View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

S. HRG. 100-281





JULY 21, 1987

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


For sale by the Superintendent of Documents, Congressional Sales Office
U.S. Government Printing Office, Washington, DC 20402

WILLIAM PROXMIRE, Wisconsin, Chairman
JOHN HEINZ, Pennsylvania
ALAN J. DIXON, Illinois
JIM SASSER, Tennessee
TERRY SANFORD, North Carolina
JOHN H. CHAFEE, Rhode Island
KENNETH A. MCLEAN, Staff Director
LAMAR SMITH, Republican Staff Director and Economist



T U E S D A Y J U L Y 21, 1987

Opening statement of Chairman Proxmire
Opening statements and remarks of:
Senator Moynihan
Senator D'Amato
Senator Garn
Prepared statement
Senator Riegle
Senator Hecht
Prepared statement
Senator Dixon
Prepared statement
Senator Karnes
Prepared statement
Senator Shelby
Senator Gramm
Senator Sasser
Senator Bond
Senator Graham
Senator Heinz
Senator Cranston



Alan Greenspan, nominated to be Chairman, Board of Governors, Federal
Reserve System
Biographical sketch
Response to written questions from:
Senator Proxmire
Senator Riegle
Response to written questions of Senator Proxmire from the Federal
Reserve staff



Letter to Chairman Proxmire from Alan Greenspan



TUESDAY, JULY 21, 1987

Washington, DC.

The committee met at 10 a.m., in room SD-538, Dirksen Senate
Office Building, Senator William Proxmire (chairman of the committee) presiding.
Present: Senators Proxmire, Riegle, Dodd, Dixon, Sasser, Sanford, Shelby, Graham, Garn, Heinz, D'Amato, Hecht, Gramm,
Bond, Chafee, and Karnes.
Also present: Senator Moynihan.
The CHAIRMAN. Dr. Greenspan, will you rise and raise your right
[Whereupon, the witness was duly sworn.]
The CHAIRMAN. We are delighted to have the two distinguished
Senators from New York here to present the nominee. One of them
is a very distinguished member of this committee and has served
with great distinction with us and we all value his friendship as
well as his ability. The other is a man we all honor as a great
American. Are you the senior Senator, Pat?
Senator M O Y N I H A N . I believe I am. I'm the one with the gray
The CHAIRMAN. SO you go right ahead.

Senator MOYNIHAN. Mr. Chairman, you're very gracious to have
Senator D'Amato and me here. And of course, he's a member of
this committee. And it's a very special honor for this New Yorker
to introduce to you what cannot but be the most distinguished saxophone player ever to come before the committee.
The CHAIRMAN. I always thought it was the clarinet.
Senator MOYNIHAN. I misspoke, Mr. Chairman, as they say in
the hearing. [Laughter.]
Mr. Chairman, Dr. Greenspan is well and I'm sure favorably
known to this committee. He has had a distinguished career as an
academic, as a businessman in New York. He was an economic consultant. He is a man of world stature. He's been a student in his
time and I think is in the right honorable succession to the venerable and revered Arthur Burns, whom we mourn this month.

As you know, Dr. Greenspan served for 7 years on the Council of
Economic Advisers, for I believe 4 years as Chairman of the Council, faithfully carrying out the mandate of the Employment Act of
1946, being true to his profession, being loyal to his President, but
having that very special capacity which is that a scholar ought to
bring to his work which is the ability to tell truth to power—to
speak truth to power, as the Quakers would say.
I do commend him, sir, to this honorable committee, as a man of
the utmost integrity and experience and capacity for this work.
The CHAIRMAN. Thank you very much, Senator Moynihan.
Senator D'Amato.

Senator D'AMATO. Mr. Chairman, I am really privileged to join
with Senator Moynihan in introducing Dr. Greenspan as the nominee to the position of Chairman of the Board of Governors of the
Federal Reserve System. We are truly fortunate to have a man of
Dr. Greenspan's stature before us this morning. As Dr. Greenspan
is no stranger to this committee, I will refrain from reciting the
entire litany of his professional and academic accomplishments, all
of which are achievements that recommend him for the position
for which he is under consideration.
Most important, however, is the fact that he is a native New
A review of Dr. Greenspan's biographical sketch reveals, Mr.
Chairman, that he is a rather busy man. In addition to his position
as chairman and president of Townsend and Greenspan, he currently is a member of the President's Economic Policy Advisory
Board, Time Magazine's Board of Economists, Senior Adviser to the
Brookings Institution, and a consultant to the Budget Office.
He currently sits on the board of seven major corporations and is
a member of numerous other councils, commissions, and noncorporate boards.
Considering that he will have to sever many of these associations, it appears that Alan may be viewing the position as Chairman of the Fed as a way to reduce his tremendous workload.
Alan, I and other members of the committee want to assure you
that, if anything, your workload will increase. As America's central
banker, you will be the ringmaster of the three-ring economic
circus which is confronting the American and world economies.
In one ring, we have an increasingly weak dollar that threatens
to push the inflation rate out of control if not properly monitored.
In the center ring, we watch both U.S. and foreign economies
growing at a slow rate that could easily slip into global recession
that could even more easily occur should interest rates climb too
And in the third ring, we watch the specter of the entire world's
financial system walking the unstable high wire of nonperforming
Third World loans.
In short, your job will not be an easy task, since to a large extent
we are entrusting you with the fate of the dollar, the course of U.S.

interest rates, and quite possibly the prosperity of the world economy.
Of all of the distinguished bankers and economists who could
have been considered, I believe that you are the best successor to
the Fed Chairmanship that the President could have chosen.
Further, I would suggest to those who feel that your nomination
will turn the Fed into an arm of the administration, that they do
not know Alan Greenspan very well. The Alan Greenspan that I
know is not one who avoids the tough policy decisions for the sake
of political expedience. I am confident that your tenure as Chairman will be most successful. And I say this not only because you
and I have been friends for a long time, but because of your academic and professional training, you have been prepared for this
position and, therefore, I quite strongly urge my colleagues on this
committee and in the Senate to swiftly confirm Dr. Greenspan so
he can get to work on the difficult tasks that we all know need to
be done.
Thank you.
The CHAIRMAN. Thank you, Senator D'Amato.
Gentlemen, thank you very, very much.
Senator MOYNIHAN. Thank you, Mr. Chairman.

The CHAIRMAN. Dr. Greenspan, I'm going to take a little longer
than I've ever taken before in a preliminary statement because I
think this is such an absolutely critical appointment.
You have been nominated by the President to head what is without question the most powerful and the most important independent agency in our Government. For almost all of the past 36 years
the Federal Reserve Board has been headed by three remarkable
chairmen—William McChesney Martin, Arthur Burns, and Paul
Volcker. The economic policy of this country has gained greatly
from their leadership. Their policies have contributed significantly
to the economic growth of our country.
If there is one distinguishing hallmark of their service as Chairmen of the Fed it was their consistent independence. They were independent of the President and they were independent of the Congress.
Chairman Martin never hesitated to say no to President
Truman, to President Eisenhower, to President Kennedy or President Johnson. I can recall how furious President Johnson could
become when he was frustrated, but Martin didn't hesitate to say
no to him anyway. Chairman Burns often ignored the pleadings of
President Nixon and President Ford. And Chairman Volcker was a
sore point for Presidents Carter and Reagan.
Each of these men also resisted the pleading of Congress for a
more expansive, stimulative monetary policy. If Congress pays any
attention at all to monetary policy, it is to call for a more expansive policy. If interest rates are high, it's the Fed's fault. If they are
low, the administration and Congress fall all over themselves
claiming credit, especially when an election approaches.
It's hard for any chairman to say no to this plea for more monetary goodies. It is especially hard because the Chairman has only

one vote on this seven-member board. He has only one vote on the
twelve-person Open Market Committee that determines the buying
and selling of Government securities that expands, contracts, or
keeps stable the country's monetary supply.
Now you, Dr. Greenspan, face a tougher problem than any of
your three great predecessors. Each of them chaired a board that
had been appointed by a variety of different Presidents over a
period of years. The Congress wisely created the 14-year term for
Federal Reserve Governors with precisely this independence in
mind. The 14-year term gave the board enough political diversity
and enough ideological diversity so that a strong chairman could
find the support among fellow governors to resist the pleading of
the President, even a President who had appointed him because
the same President would rarely have appointed more than two or
three of the governors.
None of this will be true in your case. You will accede to the
chairmanship of a board that has been stripped of the independence provided by the 14-year term. Think of it. Who is the senior
member of the board of governors of the Federal Reserve Board
today? The answer is Martha Seger. When was she appointed?
Four years ago, in 1983. The fact is that President Reagan has appointed every one of the present members of the board, all of them.
We are now less than 17 months away from the next election. It
will be a congressional election. It will also be a Presidential election. All incumbent Members of the Congress, Democratic as well
as Republican, will be pushing you in one direction—toward easy
money, expansive policy that will keep the recovery going, preferably an expansive trip right up to next November.
The President and his economic specialists will be pushing in exactly the same direction. Now this isn't patty-cake. The Presidency
of the United States is at stake. Now, for the first time in this Senator's long memory, one President will have appointed every single
member of the Federal Reserve Board, all seven members. They
and you, too, will feel an understandable instinct to be helpful to
your benefactor, the President, and his party.
From the time you take over this office you will be entreated to
expand the Nation's money supply. You will be tempted to take the
chance that too much money chasing too few goods won't give us
another runaway inflation of the kind our country suffered
through 10 years ago.
Are you the man who can say no to the administration and to
the Congress? You have had some impressive years as Chairman of
the Council of Economic Advisers. You were the President's trusted
adviser, his counselor and economic supporter. You also impressed
the Congress, including this Senator, who voted against your appointment to chair the CEA. I was wrong in that vote. You were a
get along, go along, comfortable, and increasingly popular chairman.
Now you may have to reverse that congenial, cooperative spirit.
You have to find it in you to deny the President the easy money
policy he and his party want. You have to say nix to the Congress,
too. As usual, the only voice you will hear from the Congress will
be a steady chant to ease up on the money supply.

With that board all appointed by the same President, all appointed with the expectation it would give the administration an easy
money policy it craves, you're going to have your hands full bringing it along for a strong, steady, anti-inflationary policy if you do
want to keep your President from the monetary feast he wants.
Dr. Greenspan, as Chairman of the Federal Reserve Board, you
are not only the high priest of monetary policy. You are the country's leading bank regulator. The Fed, as we know, regulates a
large number of State member banks. It also regulates the bank
holding companies that control an increasing proportion of all the
commercial banking in our country.
You take over this position at a time when there's a headlong
drive toward increasing bank concentration. Late last year, the
first and second largest banks in Texas, banks that have been red
hot competitors, merged. A couple weeks ago, the second and third
largest banks in Wisconsin, also interest rate competitors, announced their intention to merge and form a bank that will be far
larger than its nearest competition in Milwaukee and throughout
As Chairman of the Federal Reserve Board, you and your agency
play the key role in approval or disapproval of these massive bank
mergers. Last year, most of the ten biggest mergers in the history
of banking in this country took place, in one year. The administration in the person of Under Secretary of the Treasury George
Gould has said that he agrees with this merger mania. He's been
reported by the New York Times to favor the creation of five to ten
megabanks. You will have the prime voice in determining whether
this kind of concentration that is already underway should be encouraged.
You come to this critical position as the director of both J.P.
Morgan and Company and its principal bank, Morgan Guaranty.
You've been reported to have announced that you will recuse yourself from all matters directly affecting Morgan. But, of course, you
will necessarily take part in matters that would have a general indirect but major effect on Morgan and its opportunities.
You also come to this position as a paid advocate—that's the
term they use—for Sears, Roebuck. Sears, as you know, owns the
most rapidly growing nonbank. Any position you take on nonbanks
will affect the interest and opportunity of your former client.
Now there's a saving grace in all this. Both as a highly successful
private economist and economic consultant and as a Government
economist and economic leader, you have consistently shown a
sense of discipline. We, of course, know of your early identification
with the extreme individualism of Ayn Rand. As I've said, we are
familiar with your service to some of the biggest, most powerful
corporations in the country.
But in all your activity, you have been sensitive to what the hard
data tells you. You have expressed your concern about the economy's inflationary tendencies. You recognized the enormous pressure, the inevitability of pressure for inflation.
I would feel much better about this appointment if there was
somewhere in your record an indication of your awareness of the
dangers to our economy of excessive financial concentration.
Maybe you can reassure us that you understand that banking

should be separated from commerce and the unique multiplicity of
banking in this country is an immense source of strength for our
small businesses and that you can't have competition without
having a large number of banks, as many banks as possible competing in every banking market. Do you have a conviction that regulators, no matter how able, cannot do the job as effectively and
efficiently as competition? I hope as chairman, you can show us
Senator Garn.
Senator G A R N . Thank you, Mr. Chairman.
Mr. Chairman, I have a prepared statement I would ask unanimous consent be placed in the record.
The C H A I R M A N . Without objection, so ordered.

Senator G A R N . Mr. Chairman and prospective Mr. Chairman,
over the years that I have been here, one of the things that I have
felt most strongly about and have said to every prospective
member of the Federal Reserve Board is my strong belief in the independence of the Fed.
That isn't just directed at you as an incoming chairman. I was
talking about the Federal Reserve Board as an institution. Because
over the years I have seen many, many proposals of what the
Chairman speaks about of Congress wanting to either tighten the
money supply or to loosen the money supply. As a matter of fact,
when I first got here more than 12 years ago, there was a proposal
before Congress to legislate the monetary targets for the year. I
find that even more difficult to believe now than I did at the time,
that we would pass a law telling the Fed what targets they should
work within and make it that inflexible.
And I have certainly not always agreed with the members of the
Federal Reserve Board, but I have always felt that they should be
absolutely independent. Whether I agree or not was not the point.
Exercise their best independent judgment.
And the reason I have felt so strongly about that is because I
agree with the chairman on the inflation problem. What has not
been emphasized in his statement, however, is that it is not just
the Fed and how we set the "Ms" that controls inflation. Certainly,
it is part of the solution to have proper monetary balance.
But I've also made the comment many, many times over the
years that as long as Congress had such an irresponsible fiscal
policy, that it made it very difficult for the Fed to properly balance
the monetary side of it because not too many years ago most people
didn't know who the Chairman of the Federal Reserve Board was.
Most people in this country were not too concerned with what the
Fed did because as long as Congress had a more moderate fiscal
policy, monetary policy did not become nearly as important. Now
we constantly find described as your position as Chairman of the
Fed as the second most powerful position in the country. We've had
that told to us so many times it's like the Chinese water treatment
hitting you in the middle of the head.
I think it's unfortunate that we have elevated the position to
that level of at least perception of importance and I've heard

Chairman Volcker sit there for years and testify about the problems of inflation. But the point I'm trying to make is, no matter
what you do, no matter how independent you are, and exercise
your judgment and do the job just right, we are still going to have
inflationary problems in this country until Congress does something about the fiscal side of it.
And we tend to give speeches here in this body and in the House
of Representatives as if somehow nothing we do here with the
fiscal policy and the budgets and $2 trillion deficits has anything to
do with it; all we need is a Fed chairman who will properly
manage the "Ms" and the money supply and then we'll have a
stable economy that will grow and we won't have inflation and all
I just think it's important to emphasize that we want you to be
independent, but once again to emphasize that we as Members of
Congress can't hide behind the Fed Chairman and place all the
blame when it goes wrong and try and take all the credit when it
goes right, because we have done an incredibly miserable job of
managing the fiscal policy of this country through several administrations and under both Democratic and Republican control of the
U.S. Senate.
So we've got a lot of work to do, too, and I would hope that we
would do that so that the Fed Chairman is not the second most important job in the country, but Congress would recognize our fiscal
responsibilities. I think the President has made an excellent choice.
I certainly admire you for the work you have done in the past and
would hope that we could expedite your confirmation.
It's my understanding that Chairman Volcker's term expires on
August 6, and certainly before we adjourn for August recess I
would hope that your confirmation would have taken place so that
you can be on the job when Chairman Volcker leaves.
Thank you, Mr. Chairman.
[The complete prepared statement of Senator Garn follows:]

JULY 21, 1987























Senator Riegle.


Senator RIEGLE. Thank you, Mr. Chairman.
Dr. Greenspan, let me congratulate you on your nomination.
We've known each other for many years through a number of different situations and I have long admired and appreciated your
commitment to public service and to public issues. I think clearly
you bring the qualifications needed to tackle this job.
As others have said, I think this job at this time is as demanding
an assignment as we have in the Federal system. I think Senator
Proxmire points out the fact that we have a Board that is relatively new in terms of length of service and in some respects complicates the challenge that we face. I think experience is worth something and particularly on the Federal Reserve Board and by the
very nature of the length of the time that our Board members have
served you come in with a Board that lacks the same length of experience that we have seen on other occasions and I find that unsettling. I do for the reason of the fact that I think we face extraordinary financial challenges today. You and I have had some occasion to talk about that before today.
All the data that we see indicates that we're living on an international credit card these days. We are adding new international
debt at the rate of $1 billion every 2V2 days and the debt accumulation of both borrowing from abroad and borrowing at home, the leveraging that we see by the Government, by the private sector, by
individuals, seem to me to be building up at an extraordinary rate
and the more that happens, particularly with the Federal Government deficit being sort of a centerpiece in that, along with the
trade deficit, the maneuvering room for the Fed is less and less,
and it's very difficult to take and expect monetary policy by itself
to manage to settle out all the problems when we've got these
other issues that in many respects are, I think, out of control or
certainly building up at an alarming rate.
So that to me is an enormous challenge and I appreciate the fact
that you are willing to take it on. The chairman has mentioned the
importance of independence in the Fed and you clearly understand
that, as well as the policy predisposition that you bring on the
major issues.
Certainly on financial deregulation, I think if we're going to do
it, we ought to do it by law with the Congress changing the law
and the President signing it, and not by administrative fiat or decision. I think these are profound issues, they are important issues,
and however we settle them we ought to do it with changes in law
rather than just administrative judgments by unelected officials. So
I would hope that we would find that to be the case.
I would hope you would talk today about as you have a chance to
present your own thinking is your sense for the amount of maneuvering room that the Fed has today and using monetary policy is
one of the aspects of our financial strategy mixture of tools. How
much latitude does the Fed have today, given the other problems
that I've mentioned—the Federal deficit, the trade deficit, the debt
accumulation in many directions—and what is it realistic for us to

expect? What can the Fed do even if it does a perfect job with its
decisionmaking? How large a role can it play in a sense acting in a
fashion to try to help us manage our way through these difficulties?
I hope you will talk about that today.
The CHAIRMAN. Thank you, Senator Riegle.
Senator D'Amato.
Senator D ' A M A T O . Mr. Chairman, I pass.
The CHAIRMAN. Senator Dodd.
Senator DODD. Just to congratulate, Mr. Chairman, our nominee
and wish him well. And I will reserve any comments until the
question period.
The CHAIRMAN. Senator Hecht.

Senator HECHT. Thank you, Mr. Chairman.
I would like to join in welcoming Mr. Greenspan here today and
I look forward to hearing your testimony. I'm going to put into the
record a prepared statement. It seems that all that I have in my
prepared statement has already been addressed today.
Let me just make a couple points to you. As Senator Garn said,
the second most powerful position in America and I don't mind repeating it because it is definitely, and Congress today is in an isolation mood. There's also an isolation mood in this committee. We
are not an island. We are part of the total global financial picture
and now we are going to attempt to see if we can remain the global
financial giant that we are. Americans do not like to be No. 2. We
want to be No. 1. And that responsibility is going to be on your
shoulders. Good luck.
[The complete prepared statement of Senator Hecht follows:]

Thank you Mr. Chairman. I would like to join in welcoming Mr. Greenspan here
today, and I look forward to hearing your testimony.
Obviously, our economy has some problems which need to be addressed. Foremost
in my mind are the Federal Budget deficit and our alarmingly high trade deficit.
However, when we look at the total picture, I feel we are in relatively good shape.
Our economy is void of the high interests rates and inflation of the 70's that suffocated it's expansion. We have all worked very hard to bring inflation under control
and interest rates to a reasonable level. I am hopeful that under Mr. Greenspan's
guidance, that these policies will continue.
Thank you Mr. Chairman.

The CHAIRMAN. Thank you, Senator Hecht.
Senator Dixon.

