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S. HRG. 104-509

NOMINATIONS OF:
ALAN GREENSPAN, ALICE M. RIVLIN
AMEkLAURENCE H. MEYER

HEARING
BEFORE THE

COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTH CONGRESS
SECOND SESSION
ON

NOMINATIONS OF:
ALAN GREENSPAN, OF NEW YORK, TO BE CHAIRMAN OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[REAPPOINTMENT]
ALICE M. RIVLIN, OF PENNSYLVANIA, TO BE A GOVERNOR AND
SERVE AS VICE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM, VICE ALAN S. BLINDER, RESIGNED
LAURENCE H. MEYER, OF MISSOURI, TO BE A GOVERNOR OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
VICE JOHN P. LAWARE, RESIGNED
MARCH 26, 1996

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

U.S. GOVERNMENT PRINTING OFFICE
24-529 CC

WASHINGTON : 1996
For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

 24-S2Q n - Qfi - 1


ISBN

0-16-052902-6

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
ALFONSE M. D'AMATO, New York, Chairman
PAUL S. SARBANES, Maryland
PHIL GRAMM, Texas
CHRISTOPHER J. DODD, Connecticut
RICHARD C. SHELBY, Alabama
JOHN F. KERRY, Massachusetts
CHRISTOPHER S. BOND, Missouri
RICHARD H. BRYAN, Nevada
CONNIE MACK, Florida
BARBARA BOXER, California
LAUCH FAIRCLOTH, North Carolina
CAROL MOSELEY-BRAUN, Illinois
ROBERT F. BENNETT, Utah
PATTY MURRAY, Washington
ROD GRAMS, Minnesota
PETE V. DOMENICI, New Mexico
HOWARD A. MENELL, Staff
Director
ROBERT J. GIUFFRA, JR., Chief
Counsel

PHILIP E. BECHTEL, Deputy Staff Director
STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel




EDWARD M . MALAN,
(II)

Editor

C O N T E N T S
TUESDAY, MARCH 26, 1996
Page

Opening statement of Chairman D'Amato
Opening statements, comments, or prepared statements of:
Senator Sarbanes
Senator Bond
Senator Domenici
Senator Gramm
Senator Shelby
Prepared statement
Senator Bennett
Senator Mack
Senator Faircloth
Senator Boxer
Senator Murray
Senator Kerry

1
2
3
4
5
6
60
6
6
8
8
9
20

NOMINEES
Alice M. Rivlin, of Pennsylvania, to be a Governor and serve as Vice Chairman of the Board of Governors of the Federal Reserve System
Biographical sketch of nominee
Laurence H. Meyer, of Missouri, to be a Governor of the Board of Governors
of the Federal Reserve System
Prepared statement
Background and Qualifications
Monetary Policy Objectives
Independence and Disclosure
Regulation
Conclusion
Biographical sketch of nominee
Alan Greenspan, of New York, to be Chairman of the Board of Governors
of the Federal Reserve System [Reappointment]
Biographical sketch of nominee

10
61
11
74
74
74
76
76
76
77
15
89

WITNESS
Ralph Nader
Prepared statement
Claims of Independence
Secrecy
Where's the Press? Where are the William Grieders?
No Money Worries at the Fed
Consumer Issues
Dissent—Is it Allowed on the Greenspan Board?
Conclusion




(III)

45
101
102
103
104
104
105
106
106

IV
Page
ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Chart on Real Economic Growth submitted by Senator Paul S. Sarbanes
Letter including enclosure from Alan Greenspan to James Bothwell dated
April 11, 1996 regarding Draft Report of the GAO
Report entitled Waste and Abuse in the Federal Reserve's Payment System
prepared by Democratic staff of the Committee on Banking and Financial
Services dated January 5, 1996
Reprinted Atlantic Monthly article, "If The Economy Is Up, Why Is America
Down?" submitted by Ralph Nader




108
109
123
166

NOMINATIONS OF:
ALAN GREENSPAN TO BE CHAIRMAN
OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
[REAPPOINTMENT]
ALICE M. RIVLIN TO BE A GOVERNOR
AND SERVE AS VICE CHAIRMAN OF THE
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
LAURENCE H. MEYER TO BE A GOVERNOR
OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
T U E S D A Y , M A R C H 26,

1996

U . S . SENATE,
COMMITTEE ON BANKING, HOUSING, AND U R B A N AFFAIRS,

Washington, DC.
The Committee met, pursuant to notice, at 11:10 a.m., in room
538 of the Dirksen Senate Office Building, Senator Alfonse M.
D'Amato (Chairman of the Committee) presiding.
O P E N I N G S T A T E M E N T O F C H A I R M A N A L F O N S E M. D'AMATO

The CHAIRMAN. Good morning.
The Committee is privileged today to have three very distinguished nominees for the Board of Governors of the Federal Reserve System.
The Committee will consider the nominations of: Alan Greenspan, renominated to serve a third term as Chairman of the Federal Reserve; Alice Rivlin and Laurence Meyer, both to be Fed Governors. Dr. Rivlin is also nominated to serve as the Vice Chairperson.
Chairman Greenspan will be joining us at the conclusion of the
Federal Open Market Committee meeting, and we believe that will
be about 12 o'clock. If confirmed, at the conclusion of his term, he
will have served as Chairman for over a decade. His wisdom and
experience have helped to avert several global financial crises. In




(l)

2
fact, Alan Greenspan is properly known as the world's preeminent
central banker. With this impressive track record, President Clinton's renomination of Chairman Greenspan is well deserved.
Dr. Alice Rivlin, the President's nominee for Vice Chairmanship,
became the Director of the President's Office of Management and
Budget in October 1994 after having served as OMB's Deputy Director for over a year. Dr. Rivlin has shown her willingness to focus
on to\igh choices in the context of deficit reduction amidst sometimes very strong political pressure, to say the least. Dr. Rivlin is
perhaps best known as the first Director of the Congressional
Budget Office, serving from 1975 to 1983.
Our final nominee, Dr. Laurence Meyer, is well known to the
business and economic community for his award-winning work in
macroeconomic forecasting and policy analysis. Dr. Meyer is President of Laurence H. Meyer and Associates, a highly regarded macroeconomic consulting firm in St. Louis, MO. His firm's impressive
list of clients includes key agencies of the U.S. Government, major
trade associations, and private corporations.
The Committee anticipates acting expeditiously on these nominees in order to ensure full representation at the Board of Governors of the Federal Reserve. We look forward to hearing their remarks and thoughtful discussions of the important economic issues
facing this country.
Senator Sarbanes.
O P E N I N G S T A T E M E N T O F S E N A T O R P A U L S. S A R B A N E S

