
    Mr. Greenspan. Thank you.
    Mr. Pearce. As far as my questions, I think that you have 
the concern I do about--you put it much better than I do--an 
overabundance of highly-skilled jobs and an underabundance of 
highly-skilled workers.
    I saw that play out when my father retired from a major oil 
company, and he was able to wring out, say, 100 barrels a day 
from certain wells, that the guy who was my age, that went on, 
could only get 50 barrels a day. And so we have incrementally 
seen a weakness in our economy because of an underperformance. 
And the next guy was paid exactly the same as my father was, 
and even more, and yet the productivity was not there.
    And so I am concerned about that. But I will tell you the 
concern that I have, that I do not hear many people speak of, 
is: If we take some of the tendencies to competition, say the 
ILCs, or large institutions buying the smaller ones, I wonder 
how long our economy can go without the reinvestment in the 
rural parts of the country, because always capital is going to 
find the larger rates of return, and I will guarantee you that 
every rate of return on any project in Manhattan is going to 
quadruple or be 50 times' the most attractive project in the 
state of New Mexico.
    And so incrementally I see our economy consolidating into 
the large centers, and it looks good on paper but has an 
underlying strength.
    Would you care to comment on my concern, both a parochial 
concern, but then for the country overall. Can we support the 
nation's economy from just the large power centers?
    Mr. Greenspan. Yes. Congressman, I am not sure I agree with 
you, and let me tell you why. What we do know is that the 
cutting edge of this economy is basically new companies which 
start from scratch, small business. Most of them fail. Those 
that really make it, do well.
    Now, it may very well be the case that after they make it, 
the entrepreneurs move to the big city. That may be true. But 
the real growth in this country is in the peripheral areas, 
where technology and innovation is the most pronounced.
    We do have an extraordinary advance that has occurred in 
the financial system in the United States in the last decade, 
which essentially has meant that we have carried technologies 
that would develop not in Manhattan Island, but they are most 
obviously applied to Manhattan, so that the value added, in a 
good part of Manhattan, is quite significant and growing, but 
the source of it is not fundamentally there.
    And I think what is so extraordinary about this country is 
the flexibility and the mobility. People move all the time. I 
mean, I think something like 20 percent of our households move 
every year.
    Mr. Pearce. Let me address one piece of that, then, and I 
know we are trying to----
    Mrs. Kelly. Mr. Pearce, we have been called----
    Mr. Pearce. Yes.
    Mrs. Kelly.--for a vote.
    Mr. Pearce. All right. Thank you.
    Mrs. Kelly. I am sorry. I am going to try to get as many 
people in as possible.
    Mr. Pearce. Thank you, Madam Chair.
    Mrs. Kelly. Let me go now to Ms. Wasserman Schultz.
    And please, Ms. Wasserman Schultz, do not take more than 2 
minutes. I am going to try to get everybody in.
    Ms. Wasserman Schultz. No problem.
    Thank you, Madam Chair.
    Mr. Greenspan, I just wanted to ask you to touch on health 
care. Yesterday the Financial Times reported that U.S. 
companies can expect about an 11 percent increase in health 
care costs over the next year.
    That will affect wage growth, it will affect their ability 
to hire more permanent workers and ask workers to share more of 
the expense.
    Can you talk about the ever-rising effect on our economy, 
with the significant increase in costs for health care over the 
years.
    Mr. Greenspan. This is clearly a major issue in this 
country. As you know, per capita we spend considerably more on 
health care than anybody else in the rest of the world. We do 
so because we have extraordinary advances in technology, and we 
have a much more sophisticated--overall--medical system. But we 
do not seem, as a consequence, to be able to significantly get 
better morbidity or mortality rates than others.
    It is mainly a system which is becoming ever larger, in 
part because pharmacological advances and technological 
advances have been so extraordinary that--especially with 
third-party subsidized payments, essentially, out of the 
Medicare system--you get huge demand; and my judgment is that 
because of this, we have a commitment to future retirees, under 
existing law, of medical services which could very well, as I 
indicated before, be a much larger demand on net real resources 
than we have the capacity to deliver.