Senator DIXON. Mr. Chairman, I just want to say that I share the
view of many committee members who have already expressed
their warm regard for Paul Volcker and the iob he has done as
Chairman of the Fed. I recall in the early 1980 s when every populist of every political persuasion in the country was demanding
changes in policy, Paul Volcker has the courage to stay the course
and I just want to say that I think the President has made an excellent selection in Alan Greenspan. I think he's that kind of a
man and I'm delighted to indicate to him that I am going to sup-

port the confirmation of Alan Greenspan as the new Chairman of
the Fed.
[The complete prepared statement of Senator Dixon follows:]

Mr. Chairman, I am pleased to be here this morning as the committee considers
the nomination of Alan Greenspan to be Chairman of the Board of Governors of the
Federal Reserve System. I look forward to hearing from Mr. Greenspan this morning. However, I would like to say at the outset that I support his nomination. I
think he will make a fine Chairman.
Since I first came to the Senate in 1981,1 have listened to Paul Volcker, the retiring Federal Reserve Chairman, give this committee the benefit of his candid views
on a variety of issues. I have watched him make the tough decisions on monetary
policy and other issues. Chairman Volcker is a tough act to follow, but given Mr.
Greenspan's towering reputation, I expect him to be just as strong-minded and just
as independent as Paul Volcker has been. Mr. Greenspan, in the past, has always
called them as he saw them; I look forward to seeing more of the same in his new
This is a time of real challenge for the Federal Reserve Board and the U.S. economy. I sometimes wonder why anyone would want the job of Fed Chairman. After
all, when the economy goes well, Congress and the President take the credit. When
the economy performs poorly, one of the first to be blamed—usually unfairly—is the
I am pleased, therefore, that the President has put forward such an excellent
nominee, and I think that Mr. Greenspan is doing the Nation a real service. I look
forward to hearing his testimony this morning and to working with him in the



Senator Karnes.


Senator KARNES. Thank you, Mr. Chairman. I, too, welcome you,
Dr. Greenspan, before our committee and applaud you for your
willingness to once again reenter public service.
My concerns will be more fully expressed during the question
period but I would like to have you make a note to consider addressing if you would at some point in time some of the concerns
about the Farm Credit System and the agricultural interests that
are so important to my State of Nebraska.
I applaud you once again for your willingness to assume this
awesome task of leading the Fed. I wish you the best and encourage you to work with the committee as you have in the past and I
ask you only in your remarks to comment briefly if you would on
the concerns that you have with agriculture.
Thank you very much.
[The complete prepared statement of Senator Karnes follows:]

Thank you, Mr. Chairman. I am very pleased to participate in the confirmation of
such a highly respected, economist as Dr. Greenspan. The performance of your predecessor has been very significant in elevating the position you are seeking to one of
the most powerful and influential positions in this country and in fact throughout
the world. Due to the respect and confidence Chairman Volcker achieved during his
tenure, your position and your actions will be subjected to tremendous scrutiny
around the world. However, I am extremely confident that you can continue to lead
the Federal Reserve with honor and distinction and I look forward to your work
with this committee, and the Congress as a whole.
The Federal Reserve's position with regard to several of the issues this committee
is currently deliberating will have a significant impact on the outcome of those discussions. Issues such as the separation of banking and commerce, the separation of

commercial banking and investment banking, other expanded bank powers, FSLIC
recapitalization, the proper supervisory controls on the financial industry, the possible merger of FDIC and FSLIC, insider trading, and corporate mergers and acquisitions will be greatly affected by the position the Federal Reserve takes.
I applaud the Reagan administration for the selection of Dr. Greenspan who
comes to the Federal Reserve with widespread respect in national and international
circles. Your conservative credentials and anti-inflationary philosophy gives me
great confidence that under your leadership you can assist in avoiding the ravages
of double digit inflation that wreaked havoc on the agricultural economy in Nebraska and the rest of the Midwest.
Mr. Chairman, I look forward to the remainder of this nomination hearing and to
working with you, the rest of the committee, and Dr. Greenspan as we proceed to
address the economic issues before us. Thank you.



Senator Shelby.


Senator SHELBY. Mr. Chairman, I also wish to add my congratulations to Dr. Greenspan on his nomination.
Certainly, Dr. Greenspan, you are a man of considerable knowledge and experience. No doubt you will need these skills as you
confront the challenges ahead of encouraging economic expansion
and in discouraging inflation, while at the same time sustaining
confidence in our economy. That's a hard task.
Our Nation is confronted, as you well know, with formidable economic problems. The U.S. trade deficit is tied largely to the international exchange rates and the delicate balance between inflation
control and rising monetary rates must be maintained. In addition,
our Nation's budget deficit is at an all-time high. Our growing deficit remains sensitive to the policies of the Federal Reserve Board.
The fact that you so readily accepted the President's call to fill
this vacancy might raise some questions about your good judgment
if we didn't know better. Attempting to fill Dr. Volcker's shoes will
be an extraordinary challenge. It's my sincere hope that you will
rise above partisan politics, as has been mentioned here today, and
avoid policies that result in short-term political gains at the expense of our long-term economic health.
Dr. Volcker was successful in subduing inflation and this restores confidence in our economy. I hope that you will continue
this legacy.
One of the many problems confronting the Fed will be with the
Latin loans. The economic growth of Latin America could mean
much to our economy. Not only must we cope with our past debts,
but new money is essential to their economic growth. How are we
going to get it to them?
Another problem lies with our traditional banking institutions,
as has been mentioned by the chairman. We must take the steps
necessary to restore banks to a competitive position in the marketplace and yet we must ensure their stability. Our banks should
return to global prominence which they have lost.
Dr. Greenspan, I look forward to your testimony here today and I
certainly wish you well in your big endeavor.
The CHAIRMAN. Thank you, Senator Shelby.
Senator Gramm.

 78-038 - 87 - 2


Senator GRAMM. Well, Mr. Chairman, I'm sure as Dr. Greenspan
listened to you and Senator Garn talk about how the Fed should be
independent and how the President and the Congress is always
wrong on monetary policy that he made a little note that when you
call him next month to give him advice he will hang up. [Laughter.]
The CHAIRMAN. I won't call him. If I did, it would be the first
time in 30 years that I've ever called a Fed chairman to give advice
on anything.
Senator GRAMM. Well, I have called our current Chairman on
many occasions, Dr. Greenspan. He's always taken my call and I
want to make it clear I don't think there's anything wrong with
the head of the Federal Reserve Board talking to Congress, listening to them. Every once in a while a few of them are right.
I don't know that I would want you to be measured by the ebb
and flow of the majority, but we have had I think as far as the national interest is concerned great fortune in having William
McChesney Martin and Arthur Burns and Paul Volcker, and I
think your name will be etched at the bottom of that distinguished
list. I hope you will serve in this office for many years and I look
forward to working with you.
The CHAIRMAN. It may be even higher than the bottom. [Laughter.]
Senator Sasser.

Senator SASSER. Thank you very much, Mr. Chairman.
I want to join my colleagues in extending my congratulations to
Dr. Greenspan for being nominated to this very, very important
post, a post that's important not just to those of us here in this
country, although it is extraordinarily important to us, but a post
that I think is of extraordinary importance worldwide. And the individual that sits with his or her hand on the throttle of the Federal Reserve I think can probably have more impact on the international economic situation than perhaps any single individual.
The nomination of Dr. Alan Greenspan, admittedly a man of
very substantial qualifications indeed, both personal, academic, and
from the business world, raises a number of questions, many of
which I hope will be answered today by the nominee and I'm sure
that they will be.
First, Mr. Chairman, as you so adroitly pointed out, how independent will Dr. Greenspan be of the economic and political
agenda of the Reagan administration? Will the nominee be able to
resist the pressures to pursue policies which might not be in the
long-term best interests of the American people but might be in
the short-term best political interests of the administration? I trust
he will answer those questions today to the satisfaction of not only
myself but this committee.
Second, in reading the commentators, I am concerned about
some of the things that are being said and in response to those
statements in the newspapers and statements by the columnists
and others and statements by leaders of some of the large banks in

this country, will the nominee feel compelled to prove himself as
an inflation fighter and clamp down hard on monetary controls,
thereby raising interest rates and sacrificing the jobs and homeownership aspirations of millions of Americans? Although I share
with my colleagues their respect and admiration for Paul Volcker,
let us not forget that there were other things at play that helped
dampen the fires of inflation rather that just the monetary policy
of the Fed in 1981 and 1982, and let us not also forget the tens of
thousands of businesses that were destroyed, farms that were lost,
jobs that were lost during those efforts of the Fed in 1981 and 1982
to combat inflation, utilizing what I viewed then and still consider
to be an overly restrictive monetary policy.
Third, Mr. Chairman, how will the nominee address what I perceive to be the economic excesses that we are seeing today that
have been compared to some of the excesses that occurred prior to
the crash of 1929? For instance, the current takeover craze which it
appears to me is leveraging many of our large corporations deeply
into debt and also the enormous and frightening increase in corporate debt that occurs as these corporations attempt to fight off the
Well, these are questions, Mr. Chairman, and my colleagues
think are most important and I'm looking forward, as are the
American people, to Dr. Greenspan's answers. This nominee has
made enormous contributions to his government and to his country
over a number of years of both public service and private service,
so I welcome you before the committee, Dr. Greenspan, this morning and look forward with anticipation to your response to the
questions. Thank you.
The CHAIRMAN. Thank you, Senator Sasser.
Senator Bond.

Senator BOND. Thank you, Mr. Chairman.
I think that we are indeed fortunate to have before us such an
outstanding individual nominated for this very important post. I
have respected Dr. Greenspan since I first had an opportunity to
get to know him when he was Chairman of the Council of Economic Advisers in the midseventies.
I would say I share with my colleague from Alabama the question of why anybody would want to be Fed Chairman at this time.
Dr. Greenspan, you will have to contend with a fiscal policy that's
out of control as a result of our inability to bring the budget deficit
down, the resulting trade deficits, the lingering recessions in some
parts of our country, the Third World debt crisis, a record number
of bank failures, an outdated legal structure for our financial institutions.
In addition, we all know that the Federal Reserve has become a
very convenient scapegoat for Congress, the White House, the press
and anyone else who's dissatisfied with economic performance.
There are many different qualities that we would like to see in the
Federal Reserve Board Chairman, a sound grasp of economics, a
willingness to take political heat from both Congress and the White

House, and the ability to make hard choices on very complex problems.
We in Congress certainly have not made the Fed Chairman's job
any easier by refusing the current Chairman's plea to reduce the
Federal budget deficit and get rid of the massive imbalances that
that is causing in the world economy. I'm sure that you, Dr. Greenspan, are up to the task. I applaud your willingness to tackle these
issues, although I do have some question about your judgment in
wanting to do so.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Bond.
Senator Graham.

Senator GRAHAM. Thank you, Mr. Chairman.
Dr. Greenspan, I would like to also add my voice to those who
have commended you for accepting this very challenging position
in these equally challenging times. I will have some questions later
which will focus on what I consider to be two of the fundamental
economic issues facing this Nation and the world.
The first is the issue of how do we lengthen the economic horizon
in which we view consequences? It seems to me that many of our
problems today fall under the umbrella of a system which evaluates results by too short a time frame and thus discourages longterm investment, both in people and in capital goods and in ideas.
Second is the integration of the United States into the world
economy with particular attention to how that affects our use of
market factors to make economic decisions with Government essentially in a neutral role as opposed to where the cause of the internationalization of many of our formerly domestic economic issues
Government has a new role to play, and a particular dimension of
that is the question of Third World debt—what should be the role
of marketplace factors and commercial institutions as opposed to
Government in meeting the mutual needs which this country,
other creditor countries and the debtor countries in the world have
in bringing that issue under control so that we can regenerate economic growth in important markets and areas which are important
to America's strategic future?
Those are challenging issues. I agree that your name will be
added to that list of distinguished Chairmen of the Federal Reserve
System and I'm confident that the listing that was given by the
other Senator Gramm was strictly chronological.
The CHAIRMAN. Thank you, Senator Graham.
We will follow a 5-minute rule in questioning until the number
of members here is less than 5, and I suspect we will have several
rounds before that. Senator Heinz may be a little late but he has
submitted a statement for the record.

Mr. Chairman, I join in welcoming Dr. Greenspan, the administration's nominee
to be Chairman of the Federal Reserve Board of Governors.
In a March interview with Business Week several weeks before he was tapped for
the Fed, Dr. Greenspan was asked what he thought of the Chairman's job. He responded by saying, "It's a loser."

There are many on this committee, Mr. Chairman, who can sympathize with Dr.
Greenspan's sentiments. Perhaps the nomination could be put in a new category in
Esquire magazine's annual Dubious Achievement Awards?
On a more serious note, I know that the committee and Dr. Greenspan recognize
that the position of Chairman of the Federal Reserve Board is one of awesome responsibility. The Chairman must guide the design of monetary policy while pursuing the goal of continuing economic expansion without reigniting inflation. The
Chairman must also chart the policy course for and preserve the safety and soundness of the Nation's financial system and all of its component parts.
This will not be an easy task. In fact, it is going to take a good deal of intestinal
fortitude to fight the battles ahead. We have only to review the track record of the
outgoing Chairman, Paul Volcker, to recognize this. Paul Volcker fought and won
the battle against economic enemy number one, inflation, but at considerable cost to
the Nation at the outset.
The country's economy now sits at a crucial juncture, and the next Chairman will
play an important role over what direction it will take. The U.S. economy has entered its fifth year of slow, but sure, economic expansion. After rising at meteoric
rates, the dollar has turned downward. While it has finally leveled off, there is good
reason to worry about it taking another nose dive and reigniting inflation.
The next Chairman will also have to contend with changes in the financial services industry. In the upcoming months, this committee will begin its comprehensive
review of the Nation's banking laws. The Chairman of the Fed will undoubtedly
play an important role in this process.
I look forward to his testimony today.


Senator CRANSTON. I welcome Dr. Greenspan to the committee
this morning to address some of the issues that will confront him
as Chairman of The Federal Reserve Board.
Dr. Greenspan, you are a well-respected conservative economist.
You will certainly have your job cut out for you as a successor to
Paul Volcker. Anybody would.
The Federal Reserve's greatest feat under Mr. Volcker was successfully wringing inflation out of the economy, though at a great
price in unemployment and economic recession. Some believe at a
price that inflicted more than necessary pain upon the country.
United States agriculture has not experienced such suffering since
Dust Bowl times in the 1930's. American manufacturers have lost
long-accustomed markets. Hundreds of banks and savings institutions have been destroyed. The Third World has been thrown into
the worst debt crisis since the Great Depression. I hope that you
will keep this uppermost in mind at this time of recurring fears
that inflation may rebound.
As Chairman you will be blessed in having the majority of Federal Reserve Board members appointed by the same President and of
the same party. Maybe we will, under your tenure, have a more
coordinated Federal policy and a firmer picture of who is responsible for what is happening to the economy, the President's policies
or Congress.
You are obviously qualified in your field and imminently qualified for this job, you will face tough challenges at home and from
abroad. I wish you will in undertaking this task.
Thank you, Mr. Chairman.
The CHAIRMAN. DO you have an opening statement, Dr. Greenspan? If so, go right ahead.


Dr. GREENSPAN. I have a very short statement. It's a privilege, as
always, to appear before this distinguished committee today for
your consideration of my appointment as Chairman of the Board of
Governors of the Federal Reserve System.
I especially appreciate the expeditious fashion in which you have
acted upon the President's nomination and I wish again to thank
the President for the confidence he has expressed in me.
Finally, I would like to again acknowledge the extraordinary contribution that Paul Volcker has made to this country in his 8 years
as Chairman of the Fed and wish him well in his next endeavor.
If confirmed, I will attempt to supply the committee with whatever analytical insights into the major problems that confront this
Nation and the world that I am able to marshall and will look to
this committee and the Congress in general for guidance in the difficult years ahead.
Thank you, Mr. Chairman.
The C H A I R M A N . Thank you, Dr. Greenspan.
Dr. Greenspan, I can assure you that as chairman of the committee I will do everything in my power to have the committee meet
and act on your nomination very promptly.
Dr. GREENSPAN. Thank you, sir.
The C H A I R M A N . N O W if you're confirmed, do you agree to appear
before this and other committees of Congress on their request at
D r . GREENSPAN. Y e s , s i r .

The C H A I R M A N . You've agreed with the Office of Government
Ethics and the Federal Reserve Board to place most of your holdings into two blind trusts. Can you summarize for the committee
the nature of those blind trusts?
Dr. GREENSPAN. Yes. These two trusts are reflective of the assets
which I have which are split into two parts. Should the Senate confirm me and I am about to be sworn in, I will then place these
assets into the two blind trusts. They will include essentially securities and other liquid assets. I divided them in two largely on the
grounds that I think it's inappropriate that any one individual in a
blind trust environment control one's assets. So that's the reason I
have two.
The C H A I R M A N . DO you commit to the committee to enter into
and abide by the blind trust arrangements you have just described?
D r . GREENSPAN. Y e s , s i r .

The C H A I R M A N . In a letter to the Federal Reserve general counsel you outlined the steps you are prepared to take to recuse yourself from matters involving a potential conflict of interest.
Can you summarize for the committee the nature of that agreement?
Dr. GREENSPAN. Let me read a short statement, if I may, Mr.
The C H A I R M A N . Yes, indeed.
Dr. GREENSPAN. And then answer questions as is necessary.
I believe I have taken all the steps necessary to resolve any conflicts of interest or appearance of conflicts of interest. The details

of the measures that I have undertaken include recusals, establishment of blind trusts, and divestiture of assets.
These are contained in detail in a letter I have written to the
general counsel of the Board of Governors of the Federal Reserve
System which has been made available to the committee.
In taking these various measures, I have consulted very closely
with the general counsel of the Federal Reserve. He has informed
me that the various measures that I have taken or propose to take,
including those with respect to dealing with the appearance of conflict of interest, are fully consistent with the applicable provisions
of law, the Board's voluntary guide to conduct for senior Federal
Reserve System officials, and with Board practice.
He has advised me that these measures are sufficient to address
any conflict of interest that arises out of my past associations with
Townsend-Greenspan, as well as any appearance of conflict of interest arising out of this former relationship.
Very specifically, Mr. Chairman, what I plan to do is to recuse
myself from any decisions affecting directly applications or other
immediate direct interests, as I explained in the letter, of Morgan
Guaranty and its holding company for a period of 1 year.
With respect to matters that might involve the appearance of a
conflict, I also will recuse myself from any decisions which reflect
two conditions: one, they involve former clients of mine and, two,
they involve matters on which I directly consulted with them.
I have discussed that at length with the Fed's general counsel
and he believes that that is appropriate to the occasion.
The CHAIRMAN. NOW, as you know, Sears has a nonbank bank
that's been grandfathered by the provisions of S. 790, the bill that
is now awaiting final Senate and House action, subject to certain
restrictions administered by the Federal Reserve Board.
You performed advocacy services for Sears on the subject of financial deregulation and in particular wrote articles in support of
allowing commercial and industrial firms to own banks.
I can foresee a potential conflict if the question of how to interpret the Sears nonbank bank grandfather restrictions came before
the Board.
Does your recusal agreement extend to any matter involving
grandfather restrictions on the nonbank banks owned by Sears?
Dr. GREENSPAN. Specifically by Sears, yes. On the general issue
of nonbank banks, I wish to point out, Mr. Chairman, that the general view I have towards the issue of banking structure very significantly predates my relationship with Sears and I think that I
would like to be free to discuss that issue as a general question
should the issue arise. But certainly any application or any decision which specifically relates to their application in the area of
nonbank banks I would feel the necessity to recuse myself.
The CHAIRMAN. Let me go back. The staff disagrees—and sometimes the staff is right, not always but sometimes—I took it in your
response to me on your holding in the two blind trusts that you did
specifically in the way you described it commit to the committee to
enter into and abide by the blind trust arrangement you described?
D r . GREENSPAN. Y e s .
D r . GREENSPAN. Y e s .


that, right?

The CHAIRMAN. Senator Garn.
Senator GARN. Dr. Greenspan, as you well know, for several
years the Congress, the administration, the Federal regulatory
agencies and so on have been wrestling with the debt problems of
the Third World countries.
What's your view of the Third World debt situation as of today
and in light of the increased reserves that commercial banks have
been setting up as a result of those loans?
Dr. GREENSPAN. Senator, the situation, while still fraught with
very considerable difficulty, has improved really quite dramatically
since the problem came on the international scene in 1982. I remember that there was a very grave concern expressed within the
financial community at the time that that type of situation could
very easily lead to not default but repudiation by a number of the
major borrowers. That would have created a very significant
breach in a very important structure that exists in the international financial system.
That has not happened. Not only is that not the case, but a
number of very positive things have occurred concurrently. One,
the commercial banks have very significantly built up their reserve
balances and equity capital. In fact, the largest American banks
which have very substantial exposure in Latin American debts doubled their net worth in a very few years and very sharply increased
their capital-asset ratios.
There's also been significant activity within the debtor nations as
well which in a way is terribly important because it reflects not
only their immediate views but they're part of a growing international awareness that market solutions to financial and economic
problems are the way to get out of very grave difficulties. The type
of centrally planned socialist oriented types of governments, which
existed in so many of the LDC's for so many years, is now becoming an increasingly less acceptable way to function.
We should recognize this because we tend to emphasize the difficulties. It's important to recognize how far we have come.
On the issue of the banks taking very significant loan provisions—they haven't written down the loans; they have just merely
increased their provisions. This clearly is merely a recognition of
what the markets have known all along and we have seen, as you
know, Senator, a significant marking down of the stock prices of
those bank holding companies with very heavy exposure in a
number of these areas, and that write-down has essentially reflected what the secondary market has exhibited with respect to those
various different loans.
My only concern in making this recognition is that it does not
break down this extraordinary continued improvement that we've
seen in the solution to these problems, which is another way of
saying it is very important that the commercial banks continue as
active players in the resolution of these debt problems and that the
debtor nations continue to restructure their economies in such a
way as to eventually enable them to restore their access to financial markets, be able to service their loans again the way they used
to be able to, and in a sense make the commercial banking system
not necessarily fully whole but significantly better with respect to
those loans than it is today.