Senator S A R B A N E S . Mr. Chairman, thank you very much. I am
very pleased to welcome Dr. Alice Rivlin and Larry Meyer before
the Committee.
Let me just say a few words about Alice Rivlin, whom I've known
for quite some time. I think extremely highly of this nomination.
Alice Rivlin has had a very distinguished career. She, of course,
was an honor graduate of Bryn Mawr College, has a Ph.D. from
RadclifF and was for many years at the Brookings Institution where
she at one point was the Director of the Economic Studies Program. She participated in that program for a number of years. She
served in the Department of Health, Education, and Welfare as an
Assistant Secretary for planning in the late 1960's.
In 1975, as we all know, she became the first Director of the
Congressional Budget Office and served there until 1983, in other
words, for 8 years. During that period, I think largely due to her
very skillful and strong leadership, the CBO developed a reputation for., independent professional analysis of controversial issues
that stays with it even today. That's no small achievement, to take
a new institution and to build to that high standard in that period
of time.
Subsequently she was a McArthur Foundation Prize Fellow, a
high distinguished award, and of course she came back into Government in 1993 as a Deputy Director of the Office of Management
and Budget, and then became the Director of the Office of Management and Budget in October 1994, a position she presently holds.
Both her record at CBO and at OMB have been exemplary. At
OMB, of course, she developed policies that I think contributed significantly to the effective performance of the economy. She has




3
maintained the highest standards there as she did at CBO and I
think both are a very significant achievement.
She is a frequent author, as we know, of magazines, journals,
and books. But I think most importantly she brings expertise and
experience to the Federal Reserve and a wide range of public policy
positions. Her peers among professional economists have recognized her exceptional talents over the years, in fact choosing her
as President of the American Economic Association. I'm convinced
that the Federal Reserve and the Nation will benefit from her
skills as an economist, as a policy analyst, and as an institutional
builder, and I really commend the President for this nomination,
and of course recommend her very strongly to my colleagues.
Let me just say a word about Larry Meyer, whom I don't know
as well personally, but who has an extraordinary reputation within
the economics profession and is considered as perhaps our Nation's
most preeminent economic forecaster.
He is a graduate of Yale and then got a Ph.D. from MIT. He has
been at Washington University in St. Louis now for a number of
years, I think since the early 1970's, if I'm not mistaken. He heads
up his own economic forecasting firm which has won the Blue Chip
Economic Forecast Award for the most accurate forecasts both in
1993 and in 1995. I gather he didn't get it in 1994 because they
don't give it 2 years in a row, or otherwise I think he would have
had it then as well.
So he is going to be a very important and significant addition to
the Federal Reserve Board, and I'm pleased to welcome him before
the Committee.
Thank you.
The C H A I R M A N . I'm going to recognize Senator Bond for the purpose of introducing one of the nominees.
O P E N I N G S T A T E M E N T O F S E N A T O R C H R I S T O P H E R S. B O N D

Senator B O N D . Thank you very much, Mr. Chairman.
I do apologize to the witnesses and my colleagues. I have another
commitment that I am going to have to make this morning, but I
do want to join you in welcoming Dr. Meyer and Dr. Rivlin. We are
very honored to have two such highly qualified individuals with us
today.
I am particularly pleased, Mr. Chairman, to introduce a fellow
Missourian, Dr. Laurence Meyer for nomination to the Federal Reserve Board of Governors. With more than 27 years of experience
in academics, consulting and economic forecasting, Dr. Meyer has
long been a leading figure in national economic forecasting and development, and I believe that his background in the public, private,
and academic centers make him uniquely qualified for this position
on the Federal Reserve Board.
In my home State of Missouri, Dr. Meyer has played a key role
in the development and expansion of the Economics Department of
Washington University. As former department chairman and a university professor, Dr. Meyer has been recognized repeatedly for his
academic achievements by students and faculty alike.
Fellow economists similarly appreciate his expertise having twice
granted him the prestigious Annual Forecast Award for being the




4
most accurate forecaster on the panel for the Blue Chip Economic
Indicators.
As an adviser to each of the last three Presidents, Dr. Meyer has
demonstrated an ability that is unique in Washington, the capacity
to rise above partisan politics. Even today Dr. Meyer counts among
his clients the President's Council of Economic Advisers, the Office
of OMB, and the Departments of Treasury and Commerce.
To balance this perspective I might tell my colleagues here that
Dr. Meyer also advises our House colleague and Budget Committee
Chairman, John Kasich on budget-related issues. I do not know
whether that should have been on the public record, but Fm willing
to take a chance on that.
The CHAIRMAN. DO you think the President was aware of this?
[Laughter.]
Senator B O N D . If you won't tell him, Mr. Chairman, I won't.
Finally, Dr. Meyer also represents the entrepreneurial spirit in
all Americans. Almost 15 years ago this university professor and
two former students invented the first macroeconomic model that
could be programmed into a personal computer. Today his business
sells models and forecasts to major corporations and governmental
agencies across the Nation and, as we have heard previously, the
thing must work because he has been remarkably successful in his
forecasts.
I have also heard from his colleagues at Washington University
with whom he has had spirited political discussions that while they
feel that he may be wrong-headed occasionally in political choices,
that his economic credentials are very solid and they give him the
strongest recommendations on the basis of qualifications.
In conclusion, Mr. Chairman, I think that Dr. Meyer's unique experience in the public, private, and academic areas will prove invaluable as we move into the 21st century.
Mr. Chairman, I am pleased to endorse the nomination of Alice
Rivlin to be Vice Chairman. As the Director of OMB she demonstrated the requisite leadership abilities and the economic acumen necessary to lead our country in the next century. I think her
extensive Federal Government experience with strong academic
qualifications and private sector expertise will be valuable in her
new role, and I would strongly support her nomination.
Finally, though he has not yet joined us this morning, I want to
offer my wholehearted endorsement for Chairman Greenspan for
his third term as Chairman. Under his adept leadership, the U.S.
economy has achieved an unprecedented level of economic stability.
As an ardent apostle of free markets Chairman Greenspan also understands the curious world of Washington politics. These unique
qualities together with his understanding of economic theory make
Chairman Greenspan uniquely qualified for a third term as Federal
Reserve Board Chairman.
Thank you, Mr. Chairman, and I thank my colleagues.
The CHAIRMAN. Thank you, Senator.
Senator Domenici for the purposes of an introduction.
O P E N I N G S T A T E M E N T O F S E N A T O R P E T E V. D O M E N I C I

Senator DOMENICI. Thank you very much, Mr. Chairman and fellow Senators.




