The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
CONDUCT OF MONETARY POLICY Report of the Federal Reserve Board pursuant to Section 2B of the Federal Reserve Act and the State of the Economy HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS SECOND SESSION FEBRUARY 27, 2002 Printed for the use of the Committee on Financial Services Serial No. 107–56 ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 78–399 PS : 2002 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa MARGE ROUKEMA, New Jersey, Vice Chair DOUG BEREUTER, Nebraska RICHARD H. BAKER, Louisiana SPENCER BACHUS, Alabama MICHAEL N. CASTLE, Delaware PETER T. KING, New York EDWARD R. ROYCE, California FRANK D. LUCAS, Oklahoma ROBERT W. NEY, Ohio BOB BARR, Georgia SUE W. KELLY, New York RON PAUL, Texas PAUL E. GILLMOR, Ohio CHRISTOPHER COX, California DAVE WELDON, Florida JIM RYUN, Kansas BOB RILEY, Alabama STEVEN C. LATOURETTE, Ohio DONALD A. MANZULLO, Illinois WALTER B. JONES, North Carolina DOUG OSE, California JUDY BIGGERT, Illinois MARK GREEN, Wisconsin PATRICK J. TOOMEY, Pennsylvania CHRISTOPHER SHAYS, Connecticut JOHN B. SHADEGG, Arizona VITO FOSSELLA, New York GARY G. MILLER, California ERIC CANTOR, Virginia FELIX J. GRUCCI, JR., New York MELISSA A. HART, Pennsylvania SHELLEY MOORE CAPITO, West Virginia MIKE FERGUSON, New Jersey MIKE ROGERS, Michigan PATRICK J. TIBERI, Ohio JOHN J. LAFALCE, New York BARNEY FRANK, Massachusetts PAUL E. KANJORSKI, Pennsylvania MAXINE WATERS, California CAROLYN B. MALONEY, New York LUIS V. GUTIERREZ, Illinois NYDIA M. VELÁZQUEZ, New York MELVIN L. WATT, North Carolina GARY L. ACKERMAN, New York KEN BENTSEN, Texas JAMES H. MALONEY, Connecticut DARLENE HOOLEY, Oregon JULIA CARSON, Indiana BRAD SHERMAN, California MAX SANDLIN, Texas GREGORY W. MEEKS, New York BARBARA LEE, California FRANK MASCARA, Pennsylvania JAY INSLEE, Washington JANICE D. SCHAKOWSKY, Illinois DENNIS MOORE, Kansas CHARLES A. GONZALEZ, Texas STEPHANIE TUBBS JONES, Ohio MICHAEL E. CAPUANO, Massachusetts HAROLD E. FORD JR., Tennessee RUBÉN HINOJOSA, Texas KEN LUCAS, Kentucky RONNIE SHOWS, Mississippi JOSEPH CROWLEY, New York WILLIAM LACY CLAY, Missouri STEVE ISRAEL, New York MIKE ROSS, Arizona BERNARD SANDERS, Vermont Terry Haines, Chief Counsel and Staff Director (II) VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 CONTENTS Page Hearing held on: February 27, 2002 ............................................................................................ Appendix: February 27, 2002 ............................................................................................ 1 55 WITNESSES WEDNESDAY, FEBRUARY 27, 2002 Greenspan, Hon. Alan, Chairman, Board of Governors, Federal Reserve System ................................................................................................................... 5 APPENDIX Prepared statements: Oxley, Hon. Michael G. .................................................................................... Greenspan, Hon. Alan ...................................................................................... ADDITIONAL MATERIAL SUBMITTED FOR THE 56 59 RECORD Greenspan, Hon. Alan: Board of Governors of the Federal Reserve System, Monetary Policy Report to the Congress, February 27, 2002 ................................................ Written response to questions from Hon. Michael G. Oxley ......................... Written response to questions from Hon. Christopher Cox .......................... Written response to a question from Hon. Janice Schakowsky .................... Written response to questions from Hon. Ronnie Shows .............................. 77 112 128 129 131 (III) VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 CONDUCT OF MONETARY POLICY WEDNESDAY, FEBRUARY 27, 2002 U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, DC. The committee met, pursuant to call, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Michael G. Oxley, [chairman of the committee], presiding. Present: Chairman Oxley; Representatives Baker, Bachus, Castle, King, Royce, Kelly, Paul, Cox, Biggert, Hart, Gillmor, Shadegg, Miller, Cantor, Grucci, Capito, Ferguson, Rogers, Tiberi, LaFalce, Frank, Kanjorski, Sanders, C. Maloney of New York, Carson, Sherman, Sandlin, Meeks, Lee, Mascara, Inslee, Schakowsky, Moore, Capuano, Ford, Hinojosa, Watt, Maloney, Hooley, Gonzalez, Tubbs Jones, Lucas KY, Shows, Israel, and Ross. Chairman OXLEY. The hearing will come to order. Before we formally welcome Chairman Greenspan, I want to take a moment to welcome the Committee back to our newly refurbished Committee room. We’ve completed the bulk of our renovations to our Committee hearing rooms, which have taken a full year to accomplish. Over the last 6 weeks, we replaced the original 40-year-old audio system with a state-of-the-art digital sound system. The new system will enable all of us, and the audience, to hear each other clearly for the first time. We also added some multimedia and broadcast capabilities to the tools available to the Committee. All of these improvements will improve the work of this Committee, and make its proceedings even more accessible to the public. I particularly want to thank Chairman Ney for all of his support and hard work in helping us to complete this project. It probably didn’t hurt to have him on the Committee either. I also want to thank all the Members of this Committee for their strong support in making every aspect of this Committee, including our hearing rooms, the best on Capitol Hill. With that said, good morning, Chairman Greenspan, and thank you for coming here today. The world economy has been turbulent, and you’ve had issues to deal with that even you’ve never seen before. The economy has benefited greatly from your leadership at the Fed. In these uncertain times, experience and steadiness at the helm with the central bank are particularly important, so we’re all grateful for your continued service. Before we begin today, I also wanted to say that this Committee—and the Nation—owes you its appreciation for everything the Fed did in the days immediately following September 11th. The (1) VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 2 Fed, working with financial institutions of all kinds, all over the country, made it possible for our system to continue to work flawlessly at a time of great confusion and great peril. It is a great story, one that not enough people know about. And we owe you, and everyone at the Fed, our gratitude and I remember our conversation when you came back from Europe the day after the 11th tragedy, and your experience and dedication are most appreciated. Terrorism gave our stagnating economy a hard shove, but so far the war has caused no lasting economic damage. In fact, our economy is rebounding from recession despite the war, and despite the difficulties experienced by individual companies in many different markets. This is an amazing testament to our fundamental economic strength. We look forward to your views on what’s happening in the economy and what else can be done to speed the economic recovery. Congress also must do its part in a number of areas. We look forward to your opinions and reactions to many of those issues. This Committee overseas the growth engine of the economy—the companies that provide the capital for all of our businesses to expand, and to begin. That’s why your visit here twice a year, and that’s why we always seek your advice on things Congress can do that will help grow the economy. Our Committee was the most productive in Congress after September 11th. We’ve enacted bills ranging from the Patriot Act to eliminating excess fees investors pay for operations of the SEC— the second biggest tax cut of this Administration. We passed terrorism insurance legislation and a host of other bills. Throughout it all, we were doing much more than responding to terrorism: we’re trying to help the economy recover and grow. Economic growth remains our Committee’s focus today. It’s more important than ever for this Committee to focus on all the ways we can remove barriers to economic growth. As you state in your testimony, ‘‘deregulation and innovation in the financial sector have been especially important in enhancing overall economic performance.’’ Congress has made great initial strides in the 1990s. We began to deregulate financial and product markets in Gramm-Leach-Bliley. We made sure the trading on the stock markets occurred in decimals. We worked to help investors get more information from companies so they can make informed decisions about their portfolios. The result was unprecedented prosperity—and the unprecedented ability to bounce back after a recession after September 11. But it’s no time to rest on those accomplishments. There’s a lot more to do. Now more than ever, we need to free up capitol to seed new businesses and expand existing businesses. We need to make sure that the whole value of every business is reflected in its accounting and in its financial statements. We need to increase the transparency and usefulness of financial statements to the investing public so that as much light as possible to be shed on the operations of every company. We must continue to remove unnecessary economic and regulatory burdens on our businesses so that they can lead the economic recovery. We’re trying to do that here, both by reforming the VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 3 deposit insurance system and by spearheading regulatory relief for financial institutions. On these issues, and many others, we look forward, Mr. Chairman, to your continued advice and assistance and we appreciate your appearance here today. With that, let me yield to the gentleman from New York, Ranking Member, Mr. LaFalce, for an opening statement. [The prepared statement of Hon. Michael G. Oxley can be found on page 56 in the appendix.] Mr. LAFALCE. Thank you very much. Chairman Greenspan, it’s always a pleasure to have you before us. I’d like to highlight two areas that I believe are of great importance to the economy today. The fallout from the systemic problem known as Enron, and conditions in both our domestic and global economy. But first, I want to address monetary policy directly. I do not believe it is now appropriate to raise interest rates. I believe a move to raise rates in the weeks ahead could well jeopardize our fragile recovery in the domestic economy, and would likely have adverse consequences for the global economy. Much of my concern about the performance of the United States economy in the months ahead relates to the aftermath of the stock market bubble, the collapse of Enron, and what both have meant for the soundness of corporate financial statements and corporate governance. Between 1995 and 2000, you and a few others grew increasingly concerned about the possibility of a stock market bubble. Essentially, the stock valuations did not reflect the underlying earnings of publicly-traded companies. The concern was that the inevitable market correction could be volatile and steep, setting off adverse reactions in investor confidence, consumer confidence, banks’ willingness to lend, and so forth. Then, most recently came Enron. Unfortunately, I believe Enron is too symptomatic of a condition that has spread across corporate America in tandem with the stock market bubble. The desire to meet the expectations of an ever-rising market drove grossly inappropriate accounting and corporate governance practices, and exposed the shortcomings of regulation in these areas. I warned about these shortcomings shortly after our Committee obtained jurisdiction in January of 2001. I began calling in this Committee, the Rules Committee, the floor of the House, for a 200 to 300 percent increase in the budget of the SEC. In June of 2000, I sent all 600,000 of my constituents a newsletter on this subject dealing with the protection of investments and talking about the need to beware of Wall Street recommendations and to beware of the numbers explaining the earnings manipulation that has been taking place across corporate America, calling the conditions that existed in June 2001 the tip of the iceberg and calling upon our Committee to focus on one issue primarily: accounting. It took Enron to give this issue the attention it deserves. Unfortunately, I believe we have to be at least as concerned about these very same issues internationally. If the United States purportedly has the highest corporate financial standards in the world, what are we to make of the potential for Enrons in countries like Japan, China, India, even the EU, all of which have well-developed finan- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 4 cial markets but may have less than adequate regulatory standards. And our Big Five accounting firms are in virtually every major city in the world and very often the same auditors of the largest global companies. With an eye toward the global economy, I now want to go back to the issue of U.S. monetary policy. It’s clear to me that U.S. monetary policy has an increasingly long reach, extending well beyond our domestic borders. In particular, I’m concerned about the impact of premature rate increases in the United States on the situations in Japan and in Europe. In Japan, because they’ve had a stagnant economy for a decade, and are the second largest economy in the world. In Europe, because it’s going through the difficult process of solidifying a centralized monetary policy and achieving economic integration while also bringing in about ten new countries into the union. I believe it’s critical that the United States be cognizant of any policies that could impact economic conditions globally, especially in Japan and the EU. With respect to the EU, the member countries of it are in the midst of a grand political, social, and economic experiment not unlike the one our own founding fathers embarked on 226 years ago, and the global economy will be the ultimate beneficiary of successful economic integration. I hope that we, in our monetary and fiscal policy, will do all in our power to help support that endeavor. And Dr. Greenspan, I hope in the course of this morning’s dialogue, you’ll be able to discuss some of these issues too. Thank you. Chairman OXLEY. The Chair is now pleased to recognize the gentlelady from New York, Mrs. Maloney. Mrs. MALONEY. Thank you. Good morning, Mr. Greenspan, and thank you for appearing before us today. After eleven interest rate cuts over the last year, we are all hoping that the Fed will report that the country is through the worst of the recession and that growth is ahead. While we’re all hoping for a turnaround in the coming months, as many as two million Americans are expected to exhaust their unemployment insurance. These families cannot wait until a rising tide lifts all boats. The combination of the recession and the economic impact of the World Trade Center has made the situation particularly dire for your home State of New York, where 71 percent more people are now on unemployment insurance than at the same time last year. Last quarter alone, 65,000 New Yorkers exhausted their unemployment insurance benefits. The good news is that both the Democrats and the Republicans agree that we should help these families and pass a 13-week extension of unemployment benefits. I hope the House will soon follow the Senate and pass a clean unemployment extension. I am concerned that the predictions of some of the economists— and some of them have stated that they are concerned that positive statements from you today could foreshadow increases in interest rates; in fact, futures traders are betting that the Federal fund rate will rise this summer. My concern is that the Fed may reverse direction and begin to put the brakes on the recovery before out-ofwork people benefit from the turnaround in our economy. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 5 Other questions that I look forward to hearing from you today are your views on the failure of Enron, and the crisis of confidence it has caused in our financial markets. Also, in New York City, constituents tell me that the lack of terrorism insurance is holding back building projects, causing a credit crunch, and stalling the City’s overall recovery. I look forward to your comments on insurance and its impact on our economy. Finally, since your last appearance, our Government finances have turned 180 degrees. We have shrunk a $5.6 trillion unified surplus by $4 trillion. This is the most radical fiscal reversal in my lifetime. New spending to fight terrorism, to protect the homeland and to rebuild after the attacks is definitely legitimate, but I am very much opposed to the very expensive, retroactive special interest tax breaks that are likewise proposed. One earlier version of the budget even included a tax break for Enron. I look forward to your testimony today, as always. Thank you for being here. Chairman OXLEY. The gentlelady’s time has expired. We now turn to our distinguished witness, the Chairman of the Federal Reserve, Dr. Greenspan. STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM. Mr. GREENSPAN. Thank you very much, Mr. Chairman. I’ve a rather extended statement and I will excerpt from it, but request that the full statement be included for the record. Chairman OXLEY. Without objection. Mr. GREENSPAN. Since last July, when I last reported to you on the conduct of monetary policy, the U.S. economy has gone through a period of considerable strain, with output contracting for a time and unemployment rising. We in the Federal Reserve System acted vigorously to adjust monetary policy in an endeavor both to limit the extent of the downturn and to hasten its completion. Despite the disruptions engendered by the terrorist attacks of September 11, the typical dynamics of the business cycle have re-emerged, and are prompting a firming in economic activity. An array of influences unique to this business cycle, however, seems likely to moderate the speed of the anticipated recovery. One key consideration in the assessment that the economy is close to a turning point is the behavior of inventories. Stocks in many industries have been growing down to levels at which firms will soon need to taper off their rate of liquidation, if they have not already done so. Any slowing in the rate of inventory liquidation will induce a rise in industrial production if demand for those products is stable or is falling only moderately. That rise in production will, all other things being equal, increase household income and spending. But that impetus to the growth of that activity will be short-lived unless sustained increases in final demand kick in before the positive effects of the swing from inventory liquidation dissipate. Through much of last year’s slowdown, spending by the household sector held up well and proved to be a major stabilizing force. As a consequence, although household spending should continue to trend up, the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 6 Changes in household financial positions in recent years are probably damping consumer spending, at least to a degree. Overall household wealth relative to income has dropped from a peak multiple of about 6.3 at the end of 1999 to around 5.3 currently. Moreover, the aggregate household debt service burden, defined as the ratio of households’ required debt payments to their disposable personal income, rose considerably in recent years, returning last year to its previous cyclical peak of the mid-1980s. However, increased debt burdens appear disproportionately attributable to higher income households. As a result, although repayment difficulties have already increased, particularly in the sub-prime markets for consumer loans and mortgages, the overall levels of debt and repayment delinquencies do not, as of now, appear to pose a major impediment to a moderate expansion of consumption spending going forward. We have already seen significant spending restraint among the top fifth of income earners, presumably owing to the drop in equity prices. Moderate income households have a much larger proportion of their assets in homes, and the continuing rise in the value of houses has provider greater support for their net worth. Reflecting these differences in portfolio composition, the net worth of the top fifth of income earners has dropped far more than it did for the bottom 80 percent. Accordingly, most of the change in consumption expenditures that resulted from the bull stock market, and its demise, reflected shifts in spending by upper income households. The restraining effects from the net decline in wealth during the past 2 years presumably have not, as yet, fully played out and could exert some further damping effect on the overall growth of household spending relative to that of income. Perhaps most central to the outlook for consumer spending will be developments in the labor market. The pace of layoffs quickened last fall, especially after September 11th, and the unemployment rate rose sharply. However, layoffs diminished noticeably in January, and initial claims for unemployment insurance have decreased markedly, on balance, providing further evidence of an improvement in labor market conditions. Even if the economy is on the road to recovery, the unemployment rate, in typical cyclical fashion, may resume its increase for a time, and a soft labor market could put something of a damper on consumer spending. However, the extent of such restraint will depend on how much of any rise in unemployment is the result of weakened demand for goods and services and how much reflects strengthened productivity. In the latter case, average real incomes of workers could rise, at least partially offsetting losses of purchasing power that stem from diminished levels of employment. Indeed, preliminary data suggest that productivity has held up very well of late, and history suggests that any depressing effect of rapid productivity growth on unemployment is only temporary. While the balance of factors influencing consumer demand will have important consequences for the economic outlook in coming months, the broad contours of the present cycle have been, and will VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 7 continue to be, driven by the evolution of corporate profits and capital investment. The retrenchment in capital spending over the past year-and-ahalf was central to the sharp slowing we experienced in overall activity. New orders for equipment and software hesitated in the middle of the year 2000 and then fell abruptly as firms re-evaluated their capital investment programs. For much of the