There are two basic problems. One, the commercial banks who
have these difficult loans; and, two, the debtors who have difficult
economic problems. The adjoining of those two problems, those two
negatives, could very easily create a positive and I hope that we do
not throw in the sponge prematurely and endeavor to take a
wholly new course because the current course is slow but working.
Senator GARN. Well, I agree with you, Dr. Greenspan. It's still a
very serious problem. I agree with you that it has improved dramatically. I can remember the most difficult task I had politically
while I was chairman of this committee was increasing our quota
in the International Monetary Fund. That was not very politically
popular, particularly when the slogan on the other side was simply
don't bail out the big banks, and you had to go into all the detailed
explanation of why it was necessary to have that increase in IMF
along with the conditionality that went with that increase.
I particularly remember when Argentina was talking about defaulting. Chairman Volcker called me and asked if, along with a lot
of other people, we would make some telephone calls and help
them understand what it meant to them and their own economy to
default. It seemed like an easy way out.
I think the LDC's themselves, as you have explained, have a
much better and more sophisticated understanding of what it
means to them and so we passed that likelihood of default. The
banks as well, are starting to recognize the realities and not hiding
it under the table. They're saying we've got to take these steps and
go forth.
I appreciate your assessment. I think it's an accurate one, but
it's one that we again have to keep managing virtually on a day-today basis. Thank you.
Senator RIEGLE. Dr. Greenspan, we're in the middle of a vote
here, so I'm going to go directly to two or three questions and then
if other members have not returned I'm going to recess briefly
until they do.
I want to ask you two or three very pointed questions on the independence issue because I want the questions and the answers
clearly on the record today.
If financial market conditions in the middle or early fall of next
year indicate that the money supply has to be tightened and you
see clearly the need to do that, are you prepared to take those
steps and advocate that course of action within the Fed?
Dr. GREENSPAN. Certainly. Senator, should the Senate confirm
me, I will be taking an oath of office and I take that oath very seriously. It's just not credible to me that I would be advocating actions other than those which I thought were relevant to a situation. It's conceivable my advice may turn out to be wrong, my actions may turn out to be wrong, but it certainly would not be on
the basis of politics rather than economics.
Senator RIEGLE. If some person in the administration, tried to
muscle the decisions of the Federal Reserve System some time next
year in advance of the election, what would be your response to
Dr. GREENSPAN. I certainly don't anticipate that happening, but
were it to happen, I obviously would reject it.

Senator RIEGLE. Well, I think it's essential that that be the case
and I expected that you would say that and it's my view that you
would operate in that fashion. I think you have had experiences in
the past of serving in administrations, a number of administrations, in different capacities. Have you ever before served in an independent agency in a capacity similar to what you will be having
now here, if confirmed?
D r . GREENSPAN. NO, s i r .
Senator RIEGLE. SO this

will be a new experience for you to be in
an independent arm of the Government, so to speak?
Dr. GREENSPAN. That is correct.
Senator RIEGLE. And I take it, then, that the sense of your
answer is that you see a real distinction there between that and
that you need to be insulated completely from any pressure from
any outside source, whether it's the Congress or the administration
or anybody else?
Dr. GREENSPAN. Well, I'd like to be insulated. I'm not certain it's
going to happen that way. But clearly, I think it's important for
the Federal Reserve to maintain its independence. I think it's terribly critical as its institutional nature requires and I certainly will
do everything that I can to see that that occurs.
Senator RIEGLE. I think Paul Volcker has taken on such enormous stature as we all know, almost of mythic size. And that's not
to diminish his true size or the scale of his accomplishments. But I
think it's always difficult to come after somebody who's seen as
having been a giant in that position and, like it or not, you find
yourself in that role.
And I think that that puts even more pressure on with respect to
this issue of independence and I think nothing would destroy the
effectiveness of the Fed faster, which it has to have not just domestically but I think more and more internationally, than the notion
that somehow the Fed was susceptible to pressure or manipulation.
One of the reasons that I am strongly drawn to your candidacy is
that I feel that when the chips are down that you will have the
iron will to resist pressure from anybody in any form that you
think is wrong.
Am I right in having that judgment?
Dr. GREENSPAN. I certainly hope so. I must say to you, Senator, I
really don't anticipate the types of pressures you're suggesting in
the form that you're suggesting. But obviously, should they occur, I
would feel it absolutely essential that they be resisted.
Senator RIEGLE. Well, I hope not. We're having hearings at other
locations on the Hill today and in recent weeks that indicate that
all kinds of strange pressures can get loose at different times and
cause people to do things that maybe they didn't think they would
do. But I think the role that you will have is so vital to the economic security of the country and to our future that I think your
independence has to be absolutely certifiable and it seems to me
you're saying that we can have that confidence that it will be.
D r . GREENSPAN. Y e s , s i r .
Senator RIEGLE. I'm going

to reserve the balance of my time, Mr.
Chairman, and go and vote if I may.
The CHAIRMAN. All right. Well, it's out of order now but I'm in a
good spot because nobody else is here so I can go right ahead.

Dr. Greenspan, on June 6 the New York Times carried a report
that Under Secretary of Treasury Gould favored the creation of
five to ten giant banks that would rival in size the largest banks in
Europe and Japan. The article indicated that you had signed off on
this objective.
Is the New York Times article accurate? Is it a reflection of your
views? Do you favor allowing large industrial and commercial
firms to own banks?
Dr. GREENSPAN. That's a complex question.
The CHAIRMAN. Let me just start then, is the New York Times
article an accurate reflection of your views?
Dr. GREENSPAN. Very partly, only partly. I am not in favor of the
creation of superbanks. I have always been concerned that bankers
too often have looked at where they stand in the list of the American Banker with respect to size and I think that that attitude
really was fairly widespread in the 1960's and the 1970's and is one
of the issues which I think has created some of the problems that
we have had.
First of all, size per se does not strike me in the normal banking
practice of having very much to say for it. All of the evidence that
one can see suggests that the economies of scale and scope probably
are maximized in relatively small banks in the areas of maybe
$100 or $200 million in assets. There is very little evidence that
competition between banks within that area or anywhere above
that level gives any specific advantage to the larger institutions.
In fact, when we changed the branching laws in the State of New
York a few years ago, I recall that several of the major banks in
New York City had difficulty obtaining a foothold upstate. The
reason this applies for basic banking practice is understandable.
There are certain very important advantages which a small bank
has in a community where the banker knows the people, he knows
the industry, he knows the markets, and he knows the nature of
the culture. It is very difficult for a larger institution, an alien institution, to move in and basically to out-compete that type of
If that type of bank is to be out-competed, it is very likely to be
out-competed by another relatively small bank, which in effect
brings to bear some of the skills which a small banker may not
have chosen to acquire when he should have.
So, in general, so far as banking practice is concerned, for the
domestic economy, I see no particular advantage in being large. In
fact, some of our really better banks are not all that large, and I
certainly would not argue for any governmental action to create
Having said that, however, that does not mean that I would try
in effect to inhibit those types of institutions which in the international arena believe that increased capital or scope and size are important to them. It's fairly obvious that there are certain types of
international transactions which require significant capital.
Nonetheless, most types of major loans in the international
arena are syndicated in any event, and that can be done by a
number of different corporations.
The major point that I would make with respect to this is that
even those banks which choose to get larger because they see them-

selves as being in a better competitive position do not threaten the
basic banking structure of this country because I don't believe that
they in fact can compete in the type of banking services which the
relatively small bank offers. I don t believe that they can compete
and, as a consequence, I don't believe that they are a threat to the
basic banking structure that now exists in this country.
The CHAIRMAN. Well, your answer is very reassuring in your recognition that the small banks may be more efficient or at least as
efficient as the big banks. The return on equity measure shows
that the banks in this country that were the least profitable and
had the lowest return on equity were the money center banks.
But there still is an enormous tendency for concentration and
even in this international banking area that you speak about, the
giant banks aren't doing the best. In Japan, for instance, which has
the five biggest banks in the world right now—the bank that is the
most aggressive and successful is the Bank of Tokyo which is 29th
in size.
Dr. GREENSPAN. That's correct, Senator. I think that if you look
across the spectrum of these huge banks, they are rarely the ones
that are at the top. For example, even in the United States, our
best banking institutions are not necessarily our largest. Our most
successful clearly are not and have not been our largest in recent
The CHAIRMAN. N O W there's another area that is absolutely critical here where the Fed has a voice. The Fed, as I understand it,
has a very important part to play in whether or not mergers can
take place in particular areas.
When these two Texas banks that I mentioned merged, banking
was sharply diminished. Robert Straus, a very shrewd Texan who I
think favored the merger, said that these banks have been knocking themselves out in competition—competing to see who could
offer the lowest rate and the best terms and so forth in order to get
loans in the Texas oil fields and elsewhere.
In my State of Wisconsin, when the second and third banks proposed a merger just a few days ago which will make them the biggest bank in the State and give them a $10 billion size, bigger than
First Wisconsin, which is now the biggest, again hotly competing
banks. Now the decision of the Fed, as I understand it, is to determine whether or not the merger will diminish competition. And
even though there may be conveniences for the banks merging together and even though there may be some convenience here and
there for the customers, by and large, if it diminishes competition,
it's my understanding that the intent of the law is that the merger
should not be approved by the Fed.
How do you feel about that?
Dr. GREENSPAN. Well, Senator, I'm not sufficiently familiar with
either individual cases other than having read
The CHAIRMAN. I'm not asking you to comment on those individual cases, but on the general problem.
Dr. GREENSPAN. I would be somewhat less concerned than you, I
suspect, if for no other reason than I'm fairly well convinced that,
in the event that you begin to put together banking institutions
whose services deteriorate for the customer, competition will come
in underneath these newer, larger institutions.

Remember that we are really not and shouldn't be interested in
banking per se. We should be interested in the services that they
create for the average consumer. And banks or other financial institutions which fail to meet the requirements of consumers rapidly
go out of existence. I think in fact a number of the mergers that
are occurring result from some deficiencies in individual institutions which feel the necessity to get together, and that may be a
symptom of something else and it may require different solutions.
I would be doubtful, without looking at the evidence, that at the
moment we have any really significant problems with respect to
concentration in banking. We have less concentration in this country than anywhere in the world. The system obviously works. I
have seen no evidence that worries me that that's about to change.
The CHAIRMAN. Senator Hecht.
Senator HECHT. Thank you, Mr. Chairman.
Dr. Greenspan, we have seen numerous occasions in the 100th
Congress where votes have taken place to waive the GrammRudman budget guidelines. If Congress does not adhere to these
guidelines and in effect goes on a spending spree, what do you see
this doing to interest rates and inflation?
Dr. GREENSPAN. It's a difficult question to give you details on exactly how the economy will emerge, but history obviously tells us
that in an environment like ours or any other economy, if budget
deficits get out of control, that ultimately what happens is a surge
in inflation and following the surge in inflation nominal interest
rates rise to capture that rise in inflation.
If there's any type of economic policy we should eschew, that's it,
because whatever one may say about tradeoffs between growth and
inflation, which is how in many instances these problems emerge, I
don't think there's any question that a precondition for stability
and an environment other than the type which you described, Senator, is no inflation, modest inflation, zero inflation, but certainly
not the type of inflation which is generated by successively heavy
and corrosive Government budget deficits.
Senator HECHT. Chairman Volcker used to say—I'd ask him how
can we bring down interest rates, and he would say, "Cut another
$50 billion off of the deficit." That was the stock $50 billion answer.
A few days ago in the paper it mentioned that in 1987 we're getting an extra $20 billion in revenue from the tax law in capital
gains, but that the deficit in 1988 and 1989 is going the wrong way.
Is it possible to have low interest rates and an expanding deficit?
Dr. GREENSPAN. Over the long run, Senator, the answer is no. It
is quite possible, as we have observed in recent years, that in the
short run the answer is clearly possibly yes. But ultimately, there
is just no way that you can finance ever-increasing central Government deficits without ultimately expanding the money supply, in a
sense dipping into the central bank to monetize the deficit; and
that will ultimately drive interest rates sharply higher and the
economy into a nosedive.
Senator HECHT. Did you see the particular article the last few
days about the deficit going in the opposite way in 1988?
Dr. GREENSPAN. Senator, what you're discussing is the Congressional Budget Office's projections which squared fairly closely—not
as closely as I thought they might—with the Office of Management

and Budget's estimate for fiscal 1987, both reflecting these extraordinary capital gains taxes which occurred in order to beat the
deadline of January 1, 1987 when the capital gains tax rate went
As a consequence of that, the base is much lower than we had
anticipated it would be. Therefore, while a number of realistic projections—and I think CBO's is one of them—say that without any
action on the part of the Congress either on expenditures or on the
tax side, that we will probably have a somewhat higher deficit in
fiscal 1988 and 1989 than we will have in fiscal 1987.
Senator HECHT. But isn't this the wrong signal to send out? We
have been very successful in bringing the deficit down. Now if it
goes the other way, what is that going to mean?
Dr. GREENSPAN. I think it's a very dangerous signal, Senator.
Senator HECHT. Would you care to expand on that, what the
ramifications are?
Dr. GREENSPAN. Well, one of the reasons why we have had interest rates easing in recent years is there has been increasing evidence that we have been struggling successfully against the budget
deficit. It has remained inordinately large, but it's been coming
down. It's been coming down not only as a percent of the GNP, but
it's been coming down in absolute terms. And markets tend to
project into the future.
It's premature to forecast with certainty that the budget deficit
is going to rise because the assumptions one makes in order to forecast the deficit are very fluid. And I can change CBO's economic
assumptions ever so slightly and bring the budget deficit track that
they are projecting downward.
So we shouldn't take their forecast as being a major danger
signal in reality. It's merely an early indication that we have to do
certain things.
Nonetheless, should the actual numbers start to turn up and the
underlying evidence suggests that the deficit is getting out of control again, then we are going to find ourselves in a very serious financial bind.
Senator HECHT. Thank you very much.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Hecht.
Senator Shelby.
Senator SHELBY. Thank you, Mr. Chairman.
Dr. Greenspan, in your opinion, is the annual deficit that we've
been running up year after year and the resulting $2.5 trillion debt
or close to it that we have facing us the largest problem facing our
economy today; and do you advocate an increase in taxes to reduce
the deficit; and have you any comments or thoughts regarding how
we might be able to deal with that $2.5 trillion debt?
We keep talking about the deficit, but not a lot of talk has gone
into the debt and I know you've got to have one before the other.
I'd like to share your comments with us.
Dr. GREENSPAN. Senator, when we deal with the issue of the Federal budget deficit, it's not one year's set of numbers which matters. It's really the broad, longer-term thrust because it is precisely
the issue that you allude to—namely, the level of the public debt—

which has a very important impact in the degree of potential inflation, especially in a sophisticated financial environment.
There is no question in my mind that it is the most important
economic policy variable, so to speak, to get that long-term trend
down credibly so.
Senator SHELBY. In a manageable way?
Dr. GREENSPAN. Yes, in a manageable way.
Senator SHELBY. And what is that? What is manageable?
Dr. GREENSPAN. Well, manageable at this stage is any set of deficit numbers which are going down and if we can get the deficit,
say, under one percent, that's close enough to balance so that we
have made it, so to speak.
However, it doesn't follow that we can necessarily resolve this
issue from the tax side. And the reason I am somewhat concerned
about endeavoring to solve the budget deficit wholly or substantially from the tax side is I'm not sure it will work, because I'm sure
you have all been aware of the tremendous pressures that have
been built up in recent years to spend funds which have been restrained because they are not available, and I am by no means convinced that raising taxes will cut the deficit in the long run.
I don't deny that if you raise taxes you will get 1 year's impact,
but then it will erode. That's the reason why I think it is essential
that in any package that is involved in reducing the deficit that
the emphasis has got to be on the expenditure side if for no other
reason than that you are likely to fail in your goal.
What I am basically saying is, it is not a symmetrical case where
you either balance the budget from the tax side or the expenditure
side and those are equal policy tools. I am saying that they are not.
Senator SHELBY. Dr. Greenspan, does it trouble you that we have
added—trouble you greatly I should say that we have added as a
nation nearly $1.5 trillion in about 5 years to the national debt and
it took about 195 years to go the first trillion? As an economist and
as a former Chairman of the Council of Economic Advisers, does
that bother you, notwithstanding what you're going to walk into in
a few days?
Dr. GREENSPAN. It bothers me, Senator.
Senator SHELBY. And is that profound and one of the most significant things that we have failed to deal with?
Dr. GREENSPAN. We've started to deal with it. We haven't gone
far enough and I suspect
Senator SHELBY. But we haven't touched our debt. Now we're
talking about our deficit, but we haven't touched what we already
owe, right?
Dr. GREENSPAN. Yes. Senator, I don't think it will turn out to be
necessary to actually reduce the outstanding Federal debt because,
remember, in order to do that, we must run a unified surplus. Now
I must say to you that if the Congress chose to do that and were
able to, I would be the first to applaud. But at the moment at least,
as a forecaster, that is not my most probable outcome.
Senator SHELBY. But that's a bomb ticking out there, isn't it?
Dr. GREENSPAN. The way to measure the level of the total public
debt outstanding, or more exactly the debt owed to the public, is as
a percent of the GNP; ultimately where the problems lie is in debt
service, and arithmetically if interest rates were constant, then you

could use the ratio of outstanding debt to GNP as a proxy for interest payments as a ratio to the GNP and get some judgment as to
what the debt service problems were.
Senator SHELBY. Dr. Greenspan, my time has expired. I'll have to
wait until another round.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Karnes.
Senator KARNES. Thank you, Mr. Chairman.
I would like, Dr. Greenspan, for your personal assessment of the
condition of the Farm Credit System, just in general terms, and
what suggestions you would make to address some of the problems?
I reference an article in the Wall Street Journal last Wednesday
which talked about a need for collateral enhancement or actual
monetary support to the tune of approximately $6 billion and likened it to something along the lines of a Chrysler bailout. I'm not
sure I would agree with that. Indeed, several of us have proposed
some legislation that would provide some alternative means of accommodating that system.
But in your position as the chief regulator and also the Chairman of the Fed, I'd like to hear your assessment of the system and
what you think could be done.
Dr. GREENSPAN. Well, first of all, Senator, as you know, only
about a fourth of the debt is owed to agricultural commercial
banks, and they have been doing somewhat better. In other words,
the rate of deterioration has slowed very dramatically and in fact
the rate of deterioration in the whole farm credit situation has
slowed. It's certainly not turned up.
I think the most important statistical piece of information that
I've seen of recent days is the clear flattening out and in some instances evidence of an upturn in certain land prices in the farm
areas. After a 50-percent decline in some of the major areas of our
agricultural economy, one would certainly expect that the bottom
in land prices would probably have been reached and I suspect
that's a reasonable expectation.
What that suggests is that the underlying environment is no
longer deteriorating, but it nonetheless leaves some very considerable problems in its wake and I must say to you I would hesitate to
give you any insight at this particular stage in what I think the
appropriate measures are because I have not yet had the opportunity to look into the details at a level which I think is appropriate
to make the type of judgment you are asking me to make.
Senator KARNES. YOU have not had the opportunity to share personally I think your agenda or some of the goals that you would
have as Chairman. Maybe that is something that you have a difficult time establishing, but I believe that you do have some and I
know the media has characterized certain of your goals and I'd like
to hear if you do have some general statements that you would like
to provide. I would be very interested in hearing what your agenda
would be.
Dr. GREENSPAN. Well, Senator, I've been watching the Federal
Reserve now for several decades, mostly from the outside—on rare
occasions, in a consultative capacity—and what I'm impressed by is
the extraordinary culture of the Fed which recognizes that its role
is basically to endeavor if at all possible to impart the type of fi-

nancial environment which fosters long-term economic growth and
As I indicated earlier, a necessary condition of that is a noninflationary environment. And since the Fed has such a crucial role in
the monetary aggregates and in finance in general, it is absolutely
essential that its central focus be on restraining inflation because if
that fails, then we have very little opportunity for sustained longterm economic growth.
As a consequence of that, I would say that the type of policies
that Chairman Volcker has initiated, as I've said previously, are essentially on target and I would hope, should the Senate confirm
me, to follow in the footsteps of those individuals who held very
much that same view.
Senator KARNES. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Graham of Florida.
Senator GRAHAM. Thank you, Mr. Chairman.
I would like to pursue the two questions that I raised in my
opening statement, Mr. Greenspan.
First, I have been struck that a number of the issues that we
deal with—and I would put, for example, the corporate takeover
frenzy under that category—are manifestations of a larger circumstance in which economic consequences are judged on what appears
to be a shorter and shorter time frame.
And one of the corollaries of that is a discouragement for those
who are going to be evaluated to take actions that might have beneficial results over a 5 or 10 year horizon but are detrimental to
immediate results.
I wonder if you could comment as to whether you concur in that
assessment and, if so, what recommendations, either through the
position that you are soon going to assume or to this Congress or
other private or public sources of influence in our economy, the
steps we might take?
Dr. GREENSPAN. Senator, the issue you're raising, when translated into economic variables, is what we call the real rate of interest.
The reason I put it that way is that when we have very high real
rates of interest, we are in effect forcing business and economic decisions to be very short range because, in effect, you cannot get any
payout from earnings which are generated in the long term.
I think through most of the 1980's we have been experiencing,
one, high real rates of interest and up until very recently a very
high yield in the stock market that is the inverse of price-earnings
In the last year or two, however, the situation has improved. I
don't envisage it as being back to where you would, I presume, like
it and where certainly I would, but we are moving in the right direction. And at the moment, I am not aware of any particular economic policies other than removing the excess Federal budget deficit burden on the economy which would move that in a still more
propitious direction.
So while I understand your concerns and agree with most of
them, I would just merely add that the most recent data suggests
that at least the situation is moving in the right direction.
Senator GRAHAM. I would like to move to the second question
and that is the integration of the U.S. domestic economy into world