5
I think I could do best by Dr. Rivlin by being extremely brief because all of you are waiting around to do the questioning and do
our job as a Committee. When Dr. Rivlin called and asked me if
I would introduce her I didn't hesitate a minute. I said of course,
and I'm pleased to be here doing that.
I first met Dr. Rivlin when we were talking about creating the
Congressional Budget Office and getting it started. That is a long
time ago, 1975. I don't think there are very many examples, Mr.
Chairman, and fellow Senators, of a major institution created by
the Congress of the United States that has as one of its objectives
nonpartisan, nonpolitical evaluation of the facts, fiscal facts of the
Nation. That's what CBO was supposed to do.
I think it is fair to say that CBO has achieved that goal. We believe they are better and more fair and more reasonable and more
impartial than any other group doing economics for Government.
In fact to be honest, we choose CBO over the OMB which she now
heads. I regret to say that, but I believe we do. I think a lot of that
is because she was a great leader and could understand the importance of giving Congress impartial, valid information about the
budget of our country and the problems with programs.
She has been an unabashed fighter for deficit reduction. She has
been unabashed about calling it like it is. She has not always been
successful in getting it done, but she has called to our attention
that entitlements must be curtailed or sooner or later the American
Government will have no money to spend anywhere else.
She has a great economic background, and economists think she
is a very good economist. She has been the president of their organization nationally, and you can't ask for much more.
Then she has great ideas. She wrote a book before she took this
job, and while she didn't agree with the Republican way of changing Federal Government and sending it down to local government,
she talked about saving America and saving the dream by
refocusing where Government should be with a lot more emphasis
on local governments doing certain things and the Federal Government doing less but doing them better.
That does not mean she is only for change. She understands in
a capitalist economy there are some rather perpetual ingredients,
and I am confident that on this Federal Reserve Board as a collegial member she will do everything she can to maintain a strong
economy and at the same time to keep inflation under control, and
I wholeheartedly recommend her and thank her for asking me to
introduce her.
Thank you, Mr. Chairman.
The C H A I R M A N . Thank you, Senator.
Senator Gramm.
OPENING STATEMENT OF SENATOR PHIL

GRAMM

Senator G R A M M . Mr. Chairman, let me say that I think in the
past some may have challenged the President's nominees for various positions. I have voted against relatively few feeling that within board limits the President has the right to appoint his own people and that elections have consequences.
But I would say in the three nominees that are before us today
that the President has certainly strengthened his record. These are




6
all people that deserve to be confirmed. There is nothing controversial about any one of them. Each and every one is totally qualified
for the position that they've been appointed. In an era when we
often don't have very much good to say about the President for a
very good reason, there is not very much good to say about the
President, I think it is important to note that these are three excellent nominees. I intend to vote for all of them, and I think the
President has shown good judgment in their nominations.
The CHAIRMAN. Thank you, Senator.
Senator Shelby.
O P E N I N G S T A T E M E N T O F S E N A T O R R I C H A R D C. S H E L B Y

Senator S H E L B Y . Thank you. Mr. Chairman, I ask that my written statement be made part of the record in its entirety.
The CHAIRMAN. SO ordered.
Senator S H E L B Y . I will be brief. I join with the others in welcoming you to the Banking Committee, both of you, and a little later
on the Chairman, Mr. Greenspan. I believe that the President has
shown a lot of wisdom in nominating Alan Greenspan again, you,
Dr. Rivlin, and also Dr. Meyer. I look forward to hearing from you.
There are going to be a lot of questions here. We want to get into,
Dr. Meyer, some of your economic forecasting and see where we are
going.
Thank you.
The CHAIRMAN. Senator Mack.
O P E N I N G S T A T E M E N T O F S E N A T O R R O B E R T F. B E N N E T T

Senator B E N N E T T . Thank you, Mr. Chairman. I simply join in—
oh, I'm sorry.
The CHAIRMAN. Well, Senator Bennett, since you've started why
don't you go ahead?
Senator B E N N E T T . I guess I have Faircloth's disease. I heard
Bennett instead of Mack. I had better get my ears cleaned out. I
apologize.
[Laughter.]
Senator M A C K . GO ahead.
The CHAIRMAN. Senator, why don't you continue?
Senator B E N N E T T . Well, there's really nothing to continue other
than I'm joining with my colleagues in welcoming these three nominees and signaling my intent to vote in favor of them, and I yield
to Senator Mack.
The CHAIRMAN. Senator Mack.
OPENING STATEMENT OF SENATOR CONNIE MACK

Senator M A C K . Thank you, Mr. Chairman, and thank you, Senator Bennett.
I, too, want to welcome both nominees and Chairman Greenspan
when he arrives. I support the comments that have been made
here this morning. Certainly I intend to support the nominees for
this position. I do have a few comments I would like to make at
this point.
In my opinion, the Federal Reserve has an important role to play
in our economy, and I am confident that the nominees coming in
front of this Committee today will take that role seriously. I gather




7
that not only from their personal backgrounds, but appreciated the
opportunity to talk with both of you when you came by my office
over the last few days.
The Federal Reserve can only accomplish one long-term objective,
protecting the value of our money. The Federal Reserve has the
power to do a great deal of damage, however, and if the Fed adds
too much money to the economy inflation is the result and our currency falls in value.
In the late 1970,s when monetary authorities attempted to boost
growth, my constituents in Florida, and I know everyone throughout the country, saw one third of their savings eroded by inflation
in 3 years.
To add just another perspective to that, one of the things special
about the State of Florida is we have a tremendous number of retirees who worked and saved their entire lives setting aside resources for their retirement years. Think about the shock that it
must have been to them in the late 1970's and early 1980's—as
they saw one third of everything they had worked for their entire
lives to save and set aside, once they could no longer work. One
third of it was gone in 3 years, and I don't think that should happen again.
In recent years the Federal Reserve has managed its duties well.
Under Chairman Greenspan, who was appointed in August 1987,
the price of gold was $461 per ounce, and 30-year Treasury bond
yields were almost 9 percent. Today gold prices are down to around
$400 an ounce, and 30-year Treasuries are near 6.5 percent. In my
view the reason gold prices and bond yields are down is because
inflationary expectations are down. For the past 5 years a well-conducted monetary policy has kept inflation below 3 percent. This is
an extraordinary record given our experience during the two decades before then.
The numbers speak for themselves, and many Americans have
benefited. With mortgage rates down many people have purchased
their first home and even more have refinanced at lower rates. Low
inflation has boosted the value of pension funds and retirement assets. Americans are benefiting from a Federal Reserve concerned
about inflation. This record must stay intact.
Nonetheless in recent months with signs of weakness in the
economy it has become commonplace to blame the Federal Reserve
for slow growth. The President and other critics of the Federal Reserve Board refuse to look at the impact of fiscal policy on economic
growth. Increases in taxes, regulation in Government burdens during President Clinton's Administration have slowed the potential
growth in the economy.
Let's set the facts straight on growth. I will stand second to no
one in my support of policies which enhance economic growth. Economic growth does not come from appointing easy money advocates
to the Fed. If it did, counterfeiting would be legal. Real growth
comes from entrepreneurial activities, savings, and investment.
The way to increase these activities is to free the economy from the
handcuffs of Government. We must cut taxes, reduce spending, and
slash regulation.
For these reasons I've introduced the Economic Growth and Price
Stability Act. This bill is designed to minimize inflation and there-




8
by maximize economic growth. The Federal Reserve can best maximize economic growth by keeping prices stable. Any attempt to use
the Federal Reserve to boost growth always results in higher interest rates, more inflation, less employment, and slower growth over
the long run.
I hope all the nominees understand this, and I'm looking forward
to their testimony.
Thank you, Mr. Chairman.
The C H A I R M A N . Senator Faircloth.
OPENING STATEMENT OF SENATOR LAUCH