last year, the decline in investment outlays was fierce and unrelenting. These cutbacks in capital spending interacted with, and were reinforced by, falling profits and equity prices. Indeed, a striking feature of the current cyclical episode relative to many earlier ones has been the virtual absence of pricing power across much of American business, as increasing globalization and deregulation have enhanced competition. In this low inflation environment, firms have perceived very little ability to past cost increases on to customers. Business managers, with little opportunity to raise prices, have moved aggressively to stabilize cash flows by trimming work forces. These efforts have limited any rise in unit costs, attenuated the pressure on profit margins, and ultimately helped to preserve the vast majority of private sector jobs. Part of the reduction in pricing power observed in this cycle should be reversed as firming demand enables companies to take back large price discounts. Though such an adjustment would tend to elevate price levels, underlying inflationary cost pressures should remain contained. Slack in labor markets and further increases in productivity should hold labor costs in check and result in rising profit margins even with inflation remaining low. Improved margins and more assured prospects for rising final demand would likely be accompanied by a decline in risk premiums from their current elevated levels toward a more normal range. With real rates of return on high tech equipment still attractive, that should provide an additional spur to new investment. The recovery in overall spending on business fixed investment is likely to be only gradual; in particular, its growth will doubtless be less frenetic than in 1999 and early 2000—a period during which outlays were boosted by the dislocations of Y2K and the extraordinarily low cost of equity capital available to many firms. Even a subdued recovery beginning soon would constitute a truly remarkable performance for the American economy in the face of so severe a decline in equity asset values and an unprecedented blow from terrorists to the foundations of our market systems. For, if the tentative indications that the contraction phase of this business cycle is drawing to a close are ultimately confirmed, we will have experienced a significantly milder downturn than the long history of business cycles would have led us to expect. Crucially, the imbalances that triggered the downturn and that could have prolonged this difficult period did not fester. The obvious questions are what has changed in our economy in recent decades to provide such resilience and whether such changes will persist into the future. Doubtless, the substantial improvement in the access of business decisionmakers to real time information has played a key role. The large quantities of data available virtually in real time allow busi- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 8 nesses to address and resolve economic imbalances far more rapidly than in the past. The apparent increased flexibility of the American economy arguably also reflects the extent of deregulation over the past quarter century. Certainly, if the energy sector was still in the tight regulatory fetters of the 1970s, our flexibility today would be markedly less. Airline, trucking, and rail deregulation has added flexibility to the movement of people and goods across our Nation. Both deregulation and innovation in the financial sector have been especially important in enhancing overall economic resilience. New financial products—including derivatives—have enabled risk to be dispersed more effectively to those willing to, and presumably capable of, bearing it. Shocks to the overall economic system are accordingly less likely to create cascading credit failure. Lenders have the opportunity to be considerably more diversified, and borrowers are far less dependent on specific institutions for funds. Financial derivatives, particularly, have grown at a phenomenal pace over the past 15 years, evidently fulfilling a need to hedge risks that were not readily deflected in earlier decades. Despite the concerns that these complex instruments have induced—an issue I will address shortly—the record of their performance, especially over the last couple of stressful years, suggests that on balance they have contributed to the development of a far more flexible and efficient financial system. As a consequence of increased access to real time information and, more arguably, extensive deregulation in financial and product markets, and the unbundling of risk, imbalances are more likely to be readily contained, and cyclical episodes overall should be less severe than would be the case otherwise. However, the very technologies that appear to be the main cause of our apparent increased flexibility and resiliency may also be imparting different forms of vulnerability that could intensify or be intensified by a business cycle. From one perspective, the ever-increasing proportion of our gross domestic product that represents conceptual, as distinct from physical value added, may actually have lessened cyclical volatility. In particular, the fact that concepts cannot be held as inventories means a greater share of GDP is not subject to the type of dynamics that amplify cyclical swings. But an economy in which concepts form an important share of valuation has its own vulnerabilities. As the recent events surrounding Enron have highlighted, a firm is inherently fragile if its value-added emanates more from conceptual as distinct from physical assets. A physical asset, whether an office building or an automotive assembly plant, has the capability of producing goods even if the reputation of the managers of such facilities falls under a cloud. The rapidity of Enron’s decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation. The physical assets of such a firm comprise a small proportion of its asset base. Trust and reputation can vanish overnight; a factory cannot. The implications of such a loss of confidence for the macro economy depend importantly on how freely the conceptual capital of the fading firm can be replaced by a competitor or a new entrant into the industry. Even if entry is relatively free, macro economic risks VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 9 can emerge if problems at one particular firm tend to make investors and counterparties uncertain about firms that they see as potentially similarly situated. The difficulty of valuing firms that deal primarily with concepts and the growing size and importance of these firms may make our economy more susceptible to this type of contagion. Another more conventional determinant of stability will be the economy’s degree of leverage, the extent to which debt, rather than equity, is financing the level of capital. Clearly, firms find some leverage advantageous in enhancing returns on equity, and thus moderate leverage undoubtedly boosts the capital stock and the level of output. A sophisticated financial system, with its substantial array of instruments to unbundle risks, will tend toward a higher degree of leverage at any given level of underlying economic risk. But, the greater the degree of leverage in any economy, the greater its vulnerability to unexpected shortfalls in demand and mistakes. Although the fears of business leverage have been mostly confined to specific sectors in recent years, concerns over potential systemic problems resulting from the vast expansion of derivatives have reemerged with the difficulties of Enron. To be sure, firms like Enron, and Long-Term Capital Management before it, were major players in the derivatives markets. But their problems were readily traceable to an old-fashioned excess of debt, however acquired, as well as to opaque accounting of that leverage and lax counterparty scrutiny. Swaps and other derivatives throughout their short history, including over the past 18 months, have been remarkably free of default. Of course, there can be latent problems in any market that expands as rapidly as these markets have. Regulators and supervisors are particularly sensitive to this possibility. Derivatives have provided greater flexibility to our financial system. But their very complexity could leave counterparties vulnerable to significant risk that they do not currently recognize, and hence these instruments potentially expose the overall system if mistakes are large. In that regard, the market’s reaction to revelations about Enron provides encouragement that the force of market discipline can be counted on over time to foster much greater transparency and increased clarity and completeness in the accounting treatment of derivatives. How these countervailing forces for stability evolve will surely be a major determinant of the volatility that our economy will experience in the years ahead. Monetary policy will have to be particularly sensitive to the possibility that the resiliency our economy has exhibited during the past 2 years signals subtle changes in the way our system functions. Although there are ample reasons to be cautious about the economic outlook, the recuperative powers of the United States economy, as I have tried to emphasize in my presentation this morning, have been remarkable. When I reported on monetary policy to the Committee last summer, few if any of us could have anticipated events such as those to which our Nation has subsequently been subjected. The economic consequences of those events and their aftermath are an integral part of the many challenges that we now collectively face. The U.S. economy has experienced a substantial VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 10 shock, and, no doubt, we continue to face risks in the period ahead. But the response thus far of our citizens to these new economic challenges provides reason for encouragement. Thank you very much, Mr. Chairman. I look forward to your questions. [The prepared statement of Hon. Alan Greenspan can be found on page 59 in the appendix.] Chairman OXLEY. Thank you, Mr. Chairman, and it’s always good to have you here in front of the Committee. Let me begin. Obviously, your statements regarding Enron were timely and probably predictable as well, and I suspect the questions will be in that regard as well. In light of recent market movements, in the wake of Enron, it has been suggested by some that ultimately the market does a far better job of deterring abuses than does Government. What are your thoughts in that regard, and what would be some suggestions that you would give this Committee as we work our way through some of these difficult issues? Mr. GREENSPAN. I think Enron, as I indicated to the Senate Budget Committee the other day, is not a significantly negative event to the economy and, in fact, in the long run, its emergence may alter the way we govern corporations. That the long history of corporate governance will continue to be a very substantial and positive force for economic growth and productivity. I do believe that something fundamentally different has happened in this most recent period, and I think it’s important for us to go back and look at the causes of it. I would say particularly what has changed from the way I recall corporate governance, stock prices, stock markets, security analysis, years ago, is that in earlier years there was not any really significant emphasis of the type we see today on short-term corporate earnings. Indeed, dividends were exceptionally high. In fact, the yield on dividends before 1950 for several years was 6 percent; it’s now a little more than 1 percent. And if most of what you get from a corporation is cash, you don’t worry about how it was calculated, you just take the money and that’s it. But one with the significant change that occurred with the propensity to buy back stock, which only occurred in the early 1980s with rulings which somehow delimited the concerns that stock buybacks would be perceived as price manipulation. That very act caused a very major shift from cash dividends to stock purchase. Two other events were very important in that context to create the environment which ultimately led to the Enron debacle. One was the unfortunate reversal of the FASEB ruling in the early 1990s about stock option accounting. We estimate that over the past—or say the period 1995 to the year 2000—almost 3 full percentage points of the annual average gain in earnings resulted from the fact that stock options, rather than cash, was used as compensation amongst our major corporations. This undoubtedly had an effect of accelerating the earnings outlook which in turn had been very significantly propelled upward by the structural change in productivity. And so what occurred as a consequence of all of these forces was an endeavor to try to game the accounting systemin a manner to VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 11 create the perception of short-term earnings growth which would be confused with long-term earnings growth. If long-term earnings growth were properly evaluated over this period, I don’t think we would have had very much of the type of problems that we’ve had, but there’s been a significant endeavor to make the data look as though something fundamentally different is going on in corporate America, and that has been unfortunate. Much of that has already been reversed by the market. There is now a very significant shift toward corporations endeavoring to be far more transparent on what they are doing, the markets are clearly creating price earnings premiums for corporations which are perceived to be without spin, so to speak. And so a goodly part of what needs to be done to restore corporate governance to where it was in earlier years, and I must say back then it did a pretty good job, and the vast majority of corporate governance in today’s markets, even with Enron debacle, is of superior nature and indeed far superior than any other place in the world, but we do need to fix what is wrong with our system, and I would suggest that a proper diagnosis is clearly the first step in determining what should be done. Chairman OXLEY. Thank you, Mr. Chairman. My time has expired. Let me now yield now to the gentleman from New York, the Ranking Member, Mr. LaFalce. Mr. LAFALCE. Thank you very much, Mr. Chairman. I disagree with you fundamentally and also with Dr. Greenspan in some of his introductory comments. First of all, I think we’ve shown that we cannot rely on the unfettered magic of the marketplace alone. That with respect to publicly traded there must be significant regulation. That the SROs, the self-regulatory organizations have not worked. They’ve not worked with respect to the securities analysts, they’ve not worked with respect to the accounting firms. We need a significantly enhanced role for the Securities & Exchange Commission. We need to appropriate moneys for pay parity. We need to significantly enhance their resources to do the job, because so many Americans today do have almost all of their wealth in the markets. They have defined contribution plans today rather than defined benefit plans. They’re not putting their money in banks where you, Chairman Greenspan, have your examiners there on a daily basis, where the State bank examiners are there on a daily basis. They’re in the markets and we need to protect them. I disagree with you when you say that Enron is not a significant event. I think Enron is a most significant event. I think we can, you know, make lemonade out of lemons to be sure but we can never deal with the fact that four to five trillion dollars of American money has been lost in the markets, a great amount due to the excesses, to the bubble, to the speculation, but a significant amount due to earnings manipulation. Now, where I do agree with you strongly is with respect to stock options. So much of what took place was done by corporate officers and the audit committees of boards of directors, all with stock options that were interested in one thing and one thing only. And that was enhancing market capitalization so that they could have VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 12 a good return on those stock options. And we must deal with all of those. Now who’s we? We is Government. The marketplace will be more vigilant now for a month, for two, maybe a year or so, but nothing can substitute for a strong regulatory environment for our publicly traded companies, and that’s what we must achieve. And if anybody thinks that we can achieve the end result of protection of American investors without that, they are deluded. Now, having said that—— Mr. GREENSPAN. Can I respond? Mr. LAFALCE. Sure. [Laughter.] Mr. GREENSPAN. You are quite correct, I might add, in saying that we need more resources for the Securities & Exchange Commission, especially on the pay parity issue, which I think is long overdue. I did not say, nor do I believe that there are not adjustments that are required and indeed ought to be made and I would start off with the way we account for stock options, I would account for a number of other issues as to the way we have corporate governance, because significant things have happened in the recent decades which require adjustment. I want to emphasize, however, that the overall level of corporate governance has served us well over recent decades including the current period by the vast majority of corporations who see their, management sees their self-interest as coincident with those of shareholders. I don’t want to get into the economics of this, but if we could make that tie locked in some manner or another, we will maximize the allocation of capital in this economy. There has been a severance, in my judgment, of the interests of the chief executive officer in many corporations from those of the shareholders, and that should be pulled together. Stock options help but not if they are functioning in the manner in which they currently are. Mr. LAFALCE. Dr. Greenspan, if I could just get one question. Could you comment on the conduct of United States monetary policy within the global context, given the fact that there is now one monetary policymaker in Europe that they are achieving integration with, while at the same time expanding, that Japan has been in the doldrums for a decade or so and the interplay that goes on in your decisionmaking between the domestic and the global economy. Mr. GREENSPAN. Well, Congressman, as you well know, our mandate is to maximize long-term sustainable economic growth in the United States. I mean, we consider foreign conditions only to the extent statutorily as they impact on us, and obviously as they increasingly do so, we become far more interested in what’s going on in the world and respond to it. And indeed, we have. In other words, a considerable part of our analysis of what’s been going on in the American economy in recent years has had a very high level of international interrelationship and fallout in certain respects. So we do evaluate the European economy, the Japanese economy, East Asia, Latin America, at a fairly extensive level to make certain that our policy, which is implemented here and focused on the American VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 13 system is not going to be deflected by events that we perceive are occurring more abroad. Chairman OXLEY. The gentleman’s time has expired. The Chair is now pleased to recognize the gentleman from New York, Mr. King. Mr. KING. Thank you, Mr. Chairman. Good morning, Mr. Greenspan. It’s always a pleasure to have you here. Let me just at the outset, as a New Yorker and as an American commend you for the critical role you and the Fed played in providing the liquidity that was so important after September 11th. It was very reassuring and I want to thank you for that. I’m going to focus my questions on the question of interest rates. And this in a way is a follow-up to what Mr. LaFalce was talking about with the Japanese economy being in the doldrums. I would ask you if you could just make some comments on how low interest rates can go before the cutting of the interest rates loses its impact. Now Japan has had low interest rates for a number of years and it appears that has had no impact as far as rebuilding the economy. If you could tell us how close you think we are to that level where perhaps it can’t go any lower. Second, in that regard, even though the rates have gone down, the discount rate has gone down, the long-term rates have not gone down. How essential do you believe the reduction of long-term rates are to the long-term growth of the economy? Mr. GREENSPAN. Well, Congressman, I would not view the Japanese experience as a general experience with respect to how low interest rates could or could not go. The problem in Japan, as I’ve indicated on many occasions, is that they have only one major form of financial intermediation, which is their banking system, and their banking system, as you know, is in very serious difficulty, so that the ability of monetary policy to function, in my judgment, is impaired in a manner which makes it very difficult to read what basically the level of rates and the level of economic activity are doing. I think it’s very difficult and one should not generalize from the Japanese experience. The issue of long-term rates is quite an important one because, while undoubtedly short-term rates do have significant impacts on the American economy, far more it relates to longer-term rates. Longer term rates are a function essentially of, one, inflation expectations, and the underlying real rate itself. And what we have observed in this economy is that long-term rates did come down quite materially at the tail end of the year 2000, but have essentially stabilized, as I think you pointed out, for the last year or so. But they have stabilized their relatively low historic rate and indeed one can observe what’s occurring in the housing market to basically see the impact of what mortgage rates have done. So it’s a complex issue but at the moment I think that we do not see any really significant inflation premiums embodied in longterm rates and that frankly is a good sign. Mr. KING. One follow up question, Chairman Greenspan, is regarding the Argentine and Japanese economies. How significant do you think their doldrums are going to have on our prospects for long-term growth? VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 14 Mr. GREENSPAN. Well, as difficult as the problems in Argentina are, and they’re really having considerable structural problems, and we only hope that they can correct them as