78-038 - 87 - 3

factors and what that says about the relative role of marketplace
and Government in the mix of arriving at economic policy.
You talked earlier on the Third World debt and expressed some
optimism at the progress that had been made in managing that
What would you consider to be the standards, the milestones
that we should use to evaluate success, neutrality, or failure in the
Third World debt issue? You seemed to emphasize the balance
sheet of the banks and the degree to which the debtor nations were
moving toward a less planned and a more marketplace economy as
two standards. Are there any others that you would recommend?
Dr. GREENSPAN. I think there's a very important and very clear
sign that success has arrived, and that is the ability of these debtor
nations to reenter the financial markets on a voluntary basis,
meaning the ability of one of these debtor nations to sell, say, 5year Eurodollar notes at interest rates which they can afford. The
day that they are back in the market is the day the problem is essentially solved and that would be the criterion which I would use
and, in fact, that would be the goal which I would hope those involved in endeavoring to solve this problem, both on the part of the
debtors and the creditors, would take as a standard.
Senator GRAHAM. Mr. Chairman, my time has expired. I had one
last question I'd like to ask which was in sequence.
The CHAIRMAN. IS there objection to proceeding for one last question?
Senator G R A M M . Let's hear the question. [Laughter.]
The CHAIRMAN. Without objection, go ahead.
Senator G R A H A M . Thank you. The question is, what, if any, lessons do you think we should learn from the last 10 years of experience of lending to Third World nations, the crisis, and now what
you think is the recovery period? Are there any new policies, revised policies, that we should implement based on this past decade's experience?
Dr. GREENSPAN. Senator, regrettably, the answer is no. And the
reason it is no is that history tells us that we become overenthusiastic about certain types of financial arrangements, certain types
of ideas, and we overdo it. I guess it's human nature. And in an
area as complex as credit evaluation and international lending, I
suspect it's understandable that we would eventually run into trouble in this area.
But I would be hesitant to say that there is some great new insight other than just plain prudence that has to be surfaced here
and I think there's no profound new institutional issue which has
surfaced as far as I can judge.
Senator G R A H A M . Thank you, Mr. Chairman.
The CHAIRMAN. Senator Gramm.
Senator G R A M M . Thank you, Mr. Chairman.
Mr. Chairman, let me first begin by thanking you for the expeditious way you have moved on appointments by the administration.
I don't think any committee in the Congress has matched your
committee for moving on the hearings and reporting people out
that were broadly supported, and I would just like, for one, to begin
by saying thanks.

The CHAIRMAN. Well, thank you very, very much, Senator
Gramm. I appreciate that and we'll try to match that record with
the present very important nominee we have this morning.
Senator GRAMM. Dr. Greenspan, I want to begin by asking you a
question about the money supply. Maybe it's just the haunting
memories of my graduate school days that come back and worry
me once in a while, but from time to time I get worried about how
we let the monetary base go up and down like a windowshade.
And, in fact, we had, as I recall, Ml in December of last year growing on an annual basis of 30 percent and by February it was declining and, in fact, in looking at the money supply and the monetary
base in the spring, I was becoming worried that in fact we were
constraining too much and that has now been reversed on the last
monthly figure that I have looked at.
Now should I forget about monthly and quarterly data and worry
about something else, or are you concerned about the extreme variability in the monetary base, the money supply, and were you concerned this spring that in fact we had too much constraint on the
money supply?
Dr. GREENSPAN. Senator, anyone who looks at the money supply
figures will invariably look at the most recent data, irrespective of
what we say to ourselves. In other words, we can say that we really
don't care what month-by-month fluctuations are doing and we
only care about the longer term trend. That's what we should care
But longer term trends are not visible to us and all we have is
the most recent observation and we tend to extrapolate that. And
as a consequence, we use that sort of evaluation as a proxy for the
longer term view.
There is no way we can avoid that and what we have to do is to
recognize that there is an inherent volatility that seems to crop up
in normal Federal Reserve actions.
There's been, as you know, Senator, from your graduate school
days and later, very considerable disputes amongst monetary
economists about the whole question of whether the Fed should
engage in very stable growth in the money supply or whether it
should endeavor to have an admixture of impact on interest rates
and money supply.
Senator GRAMM. Could you give us your view on that, Dr. Greenspan?
Dr. GREENSPAN. Yes. In the very long run I tend to believe that
the stabler that one can make the change in money supply, the
better off the economy is likely to be.
I also recognize, however, that there are occasions when the
normal relationships between the economy and money supply veer
off in a direction which requires temporary aberrations. In the past
there have probably been more presumed aberrations than in fact
really existed, but one of the very great difficulties that the Federal Reserve has is to make judgments as to whether what they are
looking at is the beginning of a trend or an aberration, and the
most successful monetary policies usually turn out to be those in
which these judgments are far more accurate than inaccurate.
And in many instances, it is very difficult to judge, but the
bottom line in stability is better than volatility.

Senator GRAMM. I can't resist the opportunity, since the Senate
may well be voting tomorrow on the so-called Gramm-Rudman-Hollings fix—as you are aware, this is an effort to put the automatic
mechanism back into the law that serves as either the club in the
closet if we don't get the job done we have an automatic cut which
nobody wants, or the shield which allows the politician to go out
and say, "Well, I'd like to give you all these things but if I do we
have an across-the-board cut and it hurts other people."
Could I get you to express your views as to whether or not we
should rearm this deficit reduction mechanism and how important
that is?
Dr. GREENSPAN. I have always thought that while from an economic policy point of view there were a lot of problems with your
bill, Senator, but looking at it as a practical means of getting the
budget deficit down, it seems to have done some good.
I supported that type of procedure when you initiated it. I support it today.
I can conceive of conditions in which the means by which it is
implemented would create the type of structure of spending which
I would find undesirable and therefore would argue that that probably would be a bad idea. But if you're merely asking me as to
whether or not I favor the process, the answer is, yes, I do.
Senator GRAMM. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Gramm.
Senator Sanford.
Senator SANFORD. Dr. Greenspan, I suppose you will have as
much to do with the massive national debt as anyone else, probably
will have to worry about it as much or more than anyone else.
I didn't quite understand from your answer to Senator Shelby
just how big a problem you consider that to be now.
Dr. GREENSPAN. Senator Shelby, as I recall, asked did I think it
was the major economic policy problem that the country has. And
my answer, with a lot of curlicues in it, was yes.
Senator SANFORD. And you've indicated that it was properly related finally to GNP and that the amount was not as important as
the percentage?
Dr. GREENSPAN. That's correct. In other words, the burden that
the total public debt has on the economy is relative to the total size
of the system.
Now if we want to get very sophisticated, there are other denominators we would want to put under that. But GNP is a good
proxy for most of them.
Senator SANFORD. Well, what is your idea of what is a proper relationship to GNP, forgetting the ramifications of the collateral
Dr. GREENSPAN. Senator, I think you have to look at the issue in
two different ways. One, the level of the debt is important, but the
rate of change in the debt—that is the deficit or surplus—is more
The reason is that in the financial markets, even though there is
a balancing of what we call portfolios—so-called portfolio adjustments within the economy in which the holdings of Federal Government debt are shifted into corporate debt or into other instruments and that affects the way the system functions—the net bor-

rowing requirements of the U.S. Treasury have a direct impact on
interest rates and on financial flows in a way in which the portfolio adjustment does not.
They are both important, but the deficit or the net change in the
outstanding public debt is more important.
Senator SANFORD. Well, I suppose the specific question that both
of us were trying to get at is, do you think we ought to be taking
some kind of action to reduce the national debt, which has risen in
6 years from 26 percent to 42 percent of the GNP, and is 42 percent
a mite high?
Dr. GREENSPAN. Senator, that translates into whether I am in
favor of you moving to a Federal budget surplus, because obviously
until you can get a surplus the debt does not go down.
I can't conceive of that happening very readily and I recall that
in answer to another query—I don't think it was before the Banking Committee, I think it was the Senate Finance Committee—I
gave an answer I'd like to repeat which" was that any deficit reduction which is politically feasible is almost certainly economically
The reason I put it in those terms is that you will find a number
of economists would argue that going from the deficit that we have
now to a surplus would create too much so-called fiscal drag.
I suggest that that is not an issue to worry about and if you can
find a mechanism to move us toward a surplus, I would certainly
applaud your efforts. As I said before, I think it would be extraordinarily difficult to do, but there are a great many advantages to
achieving that.
Senator SANFORD. Well, thank you. Let me ask, there will be a
great many questions relative to the banking industry and investment industry and we are working now on legislation. I could ask
perhaps 30 specific questions but let me just ask one as illustrative
of how you see your role in this kind of activity.
The three bank regulatory agencies have jointly proposed a riskbased capital regulation. You have previously stated that you believe the banking industry in this country is undercapitalized I
Do you favor the concept of risk-based capital and would you be
inclined to support a risk-based capital regulation or guidelines as
a way to enhance banking industry capitalization? Or do you believe that risk-based capital would get the Government too much in
the business of credit allocation or whatever?
Dr. GREENSPAN. NO, I support risk-based capital ratios, Senator,
because I think that to the extent that we impart current capitalasset ratios, we are finding without much surprise I suspect that
the banks are playing the system. That is, they are going off-balance sheet to reduce the asset side, that they are in fact not acquiring on their asset side interbank deposits which are often very
useful and very low risk largely because it affects their capitalasset ratio.
If we engage in risk-based capital, we will find that a lot of these
distortions will disappear and there is no question, it is a far superior means of regulating capital in our commercial banking institutions than what we are using today.
Senator SANFORD. Thank you very much.

The CHAIRMAN. Thank you.
Senator Bond.
Senator BOND. Dr. Greenspan, this committee, as you are very
well aware, has had outstanding testimony in recent months about
the problems with declining bank profitability, and we have heard
about ag loans, energy loans, foreign loans. In addition, tendency of
blue chip corporations to issue commercial paper rather than take
out short term bank loans has had an impact on bank profitability.
As you know, we are considering legislation about the role, structure, and regulation of financial institutions, and I would like your
views on the public policy implications of declining bank profitability. Is this something that we should worry about?
The second part of the question is, do you feel that granting
some types of expanded powers would have a favorable or unfavorable impact on the role the banks pay in our economy today?
Dr. GREENSPAN. Senator, the answer to your first question is
that, yes, we definitely do want to, if we possibly can, enhance the
profitmaking capabilities of our banking system, because, to the
extent that they are profitable to that extent they are viable and
create a competitive environment, which enhances finance and economic growth in the country. It is very important that we have a
financial system which has significant amounts of profit in it,
enough to attract innovation and the type of structure which is essentially required in the type of economy which is currently evolving.
There is something very fundamental that is going on and has
been going on in recent years, which is going to be a key element
in any decisions that this committee makes with respect to recommendations for restructuring the banking system, and that is the
extraordinary improvement in information technology. Largely
driven by computer and telecommunications technology, we now
find that much of what the banker had as sort of his tool of trade,
that is, credit analysis, has enabled banks, basically, to engage in
the type of intermediation which created our banking system. We
are now finding that that particular scale, that particular economic
value is falling in cost as a consequence of technology, and that fall
is irreversible.
It is enabling the banking system, or more exactly, the financial
community, to unbundle the various elements of commercial bank
intermediation. In other words, the value which a commercial bank
contributes to our system and the value which has created the expansion of banks in the society, is really a combination of a
number of risk diversification and reduction products, and we are
now finding that they are beginning to be far more cheaper, basically unbundled, than they are in the total system.
As a consequence, that has led to what we call securitization,
which is essentially a bypassing of the normal intermediation process of the banking system and has led to, as you point out, the commercial paper expansion, which is a form of, at least—it is not securitization, but it is close enough. It has created a problem which
our banks are going to be confronted with and, therefore, if we
freeze the system in this growing technology, we will undercut the
profitmaking capabilities even further than they have been under-

cut and would do great damage to the banking system, which leads
me to your second question.
The answer is, yes, I do believe that expanded powers are necessary in the context of maintaining the safety of the banking
system, and that can be done, should be done, and, in fact, is by far
the less risky road to take than standing pat with the hand that we
have now dealt the commercial banking system.
Senator BOND. Thank you, Dr. Greenspan.
The CHAIRMAN. Senator Sasser.
Senator SASSER. Thank you. Thank you, Mr. Chairman.
Dr. Greenspan, we have heard a lot this morning about the leadership and independence of Paul Volcker as Chairman of the Federal Reserve Board, and I, for one, would not dispute for a moment
that Paul Volcker will go down in history as perhaps one of the
finest chairmen that we have had at the Federal Reserve, but lest
we forget, there weren't many of us around this dais in 1981 and
1982 who were praising Paul Volcker. None of us around here at
that time wanted to pin any medals on him, and I was one of them
who was criticizing. And quite frankly, I do think that in 1981 and
1982, the Fed went too far with an overrestrictive monetary policy,
pushed us into the worst recession or depression that we have had
since the 1930's, and that thing came very near to getting out of
control, in my judgment.
The question that I would want to ask you, Dr. Greenspan, do
you see us pursuing a policy, in the foreseeable future or during
your tenure, of pushing interest rates up to a very high rate, as we
experienced in 1981 and 1982 up into the stratosphere of 18 percent, 17 percent, and that sort of high interest rate approach to
trying to control inflation?
Dr. GREENSPAN. Well, I certainly hope not, Senator.
Senator SASSER. I hope not too.
Dr. GREENSPAN. Let me, however, review that period, because
while I certainly sympathize with your concerns of the extraordinary problems that emerged at that time, the problem was not
1980 or 1981. It was not the time when we were running into real
difficulties. It was the time before that. What Paul Volcker and the
Federal Reserve were confronted with was a situation which had
gotten out of hand. In other words, the real policy problem, in my
judgment, was not the Federal Reserve putting on the clamps, but
the policy which created the type of environment that made that
necessary, because in the wake of the oil price rise and a number
of other things, we allowed our system to take on inflationary
biases which threw us into such a structural imbalance that, in
order to preserve the integrity of the system, the Federal Reserve
had to do what it did. Had it not acted in the way which it did at
that time, the consequences would have been far worse than what
subsequently happened.
The lesson that we have to learn from that period is not, whether we get involved with 18 percent interest rates, but that we make
certain that we do not get into an economic policy malaise or into a
set of policies which were unfocused, which leads us into the type
of environment in which that is the only thing that stands between
the economy and catastrophe.

And as much as I was concerned, as you were, Senator, about the
problems that occurred as a consequence of that action, the economic policy problem was the earlier policies in which we failed to
restrain inflation rather than those actions which, in my judgment,
actually made the situation better than it would otherwise have
been and, in my judgment, were necessary.
Senator SASSER. Well, I won't debate the point with you, Dr.
Greenspan. I think there were great inflationary pressures in the
economy and there were very serious problems, and I do think that
Mr. Volcker and the Fed acted properly in trying to restrict the
money supply, to a certain extent, and with a resultant uptake in
interest rates.
I think my problem with it was, I felt that it was excessive, what
it went on too long. In an effort to wring the last iota of inflation
out of the economy, we very nearly put ourselves into a serious economic tailspin that was difficult to recover from.
Let me move on to one other topic, if I can, very quickly, because
my time is limited.
Dr. Greenspan, you have written very knowledgeably on the
question of takeover and, in fact, you have testified before this
committee on this subject, and I would like to quote from your January testimony with regard to the problem of increasing corporate
You said, quoting:
While all of the debt accumulation has not reflected takeover and merger activity,
a very substantial part of it is directly or indirectly related to that process.

Talking about takeovers or fighting off takeovers.
You went ahead to say:
The huge increases in corporate debt has essentially offset the benefits that could
have occurred to corporations from the dramatic decline in interest rates over the
past five years.

You also testified that many of the companies that have been
taken over or that are saddled with the debt to fight off the takeover, were, and quoting you, "far better run than the average
American corporation/'
Now that conflicts with the argument that we hear from some of
the takeover people that takeovers are a way to deal with the problem of inefficient management at the corporate level. "Business
Week" says that corporate debt, as a result of dealing with the
takeover problem, has increased by over $400 billion in the last 2
I want to address this question to you, and this is the question.
What does this enormous increase in debt, corporate debt, mean
to us in the next downturn in the business cycle? Are we going to
see a terrific rash of bankruptcies, as a result of these corporations
saddling themselves with large debt, in an effort to fight off a takeover or to protect themselves from a takeover?
Dr. GREENSPAN. It is very difficult to say, Senator. Obviously,
they have increased their risks. The ratio of equity to debt has declined in the nonfinancial corporate system, and clearly, we are far
more vulnerable, in the event of a significant downturn, than we
were earlier in the post-World War II period.
Senator SASSER. A S a result of the debt?

Dr. GREENSPAN. Yes. As a result of the fixed charges, specifically,
debt service, which obviously does not decline when gross operating
incomes fall, and the so-called "coverage" of the interest payments
becomes insufficient in numerous areas.
As I think I indicated in my testimony, Senator, there is, not a
large, but a significant amount of interest payments currently
being made by nonfinancial corporations, which is borrowed
money. And that tells you that we are increasing debt at levels
which should make us all uncomfortable. It certainly makes me uncomfortable.
The CHAIRMAN. Senator Sasser, before I call on Senator Heinz,
let me just say that that was an excellent question on debt and a
superlative answer. We very much appreciate it, you are exactly
right. Senator Heinz.
Senator SASSER. We make a pretty good team, Dr. Greenspan.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Heinz.
Senator HEINZ. Thank you, Mr. Chairman.
Mr. Greenspan, the job the President has nominated you for involves a number of responsibilities. One, as at least I see it, would
be the management of the Nation's money supply in a way to support sustainable economic growth and price stability. Another
would be to promote the efficiency of the capital markets and the
third would be to promote the stability of the capital markets, and
hence, you've got a lot of questions about LDC debt on the latter
I wasn't here for all the hearing. You have had perhaps some
questions on the issue of efficiency of the capital market.
My first question to you, though, is, is it—is there any inherent
conflict between having more stable capital markets and having
more efficient capital markets?
Dr. GREENSPAN. That is a very good question, Senator. Technically, one would assume that the answer has got to be yes, obviously,
because efficiency presupposes the ability to adjust optimum positions which are always changing, and that, obviously, implies volatility.
I would suspect in practice, however, that because the markets
are so extraordinarily efficient, that any disruptions which tend to
occur as a consequence of shifting from one efficient state to the
other, so to speak, are really more likely to be smooth than discontinuous.
So while I suspect there is a problem, possibly, there, my impression is, it's really a quite minor one.
Senator HEINZ. Well, one argument for the greater efficiency of
capital markets is that we should repeal the Glass-Steagall Act, because the Glass-Steagall Act, at least in theory, impedes the efficient allocation of capital by preventing commerce and banking
from being intermingled.
Now in theory, theorists tell us that that should promote efficiency; is that right?
Dr. GREENSPAN. I think it is.
Senator HEINZ. And if it is right, will it promote stability, as
well? And if so, what kind of stability?