FAIRCLOTH

Senator F A I R C L O T H . Thank you, Mr. Chairman.
I am very pleased to be here and I am in strong support of Mr.
Greenspan's reappointment as Chairman of the Federal Reserve
Board. Although he won't be here until 12, let me just say this
about his tenure.
The Fed has been marked by an enormous stability in our economy. Since 1991 inflation has not been above 3 percent. Since he
was first appointed in 1987 only once has inflation exceeded 5 percent. That is a record of reliability, and it is one the American people have greatly benefited from.
I want to say to the other two nominees, Ms. Rivlin and Mr.
Meyer, while I am prepared very much to support your nominations, that I hope you will follow the lead of Mr. Greenspan. The
Congress can appropriate money, but the Federal Reserve has the
power to create money, and this is an awful responsibility and we
should never take it lightly. Further, it seems that that is the line
of demarcation that separates our economy from other nations such
as Mexico, the fact that we have a strong independent Central
Bank not subject to the short-term political needs and whims, and
I hope that we will forever keep it that way.
Finally, some in the Congress have suggested that the Federal
Reserve should be an engine of growth, that the Fed can stimulate
growth without risking inflation, but that is not the issue. If anybody can stimulate growth, it's the Congress. We need to regulate
less, we need to stop borrowing $850 million a day that we don't
have, we simplify the Tax Code, and these are the things we need
to be doing to stimulate real growth and basic growth.
With that, Mr. Chairman, let me wish Ms. Rivlin and Mr. Meyer
well in their soon-to-be new positions.
The C H A I R M A N . Thank you, Senator.
Senator Boxer.
OPENING STATEMENT OF SENATOR BARBARA

BOXER

Senator B O X E R . Thanks, Mr. Chairman.
Congratulations to both of you and to President Clinton who has
made three very solid nominations here, and I feel very good about
your prospects from what I've heard from my colleagues.
I want to agree with Senator Mack that inflation is key, that the
rate of inflation is key to economic prosperity and we must always
keep our eye on that, but I certainly want to say that equally important to this particular Senator is the rate of growth and the
ability of our people to feel confident in their future. You know, I'm
one of these people who thinks that in this case when you have




9
such talented people at the Fed you can look at both, you can walk
that fine line, and you can walk and chew gum at the same time,
if you will.
I think we are picking people and selecting people who don't
need to be told by U.S. Senators how to do that. I have faith in
Mr. Greenspan, and I have faith in you. Frankly, I think it is
healthy if people come to the table with slightly different viewpoints, and I certainly think we don't want to have one person dictate a policy, be it one of you two or the Chairman.
I think it's important that these things be discussed, and just to
put it on the table I think it has now become very fashionable for
politicians to talk about anxiety in the workplace, and we are hearing it from Republican candidates for President, we are hearing it
from Democratic candidates for President, and we are hearing it
from very mainstream candidates in both parties. I for one am glad
because there are things that lead to insecurity and I don't think
that they're all that removed from what you do because what you
do will have a definite impact as to whether the economy expands
jobs or contracts jobs. That is a very difficult choice that you are
going to be faced with, but I hope you will in fact keep both of
those goals always—always in your mind.
Right now we are in a situation where we are in a global marketplace and there are different factors. When I went to school and
majored in economics it was a different world. The kids I hung
around with their dads got gold watches. They were going to get
the gold watches after 30 years at a job. It was a very secure kind
of world. It's a global marketplace and it's different, as the President has said many times. We are facing competition from other
countries that have cheap labor.
We don't have guaranteed health care in this country, and I hope
we're going to fix some of that in a bipartisan effort to allow people
to take health care with them. There are raids on pensions, and I
hope we can protect those pensions, and there is a need for constant worker retraining. All those things are not going to be in
your domain, but economic growth I think is in your domain.
So I just would say perhaps as a counterbalance, surprise, surprise, that I think both of these factors, keeping inflation low, and
we all know what happens to other countries when inflation rates
get out of control, and it has happened in this country, and I lived
through it. Senator Mack is right, it is a terrible tax on our people.
Inflation is a terrible tax, and particularly on those who are retired. It is a horror story. But that does not mean we have to close
our eyes to the rest of the economy. We have to look at it all. So
that is my message.
I wish you every good wish, and thank you very much.
The C H A I R M A N . Thank you, Senator.
Senator Murray.
OPENING STATEMENT OF SENATOR PATTY

MURRAY

Senator M U R R A Y . Mr. Chairman, I will pass on an opening statement, and just let me join my colleagues in welcoming both of you
and I look forward to supporting your nominations through this
process.




10
I would just say one thing and remind you when you are sitting
on that Board and looking at interest rates that it does affect every
one of our constituents, and although they feel very disconnected
from a lot of what happens here, certainly interest rates have a tremendous impact on their personal lives.
I appreciate both of you for your willingness to go through this
process and for being willing to serve.
Thank you.
The CHAIRMAN. Would you both please stand for the purposes of
the oath.
[Whereupon, Alice Mitchell Rivlin and Laurence Harvey Meyer
stood and were duly sworn by the Committee Chairman as follows:]
The CHAIRMAN. D O you swear or affirm that the testimony you
are about to give is the truth, the whole truth and nothing but the
truth, so help you God?
M s . RIVLIN. I d o .
M r . MEYER. I do.
The CHAIRMAN. D O

you agree to appear and testify before any
duly constituted Committee of the Senate?
M s . RIVLIN. I d o .
M r . MEYER. I do.
The CHAIRMAN. Thank

you very much.
Ms. Rivlin, we would be pleased to receive your statement.
O P E N I N G S T A T E M E N T O F A L I C E M. R I V L I N
OF PENNSYLVANIA, TO B E A GOVERNOR A N D SERVE AS
VICE CHAIRMAN OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM

Ms. RIVLIN. Thank you, Mr. Chairman.
I am pleased and honored that the President has nominated me
to serve as Vice Chair and member of the Board of Governors of
the Federal Reserve System. Presuming that the Committee and
the rest of the Senate approve my nomination, I look forward to
serving in those important posts.
This is, indeed, a particularly challenging time to help set the
Nation's monetary and banking policy. The American economy is
changing rapidly and becoming increasingly interlinked with the
rest of the world. At the same time, the structure and technology
of banking and financial services industries—at home and abroad—
are making the transition to a future whose outlines are still far
from clear.
For most of my career as an economist, I have been primarily
concerned with fiscal policy, budget choices, and the management
of Federal spending programs. I have been a strong advocate of fiscal responsibility and of budget choices designed to enhance the
long-run growth of the American economy and a rising standard of
living for average Americans. Working on fiscal policy has made me
acutely aware of the importance of sensible, soundly-based monetary policy and of a strong banking system to the present and to
the future health of the American economy. I am delighted at the
prospect of shifting focus to policies under the aegis of the Federal
Reserve.
At the moment, the economy, at least at the aggregate level, is
performing extremely well. Unemployment is lower than many