quickly as possible, they have not had a contagion effect where one would ordinarily have expected them to have an effect, specifically in Brazil where markets are doing reasonably well and especially in Mexico, which has done quite well. So in Latin America, it’s important that Argentina stabilize as quickly as they are capable of doing, but fortunately, there’s not been significant fallout. Japan has been essentially stable for a decade now. Growth has been effectively zero. And it’s difficult to read exactly how changes in the Japanese economy impact the rest of the world. Clearly to the extent that they are the second largest economy in the world, they do affect us, and clearly what is going on in Japan is negative to the United States outlook. But I do not perceive it as a major factor containing a recovery in the United States which we believe is just beginning to get underway. Mr. KING. Thank you, Chairman Greenspan, Mr. Chairman. Chairman OXLEY. The gentleman’s time has expired. The gentlelady from New York, Mrs. Maloney. Mrs. MALONEY. Thank you, Mr. Chairman. Mr. Chairman, I want to likewise thank you for moving quickly and dropping interest rates 50 basis points in the very uncertain environment the day the financial markets opened shortly after September 11th. As New York works to recover from the terrorist attack, it’s critical that we have an accurate assessment of the economic damage to our city, State and the private sector. After having contacted CBO and many other agencies, no single Federal entity is compiling an in-depth analysis of the economic impact on New York and costs to its institutions. I know the New York Federal Reserve has a very large and accomplished research staff and I would like to appeal to you, and will do so separately, to President McDonough, for just such a well-researched economic analysis. New York really needs your help. Could you help us with this? Mr. GREENSPAN. Well, Congresswoman, I agree with you that the Federal Reserve economic staff is first rate and a considerable part of what they do is a continuous evaluation of the Second District, obviously New York City being a very major part of that district. But I will communicate to them, and I assume you will speak to President McDonough, and my impression is that they probably are fairly far along in examining the type of issues that you think are important to be examined. Mrs. MALONEY. That would be extremely helpful. As a Representative from New York, I am spending a great deal of my time on the recovery effort. One of the areas that I am hearing tremendous concern from my constituents is the lack of availability of terrorism insurance, the escalating cost of insurance. Many building projects and proposals have not been funded and turned down by the banks as being too risky, and there appears to be a credit crunch that is stalling the recovery of New York City and New York State. I would like to hear your comments on the fallout from the lack of insurance, terrorism insurance, and do you think a Fed- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 15 eral reinsurance program is necessary? Could you share your thoughts? Mr. GREENSPAN. Well, we have obviously spent a good deal of time on exactly that issue, because it’s a crucial aspect of a fairly large segment of the economy. The difficulty that one has when dealing with terrorism insurance is that it is exceptionally difficult for an insurer or even a reinsurer to have any sense whatever of what the probability distribution of a terrorist event is and, more importantly, what is its magnitude. In all insurance, you have to have some general knowledge of what the parameters of what could happen are, or you cannot set premiums. In this case, it is virtually impossible to do so and a number of people have argued I think somewhat effectively that what may be necessary here is for the Congress to stipulate that in the event of a terrorist attack clearly defined as a terrorist attack, that the Federal Government, with some deductible, would cover the cost of that. The problem that you have with trying to do it before the event is it’s almost impossible to know precisely how to construct a response to it, but if individuals know that after the fact that it will, in fact, be covered one may hope that you can construct a means by which there can be some form of reinsurance to remove the types of problems that we see. This is an issue which I think there is considerable dispute on, because we don’t know what the nature of what it is we are facing. But I’m one who thinks that we ought to be addressing this not solely because of its impact on the economy, but there is a very difficult problem of how one handles things over which one is not responsible. The issue of home security is now, in fact, indistinguishable from our national defense budgets, and much of that has the same basis of taxation for financing. Mrs. MALONEY. Thank you very much. And I ask unanimous consent to add additional questions to the record. Thank you. Chairman OXLEY. Without objection. The Chair now is pleased to recognize the gentleman from Alabama, the Chairman of the Financial Institutions Subcommittee, Mr. Bachus. Mr. BACHUS. Thank you, Mr. Chairman. Chairman Greenspan, first of all I welcome your written testimony on Enron. You’re on the President’s working group and I think what you said here is very valid as to what happened at Enron. My question is—I’m not going to ask you for a prediction—I’m going to ask you for what’s happening real time. I know you have folks at the Fed who look over data. You spend a lot of time focusing on productivity. My question is a simple one. You talked about through the last decade a surge in productivity. Real time, are we continuing to see an increase in productivity, or is it slackening, is it constant, or is it declining? Mr. GREENSPAN. Well, Congressman, the data that now appear to be in real time, as you put it, probably are exaggerating the underlying trend in productivity, if for no other reason than the numbers look just too large to be credible. We’re going to have another upward revision in the fourth quarter’s productivity numbers, and if you take a look at the first quarter, we already have a good deal VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 16 of data in on both the numerator and denominator of output per hour. And at this particular stage, unless average hours worked rises very sharply in the February-March period, for which we don’t as yet have data, and/or payroll numbers rise significantly, we’re going to have a very large increase in the first quarter. So while I doubt very much if they will be representative of the true underlying trend, the do nonetheless confirm that the long-term trend of productivity has managed to sustain itself through these very difficult times of say the second quarter of the year 2000 to date. That doesn’t necessarily mean it will continue, but since you didn’t ask me for a forecast—— Mr. BACHUS. No, that’s right. Mr. GREENSPAN. And I think the real time data are really quite impressive. Mr. BACHUS. Thank you very much, appreciate that. I’m going to yield the balance of my time to the gentlelady from Pennsylvania, Ms. Hart. Ms. HART. Thank you, Mr. Bachus. I have a question actually regarding interest rates. They’ve obviously been quite helpful to some businesses we’ve heard. However, in my district there are some smaller and medium-sized businesses that now are having serious trouble getting access to credit caused by the new pressure on loan portfolios. Do you have evidence of the tightening of that kind of credit, particularly available to kind of the main street-type businesses? And if so, do you expect that to have a negative impact on our efforts to pull out of the recession? Mr. GREENSPAN. Congresswoman, the evidence there is mixed. We are observing certain tightening in some of the banks of a modest type. We’ve not yet seen, or I don’t know whether you could say not yet, but we do not see the general pressure on small business as reported by the National Federation of Independent Business. They have a fairly extensive survey of their members, of credit conditions available to them, and their series have not indicated any really serious concerns. But it’s highly unlikely, in a period such as we’ve been running through, that there wouldn’t be some difficulties. Indeed, if somebody told me there were none, I would say the data are wrong. So there clearly are such events. Hopefully, if the economy continues to show the signs that it has been exhibiting of late, some of that pressure will be removed, and I would hope that the opening up of profit margins and improved balance sheets would bring a number of especially smaller enterprises up to a level where credit availability is no longer a difficulty for them. Ms. HART. Is there an action regarding that that you think the Fed could take or should take that would be appropriate that would help them? Mr. GREENSPAN. I don’t think that there’s anything that we, the Federal Reserve, can do and at the moment frankly I don’t think anything really needs to be done because, unless I’m mistaken and this whole change in the economic environment is a false dawn, then things should improve. Ms. HART. Thank you. Also there was a report released yesterday. This is dealing with the steel issue and all the bankruptcies we’ve had in the steel industry. American University released a re- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 17 port that if the Administration didn’t act strongly regarding the 201 and either implementing a tariff rate of maybe 40 percent or so, that about 325,000 American steel jobs would be lost in the coming months. Mr. GREENSPAN. How many? Ms. HART. About 325,000. Mr. GREENSPAN. There aren’t 325,000. Ms. HART. I think it’s steel producing jobs around that industry. Mr. GREENSPAN. I see. Ms. HART. Anyway, there already are a significant number of bankruptcies. There are many more companies, especially in the area that I represent, and I think a lot of the areas in the midwest and in the east, that would lose a lot more jobs. And the bankruptcies are also affecting office suppliers and others. What effect do you think that would also have on the economy in general? Do you think it’s large enough to affect it in general? And do you think it would slow our pulling out of the recession as well? Mr. GREENSPAN. Now, as you know, the President has to make a judgment before March 6th on the 201. It’s a difficult decision for lots of obvious reasons. But I think the important issue which is on the table is not only the impact that it has on, one, jobs, and the 600,000 retirees in the steel industry, who have as we call significant legacy costs, but it’s also an issue of what a marked increase in steel import prices would do to the costs of steel using industries, of which the numbers are quite significantly larger than the roughly 150,000, 175,000 who work directly in the steel industry. In my judgment, far more important than that, because neither of those two issues are big as far as the domestic economy is concerned, is the implication for our international trade posture. And here the whole question of the importance of international trade and how we handle it is critical to, in my judgment, the next number of years, because even though I raise the issue of the flexibility and resiliency of our economy being the major reason for the fact that we didn’t go into a severe contraction in this most recent period, but what I didn’t mention but which is also the case is a very substantial part of the economic growth that we’ve experienced in the post-World War II period occurs as a consequence of the opening up of international markets for which the United States has been the largest recipient of growth as far as I can evaluate. So I think the President’s got a very difficult set of choices before him, and I wish him well. [Laughter.] Chairman OXLEY. The gentleman’s time has expired. Ms. HART. Thank you Mr. Bachus, thank you, Mr. Chairman. Chairman OXLEY. The gentleman from Massachusetts, Mr. Frank. Mr. FRANK. This illustrates the dilemma, the colloquy you just had, which is this. You and many others believe, and I share that to some extent, that the increased open trade regime is helpful to the economy. One of the major obstacles is precisely the resistance engendered by the only 175,000 people who may lose their jobs. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 18 They tend not to think of themselves as ‘‘only.’’ Well, from the macro standpoint, they’re only; for them, they’re it. And I am afraid that we may be exacerbating that. I read the Administration’s analytical perspectives on the budget and they, in their analysis on page 24, come back to something we’ve discussed before, the NAIRU, the non-accelerating inflation rate of unemployment and give it a much higher rate than I think experience has shown. And their projection is that given everything they want to do, this is their optimistic projection. If the Administration gets all that it wants in the budget, unemployment will level off at 4.9 percent for the next decade and stay at 4.9 percent. It’s about 25 percent higher than we had managed to get it during the growth. Here’s what troubles me. You say, and I hope you’re right and I’m inclined to agree that the productivity gains that we have been having are not going away. It’s the productivity gains in part that helped us get the unemployment rate lower consistent with low inflation. If in fact, you’re accurate, I hope you’re going to tell me you don’t agree with this, because if you’re going to go to a 4.9 percent best case unemployment, we’re talking about 4.9 percent after the recession and full recovery. If that’s as low as we can get it, if, in fact, the Administration is correct, and I don’t believe they are, that there’s an economic rule that says we can’t go below 4.9 percent for any considerable period lest we trigger inflation. Then not only is that going to be socially a problem but it’s going to exacerbate precisely the resistance to the kind of trade regime you want to see. So I’d be interested in your comment. Do you agree with them. I know you’ve been skeptical about the whole concept of NAIRU but is it, in fact, the case that we’re going to have 4.9 percent unemployment best case, going out, 25 percent higher than we’ve been able to get to? Mr. GREENSPAN. I don’t consider the fact that there’s a 50,000, 100,000, 175,000 jobs at stake an irrelevant consideration. Indeed, it’s much less than that because, as you know, half the industry is minimills, and they’re not in the same difficulties that the socalled traditional coke operated and blast-furnace steel type of operation is in. But my own judgment is that we should focus very significantly on making certain that those, who through no fault of their own lose their jobs because of the opening up of international markets, that we make certain that they are appropriately compensated and taken care of by any number of programs which one can conceive of. Mr. FRANK. All right, let me just ask in the written part. I want to get to some other questions. I’d be interested if you would give me a list of the ways of compensating people who are getting hurt this way that the Federal Reserve would think was a good idea. And the problem of course is that we’re in a budgetary situation in which some of those things are being cut and not expanded, but I’d be interested in the programs you supported. Mr. GREENSPAN. Let me put it this way. In this regard, I’m speaking for myself, not the Federal Reserve. Mr. FRANK. Well, I’ll take a few personally. It’s OK, the rest are on their own. I’ll ask for that from you personally. But do you think VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 19 4.9 percent, though—let’s get back to the macro question—do you think 4.9 percent is as good as we can do for the next 10 years unemployment? Mr. GREENSPAN. No, Congressman. I have not changed my view on that since we discussed it last. And I have serious questions about the concept itself, because I don’t believe it’s a stable number and I don’t believe that one can categorize. Mr. FRANK. Well, I appreciate that and I think having the Administration’s official projection be that again, this is assuming that they get everything they want in terms of policy, we’re going to be at 4.9 percent. That’s very discouraging so I hope the next time you and Mr. Hubbard are talking, you might bring that up. Let me ask you another question about long-term interest rates. In the written report we got, on page 23, it talks about the failure of long-term rates to continue to drop, although, as you said, they’ve dropped some, and the report says, ‘‘they may also have been held up last year by an increased likelihood of Federal budget deficits and investors’ optimism about future economic prospects.’’ Now that’s another issue. Some have argued that the budget deficit is irrelevant or has only very slight relevance to long-term interest rates. Would you elaborate on that? Mr. GREENSPAN. I’ve always argued that there is a relationship and indeed I think the markets respond as though there is a relationship, and I think quite properly so. Mr. FRANK. Well if the markets respond that way, then there is obviously. Mr. GREENSPAN. Of course. Mr. FRANK. So you think there is a—you’re unusually reticent. I hope it’s not simply the reluctance to disagree with the Administration that gives us the shortest answer I’ve ever heard you give on an important issue. [Laughter.] Mr. FRANK. Would you elaborate a little more? Do you believe that the switch in the Federal fiscal situation from expected surplus to expected deficit has had an impact in keeping long-term interest rates from dropping as much as they otherwise might? Mr. GREENSPAN. No. As I’ve commented and testified previously, I do believe that the extent to which interest rates have not come down as much as they ordinarily would have in a period say such as this is partly the result of a change in the long-term fiscal policy. Mr. FRANK. That’s two things to talk to Mr. Hubbard about. Chairman OXLEY. The gentleman from Louisiana, Mr. Baker. Mr. GREENSPAN. I agree with most of what he says, however. Mr. FRANK. Well, the Republicans can ask you that, Mr. Greenspan. Chairman OXLEY. Call on Mr. Baker. Mr. BAKER. Thank you, Mr. Chairman. Chairman Greenspan, welcome. I wanted to return to what I believe is the underlying economic perspective of the statement this morning which is essentially that an information-based economy must have access to accurate free flow of information in order for it to function properly. Even with the free flow of such accurate information, that would not predetermine the advisability of some VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 20 particular capital investment decision, but real time accurate information enables proper balancing of equities to minimize potential market distortions which have resulted from the release of misleading data. Thus, any revision of a rule, regulation, or statute that provides for additional transparency, responsibility for disclosure of material facts, even more forward-looking statement responsibility should, to the contrary opinion of some, minimize, not enhance, market volatilities. As I understand your statement, reputational capital or the belief that a non-marketed idea has significant value, underscores the need for meaningful corporate disclosure. Additionally, it is appropriate I think for careful review of all corporate governance standards, given the fact that reputation has driven many investment decisions. Some have suggesting that Government regulation can move faster than the markets to preclude unwarranted activity. I don’t believe that is well-founded. Certainly smart investment individuals know that Rule 10.b[5] exists and fraudulent conduct can take you directly to jail without going anywhere else first. And for those who choose to distort and misrepresent, Government can provide for consequences of that inappropriate behavior, but we cannot preclude such behavior. However, real time disclosure of accurate information to the markets provides a much more difficult problem for those who choose to pursue ill advised course, and that is an inability to secure the capital in the first place to engage in an ill advised investment practice. Therefore, my question goes to the advisability of the Committee’s future work, not only to examine but to modify where justified disclosure requirements, the nature of the disclosures to be made, the timing of the disclosures, to define more clearly the responsibilities of corporate executives and members of the board, not only to disclose material facts but to ensure the independence of the audit team in reporting of the accurate financial condition of the corporation. Such a system should ensure that markets, and by that I mean every investor, has a platform to make a decision from which real information leads to sound investment strategies, not always success but the best possible strategy one can devise from his own perspective. Looking backward, Rule FAS–133, for example, on the treatment of derivatives reporting, even the fair disclosure regulation I would suggest has not resulted in the type of disclosure regimes which I think enable competent investment decisions to be made. And we should be encouraging real time material fact disclosure, forwardlooking statements in order to ensure that information flows precedent to the decision being made. Can you comment? Mr. GREENSPAN. Yes. Congressman, I generally agree with the whole thrust of your remarks. Let me just say this, that it’s a very complex issue and clearly as we move toward an increasingly conceptual environment, the values that are relevant to producing future income flows and hence the market value of a firm, depend very much on, as I said in my prepared remarks, ideas which you cannot physically feel. Mr. BAKER. Let me interrupt on that. Particularly on that point, a report that indicates the historical position of the corporation, which is 90 days old does not indicate where an idea-driven cor- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 21 poration is going in the next 30 days, and the reporting system itself leads to some misrepresentation in the investor’s mind. Mr. GREENSPAN. I think that is a very relevant consideration. I would say that in periods in the past when most wealth was visible, in other words, you had automotive plants, petrochemical feedstock operations, steel mills, there was real assets which one could evaluate and you couldn’t spin what your open hearth furnace capacity was, it was real. In today’s environment, it is very important that the form of disclosure essentially fit the nature of the value creation process. Mr. BAKER. And that the disclosure is complete so there’s not offbalance-sheet obligations which do not reflect the true financial condition of the corporation. Mr. GREENSPAN. I would say, however, that it is important to remember that no matter what you do, unless you changes the incentives to game the GAAP accounting system, it will be gamed. Mr. BAKER. Well, if an executive has a no-cost—— Chairman OXLEY. The gentleman’s time has expired. Mr. BAKER. Just three seconds. If an executive has a no-cost option, can run up the stock price, capture that, and then do a restatement of earnings 6 months later, the shareholder takes the loss, the executive doesn’t, and I think that’s something we need to look at. Mr. GREENSPAN. Agreed. Chairman OXLEY. The gentleman from Pennsylvania, Mr. Kanjorski. Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Chairman, following up on Mrs. Maloney’s question on terrorism insurance, we are going to have a hearing later on this afternoon on that very issue to see what the risk is to the economy. But, I would like to find out whether or not the Federal Reserve has gathered any evidence to demonstrate that this lack of coverage has caused any drag on the economy, or what the potential future of the economy is, and most of all, how you see the potential risk and exposure of our banks? Has there been any use of the failure to acquire terrorism insurance as a default mechanism in some of our financial institutions? Mr. GREENSPAN. Congressman, we haven’t seen any impact of that nature on the banks. Indeed, much of the problem is it’s presumed that banks won’t lend unless a particular borrower has forms of insurance which previously they did not need. So the problem is not threats to the banking system, the problem basically is whether or not the types of real estate activity which occurred in the past very readily is being held up. Whether construction’s being held up, whether, in fact, there’s a significant impact on the economy. To date, in an aggregative sense, it does not appear to be the case. We are still struggling to get enough adequate data to make judgments but clearly there have been effects. What we do not know is what the aggregate size of those effects are because we largely are dealing with anecdotal rather than macro economic data systems. Hopefully at some point, we’ll be able to get considerably more information but at this stage, I think it’s actually too early to make a judgment of that type. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 22 Mr. KANJORSKI. But could I assume, though, that you feel that the Congress should take action and provide some sort of backstop? Mr. GREENSPAN. I personally do, yes. Mr. KANJORSKI. Now, moving to an entirely different matter, the Federal Reserve and the Treasury Department have had under consideration a proposal that would allow national banks and financial holding companies to engage in real estate management and brokerage. The proposal has attracted considerable opposition here on the Hill. As you know, in passing the Gramm-Leach-Bliley Act, Congress did not intend for banks to engage in commerce. But this proposal, in my estimation, would subvert congressional intent. What is the status of this ill-conceived regulation? Could we get a report? Mr. GREENSPAN. Well, Congressman, as you point out, there has been considerable discussion on this issue, and the consequence of that is an extraordinary amount of comment that we have been getting as a consequence of our request for comment on various different types of rulings. The result is we have a lot of processing to do so we will work through it. And obviously since we have to coordinate with the Treasury Department, we will move as quickly sa we can, but at the moment it’s going to be, in my judgment, a while just effectively dealing with the processing of comments that we have so far today. Mr. KANJORSKI. Thank you, Mr. Chairman. I yield back my time. Chairman OXLEY. The gentleman yields back. The Chair now recognizes the gentleman from the First State, Mr. Castle. Mr. CASTLE. Thank you, Mr. Chairman. Chairman Greenspan, let me preview a question I’m not going to ask you but I’d like to submit in writing to you. I mean I know you’ve probably heard it before but it relates to the creation of money and the selling of money by the United States the Bureau of Engraving and Printing and the Mint which, as you know, are done fundamentally differently, and it seems to me that the BEP’s methodology is clear, more transparent in terms of what they’re doing and also accounts for the dollars in a better sense. The Mint I think the way they do it has a lot of obfuscation to it that perhaps there’s some controls on the Mint which are not totally in place, not that they’re doing anything wrong with it, and obviously it doesn’t score income for Congress and the 50-state quarter program which I was involved with is going to produce now $5 to $10 billion in so-called profits and that’s something I think we need to look at. I’ll submit in writing. My question I want to ask you, questions I want to ask you today relate to the economy, if you will. A year ago, your outlook report delivered here predicted, and I quote: ‘‘Stronger economic additions to emerge as the year progresses’’ with the economy growing at a rate of 2 percent to 2.5 percent. The report also said, and I quote again: ‘‘an end to the profitable investment opportunities in the technology area does not yet seem to be in sight.’’ I guess that was a longer term than a year statement, since households and businesses are still in the process of putting recent innovations in place. Even without the 9/11 attacks, it does not appear that the VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 23 economy would have achieved the results, the 2 percent to 2.5 percent results. To what do you attribute this under performance? Mr. GREENSPAN. Well, Congressman, I’m not sure that that statement is accurate. Mr. CASTLE. You believe it was 2 to 2.5 percent? Mr. GREENSPAN. Well, no. I think it was less but not all that much less. As we were going into the month of August, the economy was clearly gathering some stability and as we’ve seen what’s happened in the last few months, I’m sure we would not have made the actual, the Federal Market Committee’s forecast would have fallen short, but I’m not sure it would have fallen short by a particularly large among. Mr. CASTLE. So you’re saying without September 11th, we would have come close, even though we might not have achieved it? Mr. GREENSPAN. Clearly, without September the 11th, the third quarter would likely have been no change or maybe a small plus or very small minus, and the fourth quarter would probably have done better. Now whether or not that would have added up to the figures that we have, I don’t know, but I think that the quality of the forecast, if I may differentiate from the numbers, was not all that far off in my judgment. Mr. CASTLE. Well, let me extrapolate all that and carry it to the future which is what I guess we’re all more concerned about right now. Economic indicators demonstrate that we’re coming out of the recession, at least some of them do that I’ve seen, if we’re not out already on a technical basis. I would like to factor into that what the economic impact of the long term war on terrorism may be, which I think it is going to be, and also the Enron effect, which appears to be reduced capital markets of a substantial nature and other corporate uncertainty which is going on out there. Will these eventually trigger a recession, going back into a recession? If so, what steps should we be taking in Congress to prevent or mitigate this? Mr. GREENSPAN. Congressman, I think not. Indeed, as I said earlier, I think after the fact, we’ll look back on this Enron episode as a period when we put our corporate governance back on track, which would not have happened without it, in my judgment, not fully. That is favorable to the long-term outlook. If it were going to have a significant impact on the economy in the short run, we’d already be seeing it, and we are not. And I don’t deny that there may be other Enrons out there which we just have not, have not been exposed, it’s conceivable to me, but it cannot be a large issue. It’s almost too late for it to have had delayed effects which would be material. If they were going to occur, much of what we would have seen, much of what occurred would have likely occurred earlier rather than later. Mr. CASTLE. I don’t mean to get in an argument with you about this; you know much more than I do, or split hairs, but it does seem to me that some of these effects could be long-term. Mr. GREENSPAN. Oh, yes. Mr. CASTLE. Much longer term than we seen so far in terms of the accounting aspect of it, the effect on the corporations, capital markets, just a whole variety of changes which are going to occur. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 24 Mr. GREENSPAN. Congressman, I don’t deny that. I’m just basically saying that the order of magnitude is not material for the long term outlook. Chairman OXLEY. The gentleman’s time has expired. Mr. GREENSPAN. It will affect, there’s no question that there will be long-term effects of Enron and I think that’s good, not bad. Chairman OXLEY. The gentleman’s time has expired. The gentleman from Vermont, Mr. Sanders. Mr. SANDERS. Thank you very much, Mr. Chairman, and it’s nice to see you again, Mr. Greenspan. Mr. GREENSPAN. Thank you. Mr. SANDERS. Mr. Greenspan, as the Nation’s chief economist, I would like to tap your expertise. Over the years, I think, as you know, you and I have disagreed on some major economic issues. As I recall the last time you were here, you informed us, to my amazement, that you actually believe in the abolition of the minimum wage at a time when many of us think we should substantially raise the minimum wage. I also have a very difficult time in recognizing the kind of rosy economy that you are portraying, and that is not the economy that I see in Vermont and not the economy I think that exists in many areas of this country. The reality is, as you know, the tens of millions of Americans today are working longer hours for lower wages. Twenty-five or 30 years ago, when you and I were a little bit younger, the norm was that in the middle class one breadwinner, one person could earn enough money to take care of the family, and today for the middle class that is very much the exception to the rule. The statistics are amazing about how many two-worker families there are because of the decline in real wages. With a $400 billion trade deficit, some folks my colleagues talked about steel, but it’s not just steel. We have lost millions of decent-paying manufacturing jobs to China, Mexico, and elsewhere and they are often being replaced by part time temporary jobs in the service economy which have no benefits, which are low wage. We have 44 million Americans who have no health insurance, millions of senior citizens can’t afford their prescription drugs. One end of the country to the other, there’s a housing crisis. Middle class families are paying 50 to 60 percent of their incomes for housing. Families are going in debt to pay for college. The childcare situation is a national disgrace. So I don’t quite see the economy that you are talking about for the working families of this country. But, in fact, the issue that I wanted you to comment on had to deal with a front page story that appeared in the Wall Street Journal on Monday. And that dealt with the growth of economic oligarchies in this country, and the reality that a small handful of corporate executives have enormous power today over the U.S. economy, and perhaps never before in our history have so few people had so much power over the American economy as is the case today. The Wall Street Journal gave some examples, and let me give some others. Twenty years ago, there were thousands of small cable TV companies; today a pending deal would leave three companies in control of two-thirds of the market. We used to have many defense contractors selling defense products to the Govern- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 25 ment. Today there are five. We used to have many, or at least eight, Baby Bell telephone companies; today there are four. In terms of the media, fewer and fewer giant media corporations control television, radio, newspapers, and magazines. Oil, in the wake of oil company mergers, five companies control more than two-fifths of domestic production. Agribusiness five firms now account for over 80 percent of the beef packing market. Six firms account for 75 percent of pork packing. Airline competition is almost non-existent in many parts of this country. So my question to you is has the Government been too lax in terms of enforcing antitrust regulations. Have we allowed fewer and fewer corporate executives to have huge amounts of economic power by controlling industry after industry. Is it morally right that CEOs of large corporations now make over 500 times what their workers make, and seem to make more money to the degree that they lay off American workers. Do you have any concern about any of these issues? Mr. GREENSPAN. Well, Congressman, let me just say there are a few qualifications I would make to the data that you cite. First, to be sure, there has been a very considerable consolidation of defense procurement activities because the defense budget, as a percent of the GDP, is very much smaller than it was in periods past, so when you have a declining industry, you’d expect that to happen. Mr. SANDERS. Several hundred billion dollars is not insignificant. Mr. GREENSPAN. Several hundred billion dollars is a good deal less than the—remember we’re talking about the relationship within the economy—so that if you go back 20, 30 years, the proportion of the economy which represented defense was much larger and you can afford—or put it this way; there was enough business for a much larger number of companies to function. Mr. SANDERS. But it’s not just defense, Mr. Greenspan. Mr. GREENSPAN. No, I understand that. Let me go down to—I mean, to be sure, there’s been a consolidation in the oil industry, but remember that a very significant change has occurred in the last generation or so when most of the oil, a very significant part of the oil-producing properties have effectively been taken over by host countries, especially in the Middle East, so that the nature of the international oil companies have changed. Now I’m not going to say what is in the media. The media is a very significantly controlled operation and that really gets down to what Government policy should or should not be. But we have an extraordinarily competitive economy today. It’s more competitive than I ever recall it and indeed the international aspects of the competition is one of the reasons why I think, contrary to the remarks that you made, that the standard of living of this country is higher than it’s ever been on average, and two—— Mr. SANDERS. I would respectfully disagree with you. I think the facts do not speak to what you say. Chairman OXLEY. The gentleman’s time has expired. Does the Chairman wish to continue? Mr. GREENSPAN. I just basically wish to stipulate that we have an extraordinary standard of living. I don’t deny that there are, as there always will be, significant parts of our population which are basically in difficulty in one form or another with respect to the VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 26 economy. I think we ought to work as hard as we can to alleviate that but I don’t think it changes the fact that the economy is doing extraordinarily well in an historic context, that all of the data that most economists would adhere to believe the standard of living is higher than ever before on average. And if you wish to dispute that then to be sure we do have a very significant disagreement as we always do. Chairman OXLEY. The gentleman’s time has expired. The pivoting from one corner of the philosophical divide to another, I now recognize the gentleman from Texas, Mr. Paul. [Laughter.] Mr. PAUL. Thank you, Mr. Chairman. Welcome, Chairman Greenspan. I wanted to start by referring to a speech you gave in January at the American Numismatic Society where you spoke profoundly about monetary policy and said that central bankers have had relative success over the past decades, and it raises hopes that the fiat monetary system can be managed in a responsible way. So I think you’re still at the point of hoping that this system will work. I maintain that the jury is still out on whether or not fiat money will work over the long-term. And then you followed it up by saying, in case it didn’t work, and I don’t know whether you had tongue-in-cheek or not about this, but you said that we might have to go back to sea shells and oxen as our medium of exchange. And then you reassured everybody that the discount window would have an adequate supply of oxen. Chairman Oxley, if we get to this point, which I suspect we will someday, I ask you that we have hearings to debate the issue of what medium of exchange we have before the Fed starts using oxen as a medium of exchange. Chairman OXLEY. Are you referring to the Chairman here? Mr. PAUL. Yes, I hope that you will at least consider that. But I think it is an important point and I want to relate that to the Enron issue, because in many ways, I think the system that you have been asked to manage is similar to being asked to manage an Enron system. Because Congress is notoriously in favor of deficit spending, we’re currently expanding the national debt at $250 billion a year, and we have nearly a $6 trillion debt. Now we create that debt by buying votes. We spend a lot of money. Then the Federal Reserve comes in and they buy that debt in order to maintain the interest rate that they think is the right interest rate. And they take that and use it as an asset. You put it in the bank. You call this debt that we created an asset, and you use it as collateral for our Federal Reserve notes. So that’s a pretty good scheme, and I think in the moral terms, as well as the economic terms, it’s very similar to how Enron operates. I’m not convinced the system works very well because a lot of people here praise you for the adequate amount of liquidity and that’s what inflation is: create more money, lower interest rates. Every time you ask for liquidity, and every time you ask for lower interest rates, you’re asking for inflation of the money supply. I think that what we fail to do is to ask about the cost. Do we ever concern ourselves about the people who have had two-thirds of their income removed because they happened to be savers and living off interest? We gouge them with inflation, the loss of purchasing power, and taxes. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 27 A lot of people in this country have suffered from this particular system. Now the analogy I would like to draw is something you said in your testimony on page 13, and you have mentioned several times now that Enron may be a good lesson, and I think it is. And I’m not for more of this regulation by SEC. I think you’re correct that derivatives provide a market tool that is worthwhile, but you also said the Enron decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation, with very little on no physical assets. That’s exactly what our monetary system is all about, and that’s why I believe the dollar is vulnerable. We in Congress do not have a responsibility to run Enron. Some other government has the responsibility to deal with fraud. We have a responsibility to the dollar, and I think that’s what we fail so often to address around here. In addition, you said that Enron provides encouragement that the force of market discipline can be counted on over time to foster a much greater transparency. That’s exactly what the market does with money. If you look at the rapid and the sudden devaluations of the fiat currencies around the world, such as what happened to us in 1979 and 1980, that was the market coming in and forcing vulnerability and transparency on us. Now gold gives you a hint as to what’s happening. Gold has sent a mild message in this past year. In spite of the fact that central banks and others continually sell and loan out gold and push the price of gold down, there is a message there. So I would ask you, can you see any corollary whatsoever on what you’re asked to do in running our monetary system to that which Enron was involved in? Mr. GREENSPAN. I hope there are fundamental differences. First, dealing with essentially a fiat currency, what it is that we are doing is that the currency is granted value by fiat of the sovereign, as it is said in the textbooks. The issue there is that in years past, there has been considerable evidence that fiat currencies have been mismanaged in general, and that inflation has been too often the result. What I was mentioning in the speech that you were referring to is the fact there is some evidence that we’re learning that lesson, learning how to manage a fiat currency. I’ve always had some considerable skepticism about whether that in the long run can succeed, but I must say to you that the evidence of recent decades is that it has been succeeding. Whether that continues is a forecast which I can’t really project on. The Enron situation is essentially one in which there was an endeavor to imply that earnings were much greater than they really were, that increasing debt was hidden. I can think of no reason to have done what they did with their off-balance sheet transactions other than to obscure the extent of the debt they had, and what essentially was squandered in that process was the reputational capital which they had succeeded in achieving over a period of time. And I don’t perceive that anything that we are doing as a Central Bank involves anything related to that. I hope that where we need to be transparent and indicate what we are doing we do so, and we do so except in those areas where it, as I mentioned to VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 28 you previously, inhibits the ability to actually function as a Central Bank. But as I say in summary, I hope your analogy is inappropriate. Mr. PAUL. I guess we’ll all keep hoping. Chairman OXLEY. The gentleman from California, Mr. Sherman. Mr. SHERMAN. Thank you. Thank