Dr. GREENSPAN. Well, I think it does promote efficiency. I think
you are quite correct in saying it adds slightly to instability, but it
also has
Senator HEINZ. I didn't say that. I was asking.
Senator HEINZ. I was asking.
Dr. GREENSPAN. I will put it in

my words. [Laughter.]
But first of all, the difference between a bank loan and a security
is getting less and less observable. Whether or not corporation X
borrows from a bank which then, in a sense, finances it and funds
it with deposits from a saver, or whether or not X sells a bond directly to that saver, is really not a terribly significant difference in
the form of the instrument involved. And in one sense, underwriting securities, not in all senses, is less risky than making loans, not
holding that instrument on your books as much as one would do
with a loan. But even bank lending these days is turning more and
more into origination of loan and sale of loan, and that, technically, is exactly the same as underwriting.
Senator HEINZ. I was really asking beyond the financial services
area for your views. I was thinking more of whether commercial
firms, not securities firms, but commercial firms, General Motors
should own banks or banks should own General Motors.
Dr. GREENSPAN. If there were no Federal safety net, that is, no
Federal deposit insurance, no access to the payment system, no discount window, I would say that there should be no regulation
whatever. That a General Motors Acceptance Corp., which is a vehicle which is owned by General Motors, is very close to a banking
institution without those Federal safety net issues.
Senator HEINZ. I would agree. Of course, that is not the world we
live in nor
Dr. GREENSPAN. NO. But I was about to get to the next statement. Because the Federal safety net is essentially a subsidy, I
would not approve of the issue of using that subsidy to help a nonbank affiliate. That does not mean, however, that I am not very
much in favor of exploring the issue of bringing nonbank affiliates
and bank affiliates together, provided that we construct an effective firewall. As you know, Senator, there is very great dispute on
whether that is feasible. I happen to believe it is. If I am wrong on
that question, and the evidence suggests that I am wrong, then I
will change my view. At the moment, I think I am right, and to
that extent, if it is feasible, I think that the additional capital
which can be added to the commercial banking system would be a
very valuable addition to the vitality of that system.
Senator HEINZ. My time is expired, but I have one last question
that I think you may be able to answer yes or no.
Is it the commercial banking system that needs more capital, or
is it the savings and loan industry that needs more capital?
Dr. GREENSPAN. They both do.
Senator HEINZ. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Wirth.
Senator WIRTH. Thank you, Mr. Chairman. And Dr. Greenspan,
I, for one, am delighted that you have agreed to take on this responsibility, assuming that you are confirmed, which I would suspect you will be, and we look forward to working with you.

One of the issues we face on this committee, which has been
touched upon by Senator Bond and Senator Heinz and others, relates to the question of Glass-Steagall and where do we go from
here. Clearly, we don't live in an ideal world of starting from
scratch, nor are we going to completely repeal Glass-Steagall. We
live in a world where there are such constraints built in by the
FDIC and access to the discount window, and so on.
What we are searching for, I think, is the model or the approach
for, you know, how do we proceed. And one proposal that has been
raised before the committee in quite extensive testimony was that
offered by Mr. Corrigan of the New York Fed, and I was wondering
if you had reviewed that proposal and if you had any reactions to
the ideas that he brought before the committee and has articulated
around the country over the last couple of months.
Dr. GREENSPAN. I thought it was an extraordinarily thoughtful
proposal. Obviously, there were elements in it which I disagree
with. On the issue of commerce and banking, he comes out on one
side; I come out on the other, and it really gets down to an issue
not of philosophy but of facts as to whether or not an optimum firewall can be built to gain some of the advantages of that capital.
Aside from that, I think it is a terribly thoughtful proposal, and
if the committee were endeavoring to use a starting point from
which it would try to think of what would be an optimum system,
that's as good a piece of paper as I know, to start with.
Senator WIRTH. It seems to me we have to start somewhere, particularly if the FDIC legislation becomes law, and we have that
window of the freeze or the moratorium, we have a relatively short
period of time and have to start with some kind of a document.
And I think your views are very valuable.
Let me move to a second, perhaps a little more cosmic issue and
that relates to what we would were we to have a recession. As I
look at the financial community now and look at the overall level
of debt in the United States compared to GNP, which has gone up
pretty sharply over the last 6 years, look at the number of failures
in banks, that number has increased pretty sharply since 1981,
look at the problems of S&L's, which are very familiar, and the
whole international bank debt problem, plus our own deficit problem, we get pretty worried. As least I do. I can't find myself feeling
the same, as some do, about, you know, everything is going to be
all right down the line. I think we are in for some very, very real
Were we to have a recession similar to that that, say, we had in
1974—no worse than that, that we had in the early 1980's, what
mechanism is available to deal with that? Or specifically, what
would you do, as head of the Federal Reserve, through monetary
policy, to deal with a recession and what other steps would you recommend to the Congress?
Dr. GREENSPAN. Senator, all recessions are different. They all
have different characteristics, and as a consequence, require different responses.
I would hesitate to answer you in a very generic sense. I don't
believe that the business cycle has been eliminated—somewhere
down the line, we are going to have another recession. Whether it
is as large as 1981 or half as large, I don't know. What I do know is

that it will have characteristics different from any that we have
seen previously and what monetary policy you craft to adjust to
that, and indeed, obviously, policy has to adjust to that, is going to
depend on the nature of what actually is going on. And I suspect
that we are going to find that it is not an automatic policy, where
one looks on page 5 and says, "Recession policy. See paragraph 4."
I wish it were that way; regrettably, it is not.
Senator WIRTH. Well, to pursue that a little bit further, anticipating the kind of problem you are suggesting, given the cyclical
nature of the economy and given the history, is going to occur, and
whether it is as grave as the one in early 1981 or less grave or perhaps more grave, we, it seems to me, have to be thinking about the
fact that we do not have unlimited resources to deal with that particular problem. And if we get into a recession, it seems to me,
given the nature of the deficit, it is pretty hard to prime the pump
in a classic fashion, and we can't do that, it's pretty hard to cut
taxes. We can't do that. We've already done that.
The more traditional tools that we had all grown up to know
could be used don't seem to be available, and I don't think—I don't
know where they are. Therefore, you know, one of the few remaining items is monetary policy and how to deal with that, and it
seems to me that the burden of that next recession is going to fall,
perhaps unfairly and perhaps unduly, on the shoulders of the Federal Reserve, and I think that we all have to think very carefully
about, you know, what you can do, what kind of response is there
that the Fed can take, if we are limited in the ways that we can
respond by the nature of where we are right now in our own fiscal
and tax policy.
Dr. GREENSPAN. Senator, that is the reason why I think it is important to recognize that the best way to deal with a recession is
before it. Several years, 5 years, 3 years, 2 years.
The other side of this debt question is equity. That is the reason
why I answered before that I thought that we need more capital.
We need more capital in the total system. We need more capital in
the nonfinancial system and in the financial system, largely because of the problems you outlined. There is no substitute for that.
Having said that, I am also acutely aware that it is not easy to
implement, that I may say that we need more capital in the commercial banking system, but I am also aware that that is not easy
to do, because, clearly, if you order banks to sharply increase their
capital, they don't increase their earnings as a consequence, and
you very sharply dilute their rate of return on equity, and it makes
it very difficult for them to raise the capital. And so it is a very
tough process, but it is a process which I think we ought to move in
the direction of, if we can find a way.
And the reason I say that is, we may or may not be able to find
the appropriate set of tools to counter that hypothetical recession
you have described, but what we can certainly do is to restructure
or structure the economy, and specifically the financial system, in
a way that would enable it to take whatever blows are contributed
by that recession far more easily than we would be able to do in
the structure that we are now looking at.
Senator WIRTH. Mr. Chairman, thank you very much. Again, Mr.
Greenspan, thank you, sir. I look forward to working with you.

The CHAIRMAN. Thank you, Senator Wirth.
Dr. Greenspan, I am going to be the skunk at the picnic at ;his
love feast that we are having here this morning and give you seme
questions in the "nobody's perfect" department.
Federal Reserve Board policy depends on the judgment of the
Board about the outlook for the economy, whether it is implicit or
explicit. You have to have some kind of a forecast in mind for economic growth, for interest rates, for inflation and unemployment,
and so forth.
In other words, it depends on your ability to forecast. So how
about your ability to forecast?
Now in the first place, when you were Chairman of the Council
of Economic Advisers during the Ford administration, the Council
had a dismal forecasting record. I have here a study by the Joint
Economic Committee, which showed, in the 3 years 1976, 1977,
1978, the forecasts of the agency which you headed, were wrong by
the biggest margin of any in the 11 years, 1976 through 1986. They
tied the record for being wrong in 1978. They were almost as bad in
1977, and they were way off in 1976. That's on growth.
Then it comes to Treasury bill rate forecasting interest rates.
There you broke all records for the entire period in error, when
you estimated that you predicted that the Treasury bill rate in
1978 would be 4.4 percent. It actually was 9.8 percent. You were off
by a huge margin. In 1977, you predicted it would be 5.3. It was 8.8.
Again, way off. 1976 wasn't quite as bad, but you were off then.
Then we come to your forecasts on inflation. The Consumer Price
Index. And there again, you broke all records. 1978 was the worst
forecasting years that we had. You estimated that the rate of increase in the CPI would be 4.5 percent. It was 9.2 percent. And you
were way off in 1977 and 1976.
Your estimates on unemployment weren't as bad. They weren't
perfect, but they were better than most. But you were way off in
those areas.
Now in view of the critical importance of being able to use the
data to determine the likelihood of what's going to happen in the
economy, and then adopt policies to cope with it, how do you
answer to the fact that your forecasts were so far off?
Dr. GREENSPAN. First, I must say to you, Senator, that I don't
dispute your figures, but that is not my recollection of the way the
forecasts went. Was this a forecast made as of when? Do you
The CHAIRMAN. Well, the forecast was for the fiscal year budget
1976, 1977, and 1978.
Dr. GREENSPAN. What was the date of the actual document, do
you know?
The CHAIRMAN. The date of this document—the date of the forecasts were, date issued February 1975, January 1976, and January
Dr. GREENSPAN. SO, successive years.
The CHAIRMAN. That's right.
Dr. GREENSPAN. Well, if they're written down, those are the
T h e CHAIRMAN. Y e s .

Dr. GREENSPAN. There is a very substantial difference, Senator,
between forecasting in the Administration and forecasting outside.
The CHAIRMAN. I sure hope so! [Laughter.]
Dr. GREENSPAN. And I will explain to you, as best I can, with imminent sense of failure of my mission. [Laughter.]
It is very difficult to get across that what those budget projections are—which is the base for the budget projections—are essentially goals. That is, those are the projections that the President's
economic policy, if implemented, is supposed to create.
The difficulty is that it is almost never implemented, and therefore, the premise under which the forecast was made never actually materializes, and therefore, I must say I have great sympathy
for those who succeeded me in that office, who had to make forecasts, because essentially, it is a different type of forecast from
being in the private sector or, in fact, being the Federal Reserve.
The CHAIRMAN. But let me just interrupt to point out that every
one of the other chairmen of the Council of Economic Advisers had
the same problem, and they didn't miss by as much as you did., not
nearly as much. In other words, their forecasts were not good, but
their forecasts were substantially better than yours.
Dr. GREENSPAN. I feel sorry for me and happy for them. [Laughter.]
The CHAIRMAN. Well, then you had an opportunity to be a forecaster with Greenspan & O'Neill. As you know, you put your forecasts to a direct test in the private sector. The fact is that the firm
only survived a few years, and according to a "Forbes" article of
April 20, "In 1985, its first full year in business, Greenspan &
O'Neill turned in one of the least impressive records of all pension
fund advisers."
Now here was an experience in which you were independent.
There were other problems, I guess. This article that you are familiar with, I'm sure, "1 Plus 1 Plus 1 Equals 0." You and your partner weren't always seeing eye to eye, but apparently the results
were not impressive. They said they took two great people, two
wonderful people with fine reputations and somehow it didn't work
Dr. GREENSPAN. All I can say is, I acknowledge that that did not
work very well, and I take my share of the responsibility.
The CHAIRMAN. Well, I hope on number 3, when you get to the
Federal Reserve Board everything will come up roses.
You can't always be wrong.
Dr. GREENSPAN. All I can suggest to you, Senator, is that the rest
of my career has been somewhat more successful. [Laughter.]
The CHAIRMAN. Senator Riegle.
Senator RIEGLE. Let me ask you about exchange rates. We have
watched the volatility, particularly, the dollar versus the yen, and
the rate has changed recently. It closed yesterday. It went 152.75,
and there is talk—some people think that we ought to stay more or
less in this zone, somewhere in the 150 to 140 range. I have asked
that a chart be given to you that I will refer to in a moment.
Is there a danger zone—given the huge bilateral deficits that
exists between countries like Japan and other nations and the fact
that we are going deeper in international debt at the rate of $1 bil-

lion every
days at the rate at which we are running now, if we
were to see that exchange rate drop, say, to 130 and stay or 120, is
there some point at which, if it were to get down into that lower
range, that it would, in your judgment, kick off other repercussions? The one I am most concerned about is our ability to continue
to borrow this international money that we are hooked on at interest rates that we can afford, or would we likely find at some point
that we would have a serious problem where interest rates would
probably have to go higher, if we found that happening.
And I'm wondering—I want to get your professional sense as to
where in that zone of exchange rate differentials—if we get down
into the range, again, of 130 or 120, does that present a problem, in
terms of continuing to attract international debt at interest rates
as low as they are presently?
Dr. GREENSPAN. Well, Senator, there are a number of people who
argue that we are already at areas which should cause some concern.
Senator RIEGLE. DO you hold that view?
Dr. GREENSPAN. I am inclined to believe that if we were to go
into a free fall, we would not solve our problems with respect to
trade or balance of payments, because we would create other offsetting effects.
The difficulty that we have at this particular stage is that we
know that the exchange rate is driven to a very substantial extent
by the portfolio adjustments that are being made by the vast
number of investment funds around the world. It is a huge block of
external currencies—direct claims against the United States, direct
claims against other countries and other currencies and the whole
Eurocurrency and Asian currency system.
The private investors in that group are what drive exchange
rates, when they shift from one portfolio mix to the other.
Senator RIEGLE. Right.
Dr. GREENSPAN. And there is a very considerable danger that
should it be perceived that the dollar is heading in a straight line
downward direction, it would exacerbate it.
Senator RIEGLE. Right.
Dr. GREENSPAN. Fortunately, what the evidence suggests at this
stage is that we have run into a period of stability. That is, there is
very little evidence to suggest that there is further downward adjustment in the immediate future, and I think that it will be very
interesting to see what happens to our trade balances now that exchange rates have stabilized.
Senator RIEGLE. I want to go right to that, and I am very conscious of the time limit that we have. But my question is really not
so much where you think we are likely to stay at the moment, but
I am wondering, if we could test it in a way in the future that we
were to see the value of the dollar change versus the yen, so that
we got back down to the 130 range and stayed there or the 120
range, and we stayed there for a period of time, does that, in your
view, constitute a kind of danger range, in terms of kicking off
other repercussions that would cause you some serious concern?
Dr. GREENSPAN. Senator, I don't know the answer to that. I
would hope we don't get down there. I see no reason why we will.
There is one great advantage that we have at the moment, and

that is that profit margins on imported goods have gotten down to
very low levels.
Senator RIEGLE. Well, let me go right to that, the chart that you
have got at your elbow there shows—and I am going to have a
large version put up, and I have distributed copies to my colleagues
If you take the trade deficit through the end of last year, we
were running at the rate of about $170 billion. And what this chart
shows is the extension month by month into 1987, including the
last month's data which we got a week ago, shown on an annual
basis. So you can get some idea whether we are getting a J curve
effect because of the change in currency values and other things
beginning to turn the trade deficit around.
What I notice on this chart, is while there is a lot of talk about
an improvement in the trade deficit, as you measure it this way,
with these numbers, I don't see much improvement. I see us running at an annual rate over the first 5 months. It looks to me like
we are more or less at a plateau. Now maybe we are getting some
slight improvement, but we are not getting any—it looks to me
more like an L curve than a J curve. And an L curve worries me,
and it seems to violate the argument that we could expect, in a
sense, an automatic improvement.
The reason I make this point, relative to the exchange rate differences is, it looks to me as if the exchange—the very substantial
exchange rane differences that we have already had, have not had
the effect of turning this trade deficit, and it looks to me as if there
is not an awful lot of mileage out there in being able to force exchange rates further in that direction to solve the trade deficit. So
that we've got a persistent problem on our hands.
The New York Fed has estimated that by 1990, we may well owe
the rest of the world $1 trillion coming off this trade deficit, and in
addition, our Federal budget deficit.
And my question to you is, when you look at this data, and you
are in the data business and the data analysis business and have
been in a very high profile way. If we have a $1 trillion international debt 2% years from now or something close to that, is that
something that we have to worry about? Are we going to find that
there is going to be a very sharp effect that sets in at some point,
either in terms of the dollar having to go lower, interest rates
having to go higher, living standards having to come down?
Can we tolerate the continuation of this performance, if we stay
where we seem to be at the present time?
Dr. GREENSPAN. Well, first, Senator, if we assume, as I do, that,
say, exchange rates will remain stable for a while, we are likely to
get margins on imported goods starting to rise again. One of the
reasons why we had very little apparent response in your chart to
this extraordinary decline in the dollar's exchange rate against the
major countries, is that we started in early 1985 with a very high
level of profit margins.
Senator RIEGLE. YOU mean foreign profit.
Dr. GREENSPAN. Foreign profit.
Senator RIEGLE. Right.
Dr. GREENSPAN. In other words, the margin of foreign producers
and their distributors in the United States. It is the difference be-

tween their costs and the prices they sell in dollars in the United
As the exchange rates basically shifted in early 1985 against the
dollar, rather than raise prices on imported goods, and in a sense
price themselves out of the markets, to an extraordinary degree,
foreign shippers to the United States, and I am excluding those
whose exchange rates didn't change like Canada, Taiwan, South
Korea, et cetera, those shippers largely absorbed the increased
costs implicit in the weakening in the dollar and the rise in their
domestic costs in fallen profit margins.
We have now come to a level where the early 1985 data very
clearly indicated we were up at the upper range. We are now very
obviously at a very low level. And it is quite possible that we are
going to now find—and I think this is the more likely outcome,
that those margins will begin to open up, which means that we will
begin to get rising import prices without the dollar weakening.
If that happened very rapidly, obviously, that could create some
inflationary problems for us, but it doesn't strike me as the most
likely outcome. What does strike me as likely, is that import prices
will rise enough to continue a significant decline in the physical
volume of imports which we have had in this country since the fall
of last year.
Ultimately, therefore, I think we are going to find, as we get—
just as we get exasperated at the numbers you are showing, Senator, that very significant improvement in the nominal quantities
will finally begin to show.
Senator RIEGLE. That may or may not help us in terms of the
dollar valuation, though.
Dr. GREENSPAN. NO, it ultimately will, because what history tells
us about these conditions is that the physical volumes decline percentagewise more than the unit dollar prices rise, and that, therefore, the nominal values begin to decline; however, we haven't discussed the export side, which is crucial to these data.
Senator RIEGLE. Well, in the lower living standard side—I realize
it is very complex, but it is sort of at the heart of how much maneuvering room I think the Fed has right now.
Dr. GREENSPAN. I couldn't agree with you more, Senator. You are
raising the critical international problem that the Federal Reserve
and administration policy, generally, has got of how to manage our
way out of these dual deficits, the trade side, on the one hand, and
the budget deficit on the other. And I would suggest that if we
could do the budget deficit, over which we really have substantially
more control, we would find that we were moving, certainly, in the
significant direction which would assist this deficit as well.
Senator RIEGLE. I would agree with that. My time is up, and I
don't want to trespass on my colleagues here.
The CHAIRMAN. Senator Shelby.
Senator SHELBY. Thank you, Mr. Chairman.
Dr. Greenspan, is this Nation, the United States, the largest
debtor nation in the world, presently?
Dr. GREENSPAN. YOU mean net debtor. Well, I don't want to quibble, Senator, but since I deal with numbers, I look at them, the
answer to that question is, we are close. If we are not now, we will
be, but there is at least some question as to whether we are.