11
economists would have thought possible without igniting inflation,
and yet inflation is not visibly accelerating.
The budget deficit has been cut in half in the last 3 years, and
there is good hope of reaching a balanced budget.
The challenge now, both for monetary and fiscal policy, is to keep
up the good work and find the continuing set of policies that will
enable the U.S. economy to attain maximum sustainable growth as
we move into the 21st century.
I have great respect for Chairman Alan Greenspan, whom I have
know for a great many years, and for other members of the Board
of Governors, and for my fellow nominee, Larry Meyer. I expect the
Board and the Open Market Committee to involve lively exchanges
of ideas, in which I will not hesitate to make my own views clear.
I look forward to a close working relationship with the Chairman
and other members of the Board, as well as frequent communication with this Committee and with other Committees of the Congress.
Mr. Chairman and Members of the Committee, I would be delighted to address your questions.
The CHAIRMAN. Thank you very much.
Mr. Meyer.
O P E N I N G STATEMENT OF L A U R E N C E H. M E Y E R
OF MISSOURI, TO BE A GOVERNOR OF THE B O A R D OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. MEYER. Thank you, Mr. Chairman and Members of the Committee. It is a pleasure for me to appear before you today as President Clinton's nominee to serve on the Board of Governors of the
Federal Reserve System.
I pledge, if confirmed, to work with the other members of the
Board to carry out the objectives that you, the Congress, have established for monetary policy and the responsibilities you have entrusted to the Federal Reserve with regard to protecting the safety
and soundness of the banking system, ensuring the efficiency and
integrity of the payments process, and enforcing fair lending laws
and other consumer legislation. These are wide-ranging and important responsibilities and I look forward to the opportunity to serve
the Nation in their pursuit.
Let me turn now directly to my views on the role of monetary
policy.
Economists usually identify three objectives as central to excellent macroeconomic performance. These objectives are price stability, full employment, and adequate growth. I want to address the
role of monetary policy in relation to each objective. I have chosen
an ordering of the objectives that reflects the degree of control and
therefore responsibility the Federal Reserve has over each. One of
the themes I want to develop is that you should never expect more
of a policy than it can deliver.
Price stability comes first because it is a singular goal for monetary policy in the long run. Macroeconomic theory tells us that, in
the long run, inflation is principally caused by money supply
growth which in turn is determined by the Federal Reserve System. When it comes to price stability, therefore, the buck literally
stops at the Federal Reserve.




12
The second goal, full employment, is the basis for the commitment in the Federal Reserve Act to "maximum employment." The
language of the Act leaves much to be desired from the standpoint
of precision. If we accept that "maximum employment" can be
translated into achieving and maintaining "full employment," then
"all" we have to do is to define full employment. The conventional
wisdom, which I fully endorse, holds that full employment is the
maximum level of employment that can be sustained without suffering increasing inflation.
This view implies that there is no long-run tradeoff between inflation and unemployment. Therefore, there is no conflict in the
long run between the objectives of price stability and full employment. While the Federal Reserve cannot fine-tune the economy, it
can and it should, in my judgment, make efforts to smooth out the
business cycle.
The third goal, adequate economic growth, has certainly gotten
its fair share of attention of late. As you know, the President has
focused considerable attention on this goal, and appropriately so, in
light of the disappointing rate of growth in real GDP on average
since the early 1970's and stagnation in real spendable income by
the median family over the past 20 years.
Before I present my views on the role of monetary policy with respect to growth, let me clarify this goal and distinguish it from that
of full employment. By growth, I mean the growth in the economy's
productive capacity: That is the rate of growth possible once the
economy achieves full employment. I will refer to this as "trend
growth." Trend growth is a result of growth in the labor force,
growth in the capital stock, and advance in knowledge.
The Federal Reserve cannot, itself, raise trend growth. Growth is
predominantly the outcome of private sector decisions related to
work effort, education, research and development, and saving and
investment. Yet public policy can make a difference. Without meaning to overstate the degree to which Congress can raise the economy's growth potential, decisions you make with respect to budget
deficits, public investments, regulation and tax reform will be the
ones that have the potential to make a difference.
What then is the role of the Federal Reserve with respect to
growth? I would term this role "accommodative" and stand with
Chairman Greenspan in his comments on this subject in his recent
Humphrey-Hawkins testimony. The Federal Reserve should support the full measure of growth that the economy's increase in productive capacity permits. Growth, as I have defined it here, does
not cause inflation. It is not a threat. It is the vehicle for higher
living standards that we all want to achieve.
I support the independence of the Federal Reserve System. History speaks clearly to the point that central bank independence is
a critical ingredient to ensuring a steady commitment to price stability.
WTiereas I have studied and written about monetary policy
throughout my entire career, I have invested less time and therefore been quiet about the regulatory side of the Federal Reserve's
responsibilities. I am now involved in a crash course in these areas.
These are important responsibilities.




13

I shall present here only a broad perspective on the fundamental
principles that will shape my views with respect to specific issues.
I believe strongly in the value of cost-benefit analysis in the development and implementation of Government regulation. Good intentions are a good start, but they are not an excuse for disregard for
the private sector costs of regulatory intervention.
But neither is concern about the cost of compliance an excuse for
failing to serve the public good through appropriate regulatory policies. Balance here, as in all such situations, is the rule of reason
and the rule I shall strictly apply in these matters if you confirm
my nomination.
I want to thank the Committee for the speed with which this
hearing has been scheduled. I shall be happy to answer any questions you may have.
The CHAIRMAN. Thank you.
Let me just pose one question to our nominees, and then I am
going to reserve the balance of my time for Chairman Greenspan.
One Federal Reserve Bank president recently called for private
auditors to be the main examination force of banks instead of Federal regulators. Another Bank president suggested that examiners
are not able to monitor the most sophisticated banks any more and
thus these banks should be unregulated but lose deposit insurance.
What is your view with respect to these two proposals?
Ms. RIVLIN. I haven't examined those particular proposals, Mr.
Chairman. I think they sound worthy of examination.
The CHAIRMAN. A good answer.
Ms. RIVLIN. The regulatory responsibilities for the banking system are very complicated, and I think it is a good moment to think
about whether this set of responsibilities can be simplified and
what role, if any, a private set of auditors might play.
The CHAIRMAN. Mr. Meyer, have you thought about the proposal
as it relates to the possibility of less regulation and changes in deposit insurance, because I have to tell you I think we ought to look
at this very clearly. The Federal Government is now providing insurance for some kinds of activities that I don't think we ever envisioned. Should we set that aside so that if the Government wants
to ensure a person's deposits maybe the bank holding the deposits
would be very restricted in using those deposits, perhaps restricted
to Federal instruments.
Mr. MEYER. Mr. Chairman, I have only seen newspaper accounts
of this. I have not seen the full text of the speech, and I have not
been briefed on any material related to it. As a new Governor, if
confirmed, all I can tell you is that I will keep an open mind and
I will be vigilant in looking at opportunities to reduce costs of compliance and otherwise, but I'm certainly not prepared to reach a
judgment on those issues right now.
The CHAIRMAN. My concern is whether there is a way to limit the
Federal taxpayers' possible liability and exposure; thereby providing a number of benefits. One benefit is to remove Congress and
regulators from what can be a tremendous burden and give some
kind of assurance to the small depositors that they will be protected, but by the same token not have the Government involved
directly or indirectly in other much riskier activities. That's something I think we're going to examine.