you, Chairman Greenspan, for an outstanding presentation. As before, I’ve got far more questions than the 5 minutes allotted so, as in the past, I’d like to start off with some questions that I hope that you and the Fed Staff would respond to for the record. We met here a year ago. Of course, you come every 6 months, but a year ago is the last time I’d had a chance to ask you a question, and we dealt with the incredible deficit and I’d coin the term ‘‘trade debt,’’ that is to say, the trade deficit building up year after year, the transfer of assets abroad, and I’m still amazed that the dollar sells for more than the euro, and that we hope that this trade debt and deficit reach a soft landing. I don’t know anyone who could have predicted a decade ago that the country could run a trade deficit as long and as large as we have and still have such a strong currency. I’d like to restate the concern that I expressed to you in this room a year ago, and echo the comments of Mr. Kanjorski that real estate brokerage was never designed to be something included in the grant of powers to national banks and financial institutions. Not only is it bad public policy, but I think that if the bank regulators go down that road, it will undercut your relationship with Congress. We were in this room for literally hundreds of hours over half-a-dozen or more years trying to paint a picture for ourselves as to what financial reform would mean and under particular statutory text. None of us in this room ever put forth the idea that the bill we passed would open this huge industry to those insured financial institutions. And I noted that you have not acted precipitously in this area. You indicated that you’re going to wait for a chance to respond to all the incoming comment and if what it takes to avoid precipitous action is additional incoming comment that needs response, I’m sure that can be arranged. First, as to economic stimulus, there’s two ways to do it, monetary and fiscal. The monetary has immediate effect. You could meet in the next day. The interest rates are lower. It may not have an immediate impact. Fiscal takes months, it seems, for the IRS to even get the checks out to even have an effect, let alone an impact. Yet it’s odd that this country is now thinking in terms of fiscal stimulus and monetary sedative, for want of a word to express the opposite of stimulus. First, let me urge you to consider cutting interest rates one more time instead of increasing them. But second, putting aside your well-known preference for lower total Federal expenditures, and assuming those expenditures are going to remain the same, does it make any sense for Congress to be thinking of fiscal stimulus while the Fed is at least rumored to be considering monetary sedative? Mr. GREENSPAN. The problem with fiscal policy, as economists have begun to realize over the decades is that it’s very difficult to VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 29 implement in a timely manner largely because our capacity to forecast in a specific timeframe itself is limited. Nonetheless, as I indicated over the last year or two, if it turns out that you can fortuitously time a tax cut in a period of economic weakness, it obviously does do some good. I do think that the tax cuts of last year in the middle of the year did show up as increased expenditures in July and August. That’s not the way they were constructed in that timing, but they turned out to be actually quite effective as best I could judge. But the broader question still remains whether it is possible to implement an effective fiscal policy with the inevitable time lags that are involved. I’m skeptical myself that it is feasible. Mr. SHERMAN. Do we need stimulus at this time, let alone is there any evidence that we need stimulus 6 months from now, or a year from now? Mr. GREENSPAN. Well, the question really rests on whether the level of final sales will kick in, as I put it in my prepared remarks, prior to when the obvious significant positive thrust coming from a reduction in inventory liquidation dissipates. It’s too soon to make that judgment at this particular point. So one can argue that if one believes that it might not, that as an insurance policy, you might want some fiscal stimulus. My own impression is that it’s probably not necessary, as I indicated in previous testimony. But there is a credible argument for it as an insurance policy for those who believe that the economy may be at risk of not being able to follow through after we get the inventory turnaround. Chairman OXLEY. The gentleman’s time has expired. Mr. SHERMAN. If I could have just ten seconds, though. Chairman OXLEY. The gentleman from California, Mr. Cox. Mr. COX. I’d yield ten seconds to my colleague. Mr. SHERMAN. I just want to point out that the cheaper insurance policy is for you to cut interest rates which would have the stimulus effect if that was determined to be needed without increasing the national debt. I thank the gentleman. Mr. COX. Mr. Chairman, welcome. As you point out in your testimony, the proper functioning of our markets depends upon investor confidence. And the Enron debacle, which is in major part an accounting scandal, has eroded public confidence in, among other things, financial reports generally. It has put a glaring light on the role of directors, particularly members of the audit committee. It has cast into doubt the adequacy of the entire accounting profession. To address these problems you, regulators, Congress, the SROs and the private sector know that we have got to take every responsible step to increase auditor independence, to strengthen the role of the audit committee, of an independent audit committee, to fortify the accounting profession to attract highly skilled, intelligent people of integrity. And yet if we survey the lay of the land today, we know that the market forces, the trends, the incentives are all running in the opposite direction. At a time when we need the very best people to serve on boards, the risk to such service is greater than ever. We can ask ourselves based on very real experience of late, who would want to volunteer VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 30 for service on an audit committee of any large enterprise today? Whereas, 30 years ago, many top graduates of the Nation’s business schools headed for the accounting profession. That’s no longer the case, and Enron has almost certainly made the problem worse. The question I’d like to put to you is what we as Congress can do and what the private sector can do, what regulators and SROs can do to address the problem of auditor compensation while still— or not while still, but while actually increasing auditor independence? And what can we do to encourage people of character and reputation to risk those irreplaceable assets to serve on the boards and the audit Committees of the Nation’s businesses? Mr. GREENSPAN. Congressman, this is an issue which the President’s Working Group is deeply involved in at this particular stage. One of the things that I think is becoming evident is that the change in corporate governance which has occurred over the generations where you very rarely now have shareholder control in a limited number of hands so that effectively the directors are appointed and work for the shareholders and the CEO is appointed and works for the directors. The fact that such a substantial amount of shareholding is now for investment and not for control has effectively switched the locus of control from shareholders to the CEO. And if the CEO endeavors to run the company wholly in the interests of shareholders, then there’s no loss in the structure of corporate governance. And it’s in our judgment that what we have to start to do is to try to find those areas where the CEO’s self-interest has diverged from that of shareholders and try to find means and incentives which would restore what, I think, was the case 20 or 30 years ago before shortterm earnings expectations became such a critical issue in what individual corporate managements were able to do. My own judgment is that you have to be careful about trying to presume that directors are really, truly independent. I’ve served on innumerable boards in the private sector, and there is an asymmetry of information between an insider in a corporation and an outside director which will never be breached, which will never be brought together, I should say. The result of that is that it is crucially important that the incentives require that the CEO behave in a certain manner or be incentivized in a certain manner. I’ve served on too many audit committees to know that even though I would consider myself independent, I would consider myself knowledgeable, I did not know what questions to ask the chief financial officer during meetings to find out what it is that conceivably is going wrong in the corporation, and he wasn’t about to tell me. So that there is a very difficult problem that one confronts, and the mere presumption that you somehow make a bunch of people independent and have an independent audit committee, it won’t work that simply because if you make everybody on the board independent, what’s going to happen is you’re going to have competing power centers within a corporation. And in my judgment, corporate governance will suffer as a consequence. Mr. COX. Mr. Greenspan, I wonder also if—you’re making the case for the complexity of the problem. I wonder if you could address the concern which is no matter how we address corporate VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 31 governance issues remains, and that is how you attract quality people. Because I think the accounting profession has taken a hit. I think that the ranks of boards and audit committees are going to take a hit. And we’ve got to have good people in these positions if we’re going to lick these problems. Chairman OXLEY. If I could interfere just briefly. We have a vote on the floor. Make that the last question. The Chairman could respond and then we’ll take a break for the vote. Mr. GREENSPAN. Why don’t I answer it later then, if that’s the case? Mr. COX. Well, I’m happy to put the question to you now and hear your response and not put any further questions so that we can that wrap it up, Mr. Chairman. Chairman OXLEY. Yes. If the Chairman would like to respond. Mr. GREENSPAN. Which specific question did you want to ask quickly? Mr. COX. The burden of my question is, we are seeing increasing risk to the individuals who we want to be even more responsible than they have been in the past, and we’ve got to attract persons of training and integrity to these positions. What structurally can you recommend to the Congress that we might do to fortify the accounting profession and the ranks of our directors? Mr. GREENSPAN. It’s my impression on the basis of experience I’ve had in an innumerable number of boards on which I have served that if you get a chief executive officer who looks toward his outside auditor as somebody to tell him what he is doing wrong rather than somebody who should try to acquiesce in a particular set of accounting principles, he will change the whole nature of the relationship between directors, CEOs, and he will certainly create the type of independence of the audit function that will attract numbers of people back into the accounting profession and create the type of directors who will be most effectively helpful to the CEO and to the shareholders in getting appropriate corporate governance. Chairman OXLEY. The gentleman’s time has expired. The Chair would declare a recess of the hearing for the vote, and we will reconvene in 10 minutes. [Recess.] Chairman OXLEY. The hearing will come to order. And the Chair now recognizes the gentleman from Pennsylvania, Mr. Mascara. Mr. MASCARA. Thank you, Mr. Chairman. I’d like to revisit the steel crisis issue, Mr. Chairman. I come from Southwestern Pennsylvania where steel and coal used to be king. And as we all know, there is an apparent steel crisis. The steelworkers will be here tomorrow at a rally to stand up for steel and I certainly will visit with them. First of all, I happen to believe that the steel crisis is a microcosm of our failed trade policies. And I don’t want to get into that, because that’s a long story. But, I respectfully disagree with you in an earlier comment to a question about what effect tariffs would have on steel, and that perhaps prices would increase as a result of even as high as 40 percent. The President, on March the 6th, will make a decision about the percentage of increase on steel tariffs. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 32 I don’t believe that I’ve seen any decrease in the cost of automobiles, appliances as a result of the consumer consumption or the domestic steel users in this country of that cheap steel passing that profit on or any part of it to the people who buy automobiles and appliances. That’s one point I want to make. And I’m wondering whether you have any feel for what the President—I’m not asking you to guess the President—but what the President should do in regards to the March 6th decision that he has to make? On Sunday, I was on KDKA television in Pittsburgh with the CEO of Weirton Steel that employs 3,500 steelworkers. He said that 20 percent would be of no help and that eventually the steel industry would die on the vine, that companies continue to go into Chapter 11. In fact, Wheeling-Pittsburgh Steel plant in my district is now in Chapter 11. And I was wondering whether you had any feel where that number should go from 40 percent down, given that 20 percent won’t work. Mr. GREENSPAN. Well, first of all, I’m not clear as to what you mean if you put a tariff on that the price will not go up. If it doesn’t go up then it has no impact on the domestic steel price that the traditional steel operations are still under severe pressure because their margins are not going to change. I’m not sure if a tariff doesn’t increase the domestic price its impact on domestic profitability and employment is zero. Mr. MASCARA. What I said, Mr. Chairman, is that the savings that the domestic users of steel to make their products with, that savings has not been passed on to the consumers. Mr. GREENSPAN. Well, if it hasn’t, then the profits of the steelusing industry must have risen significantly and there’s no evidence of that happening, Congressman. Mr. MASCARA. Well, I don’t have those facts here. But there is a concern that the steel industry will cease to exist. Have you considered the national security impact? Bethlehem Steel, which is one of the only producers of the steel that’s used in ships and tanks, is also in Chapter 11 now. And do you feel that if the steel industry does, in fact, cease to exist in this country—and those kinds of talks are going on currently—what will we do in the event that we need to produce that kind of steel? Would we have to depend on foreign production of that type of steel? Mr. GREENSPAN. Are you talking about defense? Mr. MASCARA. Yes. Mr. GREENSPAN. You’re talking about steel plate and the like? Mr. MASCARA. Yes. Mr. GREENSPAN. Well, first of all, I don’t believe that it’s credible to presume that the steel industry will no longer exist, because half of the mills, as you know, are electric arc furnace, steel scrap consumers and while they’re under some pressure because of the obvious weakness in steel prices, they’re doing reasonably well. And there’s no evidence of which I am aware would suggest that they’re going out of business. The crucial issue that really is involved with the notion of the traditional steel industry is there are certain types of steel which cannot be made effectively in a scrap furnace. In other words, the chemical control that you have of the scrap makes it difficult to cre- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 33 ate the type of steel which for example you need in an automobile for forming purposes and the like. And so that there is a need in the country for a certain what I would call ore-originated steel, because you can essentially control the metallurgy in an appropriate manner. But that’s not a very large number. And indeed, as you know, there’s a good deal of slab imports which are made from ore and which are rolled into a type of cold-rolled sheet which the automobile manufacturers need. As far as steel for defense, the amounts that we need are extraordinarily small. And I’m not convinced, at least from what I understand it, that with the appropriate amount of pellets within say a scrap mix that a goodly part of the actual heavy steel that we need is not available. But in any event, I mean there’s certainly not going to be a disappearance of the traditional steel industry. I do agree with you that it’s under severe difficulty and as one who is old enough to have visited the old Homestead Works when they were really extraordinarily effective and productive, I know what it means for that type of industrial structure to fade. Mr. MASCARA. My time has expired. But apparently we disagree on some issues as it relates to the stability of steel industry. There are hundreds of thousands of retired steelworkers who now may lose their health care and pensions. I think the President ought to do something and do it very quickly. Thank you, Mr. Chairman. Chairman OXLEY. The gentleman’s time has expired. The gentlelady from New York, Mrs. Kelly. Mrs. KELLY. Thank you, Mr. Chairman. Mr. Greenspan, you’ve been here a long time and so I really want to make this fast. But I noticed something that I wanted to ask you about. We saw in the news this morning the Commerce Department said that durable goods rose by 2.6 percent in January and they rose in December by .9 percent. But in your testimony on page 4, you said, as a consequence, although household spending should continue to trend up, the potential for significant acceleration in activity in that sector—this sector is likely to be more limited than in past cycles. That seems to be somewhat in conflict with the numbers, and I wanted to know if you believe that this is a trend in durable goods and one that’s likely to continue. I wonder if you’d address that for me. Mr. GREENSPAN. I would say looking at the data that we saw today, clearly it’s encouraging that the markets are coming back. But they went down in an awfully extended way and they were under really severe pressure. So I think that it’s going to take a while to be sure that we’re getting the type of response that we’re going to ultimately need. There are a number of elements in the capital goods markets which are still quite weak. And indeed, some of the anecdotal stuff especially. And in the telecommunications area, for example, orders are not showing very much. They did improve in this morning’s numbers and that was encouraging. But all I would say to you is that, yes, the durable goods orders were somewhat better than I would have expected this morning. That if they continue that way, then I think things will clearly improve. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 34 But it’s too soon to make those types of judgments. We need a good deal more time to see that this recovery is integrating, is taking shape in an integrated form. Ms. KELLY. So you don’t feel that the numbers over the past— I know the projects in December had projected zero growth or negative, and we got a .9 percent. And here we are in January with a 2.6 percent. You’re saying you don’t feel that that yet, that that’s enough to make a trend? Mr. GREENSPAN. No. I think it’s certainly enough to indicate that the hypothesis that we’re coming out of what has been a period of significant stress that the probability is improving. It’s nonetheless still early in the sequence. Ms. KELLY. Let me just throw something else in that equation. According to the National Association of Realtors, existing home sales for January set a monthly record. They topped out a $6 million mark for the first time. On page 5 of your testimony, you say in recent months, low mortgage interest rates and favorable weather have provided considerable support to homebuilding. Moreover, attractive mortgage rates have bolstered the sales of existing homes and the extraction of capital gains embedded in home equity that those sales engender. With all that said, do you feel that this is a trend in the new home sales and you think that’s a sustainable trend for the near future or do you think that trend may slow down? Mr. GREENSPAN. You mean $6 million annual rate figure? That’s clearly not going to be sustained. I mean, there’s just no evidence that we’re off on a different track. Because remember that existing home sales are essentially a rate of turnover of the existing single family housing stock plus condominiums. And historically, that ratio doesn’t change all that much. It’s a gradual change in households, and the turnover is related very largely to demographic forces as well as the obvious economic forces which I cited. So if you’re asking me do I think the $6 million number will stay up there, I think unlikely. But nonetheless, it’s still impressive. Ms. KELLY. Would you say that you feel that the trend toward increasing home sales would continue whether it hits that mark or not? Mr. GREENSPAN. Well, I think the trend of existing home sales has been relatively flat at a reasonably high level for quite a long period of time. And if we can even maintain that, I think we’re doing well. Ms. KELLY. Thank you very much. My time is up. Thank you, Mr. Chairman. Chairman OXLEY. The gentlelady’s time has expired. The gentleman from Washington, Mr. Inslee. Mr. INSLEE. Thank you. Mr. Chairman, we’ve all been talking about the concerns about Enron and the prospect of other Enrons out there, of other organizations that would overstate revenues and understate costs. And I know of at least one other large organization that’s exactly in that position of deceiving essentially their shareholders in that regard. You’re smiling. You see where I’m going with this. Which is the United States Federal Government. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 35 And it’s my belief that our deceit of our shareholders sort of makes Enron look like small potatoes, considering the phony accounting that we indulge in that I believe is leading us to chronic deficits over the next decade unless something happens. And let me just list three of those that I believe that are phony bookkeeping that disguises the fact that we’re going to have these chronic deficits. We’re already over $100 billion this year, as you know. You know, we tell the American people that tax exemptions that are now in the Code aren’t going to be renewed when the Administration makes their projections. We all know that’s not true. They’re going to be renewed. Everybody in this town knows it, including the folks in the White House. We know that the AMT eventually is going to be fixed, has to be fixed, because so many millions of Americans will be subject to it. Everybody in this town knows that, and yet we don’t tell the American people that. We base projections on that phony statement. We know there’s going to be relief for Medicare of some of the cuts that have damaged health care in this country, and everybody in this town knows that this is going to happen. Now assuming that’s true, looking at the numbers, we’re in for, at least in my view, long-term deficits somewhat approaching the history of the 1980s, which was a movie we saw once before, of big tax cuts, big defense buildup, and unrestrained domestic spending. And I guess my question to you is, if we end up back in that pickle because of our Enron-like activities at the Federal level, what impact do you think could that have on the U.S. economy in the next decade? Mr. GREENSPAN. Well, obviously, if we resort to a significant amount of deficit spending, the question essentially is how is it financed? And it’s financed basically by extracting capital from the private sector. And to the extent that you do that, obviously, the capital assets which are produced are generally less productive in producing economic goods than is the case when the Government’s drain on resources is neutral or zero even or slightly in surplus so that it’s merely a simple question of how it’s financed and what the implications of that are, and history tells us that it’s not very helpful. Mr. INSLEE. I think there’s another downside, too, and let me just ask you about this. And that is that essentially the Administration is financing this budget deficit by raiding Social Security. And of course, Congress and the Administration has told Americans for the last couple of years that raiding Social Security was no longer going to be countenanced in this town, and that’s exactly what we’re doing. And now, because of these faulty, phony numbers that we’re posing about, we’re going to be again raiding Social Security for the next decade to finance this deficit. I’ve heard it expressed that that in itself is a problem when you talk about Americans’ confidence. And I can tell you that people right now, because of that seriously question whether Social Security is going to be there for them. I was meeting with a group of young people in their early twenties. They honestly don’t believe Social Security is going to be there for them. And one of the reasons they do is because of this VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 36 budget that the majority—and I’m not a part of that here—as past will put us back in these deficits. So I guess is that a factor that we should consider when we look at what people are doing in their personal investment decisions? Mr. GREENSPAN. Well, first of all Congressman, remember that the types of accounts which are kept both at OMB and CBO are reflective of the laws passed by the Congress. In other words, if the statute stipulates that a certain law is to end as of a certain date, it, meaning OMB—well, it’s basically CBO, because OMB can assume that and extend it if it wants, but CBO cannot. In other words, it’s not making the laws, it’s merely registering what the accounts imply under existing statute. So I would think that if you want to alter that, you’re going to have to change the statute or change the rules on which you request CBO to give you the types of data which they do. With regard to the issue of Social Security, if the Social Security trust fund goes to zero, the chances that benefits will be curtailed in my judgment is zero. And the reason for that is I see no credible scenario in which the Congress would fail to adhere to the benefits as now appear in law. So I don’t think it’s a credible issue to be concerned about what is happening to the Social Security trust fund if the issue is whether benefits will be continued. Because I’ve been around this town long enough to know that that’s not the way it works and I think if you’re talking about making certain we keep the books balanced, I would also suggest that we try to resolve the issues that are real and I don’t think it’s a real issue, nor do I think the American people have to be concerned about their benefits disappearing if the fund disappears. Now what I think younger people are concerned about is the rate of return that they’re getting in benefits from the numbers that they put in the fund is much lower than, for example, my generation. I mean, if you look at what I put in and what I got out or what I would have gotten out if I retired at 65, is an extraordinary rate of return. And Social Security was remarkably popular for my generation. I don’t think it is for the younger generation. But, because of the fact that they’re not perceived as getting back an adequate return. Chairman OXLEY. The gentleman’s time has expired. Mr. INSLEE. Thank you, Mr. Chairman. Chairman OXLEY. Mr. Chairman, we’re glad you didn’t retire at 65. The gentlelady from Illinois. Mrs. BIGGERT. Thank you, Mr. Chairman. And thank you, Mr. Chairman for staying this long to allow us to ask questions. As you’re aware, the electronic transfer of value was not interrupted by the tragedy of September 11th, but as I understand it, for a period after September 11th, many of the banks really didn’t know what their true financial position was because it was impossible to move the checks and payments around the country, particularly because of the airlines not flying and for various other reasons. But is the Fed doing anything to ensure that the payments mechanism really is going toward or using the technology such as electronification of paper checks to facilitate the stability of that system? VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 37 Mr. GREENSPAN. We are, Congresswoman. We were sort of taken aback by the extent to which the amount of telephonic exchange and data processing exchange which presumably was supposed to be back up in the lower Manhattan area during the period subsequent to September the 11th, we had assumed that a goodly part of that backup would work. The trouble, unfortunately, is a lot of the backup went over the same cable lines that the original systems went and were quite useless for a while. And as you point out, we had a very significant amount of float in the system as a consequence of the airlines effectively stopping and not delivering. We have a proposal, I believe it’s up to the Hill now, on truncation of checks and the effect of implementation of a significant amount of electronic processing to move the checks through the system in a much more facile way. Mrs. BIGGERT. Do you think that Congress needs to pass such a bill on check truncation? Or can the Federal Reserve do it through their rules and regulations? Mr. GREENSPAN. No. I think we need legislation. Mrs. BIGGERT. Thank you. Let me turn for a minute to trade. I don’t think we’ve talked too much about that. What effect would a free trade area of the Americas have on the U.S. economy? And can we afford to wait for the time that it seems to be taking to get that through? Mr. GREENSPAN. Well, I think the evidence increasingly is persuasive that the greater the amount of cross-border trade, the higher the standards of living everywhere. And to the extent that we can facilitate the emergence of greater trade irrespective of where, provided that the individual trade groups do not themselves become protectionist, then it’s all to the good. And all I can say, Congresswoman, is I trust that we will move forward expanding trade and gain the benefits and recognize that the problems that that invariably creates for a number of our industries which are under severe competitive pressures, that we recognize that we should find ways to assuage those problems. Mrs. BIGGERT. Is there any difference between bilateral trade agreements or multilateral? Should we be looking if we can’t get the free trade area, start with bilateral? Mr. GREENSPAN. Well, no. I would say that the greater the number of players, if I may put it that way, the better. So multilateral and indeed global is by far the best. Bilateral trade is helpful but only as a fallback position, because it is better than no trade but certainly not as good as global trade. Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman. Chairman OXLEY. The gentleman from Kansas, Mr. Moore. Mr. MOORE. Thank you, Mr. Chairman. And Chairman Greenspan, I very much appreciate your being with us again today. Secretary Paul O’Neill recently requested that Congress increase the statutory limit on the public debt from $5.9 trillion to $6.65 trillion, about three-quarters of a trillion dollars. I guess my question is, and I don’t know if there’s any good answer to this, are we opening up the checkbook so to speak if we increase it by three-quarters of a trillion dollars, say, as opposed to $250 billion? Do you have any thoughts about that? VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 38 Mr. GREENSPAN. Well, first of all, I think that I’m not a great proponent of this type of legislation to begin with, because I think that the Congress enacts tax structure and it enacts appropriations, and the difference between those two is the change in the debt. To then have to reauthorize a different level of debt is very much like trying to restructure arithmetic. I mean, you’ve already done it. And it’s not really appropriate to then put on a debt ceiling and then find yourself with contrary law. Because clearly, you cannot simultaneously have your tax legislation, your appropriations and your debt ceiling, they may not be in agreement, in which case some law is being violated, and I think that is inappropriate. Mr. MOORE. Is there any benefit, though, to such a check and saying we’re going to have a public discussion about this before we increase the public debt any more? Mr. GREENSPAN. Well, first of all, I should hope one does that in the appropriations discussions. Mr. MOORE. Certainly. Mr. GREENSPAN. I mean, that’s where theoretically it occurs. The problem I have with the specific legislation is that if you’re going to do it, and as I say, that’s not what I would do, I would put it on the debt to the public, which is truly the difference between receipts and outlays in the unified budget. The inclusion of the twoodd-trillion dollars—a little more than two trillion dollars—in intragovernmental holdings in my judgment serves no useful purpose, and that as a consequence of that, even granting, I mean, even granting that a debt ceiling might be usable, that’s not the one I would use. Mr. MOORE. Chairman Greenspan, you talked about the importance of confidence of people in the economy and how that affects the economy. And I wonder, is there a relationship between fiscal surpluses and/or debts and long-term interest rates? And I’ve heard some people in the past, for example, say—and maybe this is too simplistic, and you can tell me if it is—that if we’re able to pay down $100 billion or $300 billion or a half a trillion dollars in debt, that it would beneficially affect interest, long-term interest rates. Mr. GREENSPAN. I think that’s right. And indeed, just remember, it’s other things equal. Mr. MOORE. Yes, sir. Mr. GREENSPAN. I think the evidence pretty much is conclusive on that, although I must tell you that there’s a very considerable degree of differences amongst economists. And clearly, I don’t want to get into the details of it, but you will find people who don’t agree with that. And I think everyone agrees that under extreme circumstances where, in fact, you have huge deficits and inflation is being engendered that long-term interest rates go up and indeed, in those types of economies, you cannot sell long-term debt. No one will buy it. But there is a legitimate dispute as to what the relationship is between surpluses and deficits when those are in a relatively narrow range, is it conceivable that the changes are very modest? And the answer is yes, it is conceivable, and that may indeed be the case. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 39 Mr. MOORE. One of the Members said that they were happy that you hadn’t retired when you were 65, and I was listening to NPR this morning. They were talking about the possibility of your departure prior to the expiration of your term. And I for one hope you stay. Mr. GREENSPAN. Thank you very much. Chairman OXLEY. The gentleman’s time has expired. The gentleman from California, Mr. Royce. Mr. ROYCE. Thank you, Mr. Chairman. Welcome, Chairman Greenspan. What I wanted to ask you about specifically were some of the incentives that are currently in place for management. Incentives, especially in terms of the evolution of compensation packages with stock options, which at times in some firms have management pushing for very aggressive accounting methodologies, and then at the same time have management deciding who is going to do the audit and then trying to influence the outcome of that audit. And it seems to me that one of the questions would be can we change the structure in some way so that either the audit committee is truly independent and truly picking the auditor, the auditor responding to the audit committee rather than to management, and do you do that by setting up some special regulatory structure where the audit committee reports separately? Or do you do that by maybe requiring audit insurance perhaps rather than the mandate of an outside audit, have the insurer have the vested interest for transparency in the accounting? Or do you look at these public companies that are on the New York Stock Exchange or the Nasdaq and say, all right, give the Exchange the responsibility of picking the auditor? Any of these approaches might make the audit truly representative, even in these cases like Enron’s, because it would change the incentive structure. Either that or change the incentives for management’s compensation, which would be another way to approach the same problem and have management act in the interest of the shareholders. But could you maybe respond to those concepts and whether you think they’re viable? Mr. GREENSPAN. Yes. Well, I do agree that how a firm is audited and by whom is quite important. The issue that I think is crucial here is that if properly constructed and I would say the structure of corporate governance, that it’s interest of the CEO to see that you have an effective external audit, remembering that it’s an audit of the internal auditing system, you certainly want an auditor who knows your business, knows your company and consequently the reason why it’s important to at least have the corporation either choose or acquiesce in a specific choice of an auditor is that it is quite credible to get somebody who doesn’t have a clue as to what, in fact, he’s auditing. And the experience of the auditing profession is under such conditions you find that embezzlements occur far more readily in the early years of a new audit system than they do later on. So you have to be careful about unintended consequences of alternating a system which has evolved over the years. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 40 The President’s Working Group has been instructed to look into this issue in some considerable detail, and we are in the process of doing that. My general impression personally, having looked at a whole series of ways of coming at this, that because under the vast majority of corporate relationships with outside auditors, the outside auditor not only is a good independent auditor but also is very helpful to the CEO in overseeing how his own internal system works and suggesting to him what he can do to improve the internal workings of the system. And it’s my judgment, having seen this function for decades, it’s best when you have a good relationship between the auditor and the CEO. If, however, it turns out, as I fear regrettably seems to have been the case in the Enron situation, that a number of internal strategies thought up by internal auditors were agreed to by the external auditor only to find later on that it had to be reversed. Now that is very unfortunate circumstance and probably regrettably as a consequence of incentives not being appropriately positioned. I reemphasize as I’ve said to your colleagues in earlier questioning, if you can somehow find a way to create a set of incentives for the chief executive officer to function solely in the interests of the long-term values of the shareholders, then the whole issues of independent directors, independent auditors and good corporate governance system comes into play. Mr. ROYCE. As part of that, just to follow up, would part of that potentially be looking at the way in which proxy votes are manipulated by management and vesting more direct power in the shareholders by making changes or recommending changes in the system where management can’t corral basically proxy votes in order to—— Mr. GREENSPAN. Well, that obviously is the type of thing which I think is an appropriate issue for evaluation. The way, regrettably, the system works today is that the vast, vast majority of votes by shareholders are either 99-to-1, 98-to-2 if it’s 95-to-5, it’s perceived to be a disaster for management. Now what that clearly tells you is that the slate of directors, the various issues presented to shareholders for authorization, largely comes from the CEO. And unless and until you change the incentives for the CEO to do things in a different way, the issue of gaming the system, gaming the GATT rules, endeavoring to make it appear as though short-term earnings growth reflects longer-term earnings growth, so long as there are incentives for management and specifically the CEO to do that, I don’t care what else you do, it will not work. Chairman OXLEY. The gentleman’s time has expired. Mr. ROYCE. Thank you, Chairman Greenspan. Chairman OXLEY. The gentleman from Massachusetts, Mr. Capuano. Mr. CAPUANO. Thank you, Mr. Chairman. Chairman Greenspan, thank you for that last clarification. You just answered one of the questions I was going to ask you. I don’t think your answer earlier was as clear as the answer you just gave in differentiating short-term interests from long-term interests. I think you just did it, and I appreciate that clarification. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 41 One of the questions I do want to ask you, though, is have you had an opportunity to review the CBO report that came out roughly about a month or two ago that looked at the economic stimulus proposals that are currently floating around Capitol Hill? Mr. GREENSPAN. I’m aware of it, but I must say to you, Congressman, I did not look at it in detail. Mr. CAPUANO. Fair enough. Mr. GREENSPAN. I’m familiar with the general procedures. Mr. CAPUANO. OK. At some point, since you’re not familiar, in general their conclusions were that the proposals currently floating around will not sufficiently or accurately stimulate the economy in a short-term basis. I would appreciate it if you and your staff could review that report and comment on it to see if you would agree with their conclusions or not, if that’s an appropriate request to make of you. Mr. GREENSPAN. Well, what I’d like to point out, however, is remember that the agreed procedures in which they make those evaluations are what economists call a static model in which feedback effects are not counted. Everybody who works in this field knows that that’s a very major shortcoming of this procedure. But, because there’s such dissent as to what to do with respect to the feedbacks, there’s sort of a fallback position that we all agree, at least that’s the first approximation. So I think you have to be a little careful about making judgments as to what the economic effects of particular proposals are with a static model. We’ll be glad to take a look at that and respond to it, obviously, but I just wanted to clarify that the ability of those models to forecast even in a dynamic sense has not been impressive. And therefore, their ability to project the economic consequences of a program are somewhat marginal. Mr. CAPUANO. I understand that, and I respect their limitations, but that’s why I’m asking you to take a look at it so we can have somebody else with a different view take a look at it. I guess the thing I always ask you when you come by relates to productivity and a little bit on unemployment. I’d like to start with the unemployment rate. The numbers in the report, not your statement, but the report that accompanies it, cites a 5.6 percent rate in January. Do you know whether that report—I had read earlier that that number did not include 900,000 unemployed people who had been taken off the rolls because they had stopped seeking employment. Is that an accurate belief or an inaccurate belief? Mr. GREENSPAN. Well, it is certainly the case that the unemployment rate is measured by the number of people who are seeking jobs in a certain actively defined way and that the ratio of those who are employed plus unemployed by that definition is the labor force. And the unemployment rate is the ratio of the unemployment to the total. To the extent that people withdraw from the labor force—either go back to school or are discouraged workers or have any of a number of reasons not to be seeking a job, according to the definition— they do not appear in the unemployment data. Mr. CAPUANO. The reason that it concerns me obviously is 900,000 is a big number and any number in addition to that is a big number. But also as the unemployment rate, whatever level it VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 42 is, once it levels off, those people, many of them will try to get back into the workforce, therefore extending the length of time that the unemployment rate is high. That’s why I wanted to get a clarification. Mr. GREENSPAN. Let me just say one quick question about the 900,000. That’s a sample statistic, and my suspicion is that it’s exaggerated, because we only have a 50, 60 thousand sample of households. But the issue you’re raising is a valid one. Mr. CAPUANO. And I guess I’m going to make a comment that I’ve made to several members of the Administration. That when I read unemployment rates, I hate reading percentages alone, and I would ask that in the future as you talk about them, you talk about absolute numbers. Even a 5.6 percent unemployment rate is 8.1 