    So I would say it is an extraordinary problem to have, 
because there is no question that we are making huge advances 
in medical technology, and the changes have enhanced American 
life, unquestionably, especially for the elderly.
    Mrs. Kelly. Thank you, Mr. Greenspan.
    Mr. Garrett?
    Mr. Garrett. Yes.
    Thank you, Mr. Greenspan. I appreciate your being with us 
today, and also the times in the past.
    Just one question, which is a follow-up question with 
regard to the GSE reform.
    And I also appreciate your opening comment saying that when 
you first arrived, that you had a hard time getting your hands 
around exactly how they operate. So if you have that 
difficulty, then I feel a lot better myself, trying to figure 
out how they operate.
    You had indicated already to one question with regard to 
the portfolio size your concerns about that and the concerns 
about this committee's lack of passing legislation that would 
address the growth in portfolio size.
    And the question by Mr. Hensarling was regarding another 
significant portion of that bill, and that is that 5 percent 
portion, as far as adding to the housing stock in the country.
    My question to you is: How do these two issues dovetail? 
And that is to say, with that 5 percent provision in there, is 
that just going to exacerbate the portfolio problem by putting 
any pressure or impetus on the industry to grow their 
portfolios so they----
    Mr. Greenspan. Well, there are some who argue that because 
it is a percent of profits--and profits are very clearly a 
function of the proportion of purchased mortgages which are put 
in portfolios, as distinct from securitized--then clearly one 
could argue, and indeed many have argued, that the incentive 
there is to increase the size of portfolios in order to create 
the income.
    But as I said before, we at the Federal Reserve have not 
taken a position on that particular aspect of the bill. That is 
not where our problems lie.
    Mrs. Kelly. Thank you, Mr. Greenspan.
    Mr. Garrett. Your problems are in the portfolio side?
    Mr. Greenspan. Correct.
    Mr. Garrett. Thank you.
    Mrs. Kelly. Ms. Moore?
    Ms. Moore of Wisconsin. Thank you, Madam Chair.
    Thank you so much for all your years of service, Mr. 
Greenspan.
    You have indicated over and over again that you favor China 
reevaluating its currency, and certainly in these halls there 
is huge debate about forcing them to do that. You said that 
they will do it for their own good.
    There are many people who think that we are darned if they 
do and we are darned if they do not, that if in fact they stop 
providing the cheap loans to us and in fact sort of call some 
of their loans in in order to buoy up their economy, because 
people are living very frugally over there, that there will be 
a huge burst in our housing market, that interest rates will 
rise, that consumer spending will fall, and it will lead to a 
recession.
    Do you agree that we are at risk, you know, particularly as 
we find ourselves pressing and pushing them to do this, that we 
could be at risk of seeing our economy fail?
    Mr. Greenspan. Well, all I can say to you is that we have 
examined the issue of the impact of purchases of foreigners' of 
U.S. Treasury issues and the increase or decrease of those 
purchases on U.S. interest rates; and there is an effect, but 
it is not a very large effect, and the reason is that in the 
aggregate world markets, there are enough securities that 
compete with U.S. Treasuries, for example, that you do not get 
as large an impact as you would suspect.
    But we do get an impact, there is no question about that.
    Ms. Moore of Wisconsin. And just very quickly, in terms of 
our low savings rate, do you think that a lot of thrust and 
call for these private accounts is based on sort of making up 
for the deficit----
    Mrs. Kelly. The gentlewoman's time has expired.
    Because of a prior agreement with Mr. Greenspan, and 
because we have been called for a vote, the chair is going to 
end this session with you, Mr. Greenspan.
    We are honored to have you with us. We thank you very much 
for, every time you have been here, your great patience.
    The chair notes that some members may have additional 
questions for this panel, which they may submit in writing.
    Without objection, the hearing record will remain open for 
30 days for members to submit written questions to these 
witnesses and to place their responses on the record.
    This hearing is closed.
    [Whereupon, at 1:01 p.m., the committee was adjourned.]


                            A P P E N D I X



                             July 20, 2005


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