14
Senator Gramm.
Senator GRAMM. Mr. Chairman, if I could have your permission,
I would like to just defer my questions and comments until Alan
Greenspan arrives.
The CHAIRMAN. Certainly.
Senator Sarbanes.
Senator SARBANES. I yield to Senator Murray.
Senator MURRAY. Thank you, Mr. Chairman.
I will just ask a general question of both of you. It seems like
many economists have had a difficult time predicting the economy
over the last several years, and we hear that signs are good, and
we go out and we talk to our constituents and their economic insecurity is very real, despite what all of the facts and figures are that
are being given to them from Wall Street. Can both of you take a
minute and tell me how you see the economy performing throughout the rest of this year.
Ms. RIVLIN. Let me start. I do not have Larry's proven track
record as a forecaster, but I think most of the forecasting community right now is relatively optimistic about the rest of this year,
and I would not differ with that.
There was a moment early in the year when things looked as
though they were softening a bit, but February's numbers came
back very strong and the expectation is that for the rest of the year
the economy will be growing near its potential growth.
The mystery that you pose is a real one: Why an economy that
is doing so well at the aggregate level is not perceived to be doing
well by a lot of people. It's not entirely a mystery. Part of the problem clearly is that many people feel insecure in their jobs, either
because they have been laid off, or because they know somebody
who has been laid off, or because they read about somebody who
has been laid off, despite the fact that we have relatively high employment and a very low unemployment rate. The other source of
insecurity is the very slow growth of wages especially at the bottom
end of the scale. People are worried with good experience that they
will not be able to make it even if they have a job and work hard.
So these are serious sources of insecurity.
Mr. MEYER. Let me make a few comments on those issues. After
a period of about five quarters of quite slow growth, a little bit
below IV2 percent, the economy recently has shown signs of firming. We're seeing a little more resiliency in demand in some of the
data, and we now also see that the inventory correction that has
been weighing on this economy for most of the last year seems to
have run its course. I think prospects are excellent that the economy is going to improve in the quarters ahead and grow near trend
over this year.
So we have a situation where we are going to grow near trend
at very modest and stable inflation with quite a low unemployment
rate. The aggregate numbers, therefore, paint a very, very good picture of the economy, and yet, Senator, I think you are exactly right.
I am sure if you talk to your constituents they don't have the same
bright feeling. I think there are two things going on here. One is
that, on average, this trend rate that we can achieve now is really
quite modest, less than half as rapid as it was in the 1960's, for
example. So the best we can do right now is a very modest growth




15
on average. Second, we have seen increasing income inequality.
The combination of these two events is that people in the middle,
the median family, has really had a sense of struggle. Their real
incomes are not going up consistently. This also means that many
of the people at the bottom end of the income distribution are seeing their real incomes decline. So I think the aggregate numbers
have to be understood in the context of these other developments
as well, and it's a challenge certainly for public policy.
Senator MURRAY. Thank you, Mr. Chairman.
The CHAIRMAN. I understand that Chairman Greenspan is here.
I am going to take this opportunity to swear in the Chairman and
then we will get his remarks.
Chairman Greenspan, we are glad you could be with us.
[Whereupon, Alan Greenspan stood and was duly sworn by the
Committee Chairman as follows:]
The CHAIRMAN. DO you swear or affirm that the testimony you
are about to give is the truth, the whole truth and nothing but the
truth, so help you God?
Chairman G R E E N S P A N . I do.
The CHAIRMAN. DO you agree to appear and testify before any
duly constituted Committee of the Senate?
Chairman G R E E N S P A N . I do.
The CHAIRMAN. Welcome, Mr. Chairman. I understand you have
just come from a little meeting. Do you have any announcement
that you would like to share with us?
[Laughter.]
Just between us and we won't let anyone else know.
Chairman G R E E N S P A N . Can we do it off the record?
The CHAIRMAN. We can even take it off the record.
[Laughter.]
Mr. Chairman, we would be pleased to receive your statement.
OPENING STATEMENT OF ALAN GREENSPAN
OF NEW YORK, TO B E CHAIRMAN OF T H E B O A R D
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[REAPPOINTMENT]

Chairman G R E E N S P A N . Thank you very much, Mr. Chairman and
Members of the Committee.
I would like to begin by first expressing my appreciation to President Clinton for nominating me for another term as Chairman of
the Board of Governors of the Federal Reserve System. I am honored at the confidence he has shown in me and pledge to him, to
you, and to the American people that if I am confirmed I will continue to do my best to merit that confidence.
I also want to thank you, Mr. Chairman, for scheduling this
hearing so expeditiously. I like to think that I have had a good,
productive relationship with this Committee and the Congress during my tenure at the Federal Reserve. If you and the Senate chose
to confirm my nomination, I intend to continue to work closely with
you and your colleagues in both Houses on the many issues confronting our financial system and our economy.
As you know, I have come before you frequently to discuss a variety of specific issues related to the conduct of monetary policy and
to banking and financial markets. I thought it appropriate on this




16
occasion to step back from day-to-day concerns and take a bit of a
longer view of the forces, especially the evidently more rapid pace
of technological change and innovation, that will affect how the
Federal Reserve carries out its legislative mandates over the years
ahead.
Last month, my testimony was concentrated on the impact of
these forces on the economy. Today, I want to address their effects
on the Federal Reserve in three main areas of responsibility—supervision and regulation of banks, stewardship of the payments
system, and monetary policy.
The way we supervise financial institutions is an area in which
technology is both creating problems and simultaneously giving us
and the institutions we supervise the tools to solve them. New instruments and changing business practices have made obsolete in
many respects our previous emphasis on balance sheets in examinations. A generation ago, a month-old balance sheet was fairly indicative of the current state of an institution. Today, owing to the
proliferation of transactions, a day-old balance sheet can be obsolete. Moreover, much of what is important for the health of an institution never finds its way onto the balance sheet, except ultimately through its bottom-line effect on capital. Accordingly, banks
and other intermediaries are relying increasingly on statistical
models to measure and manage risk. By monitoring these models
and by using them to test for vulnerabilities, the Federal Reserve
can leverage off of this trend to enhance our own capabilities to ensure a safe and sound banking system.
Ultimately, the smooth functioning of our financial markets and
economy rests on the payments system. Congress recognized this
when it created the Federal Reserve, making improvements to the
payments system one of our preeminent tasks in 1913. We haven't
lost sight of that objective, but it has been complicated by the speed
and volume of transactions within the United States and between
the United States and other countries. Because large shocks can be
transmitted rapidly around the world, a breakdown in the payments system anywhere can have adverse effects on the United
States.
Here again, technology is being harnessed to reduce the risk of
a breakdown, especially by shortening the time that passes between when a transaction is initiated and when it is settled.
Events occurring in that period that prevent the completion of the
transaction can threaten the stability of the financial system. We
have been able to reduce the interval between initiating and finalizing many types of securities transactions, and I expect that reducing it further will be a high priority in years to come.
Ideally we seek a system in which a transaction would be settled
when it was initiated. Facilities to do that, however, are costly.
Sometimes it is better to accept a minor system risk owing to float,
than to invest in resources required to eliminate it. Fortunately,
technology is rapidly reducing costs, perhaps enabling the real
world to approach more closely the ideal.
We in the United States have a special responsibility, since the
dollar is the world's leading currency, and a breakdown in dollar
payments would have repercussions far beyond our borders as well
as at home. Maintaining the key role of the dollar is important to