million Americans, which is larger than the workforce, the total workforce of all but three States, which is larger than the combined workforce of 16 States. It’s a huge number of individuals, and I just think that out of respect to them and to get a real handle on what a percentage really means, that absolute numbers should be at least in a footnote someplace. Mr. GREENSPAN. They actually are reported in some detail in the reports themselves. Mr. CAPUANO. OK. I didn’t see them here. Chairman OXLEY. The gentleman’s time has expired. Mr. CAPUANO. Thank you, Mr. Chairman. Chairman OXLEY. The gentlelady from California, Ms. Lee. Ms. LEE. Thank you, Mr. Chairman. Good to see you. Let me ask you a couple of things about CRA ratings. but first let me just preface this by saying that we all on both sides of the aisle agree that home ownership is key to the accumulation of wealth, to acquiring equity so that working men and women, working families, minorities, can send their children to college, can start a small business. Equity in one’s home is really the primary way that the majority of Americans ever see any wealth in terms of accumulation. One of the areas which many of us have been concerned about is the disparity in home ownership in the minority community. I believe nationally it’s about 47 percent, as compared to white home ownership at about 72 percent. So we’ve been in touch with you with regard to the lending practices of some of the banks in California which have received very outstanding or highly satisfactory CRA ratings yet have a very poor record or minority lending. Let me just give you an example of what I’m talking about. Citibank, for example, less than 2 percent of its California conventional home loans were made to African Americans, also for Latinos. Yet it received an outstanding on the lending test. Bank United made less than 1 percent of their homeowner loans to African Americans but also received an outstanding in terms of their CRA ratings. Chase Manhattan received a high satisfactory CRA rating, and I could go on and on. And I thank you for providing the basic raw data for us to compile this analysis which was actually put together by the Greenlining Institute. So what I’m asking you today, Mr. Chairman, is how do you reconcile these great CRA ratings with the poor lending practices of these institutions and what do you think we can do about it? I ac- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 43 tually wrote to you February 20th and made some suggestions in terms of follow-meeting and to really begin to sort this through. But I’d like to get your take on this. Mr. GREENSPAN. Let me just say, I just signed off on a response to you and you’ll probably be getting it this afternoon. Let me just say briefly that there are a number of issues that we take into consideration by law on CRA rating. More generally, it’s got to do with making certain that the individual institution have appropriate credit availability for the total community and that there are a number of other issues involved other than mortgage loans. Second, as I think we may have discussed with you at another time, it’s important in looking at the issue of mortgage extensions to look not only at the bank itself but its subsidiaries, because many banking organizations do a goodly part of their mortgage lending through subsidiaries rather than through the bank itself. And these numbers which you are citing refer to as I recall conventional mortgages only. And you’ll find that FHA and VA, which is a fairly significant amount of the lending, show very significantly different figures from the ones that you cited. Now I don’t know what those data will show, because we have not compiled them. But I do suggest to you that before you reach conclusions on this issue that it’s probably worthwhile to look at it in the broader sense. There are a number of other technical issues which are involved in our CRA ratings which I try to outline in the letter we’re sending up to you and I hope it’s a satisfactory response. If not, come back and I’ll try to respond again. Ms. LEE. Thank you, Mr. Chairman. I appreciate that. And let me just, while I still have a couple of seconds left, I would like to just ask you with regard to the issue of housing production as a viable economic stimulus initiative or plan. Housing production creates jobs. Yet we haven’t been able to find the resources to establish a massive affordable housing production strategy. I’ve introduced a bill with my colleague Congressman Sanders to call for a $15 billion Federal investment in affordable housing production. How do you see this right now in terms of the recession? And does a housing production program make sense in terms of job creation? Mr. GREENSPAN. Well, Congresswoman, as I mentioned previously, residential building has been holding up remarkably well through this period of contraction. And by all historical standards, it’s reasonably high at this stage. And as you know, even though you point out the differentials between minority and non-minority home ownership, both are rising significantly. You may recall when I was in San Francisco I think I quoted a number of those statistics, and the rise in minority home ownership, the black and Hispanic, is really quite impressive. I mean, I grant you it’s still not where I would like to see it. I think that the more people who own homes, the greater their interest in the community in which they function and the more effective they are as citizens. So that’s clearly a desire over and beyond the economics that are involved. But so far as home residential construction is concerned, it’s doing reasonably well. And you have to ask yourself in allocating funds as to whether, in fact, that’s the most appropriate and effec- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 44 tive use of the funds you’re referring to rather than some other priority, and that’s a judgment that the Congress has to make. Ms. LEE. Thank you very much. Mr. GREENSPAN. You’re welcome. Chairman OXLEY. The gentlelady’s time has expired. The gentlelady from Illinois, Ms. Schakowsky. Ms. SCHAKOWSKY. Thank you Mr. Chairman. And Chairman Greenspan, I appreciate your spending so much time with us this morning and that I have the opportunity to ask a few questions. I’m going to ask them all, and if you have time to respond to all of them, fine. Maybe otherwise in writing later, I hope you will. Last year, you stated some support for a large tax cut, and that support I think was based at least in part about some concerns that you had about too quickly paying down the public debt. I’m assuming that those concerns have changed somewhat, and I wanted to ask you if you have a different view on the wisdom of those large tax cuts, particularly those that go to the very wealthiest of Americans. Second, on the economic stimulus package, the one that passed the House and others that have been recommended by the leadership emphasize major tax cuts it seems to me over investment. That is, speeding up the tax cuts that were passed, giving new ones, largely to corporations, some to very profitable corporations. The one that passed the House would have given a rebate of $254 million to Enron. I wondered if you had comments on the thrust of the economic stimulus package, the one that passed and the ones that are being considered in the House. Third, on the issue of predatory lending, which has been very dear to my heart, I know that the Fed and other regulators have suggested that Congress should act. We haven’t acted yet in any way. I’m wondering if you feel that we still should take some steps to deal with that problem. And finally, I can’t stay away from Enron too far. Your Board of Governors disclosed that Ken Lay at some point last October during a period when the company was looking for some help from senior Government officials did make a call to you. I was wondering what he said in that call and what your response was. Those are my questions. Mr. GREENSPAN. First of all, the issue that I was concerned about a year ago reflected the notion that if you believe the CBO data that we would create far too rapid a decline in the debt outstanding which would require an accumulation of assets by the Federal Government which I thought was very bad policy. In the event taxes were cut, spending was increased and that problem was, if you want to put it that way, taken care of. So I no longer have that problem. But it was the tax cuts and the spending increases which obviously obviated further action. So, yes, it is no longer a concern of mine. Second, on the economic stimulus proposals, as I said previously, it’ really comes down to a judgment as to whether you think that the emerging stabilization that has now occurred after the significant weakness in the economy is a prelude to a self-adjusting recovery after the rate of inventory liquidation dissipates. If you be- VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 45 lieve that there is not enough potential final demand, then one could argue for some form of stimulus program. I’ve argued that it’s probably not necessary. The economy is very likely to recover without it. And that would be my judgment. But it is a credible argument to stay that stimulus might be helpful in this particular context. Ms. SCHAKOWSKY. And the stimulus being, as I said, heavily weighted toward tax cuts rather than investment? Mr. GREENSPAN. I’m sorry. Tax cuts instead of investment? Ms. SCHAKOWSKY. Instead of, for example, housing, school construction, and so forth. Mr. GREENSPAN. That’s a judgment that the Congress has got to make. I’m not certain that, without getting into the full detail you can very easily determine—— Ms. SCHAKOWSKY. Well, I guess the question is, though, whether or not you believe that tax cuts, speeding up the current tax cuts or giving more corporate tax cuts is viable as an economic stimulus. Mr. GREENSPAN. If you’re asking me would it stimulate the economy, the answer is probably yes. On the issue of predatory lending, as you know, we have just recently come out with a ruling related to that and the Congress has it under consideration, and it’s a disputable issue. Because there’s sort of a fairly strong argument that subprime lending as a general issue is not a bad thing under certain conditions. When carried to what we call predatory levels, it is. And a lot of people have difficulty differentiating what is and is not predatory in the subprime categories. And I think that’s one of the reasons why it’s getting difficult to come to conclusions on this issue. Chairman OXLEY. The gentlelady’s time has expired. The gentleman from Tennessee. Mr. GREENSPAN. I’ll answer the others for you. Mr. FORD. Thank you, Mr. Chairman, Mr. Oxley and Chairman Greenspan. In fairness to my good friend Ms. Schakowsky, what you may call ‘‘spending’’ we call ‘‘investment’’ up here, so I think that’s what she might have been referring to, Mr. Chairman. I have two quick questions. Last year before the Committee, at least one of your trips to the Committee, you advocated the idea of a trigger mechanism where tax cuts would be delayed if the fiscal situation worsened, obviously meaning if our projections or expectations of revenues did not meet the grandiose projections made by some of my colleagues. In your testimony last year, I think you specifically said you supported a trigger mechanism largely because of the uncertainties that one has with respect to 10-year budget forecast are very high. Two parts to the question. In retrospect, with the dramatic reduction or deterioration of projected revenues that we’ve experienced, do you think a trigger mechanism would have been helpful? And two, there’s been considerable talk here from some of my colleagues on the other side of the Hill in the Senate and here regarding efforts to revisit the tax cut and that parts of the tax cut and even to revoke parts of it that have not gone into effect yet. President Bush has eloquently and forcefully suggested that he would not support such an idea and has even equated a revisiting the tax cut with actually raising taxes. I’d be curious to get your VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 46 thoughts on both strands of that question, Mr. Chairman. And I, too, am glad you didn’t decide to retire once you reached the eligible age. Mr. GREENSPAN. Thank you. First of all the trigger I was referring to was a trigger on both taxes and spending initiatives. And the reason for that is that the Federal budgetary process which 15, 20, 30 years ago never really got beyond 1 or 2 years out, largely because the vast proportion of it was discretionary and the Congress could very readily reverse or sunset any type of program it wanted with ease. That’s increasingly less credible as the greater proportion of spending outlays become what we used to call uncontrollables, entitlement programs of some form or another. Under those conditions, you have no choice but to make longterm forecasts, because even if you don’t make a forecast, there is an implicit forecast in the actions you’re taking in the Congress. So it’s better to have a bad forecast than none at all. But those forecasts, as you point out, are bad. And hence, it’s far superior to have some form of mechanism which recognizes the fact that if they are really very far off that the actions which were promulgated on them will not take place. So I still believe that that process should still exist. I have no particular comments on the issue of what one would do or not do about existing programs. But the point that the President is making with respect of changing the existing tax structure now, say, reversing, implying some form of tax increase is correct in the sense that there are some parts of the economy where people are making judgments about the future, making current investments about which are go-no go investments, depending on what the presumed tax structure is in the future. So if you change rates, if, for example, you had a tax cut pending and you go back to neutral, that effectively creates an effective tax increase for somebody who is making an investment. Mr. FORD. I understand that. But I guess obviously a lot of things have changed since we passed that tax cut, and as you indicated, the fiscal situation irrespective of what occurred on September 11th has changed things dramatically. And I would imagine as you chair a Board that has consistently lowered short-term rates for a period of time, you are in the business of adjusting. So as much as I appreciate your point, I’m a little confused by it. I know my time is running and I’d love to maybe get a longer answer from you, Mr. Chairman, on that. But the last time you were before the Committee I raised it, the last time I had an opportunity to address some of my thoughts to you before the Committee, my State of Tennessee, where I’m from, and other States were experiencing enormous budget shortfalls, and we see now that many other States are faced with the same crisis. The National Governors Association met last week here. I don’t know if you had an opportunity to address them. I know some of my colleagues and Members of the Administration had that opportunity. One of the things that they declared, Mr. Chairman, was that the current, quoting, the current fiscal crisis for States compounded by unsustainable growth in the Medicaid program is creating a situation in which States are faced with either making massive cuts in programs or being forced to raise taxes significantly. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 47 My question last time dealt with I couldn’t understand for the life of me how you could reconcile the idea of growing exploding surplus projections with the reality of States facing budget shortfalls. And I guess my question is, as those of us at the Federal level try to boost the economy, and you tried to address some of these questions here, while maintaining some fiscal discipline, what will be the effect of the budget problems off the 50 States and will any drastic spending cuts or even tax increases at the State level offset our efforts here at the Federal level? And for that matter, offset the Herculean efforts that your organization has engaged in over the last year. Mr. GREENSPAN. Well, as I think I may have answered last year, one of the reasons why we had this extraordinary Federal surplus and difficulties in the State areas is that there were a significant amount of tax cuts that occurred within the States to essentially remove considerable surpluses that were emerging. And so when the situation turned around, you would expect, as indeed has happened, States are in far greater difficulty than even the Federal budget system is. But as you point out, Congressman, from the point of view of looking at the economy overall, you consolidate the Federal and the State and local systems so that clearly cuts in spending in State and local authority or an increase in taxes has the same effect essentially as that which would occur at the Federal level. Mr. FORD. Mr. Chairman, I know my time is up, but just one last point. You mentioned how there may be those who are depending on the tax cut that was passed and the idea that tax cuts will kick in. I just can’t imagine that too many of my friends, at least the ones I’ve spoken to, and I don’t know a lot of friends with big estates, but the or two I do know, they’ve indicated they’ve not made any dramatic changes in their estate planning as a result of what we passed last year. So as much as I appreciate that comment, I can’t imagine—— Mr. GREENSPAN. I wasn’t referring to the estate taxes. I was referring to individual income taxes. Mr. FORD. Right, fair enough. Fair enough. Thank you for letting me go over my time. Thank you, Mr. Chairman. Chairman OXLEY. The gentleman’s time has expired. The gentleman from Texas, Mr. Hinojosa. Mr. HINOJOSA. Thank you, Mr. Chairman. Chairman Greenspan, could you give us an idea of how the decline in long-term rate would impact the household incomes and possibly what effect it would have on individuals like the one you were just talking about in making decisions to make investments, whether they be in their investment portfolio of securities or businessmen wanting to invest in say equipment and machinery in their factories? Mr. GREENSPAN. Congressman, in our type of economy, long-term interest rates play a fairly significant role. Most of us deal with it wholly from the mortgage market only and that clearly what the interest rate is on these 30-year fixed rate mortgages has a fairly significant impact on what your monthly payment is and does, has a major effect on how one behaves. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 48 They are also relevant where you are involved in investing in plant and equipment, as you point out, because to the extent that you’re borrowing money over the long run, that has very major effect on the potential profitability of that investment and clearly, lower interest rates imply that the profitability under any existing state of technology will be higher for corporations who borrow money to finance it. So it’s generally a very important element within the economy. And one of the reasons why we are so focused on keeping inflation expectations down is inflation expectations are a critical factor in the determination of long-term interest rates. And if inflation expectations go up, it tends to inhibit a lot of economic activity in this country. Chairman OXLEY. The gentleman’s time has expired. The gentlelady from Indiana, the very patient lady, is now recognized. Ms. CARSON. Thank you very much, Mr. Chairman. And thank you very much, Mr. Chairman, for your patience. I’m going to ask you this question because you are perceived—and correctly so—to know everything, and that is a compliment. It is not a put-down at all, and we appreciate very much that you’re here today. Indiana has a spiraling rate of foreclosures, housing, home foreclosures among its citizens. Could you tell me why that is? Mr. GREENSPAN. Well, I think the foreclosure rate generally, and more importantly, the bankruptcy rate for individuals has been going up recently, in large part because the economy is weak, the unemployment rate has gone up and there’s been obviously specific difficulties. I don’t know the situation specifically in Indiana, but there’s no reason to believe that that is dramatically different. I should say that the foreclosure rate, while it is up, is not up a great deal as I recall at the national level, and it varies by whether it’s FHA, VA, conventional. And as a consequence of that, it’s very hard to generalize. But the basic reason is that the economy has been weak. Ms. CARSON. Do you see, Mr. Chairman, one quick other question, any reversal of that trend, given all of these people that are going to be propelled into homelessness, if you will? These are homeowners. People that were taxpayers. People that were longtime employees and now they’re losing their place of abode. Do you see any reversal of the trends that has precipitated that chronic situation among so many people? Mr. GREENSPAN. I think so, Congresswoman. The evidence that we’re seeing nationwide is that we seem to have stabilized. A lot of the weakness that we saw earlier seems to be dissipating. And while I’ve argued that it’s too soon to say that we’re on our way back and moving at a reasonable pace, nonetheless, there are signs that those types of improvements are taking place. And if they do, that will be by far the most effective program to address the particular concerns that you have in that regard. Ms. CARSON. How are they beginning to reverse? And I don’t want to hold you. But what signs do you see related to what? Mr. GREENSPAN. Well, what we see, for example, is that the gross domestic product, which was negative during the third quarter and VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 49 appeared to be going into the fourth quarter as a significant negative, at the end turned out to be a small positive. And for the first quarter, the numbers do at this moment appear to be positive as well. So we are beginning to see the forces which engendered the rise of unemployment starting to simmer down, and while we’re not to the point where I think you can essentially say that we’re over the hump with respect to unemployment, we’re approaching it. Chairman OXLEY. The gentlelady yields back. The Chair now recognizes the gentleman from New York, Mr. LaFalce. Mr. LAFALCE. Chairman Greenspan, in my introductory remarks I asked some largely global questions which we didn’t