Senator SHELBY. If we are not first, who is?
Dr. GREENSPAN. Oh, there are a lot of others.
Senator SHELBY. Sure.
Dr. GREENSPAN. The reason I am raising the issue is, basically,
that when we take our foreign assets, less our foreign debt, we get
a net debt figure which puts us in a very substantial position, but
the assets that we record are, to a large extent, direct investment
assets at book value. That is the reason why, even though we are
technically, in a book value sense, in a net debtor position, we have
more receipts from foreign sources than payments, which should
raise a serious question as to whether our data are OK.
Senator SHELBY. Were we actually a creditor nation generating
excess capital for the world investors—we were the investors from
1914 until when—1980?
Dr. GREENSPAN. Oh, no. I would say, depending on how you look
at the numbers, within the last year or so, if not now.
Senator SHELBY. If the Japanese and the Germans and other foreign nations and their people and their institutions are buying up
more and more of our debt, our national debt, our IOU's, do you
perceive a danger that the Germans and the Japanese and the
Swiss and the others would own a large percentage of our national
debt and consequently would be able to manipulate, or would we be
open to the manipulation of our interest rates and, consequently,
our economy, to keep the dollar at a certain rate of stability?
Does this bother you at all? In other words, are we going to be
held hostage to other people in the world and then, again, we have
nothing—no control over our own economic destiny?
Dr. GREENSPAN. Let me generalize the question, Senator.
What we are and what we have been for quite a while is the custodian of the world's reserve currency. It is that, not the issue of
whether we are net debtor or not, which is crucial, because twothirds, maybe more of what I would call the world currency pool is
denominated in U.S. dollars. And that means that unless we have
sound economic policies, stable prices, a stable economy, we are
going to find that periodically there is a flip side to this issue of
being the reserve currency and that holders of U.S. dollars, whether they have claims directly against the United States or in the
Eurocurrency markets or in the Asian dollar markets, they could
decide that they would like to be elsewhere. And that could create
very serious problems for American monetary policy, for American
policy in general.
Senator SHELBY. And would the fact that the amount of currency
out there continues to grow, the currency pool and our money or
our dollars, a larger and larger percentage of it, doesn't that leave
us open again to being hostage to their ideas and their perceptions
of how our economy is doing?
Dr. GREENSPAN. Senator, the answer is, clearly, when you are reserve currency, that goes with the game.
Senator SHELBY. It's part of the turf, isn't it?
Dr. GREENSPAN. It's part of the turf, and the difficulty—the only
reason I would hesitate to answer your question directly is that we
have been in that position for quite a while, and the net increments that are occurring to aggregate external holdings of U.S. dollars, as a consequence of Senator Riegle's chart and current ac-

count deficit, that is off a much larger base than we have when we
are really looking at what is our net debtor position.
So I think the real crucial issue is not so much the net debtor
position, but is the aggregate external liability, plus the European
dollar positions. They are very large and for the indefinite future,
as the custodian of the world's currency, it is going to be incumbent on us to maintain sensible policies.
Senator SHELBY. Dr. Greenspan, but the debt is a large part and
parcel of our problem out there floating; isn't it?
Dr. GREENSPAN. I'm sorry?
Senator SHELBY. Our debt, our world debt that is owed and
picked up around the world is a big part of our problem, fundamental to what we are talking.
Dr. GREENSPAN. Yes. It is a significant part of the aggregate U . S .
dollar holdings on foreign accounts.
Senator SHELBY. Thank you, Mr. Chairman. My time is up.
The CHAIRMAN. Senator Graham.
Senator GRAHAM. Mr. Chairman, I wanted to pursue the responses to the questions that I asked on the Third World debt. I
interpret your answers to the questions of how we ought to evaluate success or failure and what lessons to be learned from recent
experience as essentially being that we should look to the marketplace as our virtually total standard of conduct in our relations
with the Third World.
Your comment that there were no particular new lessons to be
learned in the last decade, just the application of traditional lending practices.
Have I accurately summarized your remarks?
Dr. GREENSPAN. Yes. I perhaps went to some slight extreme, but
I substantially support that statement.
Senator GRAHAM. Well, my ideas on this are not fully formed
and not fully informed either, but I am concerned about that, because it seems to me that that is a very fundamental issue of, how
does the United States view its economic future, in the context of
increasingly international relationships. I am a marketplace
person, when you are dealing with domestic issues. I feel less
secure when we are dealing across international boundaries.
As an example, I was disturbed in looking at the history of the
experience of Brazil and Argentina over the last 10 years, that
while in Brazil, the best evidence is that 85 percent plus of the
lending that went to that country was for what I would call economically justifiable development projects, projects which over a
period of time will contribute to the economic strength of that
country, that in Argentina, the percentage might be a third or less
with the balance going to projects that were of little or no sustaining value to the country, yet the same lending decisions oftentimes
by the same institutions were being made for both countries. There
did not seem to be, in that history of those two countries, a sensitivity to what was in the interest of the lending countries or what
was in the U.S. interest. In fact, some suspicion that there was no
particular necessity to exercise lending prudence if things reached
crisis level that the U.S. Government would step in and not allow
major private lenders to go under as a result of their Third World

That historical scenario may or may not be an accurate one, but
if has as a degree of truth to it, it raises concern whether we can
look exclusively to marketplace standards of success or failure and
draw no lessons from our recent experience, other than those that
would be applicable to domestic financial relationship, in terms of
what we have just been through.
Dr. GREENSPAN. Well, Senator, I would give it a slightly different
spin. Remember that American banks were not the only banks involved in it. In fact, in certain areas we were rather minor players,
and, truly, the foreign banks who did very extensive lending,
couldn't count on the Federal Reserve or the United States bailing
them out. I think there was a general view extant at that time that
sovereign nations never default. And that view, I think, pretty
much was pervasive throughout that period and was a major
factor, I believe, in leading to the extraordinary expansion.
You may recall, just before the whole thing unraveled, the data
suggest that bank A didn't know that country X had just borrowed
from Bank B, and at the very tail end, there was an awful lot of
multiple borrowing, as the situation began to erode, and we ended
up with much higher numbers as far as aggregate debt was concerned, than people, say, 6 months earlier, would have even remotely suggested was out there.
In other words, all the credit lines were all taken down simultaneously. And as a consequence of that, I think we ran into some
very serious problems. I would doubt at that time, that there was
any view of the American Government or the Federal Reserve stepping in and bailing out the system.
Senator GRAHAM. SO you would explain what, from a layman's
point of view would seem to be a perverse lending policy, a level of
those lenders' legitimate confidence in the sovereign nations' commitment to repay
Dr. GREENSPAN. I'm not saying it was legitimate; I am just
saying it was there. I'm not saying it was legitimate. Obviously, it
wasn't, in retrospect, Senator. It was a terrible mistake.
Senator GRAHAM. And from that experience, you would not draw
any lessons of what change in policy, either by the Federal Reserve, the Congress, the institutions themselves should be implemented, other than to be more prudent in their lending policies?
Dr. GREENSPAN. I think that you are going to find that international lending will be significantly more prudent in the years
ahead. I don't think any new policies have to be implemented.
Stark realities of this particular episode have affected both debtor
and creditor, and that is frankly one of the reasons why I am somewhat optimistic about the outlook.
There is a general awareness that the way the game was played
prior to 1982 was neither advantageous to the commercial banking
system nor to the debtor nations. And both parties are beginning to
recognize that there is a mutuality of interests out there in which
prudent lending serves a mutually advantageous purpose.
Senator G R A H A M . If I could just conclude with a question.
Would you, therefore, take the position as Chairman of the Federal Reserve Board that if, in fact, there had been this expectation
that the United States would bail out major domestic financial institutions, if they're lending to Third World countries proved to be

so imprudent that it threatened their financial viability, that you
would recommend a hands-off governmental policy?
Dr. GREENSPAN. Senator, that is the type of question which is actually similar to Senator Wirth's question, where the specific circumstances of those types of incidents are usually so different, one
from the other, that I really cannot honestly tell you what the appropriate response would be, and I must tell you, I don't know,
unless and until you actually see all the ramifications of various
sets of policies, I don't see how one can realistically make a judgment. When that judgment is ultimately made, it is of necessity
one based on some degrees of uncertainty, and I couldn't give you
an example which I would feel sufficiently comfortable with, which
I would be willing to answer in a hypothetical vein.
Senator GRAHAM. If I could just comment, it seems to me that
that answer gives heart to those who believe that they don't have
to be very prudent in their lending policies, because in the final
analysis, the Government is not going to allow these institutions to
fail because of their imprudence.
Dr. GREENSPAN. I wouldn't read that into my remarks at all, Senator. What I am trying to convey is a nonanswer. [Laughter.]
The CHAIRMAN. Thank you, Senator Graham. Senator Sasser.
Senator SASSER. Well, Mr. Chairman, Dr. Greenspan has been sitting here for almost 3 hours with no respite, so I am somewhat
hesitant about asking questions, but I will ask one.
Dr. Greenspan, a number of economists, including a distinguished economist with whom I would guess you don't have many
areas of agreement, John Kenneth Galbraith, have written lately
of the parallels between the 1920, late—well, the decade of the
1920's and the 1980's. They refer to the takeover trend, the huge
increases in corporate debt, and even the insider trading scandals
that occurred on Wall Street. All of these are pointed to as indicators of the kind of excesses that helped precipitate the Great Depression.
I would ask you if you see any similarities between now and the
time before the Great Depression and what, if anything, should the
Fed do about that whole problem.
Dr. GREENSPAN. Senator, I will give you an unusual answer to
that question. The answer is, yes, there are many similarities, if
one uses odd analogies between now and the late 1920's, but what's
more important is whether what existed in the late 1920's, of necessity, created what occurred in the early 1930's. We have had, or
more exactly, economic historians have had great difficulty in understanding precisely what went wrong from, say, 1927 forward.
You will find an awful lot of differences in opinion but no general
consensus of what created the problem.
I am inclined, as a consequence, to assume that the chances that
the 1930's would occur as a consequence of what existed in the
1920's, was one chance in twenty, an accidental event, the sequence
of events which occurred with a very low probability. And the trouble with that is that one out of twenty does occur 5 percent of the
time, and when it occurs, there is a sense that it's inevitable.
So while I say to you today that yes, there are, if one looks at
economic data on stock prices, on debt, on a variety of other different types of measures, there are similarities. But I am not at all

certain that that should, therefore, lead us to the conclusion that
we are on the edge of a major decline, because I don't think we are.
I think what we are seeing is an extraordinarily successful market
adjustment to a lot of the problems we have, and unless we engage
in policies which are really irresponsible, I see nothing even resembling that type of event occurring.
Senator SASSER. I am going to give back some of my time, Mr.
The CHAIRMAN. Well, bless your heart! Thank you very much,
Senator Sasser. You are a very generous man.
Senator Wirth is recognized.
Senator SASSER. Thank you.
Senator WIRTH. Mr. Greenspan, we have an economic situation
with the Japanese that appears to be fraying the tempers on both
sides, and this is an enormously important relationship to us and
to the Japanese, and clearly, you are going to be engaged in a lot of
discussions related to that relationship, assuming that you are confirmed and become the head of the Federal Reserve.
With that as background, if you were meeting with the head of
the Finance Ministry or with the head of the Japanese Government, what would you be recommending to them steps that the
Japanese ought to be taking to defuse some of the tensions on
either side.
Would you recommend, for example, that they take greater responsibility in Third World debt, that they assume a larger share
of the defense burden, import more goods into their country, a combination of all the above, others?
What would be your set of recommendations?
Dr. GREENSPAN. Well, that's a very good list, Senator, I wouldn't
try to pick and choose from that, but what is clear is that the Japanese have become extraordinarily major players in the world. They
have a remarkably efficient economy. We may complain a great
deal about some of their trade practices, but the one thing we can't
avoid is looking at something which is very successful. With success comes responsibility, and I think they are seeking to do a
number of things. What that particular menu is, I, frankly, don't
know at this stage. I don't know whether the particular list that
you mentioned is what I would feel comfortable with, necessarily,
or they would feel comfortable with, but "some of the above," so to
speak, I think, is appropriate.
Senator WIRTH. Well, let me just—if you don't want to answer
that at this particular point, I understand that, that's all right, but
it is a very important relationship to us all, and you are clearly
going to be a major player in that and going to have to be a major
player on behalf of this country, and I would only pose this part of
the question by urging you to really give that consideration, and I
am sure that you are. And we want to get into a situation where
we are not bashing one another, but rather figuring out a way in
which we can accommodate the interests on both sides, there is a
synergism, it would seem to me, in that accommodation rather
than pursuing the sort of confrontation that we seem to touch upon
from time to time.
Dr. GREENSPAN. I certainly agree with that, Senator. I think
that, owing to the nature of our two economies, we are going to

have to live side by side for many, many years in the future as
partners in a very extraordinary world.
Senator WIRTH. Let me ask you, if I might, in the few minutes—
seconds—remaining to me, ask you the reverse of Senator Graham's question, in which he was saying, should we be involved in
any way, shape or form on the kind of loans that get made and the
conditions of the loans that get made and expectations that the institutions have that we are going to back them up on the loanmaking side.
The other side of that is the loan repayment side.
Should we continue to be pursuing the policies that the—say, the
World Bank was pursuing and that we were, I think encouraging
for a while, of very strict repayment schedules, in which there was
very little, as I understand it, left in many of the debtor nations to
invest in themselves after they were done repaying, servicing the
loans to this country, or should we, as many of us suggested,
pursue a more aggressive strategy of rescheduling that debt?
Dr. GREENSPAN. I think that the process which has evolved by
trial and error in recent years, which includes all the players, the
IMF, the World Bank, it is working and that that type of policy
approach which we should continue with means, in a certain sense
that there is no fixed, immediate agenda, but one seeks in each individual case to find the most appropriate solution which enhances
the capability of restoring market access to these debtor conditions.
You know, it is not that long ago that there was considerable discussion that Brazil was on the edge of getting market access restored. This was the case as recently as August and September of
last year, that they were in that trend, which is another way of
saying that they are not all that far off nor are the other debtors.
There is a way to go, but it is not an impossible task at all.
Remember that we are not endeavoring to get to a situation
where these debts are paid off. What it is that you want to do is to
get them into a serviceable position, where any individual holder of
the debt can liquidate, in effect, sell to somebody else. Once you are
in that position, then the system is working. That is what you
Senator WIRTH. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Wirth.
When I finished my questioning, Dr. Greenspan, I was asking
you about forecasts. You made a fascinating forecast on March 20.
You said, "The recession we had not expected until 1990 now appears to be more likely to emerge in the last quarter of 1988 and in
Just in time for the next President of the United States to join
the position of Herbert Hoover.
"The expected continued improvement"—this is Greenspan talking:
The expected continued improvement in net exports and a stock market-led expansion of capital equipment in late 1987 is projected to lead to a final surge for the
current business cycle. This surge is expected to precipitate a recession shortly
thereafter rather than in early 1990 and a recession is also expected to be somewhat
more severe than we have projected in October.

Do you stand by that still?
Dr. GREENSPAN. May I ask you what the date on that is?

The CHAIRMAN. The date was March 2 0 , 1 9 8 7 . Four months ago.
Dr. GREENSPAN. I don't know how to answer that. Let me explain
to you why. The economy is, at this stage, expanding, sluggishly.
Capital investment is moving. Net exports are improving. But if
you look at history, then we would expect that the economy would
weaken at sometime out there—in other words, we know there is a
recession out there. We don't know where it is. Whether it is late
1988, mid-1989, we don't know. At the moment, there are no evidences yet of a recession.
The CHAIRMAN. YOU were so specific in the dates in this forecast.
Dr. GREENSPAN. Yes. Now the reason we do that is that when
you make a single forecast, the way clients use the information
they cannot listen to the range is this and the range is that. They
have to use a single number.
The CHAIRMAN. Right.
Dr. GREENSPAN. In the general context of making those forecasts,
what we try to explain to them is what the probabilities are, and
what we are trying to convey is that in front of us there is an expansion mode. Sometime later, and we don't know when, there is a
contraction mode. And that is what we were trying to convey. I
frankly don't know at this stage where the next downturn is. All I
can tell you is that there is nothing visible on the horizon, but our
horizon really is rarely more than a year and sometimes a good
deal less than that.
The CHAIRMAN. I would like you to clarify what appears to be a
contradiction in your position on the separation of banking and
commerce, which is extremely important, I think, to Members of
Congress and certainly, this Senator.
In your answer to Senator Wirth, you said you disagreed with
the New York Federal Reserve President Corrigan on the need for
separation of banking and commerce, but I thought you said earlier
that you would not favor unrestricted ownership of banks, as long
as banks enjoyed the Federal safety net. That is, deposit insurance,
access to the payment system, discount window, and so forth.
Can you clarify that.
Dr. GREENSPAN. Yes. I thought I had made it clear, I am sorry if
I hadn't, Senator. My view, basically, is this, that I don't believe it
is desirable to have the implicit subsidy which a Federal deposit insurance guarantee grants to a bank, being used to finance a nonbank affiliate or it's
The CHAIRMAN. That is exactly, precisely, what we do in the
banking bill which passed the Senate, S. 790. We simply redefine a
bank as an institution that has Federal deposit insurance. That is
Dr. GREENSPAN. Sure. And what I am saying, basically, is this,
that if there is a mechanism, which I believe there is, which is essentially a so-called "fire wall" or "Chinese wall" by creating one
of those regulatory barriers which prevents the commercial bank
from being used by its nonbank owner to help finance itself. If that
wall can be placed there, then I think that the threats to the banking system are essentially eliminated. If that wall cannot be constructed, and Jerry Corrigan thinks it cannot, then, if he is right,
then I could not support commerce and banking under those conditions.

Since I believe that it is possible to do that, and I have talked to
a number of people in the regulatory area who also believe that, I
am inclined to think that it is something which should be explored
very closely. But what I am not in favor of is an ability of a nonbank affiliate, buying a commercial bank and being able to use its
deposit insurance and its access to the payments system and the
discount window, because that, to me, is the use of a subsidy which
would be wholly inappropriate in that context.
The CHAIRMAN. That makes your position very clear. Thank you.
Senator Riegle.
Senator RIEGLE. There are two questions I want to raise. I want
to keep this one as narrow as possible, and that is, your view as to
what power the Fed has, as you see it, to grant banks additional
powers without the express approval of the Congress.
Are there any, and if so, what would they be?
Dr. GREENSPAN. Well, that is an issue which I am not terribly
knowledgeable on, Senator, but as I have said to you on other occasions, what I would like to see is far more specific guidance coming
from the Congress.
Senator RIEGLE. We hope to do that. We have got a whole process
set in motion to freeze the puzzle for a year to try to come up with
a comprehensive answer, but absent that, there is great interest as
to whether or not your view is that the Fed ought to become, in a
sense, an active deregulator, expand bank powers, in the absence of
action by the Congress, and I am wondering if, in fact, you support
that view, and, if so, what powers you think banks could be given
by the Fed without the approval of the Congress.
Dr. GREENSPAN. I have mixed feelings on that, Senator, because
on the one hand, I would like to see banks have greater powers,
because they need them, and I think it is important for the economy for them to have them.
On the other hand, I feel very uncomfortable in expanding what
might be perceived to be the Federal Reserve's current posture
with respect to discretionary types of grants of power, and so forth.
So that is the reason why I am very much desirous of seeing the
Congress confirm matters with a new bill clarifying a number of
these ambiguous issues and giving far greater guidance than is now
Senator RIEGLE. YOU know, on some recent votes on that very
issue, Paul Volcker voted against some of the pending applications
which the Fed approved. He was in the minority and took that
view. So there has clearly been a split on the Board, and as a
result, I think your views become very important, certainly, as the
Chairman of the Board, in terms of the kind of direction you would
like to see set.
Dr. GREENSPAN. Let me just say this, Senator. I don't know how I
would vote in any specific cases, but I do know that the whole
system would be significantly improved by a far more clarified set
of guidances coming from the Congress.
Senator RIEGLE. Well, we agree on that, and we hope to do that.
There is a serious effort under way in this committee, the chairman stated his intent. We have had hearings, we've got additional
hearings planned, and we intend to try to do precisely that, that it

really ought to be a legislative action, and we ought to work together on it and not end up sort of going off in separate directions.
I've gotten another chart here, since our last discussion a few
moments ago, that shows what I think is a startling change in
terms of our—change in status from a creditor nation to a debtor
nation. And you gave Senator Shelby sort of a complex, comprehensive answer to the question, the dollar claims outstanding, and
so forth, but if you just look at the last 4 years, the change in position from, roughly, 1982 to 1986, I find to be a breathtaking change
in circumstance, particularly given the fact that we were a creditor
nation in the blue area, uninterrupted, all the way back to 1914. So
clearly, something profound, a series of profound things have happened in the last 4 years to create this change in circumstance.
And I just give you that, because, coming back to that trade data
for this year so far, we are holding at roughly the $170 billion annualized trade deficit level, so we are continuing to add new international debt at roughly the rate of $1 billion every 2V2 days.
So we are continuing to ride that curve on into 1987. I have not
updated this chart through the first 5 months, but the earlier chart
would indicate that.
My concern is that I don't think we can continue that. Maybe I
am wrong. We are in uncharted waters. We don't have any historic
experience that we can compare this situation to, but when the
New York Federal Reserve Board is estimating that we will owe
the rest of the world something on the order of $1 trillion net
within a period of 2V2 years or so, that just seems to me to be such
an extraordinarily adverse condition that I don't want to find out
what it means, and I think we ought to find a way to get off that
course, but that is the course we are on.
My real question to you is this: as a premier economic forecaster,
as you look up that curve, if we stay on that curve, and we run up
a $1 trillion international debt, what are the implications of that?
Can we take it in stride? Is that something we need to really
become alarmed about now? You know, your point earlier is, stop a
recession before it starts. It seems to me, if that is where we are
headed, now is the time to focus a discussion as to what we
should—you know, is a condition that is dangerous to us, and do we
have to get off this track?
Dr. GREENSPAN. The greater the external liability is denominated
in dollars of the United States, the greater the number of problems
that occur when holders of those dollars decide they want to switch
in and out of them, and that will affect our domestic monetary
policy accordingly.
The only thing I would say, as I said earlier, Senator, is that,
even though that is $1 trillion, and that is scarcely petty cash, it is
added to a base which, depending on how one defines the numbers,
is at least twice that, and while it is a very substantial expansion
in the aggregate proportion of dollar-denominated assets relative to
assets denominated in other currencies, it at least is not of the
order of magnitude of the type of problem which you describe.
In other words, what I am basically saying is, that, as far as the
financial aspects are concerned, it is not crucially different where
the dollars are originating from.