17
American growth and standards of living. Because foreigners want
to invest in dollar securities, our markets are more liquid and our
interest rates are lower than they would otherwise be. Because foreigners are willing to hold vast amounts of U.S. currency, the interest costs of funding the U.S. Government debt is reduced as a consequence by $10 to $15 billion yearly.
A sound payments system is only one of our responsibilities as
the central bank for the world's leading currency. Just as essential
is a sound currency—one whose value is not eroding significantly
or erratically. But price stability is not an objective you have given
monetary policy just to satisfy international investors. Rather, the
fundamental reason for this goal is that its fulfillment is an essential element in enabling the economy to reach its full potential.
A challenge we at the Federal Reserve face, as we have discussed
on a number of occasions, is to assess how innovation and technical
change are affecting the workings of the economy and its response
to monetary policy actions. Indeed, technological change has begun
to be felt at the very beginning of the policy implementation process, enabling depositories to avoid holding noninterest-earning required reserves and shrinking the reserve base through which we
work; we are looking at how we may have to adapt to this development.
Change always presents problems. Nonetheless, I look forward to
the opportunity, if you confirm my nomination, to continue to work
with you, the President, and my colleagues at the Federal Reserve
to help the American people realize the full benefits our innovative
and entrepreneurial spirit can bestow.
Thank you, Mr. Chairman. I, along with my colleagues, are open
for questions.
The CHAIRMAN. Thank you, Mr. Chairman.
I am going to ask that we restrict ourselves as closely as possible
to the time allocated, and that will be 5 minutes for each questioner. We have so many Senators here and I know they all have
questions, so we'll keep a strict time limit.
Chairman Greenspan, a recent draft GAO study on Federal Reserve operations was publicly released yesterday. In that study the
GAO recommends, and I note that it is a draft, that Congress consider legislation requiring the Fed to impose bank examination
fees. Do you agree with that GAO recommendation?
Chairman GREENSPAN. Mr. Chairman, as it stands solely by itself I do not, and the reason I do not is at the moment on average
the State member banks pay approximately half of the fee of what
national banks charge. The recommendation is to make those
equal. If the value of the State charter and the national charter
were the same I would subscribe to that, but from what I can judge
there are significant benefits that the national charters have which
the States charters do not have, and the differential price, so to
speak, in my judgment is quite appropriate. If it were otherwise I
would have expected a very major shift toward State member bank
charters, and more exactly State charters relative to national charters and, as you know, Mr. Chairman that has not happened.
The CHAIRMAN. Well, I think the Congress has been strongly in
opposition to that. I can tell you that I share your feeling and I




18
would be in opposition. I was surprised to see that the GAO would
make that kind of a recommendation to be quite candid with you.
Let me say to you there have been a number of critics that allege, and you've heard this, that you have been too cautious in your
stance against inflation and that has caused the economy to slow
beyond what is necessary to maintain stable prices. What economic
and business factors can you point to to refute these critics?
Chairman GREENSPAN. The simplest, Mr. Chairman, is to indicate that the economy seems at this particular stage in recent
years to be running at a reasonably good clip, and indeed judging
from the state of the labor market clearly unemployment has been
lower than it has been at any time in the recent past.
When we observed an acceleration of economic activity taking
place in 1994 we immediately saw all of the symptoms that one
historically has seen when significant disruptions of an inflationary
nature were emerging. This does not necessarily mean that prices
accelerate. It means that the underlying disruption began, indeed
we saw that the lead times on the deliveries of materials in early
1994 began to rise significantly implying problems on the part of
production and distribution, we saw overtime rise significantly, and
we saw pressures on commodity prices. All are indicative of the fact
that the economy was under strain.
If it was under strain at that point and as late as the latter part
of 1994, it's really quite nonconceivable, if I may put it that way,
that we have somehow opened up a very large gap in the difference
between where the economy is running and where potential is.
However, as I said at the meeting that we had here a month or
so again, we nonetheless do not guide monetary policy by trying to
determine what we think abstractly the growth rate, however
measured, is. What we respond to is not that. We respond to the
symptoms of disruption which, in our judgment, have almost invariably historically created the types of imbalances which, for example, in the case of 1994 would have caused a huge increase in
inventory investment, excess inventories with a very strong economy for a short period of time, and a very classic major inventory
recession sometime perhaps in the latter part of last year.
I think that we have succeeded by the actions we have taken to
cut the top off that particular expansion and hopefully have induced a degree of balance and stability in the system which will
keep the economy on track for at least the period ahead as best we
can see.
The CHAIRMAN. Let me return to another area. We just received
a draft report, and again I note that it's a draft report, of the GAO
with respect to the Federal Reserve. I would have hoped if that was
going to be released it should have certainly been made available
to the Committee prior to late in the day yesterday. That certainly
seems to me not to have been the way to operate.
Second, there is some question in my mind as to a draft report
being released and this Committee and yourself getting simply 1
day to review. I don't know how much time you have had, but have
you had any opportunity to review that report, and if you have had
an opportunity, what is your response, if any, to a number of the
aspects that the report raises?