have an opportunity to get into. Now I’d like to get into some more local and specific questions. You and I, I’m sure, are equally concerned about unfair and deceptive practices within the field of financial services. It’s my understanding that some 25 years or so ago, a law was passed that delegated responsibility to the Federal Reserve Board to promulgate regulations articulating what an unfair and deceptive practice is. Correct me if I’ve been misinformed. But it’s my understanding that we haven’t seen regulations in the past 25 years from the Federal Reserve Board. I’ve also been advised that the Comptroller of the Currency recently brought a lawsuit saying that we could operate under the aegis of the law itself absent regulations, and that was challenged in the courts by the financial institutions. The initial lower court holding was that indeed the Comptroller was correct. I don’t know the status of that case on appeal. But could either you or Mr. Mattingly advise me as to what the status of that is? Mr. GREENSPAN. I would say you would be much better advised by Mr. Mattingly. [Laughter.] Mr. LAFALCE. Virgil? Chairman OXLEY. Would the gentleman identify himself for the record, please? Mr. MATTINGLY. Virgil Mattingly. I’m the General Counsel of the Federal Reserve. Chairman OXLEY. Thank you. Mr. MATTINGLY. The Comptroller has taken that position, the one you articulated in several cases, and so far, my understanding is he’s been upheld on that. Mr. LAFALCE. OK. But can we go to the first issue, Virgil? And that’s what’s taken 25 years to articulate those regs? Mr. MATTINGLY. The Board wasn’t required to issue regs. It was given the authority to identify practices for banks that would be unfair and deceptive. And I think the Board has done that my recollection is once, only once. Mr. LAFALCE. Only once in 25 years. But it’s also my understanding that there’s an expectation that the Federal Reserve will promulgate regulations. As a matter of fact, that was the gravamen of the argument that was used against the Comptroller, and the Comptroller—nobody seems to dispute that. I mean, 25 years and one example. It seems to me you could be a bit more aggressive. [Laughter.] VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 50 Mr. MATTINGLY. Well, that may be so. But as you are well aware, during that 25 years, Congress itself has passed a lot of laws that have applied to banks. Mr. LAFALCE. But the unfair and deceptive practices have not been dealt with adequately. You need to become much more aggressive on this. And I would like to have a meeting with Chairman Greenspan and you and the other member of the Federal Reserve Board who is responsible for this issue in order to discuss the possibility of a much more aggressive Federal Reserve Board on this issue. Mr. MATTINGLY. Certainly. Mr. LAFALCE. Thank you. Chairman OXLEY. The gentleman yields back. Let me if I can, Mr. Chairman, use the prerogative of the Chair to ask a few questions as we wrap up here. And you’ve been very gracious with your time and we most appreciate it. Recently, Secretary of the Treasury O’Neill suggested that CEOs of public companies be required to personally certify financial statements and such CEOs be held personally liable for such certifications, thereby avoiding or not having the protection of insurance. Do you have any opinion on that proposal? Mr. GREENSPAN. The general proposal is to switch the onus of decisionmaking with respect to a whole series of corporate governance questions which we’ve been discussing today to the CEO. I fully support that. I think having served on many boards, indeed, Paul O’Neill and I served on the Alcoa Board together, there’s no question in my mind that unless you get the CEO effectively saying not we have met every GAAP requirement and therefore we have no liability further that he has to be able to say that irrespective of any particular GAAP regulation the accounts which we have appropriately certify what this company is all about. Now the question, getting down to the issue of penalties to induce the CEO to make sure that that is done, gets to the question in his mind on the degree of D&O insurance, director and officer liability insurance. And that there’s no doubt in my mind that there’s no doubt in my mind that if you created some inability to get fully liability insurance under certain circumstances, it might be helpful. Although the law as I understand it now stipulates that deceptive certifications do not cover you under a particular insurance requirement. My general view is I think that Secretary O’Neill is definitely going in the right direction on this. There is a question that has arisen with respect to if you construct an issue of increased liability on the part of the CEO that you will engender a huge new flood of lawsuits which clearly will not be to the interests of either the company, the country and I do suspect it’s something we ought to try to avoid. So there are possibilities of doing what the Secretary wants to do, but to delimit the way in which the individual CEO’s liability is adjudicated. Chairman OXLEY. Along those lines, some folks have suggested that corporate governance issues should be dealt with at the Federal level as opposed to the traditional State level. Do you have any comments in that regard? VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 51 Mr. GREENSPAN. I really don’t. I’m aware of the arguments. I don’t feel myself sufficiently in control of the facts to make a judgment at this stage. Chairman OXLEY. That hasn’t deterred others from making those same suggestions. [Laughter.] Chairman OXLEY. But I’ll pass on that. Let me ask you a couple of questions on derivatives since they have been mentioned a number of times in several different areas. In the year 2000, Congress passed the Commodity Futures Modernization Act which exempted or excluded many types of derivatives transactions from the Commodity Exchange Act. Some have recently questioned this decision certainly in the wake of Enron. Is this still sound policy or is it in need of discussion? Mr. GREENSPAN. I think not, Mr. Chairman. I think that the legislation that you passed in the year 2000 strikes me as appropriate and still valid. Chairman OXLEY. And why would you say that in light of a great deal of criticism that has come from a number of quarters that at least part of the reason for the Enron collapse was this, quote, ‘‘deregulatory move’’ by the Congress in 2000? Mr. GREENSPAN. That’s not impression of what happened. I mean, what I sense happened is that they ran into losses which they basically endeavored to obscure. And there’s nothing that they did which just could not have been done in 20 different ways, had nothing to do with derivatives except that derivatives happened to be one of the vehicles that were involved, but the issue that I’m aware of had nothing to do with the legislation that you passed in the year 2000. There is a question as to whether the specific issue of exempting over-the-counter energy derivatives from the Commodity Exchange Act. And the argument there is that somehow that Enron was not controlled and it should have been. But what that issue is is in the law that regulation of transactions between professionals is wholly inappropriate in that specific regard. And I see nothing that’s changed from the discussions we all had when that particular Act was under review. Chairman OXLEY. Mr. Chairman, some would say that in the case of Enron that the Enron collapse really began when the price of commodities, particularly oil and gas, declined. And as a matter of fact, you can look at some rather startling charts that indicate that Enron’s stock went up almost equally with the commodity prices and then plunged at the same rate. Is that a valid trigger for the Enron collapse, or is there some other theory out there that’s just as credible? Mr. GREENSPAN. Well, as far as I can see, there are two issues involved. One is the underlying earning power that Enron engendered. And I would presume that since they were very heavily in the issue of energy that the higher the price at any fixed margin, the higher would be their earnings. But I think the evidence will probably show when we finally know what all of the evidence is that the triggering point had nothing whatever to do with that. It had to do with the loss of I guess I would call it reputation capital. VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 52 That is, as I indicated earlier on, Enron is a classic case of a company whose market value is very significantly dependent on the reputation of the firm. And when it became apparent that the data that they were putting forth as representing their earnings figures were indeed false and had to be recalculated, they lost a very large part of their reputational value and indeed, it was that that ultimately did them in. Had they, for example, recognized the losses that they actually had in these affiliates early on, I have no doubt it would have hit their stock some, but it would have had a negligible impact relative to what actually happened. It was a very expensive business mistake which they made. I do not think that had they a correct set of accounts that they’d still be in business. Their stock price would be lower. Their stock price would be lower because basically, energy prices are lower, and their margins presumably wouldn’t have changed, so their earnings would have been less viable. But they would not be in Chapter 11. Chairman OXLEY. One of the former officers stated publicly that he thought that the Enron situation was a classic run on the bank and that seems to be what you are referring to. However, I guess there are some differences as to what triggered that run on the bank. Your estimation is that it was this reputational capital that was depleted rapidly, which goes to the whole question of public confidence and the like in the system. Mr. GREENSPAN. As I said in my prepared remarks, Mr. Chairman, a company whose assets are substantially physical, real, and I used the example of an automobile assembly plant, could conceivably have the reputation of its management sullied considerably or come under a cloud and yet the company would still have sufficient physical assets to engender incomes which would give it a considerable capital value. But that was not the case of Enron. Their actual real assets—pipelines and various energy-related assets—were a relatively small part of the market value of the firm. Chairman OXLEY. And finally, I couldn’t let this pass by, and that is a question on netting. You and I have had these discussions numerous times. And as you know, the netting provisions are currently in the bankruptcy bill that’s in the Conference Committee. Mr. LaFalce and I are both conferees, and as you know, Mr. Toomey of our Committee has introduced legislation also in that regard. I know you haven’t changed your mind on this, but I’m wondering if you could help us and help the listening public understand the importance of enacting netting legislation this year. Mr. GREENSPAN. Mr. Chairman, as I indicated in my prepared remarks and later, I think that the extraordinary expansion of derivatives has been a major factor in creating an increased degree of flexibility and resiliency in our system and that they are a very effective tool that used for good is exceptionally effective and used for ill can be just the same. It’s neutral with respect to that. But, because it’s such a valuable potential tool, it’s important that it function as efficiently as possible. The legal uncertainty that still exists on certain types of derivatives which did not appear in the original act which gave legal certainty to netting are a cloud over these markets which, if we can dissipate sooner rather than later, would be very helpful. There is no downside of which I am aware of in passing this legislation. And as you know, it was in the VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 53 bankruptcy legislation there solely for the purpose of trying to integrate something which I presume has fairly broad support in a bill which had some conflicts associated with it. So I would just merely argue that unless I am mistaken about this issue of there being no downside, there’s an awful lot of upside to its enactment. Chairman OXLEY. Thank you. Let me yield to my friend from New York. Mr. LAFALCE. I thank the Chair for yielding. Chairman Greenspan, I couldn’t agree with you more on the issue of netting. And I don’t think there’s a controversy about that issue but there is great controversy about the bankruptcy bill. Now in the previous Congress, we separated the netting bill from bankruptcy and passed it independently. In light of the Enron, Global Crossing and other debacles, don’t you think it is advisable to separate the netting bill from the banking conference, pass it separately in the House and separately in the Senate and send it to the President for his signature as soon as possible? Mr. GREENSPAN. I would agree completely with your remarks, Congressman. Mr. LAFALCE. Thank you. Chairman OXLEY. Mr. Chairman, we appreciate your appearance here today. And as always, most enjoyable. And your knowledge is exceeded only by your patience and good will. And we look forward to seeing you in July. The hearing now stands adjourned. [Whereupon, at 1:50 p.m. the hearing was adjourned.] VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 APPENDIX February 27, 2002 (55) VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00059 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 56 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00060 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 57 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00061 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 58 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00062 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 59 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00063 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 60 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00064 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 61 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00065 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 62 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00066 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 63 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00067 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 64 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00068 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 65 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 66 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00070 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 67 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00071 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 68 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00072 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 69 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00073 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 70 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00074 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 71 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00075 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 72 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00076 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 73 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00077 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 74 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 75 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00079 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 76 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00080 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 77 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00081 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 78 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00082 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 79 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00083 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 80 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00084 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 81 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 82 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00086 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 83 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00087 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 84 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00088 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 85 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00089 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 86 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00090 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 87 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00091 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 88 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00092 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 89 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00093 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 90 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00094 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 91 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00095 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 92 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00096 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 93 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00097 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 94 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00098 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 95 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00099 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 96 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00100 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 97 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 98 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00102 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 99 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00103 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 100 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00104 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 101 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00105 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 102 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00106 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 103 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00107 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 104 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00108 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 105 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00109 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 106 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00110 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 107 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00111 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 108 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00112 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 109 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00113 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 110 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00114 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 111 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00115 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 112 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00116 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 113 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00117 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 114 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00118 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 115 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00119 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 116 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00120 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 117 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00121 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 118 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00122 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 119 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00123 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 120 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00124 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 121 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00125 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 122 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00126 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 123 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00127 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 124 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00128 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 125 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00129 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 126 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00130 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 127 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00131 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 128 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00132 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 129 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00133 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 130 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00134 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 131 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00135 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 132 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00136 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 133 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00137 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 134 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00138 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1 135 VerDate 11-MAY-2000 10:43 Jul 26, 2002 Jkt 000000 PO 00000 Frm 00139 Fmt 6601 Sfmt 6601 C:\DOCS\78399.TXT HBANK1 PsN: HBANK1
@FedFRASER