The issue here is, to what extent are those claims against us in
direct investments, Government securities, private securities, because it is in that context that we are going to begin to see foreign
ownership, foreign interaction with American ownership, and it is
one of the reasons why we are now and have been, in a sense, entering the international arena, in a way which we have not previously.
Senator RIEGLE. My time is up, and I will come back after Senator Proxmire finishes, because I want to nail down with you, the
point, the implication for monetary policy, because it seems to me
this is a prescription for higher interest rates, and you are not
saying that, and I don't know whether you are sidestepping it, or
you just don't want to get into it, but I've got to ask you to address
that issue, and I will come back in a minute and do that.
The CHAIRMAN. Dr. Greenspan, you wrote a chapter in Ayn
Rand's book, "Capitalism: The Unknown Ideal," in which you
spelled our your philosophical objections to the antitrust laws.
As Chairman of the Federal Reserve Board, you will be called
upon to administer the Bank Holding Company Act. That act requires the Board to disapprove any bank merger that would result
in a monopoly of banking in any part of the United States. It also
requires the Board to reject mergers that would substantially
lessen competition, unless the anticompetitive effects are clearly
outweighed by the convenience and needs of the public.
Now those criteria are taken directly from the antitrust laws.
Given your philosophical objections to the antitrust laws, could
you, as Federal Reserve Chairman, faithfully and objectively administer the antitrust provisions of the Bank Holding Company
Dr. GREENSPAN. Yes, Senator. Abiding by the laws of the land, to
me, is crucially important, and when I take an oath of office—
should the Senate confirm me—it is far more important that those
laws be adhered to, as far as I am concerned, rather than my personal preferences as to whether they are right or wrong.
The CHAIRMAN. NOW let me see if I can ask you a specific case. I
know that you don't want to make a judgment in a particular case,
so let me put it this way.
Could you conceivably consider the merger of the two top banks
in the country, in size. Supposing the Bank of America and Citicorp wanted to merge, would you look with favor on such a merger
if it came before the Board? Would you consider it anticompetitive,
automatically, or are there circumstances in which you could possibly approve it?
Dr. GREENSPAN. Senator, I
The CHAIRMAN. Again, I am not asking you that particular case,
but I am saying, is it conceivable that you could do this? Would you
look at it with the notion of, well, maybe?
Dr. GREENSPAN. I would look at it to see what the full implications were in the context of the law. My own view is that, leaving
aside the problems of unhealthy banks being absorbed by healthy
banks, that the merger of two banks of that size makes no sense to
me at all, economically. Why they would want to do it, I find another issue. But if you are asking me, would I be able to apply the
law in that case, I am, as you point out, philosophically opposed to

the Sherman Act. I have been and continue to be, but I understand
it, and I understand the legal criteria which are involved in applying it and, hopefully, I am able to separate my own personal views
from what is legally required.
The CHAIRMAN. That is both very discomforting and very comforting, if you know what I mean. [Laughter.]
Let me ask you this. There has been a great debate over the appropriate targets for monetary policy.
Some say we should stick with the monetary aggregates, such as
Ml, M2, M3. Some say the Fed should target interest rates. Others
say the Fed should target the exchange value of the dollar or a
basket of commodity prices. Still others call for targeting nominal
What are your own views on the appropriate targets for monetary policy? What should the Fed consider as its primary target?
Dr. GREENSPAN. I think you have to take a step back. I think
what we have to first ask ourselves is, what is the Fed trying to do?
And what the Fed is trying to do is to set an environment in which
steady long-term maximum economic growth is feasible in our
The CHAIRMAN. That is the primary
Dr. GREENSPAN. That is the primary goal. And in doing that, as I
said earlier, what we need to be very careful about is not to allow
the inflation genie to get out of the bottle, because that will clearly
undercut that goal. I believe, as I think most people still believe,
that money does matter, that at least a significant aspect of Federal Reserve targeting has to be the monetary aggregates or something related to them.
That is not to say that one should not also be looking at the presumed effects on the economy of policies with respect to interest
rates, prices, and GNP. Obviously, one looks at all of that, because
it is very obvious that the simple rule on money supply doesn't actually work as often as we would like. And therefore, there have
got to be different sorts of adjustments, but the basic problem that
monetary theory has at this particular point is that we are developing, at the moment, I would say, a construction of what makes
the economy work, which we are continuously changing.
We used to believe we knew exactly how the system worked, and
we were wrong. Back in the 1960's, there was a belief that econometric models had captured what the system did. We now find that
the system is changing in such an extraordinary way that what is
required is to endeavor to evaluate what is currently going on and
try to understand the abstraction which is driving it, and that, if
we do understand it, will tell us what its policy should be.
And in that sense, I would say all of the items you mentioned are
relevant issues in determining what policy should be, the weighting
that you give to all those changes periodically, and I would argue
further that, at root, you cannot get around the question of the
monetary base, the various M's, as being crucial, irrespective of
what one does with the rest.
The CHAIRMAN. Senator Riegle.
Senator RIEGLE. Dr. Greenspan, I want to come back to this question of the problem here with this build up of international debt.

About 2 months ago, you recall, there was a major Treasury financing, and there was a rumor out, to the effect, that maybe the
Japanese would not participate and come in and take down the
amount that was normally expected that they would, and interest
rates kicked up. It surprised a lot of people, and the prime rate has
since gone up and adjustable rate mortgages have gone up, and a
lot of bond traders took a giant bath, as you know, in the first
quarter, and they are still reporting those losses, but I am told it is
on the order of $10 billion. It is a large number in the aggregate,
not that's
Dr. GREENSPAN. I think most of it was in April.
Senator RIEGLE. Pardon?
Dr. GREENSPAN. April, not the first quarter.
Senator RIEGLE. Yes. You are right about that.
In any event, it struck me, and I think it struck many people of
what Paul Volcker's talked about in major speeches himself, and
that is, the more we become hooked on foreign lending, as we clearly are, the more volatility there is, if foreigners decide either to
come in or not come in to a certain degree, and all of a sudden we
start to see an up and down effect on interest rates here, and now
you are about to take on the interest rate job, not that you control
it directly, but you certainly are going to have the major role in it.
What I am concerned about is, it seems inescapable in my mind
that when I see these kinds of trend lines, and I see us continuing
to borrow this foreign money every single day, every single hour of
every single day, become larger and larger net borrowers, that we
are putting ourselves in a situation here that any time they want
to interrupt that credit flow, it is going to cause repercussions in
our credit markets. We have just seen it once. I mean, it doesn't
seem to me that it takes a real leap to imagine that we are now in
a new kind of relationship.
And my question to you is, first of all, I want to know if you see
it this way, and if so, if your sense for it is that we are going to
find ourselves put in a posture where our interest rates may start
to take on more volatility simply because foreign lenders we now
depend so much on, may decide, at a certain point, for whatever
the reasons, that they don't want to lend us as much as we may
want at that point. It just seems to me, prudence would dictate
that we get off these curves, but I haven't really heard you say
that yet.
Dr. GREENSPAN. Yes. Well, I will say it, if you want me to, because, clearly, it is a problem. I am concerned, however, that solutions that are advanced to resolve this problem can be worse than
the disease, and what I am hoping that we are not moving towards,
is some mechanism that endeavors to look at the numbers and say,
well, it is a simple solution. All we have to do is shut down the
Senator RIEGLE. I don't think anyone's implied that, and I am
not even sure we quite know the full range of what the solution
ought to be. There is a debate, something of a debate going on
about that, but for the moment, I want to just ask you to talk
about the seriousness of the problem, before we get to the issue of a
solution. And I am still not quite sure how sanguine you are about
it, or the degree to which you feel that this is really becoming a

major inhibiter or risk factor that is going to hem the Fed in, hem
in our country in terms of our economic policy initiatives, because
of what is building up out there.
Dr. GREENSPAN. Senator, let me broaden the issue. I would say
that all countries' economic policies, both central bank and fiscal
policies, are becoming ever-increasingly intertwined with everybody else's.
Senator RIEGLE. Yes, but nobody is running up these huge debts
the way we are.
Dr. GREENSPAN. That is certainly the case. Nonetheless, that is
an international phenomenon and one of the reasons, I might add,
why international cooperation becomes increasingly valuable in
this context. It is certainly also the case that we being the reserve
currency are subject to more potential instabilities than the others,
as we have seen and as you have evidenced.
This suggest to me that, not only do we have to be concerned
about this, but a number of things. One of the reasons why I am
very interested in thinking about this question of increasing capital, not only in the financial area, but nonfinancial, is that one
way in which you can insulate yourself from instability is to have a
higher degree of capital-to-debt ratio rather than the other way
And as a consequence of that, I think that there is more of a
broad philosophy about what policy should be that is staring at us
from that chart, than any specific action.
What the chart, in effect, is saying, and similar charts which we
have seen on numerous occasions, is that the world is changing,
and it is becoming increasing integrated, and we are increasingly
involved, especially with the extraordinary increase in telecommunications, in a globalized environment. And it does suggest different types of policies, not dramatically different, but it does suggest that we have to recognize that the world is changing, and we
have to adjust, where feasible.
Senator RIEGLE. Well, my time is up. I think this debt binge, this
international debt binge is a clear and present danger, and we may
differ on that, and I think if we let it run on for several more
months or 2 or 3 more years, we are going to find ourselves caught
in a series of events that we are not going to have much influence
over, and I think it is dangerous if we allow that to happen.
The CHAIRMAN. About a dozen years or so ago, Dr. Greenspan, I
pushed hard for requiring the Federal Reserve Board to come up
with goals on monetary aggregates. And over the objections of—
first, the objections of Chairman Burns, we finally put that into the
law and the Fed responded.
Now what I had in mind, and I was the author of the bill, was
that they would provide us with Ml.
Dr. Burns said, we will not only give you Ml, we will give you
M2 and M3.
Now the present Chairman of the Board, there is one thing in
which I strongly disagree with him, the present Chairman of the
Board said we will give you M2 and M3, but not Ml. We don't want
to give you that anymore.
So we asked him to consult with the lawyer for the Fed, and the
lawyer for the Fed said we have a legal right, because all the law

says is that monetary aggregates, and that is the way we define
monetary aggregates. We don't want Ml to be included.
As Chairman of the Fed, what would be your position on providing the Congress with your goals for Ml?
Dr. GREENSPAN. The problem, Senator, is that at the moment, we
don't know what Ml is.
The CHAIRMAN. Well, currency and the
Dr. GREENSPAN. I am being slightly facetious.
Let me tell you what I think.
The CHAIRMAN. That should be easy to measure.
Dr. GREENSPAN. Well, yes. Let me tell you what the problem is.
Ml was always meant to be some measure of transaction balances—as you remember, years ago, it was demand deposits plus
currency, and we decided that that was sort of a proxy for what
transaction balances were. And then the world changed. First, a lot
of our currency is obviously abroad or doing other things unrelated
to transaction balances, and we began to get negotiable orders of
withdrawal and a number of other elements which had quasi-transaction characteristics which weren't clear.
I don't think the concept of transaction balances has changed,
that is, that that is a relevant consideration to try to control, but it
is not clear what numbers really are best reflected in it. I suspect,
Senator, that what we are going to end up with at some point, is a
redefinition of what constitutes those transactions and, hopefully,
the Fed will be able to respond again and give you guidelines, but
until there is some general satisfaction that, in a sense, the Federal
Reserve is measuring transaction balances, rather than something
else, I am not certain what, in effect, is the use of guidelines or any
The CHAIRMAN. What is wrong with letting us know? Just giving
us what your goals are, but then hedging them any way you want.
I mean, tell us that you don't think that this is very—that M2 and
M3 is more useful, and so forth.
Dr. GREENSPAN. Yes. Mr. Chairman, I am arguing from a large
lack of knowledge about specifically why staff and the Board and
the Open Market Committee have come to their views. I am just
giving my own personal views which may or may not coincide with
My concern is that to give you targets on a number which is ambiguous probably will merely lead to the conclusion that the Federal Reserve will have targeted a number over which it really had no
insight and could be extraordinarily off without any economic or
monetary significance.
That is what I think the problem is. I think it is a lack of knowledge rather than any particular desire on the part of the Federal
Reserve to rejuggle the game.
The CHAIRMAN. I have a question that I am going to ask for the
record, that I hope that you can respond to in writing, on the loan
loss reserves recently taken by the banks, especially National City
Bank. But I won't ask you about that.
I would like to conclude, Dr. Greenspan, by saying, this is an extraordinary kind of a situation. I think you are a remarkable man.
You are going to be overwhelmingly approved. I may vote against
you. But this nomination should result in a slam-bang debate in

committee and on the floor. It won't. And it is startling, in view of
what you have told us.
Your forecasting record, as I pointed out, has not been good. It's
been bad. You are opposed to the antitrust laws of this country, but
you will carry out the laws, although you oppose them.
We didn't get into your position on direct investment by savings
and loan associations, but many of us feel that that direct investment can mean the downfall of an industry that provides financing
for our home buying.
Your position on banking and commerce, again, is that you
would obey the law, as I understand it, but you think, if you erected Chinese walls, you can still merge banking and commerce. And
that shocks this Senator, and I think it should shock many others.
You, in my judgment, favor an increased concentration of banking, if that is the way the economy seems to be moving.
And you will move in with a Board of clones—not clowns, clones.
You will find that the people you are working with are people who
agree with you pretty much. They have all been appointed by
President Reagan. They share, to more or less of an extent, the
views you have.
This is not a diversified Board. It is the most homogeneous Board
we have ever had, all on one side.
It seems to me that banking in this country and finance in this
country is moving very sharply, likely to move very sharply in the
next 4 or 5 years or more perhaps in the direction of concentration
and in a direction which, I think, most Senators, if they thought
very long about it, might be very concerned about it. And I think
the American people would be too.
Nevertheless, you are a very good man. We are going to act on
your confirmation swiftly, and as I say, I expect that it will be
overwhelmingly approved, although there may be one or two dissenters.
Thank you very much.
Dr. GREENSPAN. Thank you, Mr. Chairman.
[Whereupon, at 1:35 p.m., the hearing was adjourned.]
[Response to written questions and biographical sketch of nominee

Mr. Greenspan subsequently submitted the following in response to
written questions from Chairman Proxmire in connection with his nomination
hearing on July 21, 1987:
Question 1: There are some who argue the Federal Reserve should
play a far more active role in managing the value of the dollar as measured
against foreign currencies. According to this view, the FED should step in
to prevent the dollar from rising too high or falling too low from its natural
On the other hand, the Milton Friedman school of economics argues
that there is no way policymakers can divine the appropriate level of the
dollar and that the level ought to be set by market forces without any governmental intervention.
How do you come down on this issue?

There are times when intervention in exchange markets can

be a useful adjunct to other policies, but intervention per se, without
accompanying changes in underlying policies, cannot and should not be relied
upon to have large or lasting impacts on exchange rates.

Moreover, it is,

indeed, difficult to know what the appropriate exchange rates should be at
any time; indeed, they may well change over time.
The best, and really only, way to achieve reasonably stable exchange
rates over the medium term is to get fundamental monetary and fiscal policy
settings right, here and abroad.
Question 2: In the past, you have suggested a return to the gold
standard. What are your current views on this issue? If you are confirmed
as Federal Reserve Chairman, will you make a return to the gold standard a
top priority?

Under the conditions of the nineteenth century the gold

standard probably worked more effectively than critics assert today, and if
the key conditions could be replicated we might be well served by such a

However, considering the huge block of currently outstanding dollar

claims in world markets, fixing the price of gold by central bank intervention
seems out of reach.

- 2 -

Question 3: As you know, many of our major banks have recently begun
to set aside loan loss reserves against their loans to the heavily indebted
developing nations. Mr. John Reed, the Citicorp Chairman, in announcing
Citicorp's decision to do that said "looking at world economic conditions
Citicorp's management decided it may not be able to collect all of the $14
billion it has lent to financially troubled Third World countries, especially
those in Latin America. The $3 billion placed in reserves is only a very
rough estimate of the potential loss on that $14 billion."
So the banks are finally admitting they may take major losses on these
loans. The only problem is the new loan loss reserves do not result in any
capital increase by the banks. They are only moving capital from one pocket
to another. Their overall safety is not improved by these reserves.
There is a debate now taking place on whether to include loan loss
reserves in a bank's capital or whether to exclude them as I understand the
British bank regulators do. What is your view on this matter?

My understanding is that the question of loan loss reserves

is indeed one the issues currently under discussion among banking
seeking to harmonize the capital adequacy standards.


I believe that this

effort is of critical importance, if we are to achieve both greater safety and
soundness of our banking system while ensuring a reasonably even playing field
for our banks as they compete in the international marketplace.

I certainly

shall be devoting a good deal of personal attention to the matter, should the
Senate confirm me as Chairman of the Board of Governors, but at this point I
hope you will understand my hesitance to risk a possible complication of the
negotiations on this key issue by voicing a viewpoint before I have had the
opportunity to discuss it fully with the other parties.
Question 4: As you know, there has been a stalemate on Capitol Hill
on the issue of bank deregulation as it affects the products and services that
banks can offer either directly or through affiliates. Some have suggested that
if Congress does not pass a comprehensive banking bill the bank regulators should
take the initiative.
What is your general attitude on this question? Do you believe in
stretching the current law to its outer limits if the Congress does not act in
a timely fashion?

There is no satisfactory substitute for timely and defini-

tive action by the Congress on the broad issues of financial institution powers.


"Stretching the current law to Its outer limits" is a distinctly inferior
approach, for the regulatory authorities can not implement major structural
change within the present legal structure that results in equitable treatment
for all participants and a sound, stable financial system.

The regulatory

agencies must, of course, carry out the law as it exists, and I would do that
to the best of my ability.
Question 5: Mr. Greenspan, public commentators have been offering
you a great deal of free advice since you were nominated. Let me quote from
Paul Craig Roberts. I find him especially interesting since he is one of the
gurus of Reaganomics in this administration, which appointed you. 1 quote:
"The budget deficits of the 1980s are the result of the unexpected collapse of
inflation. . . . Whenever inflation falls below the forecast, it means the
government has, in effect, over-budgeted for inflation—collecting less revenue
than planned and spending more in real inflation adjusted dollars than intended.
The deficit far from being a source of inflation is a result of more disinflation than expected." What do you think of this advice?

I think that this analysis involves some debatable conjec-

tures on what might have been.

But, more importantly, I'm concerned that it

may distract from the current problem we face.

The fact is that the budget

deficit is too big for an economy that produces as little saving as we do and
that is depending so heavily on a masive inflow of capital from abroad.


need to reduce that deficit, and to my mind the best way do go about that is
to reduce federal spending, which is running at an historically high rate relative to gross national product.
Question 6: As you know, the Federal Reserve is a collegial body.
Members of the Board or the Federal Open Market Committee can and often do dissent from the decisions of the majority. As you look back on the conduct of
monetary policy over the last ten years, what are the one or two major issues
over which you would have dissented from the actions taken by a majority of the

The decisions faced by the FOMC tend to involve more matters

of judgment about the trend of the economy and the appropriate settings for the
instruments of monetary policy rather than what might be regarded as discrete,


major issues.

Such judgments always must be made with incomplete information,

and I'm sure that with the benefit of hindsight the FOMC members might now
acknowledge that they did not make precisely the right decision in every case.
There have been times when my sense of the strength of the economy and the
intensity of inflationary pressures has differed from the apparent majority
view of the FOMC, but I can't say that any instances of great consequence come
readily to mind of decisions that appeared wholly inappropriate, given the
available facts.

Indeed, what comes to mind more quickly is the fact that on

the pivotal decision on the direction of policy in the past decades, namely,
the decision to act very forcefully in the early 1980s to stem the escalating
inflation, I was supportive of the FOMC and felt that it was a step that had to
be taken despite the painful short-run economic fallout.
Question 7: I know you are not being nominated to regulate the thrift
industry, but I am troubled by a comment you made before a House Government
Operations subcommittee. I quote: "The industry simply cannot overcome the
structural problems that threaten it if its associations are restricted generally and the types of investments that they are permitted to make are limited."
Does this mean there is no place for the traditional home-mortgage maker?

Clearly, the home mortgage market has changed enormously over

the past decade or so.

The key to this change has been the development of the

mortgage-backed security, which has made it possible to tap a broad range of
ultimate providers of capital and permitted institutions to act as originators
and servicers without also being holders of loans.

Many thrift institutions

have in fact chosen to become to a considerable degree mortgage bankers, packaging loans they originate for "securitization" and retaining servicing.
While some i n s t i t u t i o n s continue to be important p o r t f o l i o


in a sense along the t r a d i t i o n a l lines I think you have in mind, their


to do so s a f e l y and s u c c e s s f u l l y has to an extent depended on t h e i r a b i l i t y to


utilize adjustable rate loans and to hedge interest-rate risks through proper
liability management.

However, it is not clear that, with current asset powers,

they have the means at their disposal, to hedge adequately the interest-rate
risks that are present in all but the most stable, noninflationary economic

Consequently, these institutions can benefit from the ability to

diversify their loans and investments into areas in which maturities are shorter
or interest rates more flexible.

Moreover, diversification geographically and

among categories of investment also can help institutions control credit risks

My view is that thrifts should be afforded the freedom to diversify

in those ways, but that—insofar as they choose to go that route and thus
become more like commercial banks or other intermediaries—they also must be
subjected to similar treatment with respect to supervision, regulation, and
access to federal subsidy or support systems.

Mr. Greenspan subsequently submitted the following in response to
written questions from Senator Riegle in connection with his nomination
hearing on July 21, 1987:
Question 1:
Considerable attention has been paid to the relatively high cost
of labor in the United States and that is often given as the excuse for
the imbalance in our international trade. But comparatively little
attention is paid to our high cost of capital and the impact of such
capital cost? on the competitiveness of American industry. It seems to
me that if the average cost of capital to a major Japanese enterprise is
around 2.5 percent (as it is) and the average capital costs to a
comparable American enterprise is about three times that figure—that the
competitive advantage of Japan over the United States is formidable,
particularly in capital intensive industries such as steel, auto,
electronics and chemicals. Do you think that capital costs are more,
less or about as important as labor costs in the competitiveness of
American industry? Do you think that the cost of capital to American
business is higher, lower or about the same as the cost of capital to our
major foreign competitors? Do capital costs affect the international
competitiveness of American industry? What policies do you think the
Federal Reserve should follow to enhance the competitiveness of American
Capital costs in the United States and abroad clearly are an
important element in determining the competitiveness of American products
in world markets, but they are only one factor among many.

In both the

United States and Japan, labor costs are significantly more than half the
cost of total inputs, on average, while capital costs are substantially
less than one-half.

Across individual industries, however, the share of

different inputs varies, and capital costs can be of greater importance
for those products.
Measurement of the real cost of capital can be difficult, and
studies by different analysts have obtained somewhat different results.
Different rates of time preference, and high rates of saving in Japan,
have contributed to lower real rates of interest in that country, which
international capital flows have not completely equalized.

However, the


cost of capital depends not only on the cost of borrowing at market
interest rates, but also on the details of the tax treatment of business

This involves questions of depreciation procedures, possible

government grants or other transfers to firms, tax rates, and tax

It is also necessary to take account of the cost of financing

new capital accumulation through equity as well as through borrowing.
The Federal Reserve can contribute to an improved competitive
position for U.S. firms by creating favorable economic and financial
market conditions.

This means we should avoid the unnecessary

uncertainty for U.S. business associated with high and variable inflation
rates, with excessive volatility in exchange rates, and with the
associated risk premia, which add to the cost of capital.
policies can influence the cost of capital.

However, other

Perhaps most important is

the role of Congress in influencing the total balance of savings and
consumption, both public and private, in the United States.

Question 2:
According to a recent article in the New York Times, in the late
1970s when economists for the most part were predicting higher energy
prices for the better part of the century, you believed that prices would
level off or f a l l — a n d you were of course correct. Energy prices are
extremely important to the outlook for inflation. What are your views
regarding the direction of energy over the next five to ten years?
Forecasting energy prices is a difficult business for an economist,
especially over a five to ten year horizon.

The market for oil obviously

is crucial to the outlook for energy prices more broadly, and oil prices
over the past decade have been dominated by political, or at least not
purely economic, factors.


However, barring any major disruptions to oil supplies, I would
expect the real price of energy to be higher five to ten years from

Energy demand should rise, in line with generally rising economic


Energy supply may rise somewhat also, but at current prices

exploration and development of new sources of supply are not likely to
be strong enough to prevent increasing demand for OPEC oil.


supply still persists in the Middle East, however, and this should
temper any strong tendency for prices to r i s e — a g a i n barring major
political disruptions.

Question 3:
What do you think are the biggest management problems facing the
Federal Reserve Board and what solutions would you bring to those
problems? What recommendations would you make to enhance Congressional
oversight of the Fed?
I should perhaps not offer any very specific comments on "problems"
until I have had the opportunity to view the workings of the Federal
Reserve from the inside.

My sense is that this is a generally well run

organization, with a clear recognition—reflected

in the efforts toward

cost restraint and productivity enhancement described in various public
r e p o r t s — o f the need to husband carefully the public*s resources.


certainly want to ensure that that is, and continues to be, the case.
The question of Congressional oversight over the management and
budgets of the Federal Reserve has arisen many times through the years,
and my belief is that, in light of the internal controls that exist and
the amount of information that is provided, the decisions taken not to
alter the relationship between the Federal Reserve and the Congress in
this sphere have been appropriate and consistent with the preservation
of necessary independence of action on the part of the central bank.







(none )


Position to which. C h a i r m a n , B o a r d of g o v e r n o r s
nominated: o f t h e F e d e r a l R e s e r v e S y s t e m
Date of birth:
Marital status:
Name and ages
of children:

2 6



Place of birth:

Q a t e Qf


Mew Y o r k ,



Full name of spouse:


(none )







Geo. Washington
New York,


Dates of


New York





New York



M. A.


New York




Honors and awards: List below all scholarships, fellowships, honorary degrees, military medals, honorary society
memberships, and any other special recognitions for outstanding service or achievement.






Pace University,



by an

the A m e r i c a n








for G r e a t e s t
or A p p o i n t e d













List below all memberships and offices held in professional, fraternal, business, scholarly,
civic, charitable and other organizations.

Office held

(See p a g e


(if any)



Employment record: List below all positions held since college, including the title or description of job, name of
employment, location of work, and dates of inclusive employment.








New York,














& Co.,










Advisers, Washington,



List any experience in or direct association with Federal, State, or local governments, including any advisory, consultative, honorary or other part-time service or positions.























List the titles, publishers and dates of books, articles, reports or other published materials
you have written.

and activities:






see page




S-3 attached. )

List all memberships and offices held in and services rendered to all political parties or
election committees during the last 10 years.







Itemize all political contributions of $500 or more to any individual, campaign organization, political party, political action committee or similar entity during the last eight
years and identify the specific amounts, dates, and names of the recipients.







$1,r 0 0 0















see page









Bob Dole


(For a d d i t i o n a l ,






State fully your qualifications to serve in the
tl position to which you have been named,
(attach sheet)
(See p a g e



Future employment
1. Indicate whether you will sever all connections with your present employer, business
firm, association or organization if you are confirmed by the Senate.


2. As far as can be foreseen, state whether you have any plans after completing government service to resume employment, affiliation or practice with your previous employer, business firm, association or organization.

3. Has anybody made you a commitment to a job after you leave government?

4. Do you expect to serve the full term for which you have been appointed?


Potential conflicts
of interest:

1. Describe any financial arrangements or deferred compensation agreements or other
continuing dealings with business associates, clients or customers who will be affected by policies which you will influence in the position to which you have been









(For a d d i t i o n a l ,

see page





of A m e r i c a ;



2. List any investments, obligations, liabilities, or other relationships which might involve
potential conflicts of interest with the position to which you have been nominated.

3. Describe any business relationship, dealing or financial transaction (other than taxpaying) which you have had during the last 10 years with the Federal Government,
whether for yourself, on behalf of a client, or acting as an agent, that might in any
way constitute or result in a possible conflict of interest with the position to which you
have been nominated.
(See a t t a c h e d






in r e s p o n s e

to q u e r y


4. List any lobbying activity during the past 10 years in which you have engaged for the
purpose of directly or indirectly influencing the passage, defeat or modification of
any legislation at the national level of government or affecting the administration and
execution of national law or public policy.
(See a t t a c h e d




in r e s p o n s e





5. Explain how you will resolve any potential conflict of interest that may be disclosed by
your responses to the above items.

Civil, criminal and

I plan



if a t




















1. Give the full details of any civil or criminal proceeding in which you were a defendant
or any inquiry or investigation by a Federal, State, or local agency in which you were
the subject of the inquiry or investigation.

2. Give the full details of any proceeding, inquiry or investigation by any professional
association including any bar association in which you were the subject of the proceeding, inquiry or investigation.



Office held

(if any)

Townsend-Greenspan & Co., Inc.

Chairman & President


AG Ventures

Board of Directors


Greenspan O'Neil Associates

Chairman, Investment
Policy Committee


Aluminum Company of America

Board of Directors


Automatic Data Processing, Inc.

Board of Directors

Capital Cities/ABC, Inc.

Board of Directors

Mobil Corporation

Board of Directors


Morgan Guaranty Trust Company
of New York

Board of Directors


J.P. Morgan & Co., Incorporated

Board of Directors


The Pittston Company

Board of Directors


General Foods Corporation

Board of Directors


The Rand

Board of Trustees


Gerald R. Ford Foundation

Board of Trustees


The Economic Club of New York

Vice Chairman,
Board of Trustees


Council on Foreign Relations

Board of Directors


Committee For a Responsible
Federal Budget



Institute For

Board of Directors


Board of Overseers


Board of Governors


Member, Executive


Board of Economists






The Ronald Reagan


The Trilateral Commission




Century Country Club
Purchase, NY



Hillcrest Country Club
Los Angeles, CA



City Mid-day Club
New York, NY



Harmonie Club
of The City of New York



The University Club
New York, NY



Conference of Business

Past Chairman


National Association of
Business Economists

Member, Fellow,
Past President

Early ' 60s-presen

National Economists Club
Washington, D.C.

Past Director


Brookings Panel on
Economic Activity
Washington, D.C.

Senior Adviser



I h a v e been an e c o n o m i s t
for a l m o s t
first as an a n a l y s t , and in r e c e n t y e a r s a s a
M y w o r k has c o v e r e d both i n d u s t r i a l
and f i n a n c i a l s e c t o r s of the U n i t e d S t a t e s a n d ,
to an i n c r e a s i n g e x t e n t , the rest of the w o r l d .
I h a v e c o n s i d e r a b l e k n o w l e d g e of A m e r i c a n f i n a n c i a l
s t r u c t u r e (I served on t h e P r e s i d e n t ' s C o m m i s s i o n
and m o n e t a r y t h e o r y .
I h a v e served on the b o a r d s
of d i r e c t o r s of a s a v i n g s and loan h o l d i n g c o m p a n y
holding company
(J.P. M o r g a n ,
1977 to
My s e r v i c e as C h a i r m a n of the C o u n c i l of E c o n o m i c
b r o a d e n m y e x p e r i e n c e beyond the p r i v a t e s e c t o r .

of I n t e r e s t :

Capital Cities/ABC,
Mobil Corporation;
Morgan Guaranty

Inc.; G e n e r a l F o o d s
J.P. Morgan

& Co.,



T r u s t C o m p a n y of N e w Y o r k ;





June 30, 1987

The Honorable William Proxmire
U.S. Senate
Committee on Banking, Housing,
and Urban Affairs
Washington, D.C.
Dear Mr. Chairman s
The following is in response to your letter of
client relationships.
For purposes of accounting, Townsend-Greenspan & Co.
divides its various services into:
forecasts and analyses of the economic outlook.
(2) Specifically
on analytical subjects, such as facilities planning
techniques, the long-term world demand for oil,
What we
any analysis
development of ideas, which lead to a particular
point of view on company, industry, or public
We make it clear to potential clients
for such services that these are our positions
and they may or may not choose to publicize the
results of our work.
Some have chosen not to.
These presentations generally reflect my personal
views on specific policy questions, almost always
as an extension
some analytical
Much of the economic analysis in this segment
of our business has been in support of my personal
views on the necessity to protect intellectual

Committee on Banking, Housing,
and Urban Affairs
Page 2
June 30, 1987
to assist their client, Lincoln Savings and Loan
Association, in an evaluation of the desirability
of broadened savings and loan direct
powers. This resulted in a published study submitted
subsequently the basis of invited testimony before
Subcommittee of the House Committee on Government
Operations (February 27, 1985).
Our total billing
(including expenses)
Weiss, Rifkind, Wharton & Garrison, was:
This project is now complete.



Sears Roebuck and Company is a regular
consulting client for whom we also consult on various
We have been asked to analyze and criticize a number
of their
in the
I have also made a number of
presentations on their behalf before various private
financial deregulation.
Our total annual retainer
from Sears has been $
. It covers my personal
time devoted
to presentations
well as the time of our staff.
If there is any additional information I can present,
please let me know and I will endeavor to make
it available.

AG: an


W A S H I N G T O N , • . C. 2 0 5 5 1

September 17, 1987


The Honorable William Proxmire
Committee on Banking, Housing, and
Urban Affairs
United States Senate
Washington, D . C .
Dear M r .

T h a n k you for your letter of August 12.

I am pleased

to enclose staff responses to your questions about the
securities activities of U . S . banks and b a n k holding



I hope this information is u s e f u l to your C o m m i t t e e .
Please let me k n o w if we may be of further



September 1987
Federal Reserve Staff Responses to Questions
from Chairman Proxmire About the Overseas
Securities Activities of U.S. Banks and
Bank Holding Companies

What types of securities are U»S. banking organizations
underwriting, distributing, and dealing in abroad?
Be as
specific as possible, and be sure to state whether U.S.
banking organizations are underwriting, distributing, and
dealing in corporate debt and equity securities of U.S.

U.S. banks may underwrite, distribute, and deal

in government securities of their host authorities
their foreign branch offices.


U.S. banks and bank holding

companies may also conduct these activities for corporate
debt and, to a limited extent, equity securities through
separately incorporated foreign subsidiaries.


activities may relate to securities of U.S. issuers, but in
no case may the securities that are underwritten by the U.S.
bank affiliate be sold to investors in the United States.
The Federal Reserve currently limits equity underwriting
commitments of foreign subsidiaries of U.S. banking
organizations to $2 million (or 20 percent of the capital
and surplus or voting shares of the issuer) unless the
underwriter is covered by binding commitments from
subunderwriters or other purchasers.


How many U.S. banking organizations engage in those
activities abroad?

U.S. banking organizations have general


to conduct these activities abroad under the Board's
Regulation K.

Consequently, they do not need


approval in order to engage in the activities and may
commence or cease these activities without notice to the
Federal Reserve.

Therefore, a precise number of

institutions engaged at any one time in these activities is
not available.

As a practical matter, however,

approximately a dozen large U.S. banks have


merchant or investment bank subsidiaries that conduct this
business and account for the vast majority of all such
activities conducted by U.S. banking organizations.

A list

of those banking organizations is provided in Table 1.


What is the dollar volume of those overseas



The Federal Reserve does not collect or

systematically compile statistics on the volume of
underwriting or trading activity conducted by these offices,
but other sources of general information are available.


March, 1987 issue of Euromoney, the British publication that
covers these markets, ranked the 50 largest "bookrunners" in
the eurobond market for 1986, which covered fixed rate
securities, warrants for equity, convertibles, and floating


rate notes.


That listing indicated that six U.S. banks

accounted for $16.6 billion in eurobond underwritings, or
about 10 percent of the total for the 50 most

Those banks, along with their


volumes, are shown in Table 2.


Have those activities been profitable?


The merchant and investment bank subsidiaries

that conduct these activities have been generally
in recent years.


The Federal Reserve does not, however,

collect information showing the profitability of specific

Since these subsidiaries conduct a broad


of activities and provide many services, it is not possible
to estimate from the available aggregate data what portion
of net earnings or losses can be attributed to securities
underwriting and trading.

Partial information suggests that earnings from these
activities are volatile and may have declined, especially
with the increased level of competition in the London

Some large banking institutions, such as Lloyds

Bank and Midland Bank, have withdrawn from some segments of

Bookrunners generally coordinate the securities issues
and perform a key role in the underwriting process by
distributing shares to other managers and handling many of the
administrative tasks.


the securities markets in London because of the poor outlook
for profits.

Last spring several U.S.-owned merchant

along with other active market participants,



significant losses on their trading positions when interest
rates suddenly rose.

Underwriting losses were also realized

in the floating rate note market.


To what extent would those activities be conducted in the
United States but for the Glass-Steagall Act?

Many of these activities might be conducted in

the United States if Glass-Steagall were not in effect.
However, probably little of the current securities business
conducted abroad by U.S. banks would be transferred to the
United States, given the present nature of that business.
The greatest effect would be that U.S. banks would compete
actively for business from which they are currently banned.


Have those activities jeopardized the safety and soundness
of the banking organizations engaged in them?
Have those
activities given rise to abuses"or other problems, such as
the "subtle hazards" discussed by the Supreme Court in
Investment Company Institute v. Camp, 401 U.S. 109f"Tr971)?

At present, no U.S. banking organization has

incurred sufficient losses on its foreign


underwriting or trading activities to threaten the safety of
affiliated banks.

The experience, however, is relatively

As mentioned, U.S. banking organizations have

limited opportunity to take positions in connection with
underwriting or trading equity securities, and the eurodebt
markets were relatively small until recent years.


We are also not aware of any material problems that have
arisen from the "subtle hazards" associated with the mixture
of banking and securities activities.

The risks, however,

as well as potential conflicts of interest, are a matter of

The subtle hazards could be defined to include

damage to a bank's reputation arising from its securities

In this connection, there have been instances

where banks have covered losses of subunderwriters when
issues were mispriced

(in order to protect their


and to facilitate market entry) or have suffered undesirable
publicity because of personal positions taken by traders on
securities the bank was underwriting.

Subtle hazards may be prevented by clear rules to guide
behavior, thorough internal controls, an emphasis on ethical
conduct by employees, and active supervision by management
and regulatory authorities.

The Federal Reserve has

communicated the importance of such procedures to its
supervisory staff and, in turn, to the banking community and
will continue to be alert to such conflicts.



T a b l e 1.

U.S. banking organizations with significant
or i n v e s t m e n t b a n k i n g s u b s i d i a r i e s , 1986


BankAmerica Corporation, New York
Bankers Trust Company, New York
C h a s e M a n h a t t a n C o r p o r a t i o n , New Y o r k
Chemical New York Corporation, New York
Citicorp, New York
Continental Illinois Corporation, Chicago
First C h i c a g o C o r p o r a t i o n , C h i c a g o
First I n t e r s t a t e B a n k c o r p , Los A n g e l e s
Manufacturers Hanover Corporation, New York
M o r g a n (J.P.) and C o m p a n y , N e w Y o r k
NCNB Corporation, Charlotte
Republic NY Corporation, New York
Riggs National Corporation, Washington, D.C.
S e c u r i t y Pacific C o r p o r a t i o n , Los A n g e l e s

T a b l e 2.



U . S . b a n k i n g o r g a n i z a t i o n s among the top
b o o k r u n n e r s for all issues of E u r o b o n d s ,





Morgan Guaranty
B a n k e r s Trust
Chase Manhattan
Chemical Bank
B a n k of A m e r i c a
Citicorp Group




Euromoney, March,