19
Chairman GREENSPAN. I have only had a chance to glance
through it, but enough to come to certain fairly significant judgments.
Mr. Chairman, in the private sector I was the director of a number of very major corporations of this country. I served on the audit
committees of a number of them, and as a consultant I had a great
deal to do with the running of those organizations. My experience
with the Federal Reserve in a little over 8 years has led me to conclude that this is an extraordinarily well run organization. The
types of analyses which I picked up out of the GAO report—I don't
want to state that it is just wrong; it has a number of useful
things, and indeed I commend them for some of their insights—
nonetheless, the general thrust of the report that somehow the
Federal Reserve has been profligate in the use of taxpayer funds
I find wholly contrary to the facts.
First, we have had, as you know, and this Committee certainly
knows, a very major increase in the mandate that the Federal Reserve has had. We have had FIRREA, FDICIA, and a significant
increase in our international supervisory requirements. This has
created a very substantial increase in the amount of work that we
have had to engage in.
The result of this has been a significant increase in costs, less
than, I might add, the cost increases of the Office of the Comptroller of the Currency or the FDIC who have a higher concentration
in their organizations of the type of work that these two major
pieces of legislation required, but nonetheless we did run up costs
at a faster pace than we have in the past. However, when you
match it against nondefense Federal discretionary spending, we
have actually come in under the general level of the Government.
In the report it talks about the fact that we had three times the
increase of total Federal discretionary expenditures. Of course, that
includes the most important discretionary expenditure, the Defense
Department, which has gone down very critically.
It also mentions that our employment has gone up 4 percent
from 1988 to 1994 and the discretionary part of the total Federal
Government has gone down. Now the trouble with that statistic is
while it is true that in the nondefense part of employment there
have been modest decreases, and I must admit I compliment the
President for accomplishing what he has been doing in that area,
but the major part of the decline in employment in the civilian area
is civilian defense workers, and to compare what the Federal Reserve is doing, whose mandate is expanding very dramatically,
with something which relates to what is involved in the Defense
Department, which is going in the other direction, is clearly inappropriate.
My judgment looking at the individual items is that they are
measured against the wrong base. I find it really quite extraordinary that our expenditure increases, granted the change in the
legislation, have not been very substantially more than we in fact
have created, and the reason for that is we are very cognizant of
the fact that we operate with unappropriated funds and that we
basically have no oversight except the marketplace where our
priced services activities, which comprise a large percentage of our
outlays, are affected.




20
Nonetheless, unless we are extremely scrupulous in our budget
activities there is nobody beyond us to protect the taxpayer. As a
consequence of that, certainly since I have been there, and from
what I can judge of my predecessors as well, we have been extraordinarily concerned about what our budgets look like. I have been,
and I have worked very hard to restrain the budget, as all of my
colleagues have, and I think we have been exceptionally successful
in doing that. Aside from a few of the areas which may or may not
be accurate appraisals in individual areas in some of our expenses,
I have not been able to make judgments on them.
Most of what they conclude, I might add—for example, the Dallas Bank Building, which I must say to you I thought was an exceptionally successful project, I read what this report says and I
must tell you I do not recognize the process which I was very closely involved in.
So all I can say to you is that the GAO report is a draft. My impression is that were we to have been observing the final report
after we could have addressed some of the elements within it,
knowing Chuck Bowsher and his colleagues fairly well and having
the highest respect for their capability, there is no doubt in my
mind that the tone of this report would have turned out differently.
The CHAIRMAN. We will look forward to that because I think that
the Federal Reserve should have the opportunity to have the consultation process, which is normal, with the GAO before unfortunately the report was released in this manner. We could have gotten a better and more complete picture as you have attempted to
provide in setting the record straight. So, we thank you.
Senator SARBANES. I'll yield to Senator Kerry.
The CHAIRMAN. Senator Kerry.
O P E N I N G S T A T E M E N T OF S E N A T O R J O H N F. K E R R Y

Senator KERRY. Thank you very much, Senator Sarbanes, Mr.
Chairman.
Mr. Chairman, welcome. I know that you have appropriately received considerable praise and accolades, and I would just like to
say that I think your handling of the credit crisis and the bank failures was frankly masterful and extraordinarily important for the
country. You did what a great many Members of Congress were unwilling to do and found a means of creating sort of a long-term resuscitation program that has had a major effect.
We are in good shape, and I would like to ask you if there is not
perhaps something being missed in the equation as a consequence
of the shape we now find ourselves in?
The banks last year had an all-time record high profit in this
country of $48.8 billion. I'm just saying that you have this fact of
an all-time profit. Simultaneously consumer debt has soared by 39
percent in the last 5 years and it now exceeds $1 trillion. Personal
bankruptcies rose by 6 percent in mid-1995 from the prior year period, and I understand that consumers owe over $360 billion on
their credit cards, double the 1990 level. The average household
has four credit cards with balances of around $4,800, which is up
from two cards and about a $2,000-plus balance. Consumer loans
were about 45 percent of bank lending, which is up from 33 percent
from about 10 years ago. Nearly 5 percent of credit card loans were




21
written off as losses last year, which is up about 4 percent from the
year before.
Now you suddenly find a situation where consumers are not just
paying a college loan or a major purchase with a credit card; they
are paying for dental appointments, they are paying for cabs, and
they're paying for groceries. You find, an anomaly here, and I want
to ask you about that in the context of interest rates and Federal
Reserve policy.
Generally we don't see a rise in consumer delinquencies unless
there is also an increase in unemployment, but unemployment has
been relatively static, and yet in the current situation there has
been a rapid rise in consumer delinquencies over the course of the
last 6 to 9 months.
I wonder if there is not a transition as we all talk about these
changes in the workplace, the nature of work, the downsizing, the
kind of cottage industry that is growing, the new startups. Forty
million Americans are working out of their homes today, the
amount of people accessing the Internet number 30 million and are
growing by 300,000 a month. The fact that more Americans are
now taking income from either personal employment, self-employment and/or private portfolios, investment than from wages, might
indicate a contradiction of forces in the economy and a misinterpretation of how we perhaps decide whether the interest rates
should go lower for longer.
I wonder if you would address those forces, particularly the
consumer debt and this contradiction with interest rates.
Chairman GREENSPAN. Thank you, Senator.
First, let me distinguish between credit card debt and all other.
The main problems that we have seen with respect to delinquencies
are in credit card debt, although the noncredit card debt has edged
up slightly, but is nonetheless still relatively low.
The reason why we've had a significant increase in delinquencies
and in losses in the credit card area is partly the result of the fact
that it has turned out largely for the reasons that you have mentioned, Senator, to become a relatively widespread mechanism for
credit and, indeed, a profitable one for those who issue the cards.
The reason why there has been this extraordinarily large expansion in card issuance is because it has turned out to be a significant conveniences to consumers and, therefore, a highly profitable
item for the card issuers. As a consequence of that you expect, and
indeed we are getting, a larger element of loss in these cards, and
part of that is calculated by lenders and expected in the sense that
people are willing to pay the types of interest rates which they are
paying, which as you know are well above the average regular
consumer loan, and the fact that they are willing to do that—and
indeed in increasing numbers—has led to lenders being willing in
turn to accept increased risk.
We think that that could conceivably start to create problems, as
you imply, and indeed a number of the issuers are, as best we can
judge from some of the reports that we get, are beginning to pull
back a bit. Not only is there the $300-billion-plus outstanding that
you allude to, but there is also over $1 trillion in excess of unused
capacity in existing cards, and as a consequence of that if we just
kept going it's obviously of concern as to where that could lead us.




22
At this moment there is very little evidence that that is a particular problem in the economy, in the financial system, or in the
banking community. However, if it is not observed closely and if we
don't make certain we know precisely what is happening, there is
the possibility that we could find that we have excess credit card
problems with other types of difficulties, especially if, as you allude, incomes turn down for one reason or the other.
Senator KERRY. Just a quick follow-up. It is my understanding
that on the average about 78 percent of household income is dedicated now to paying off that debt.
Chairman GREENSPAN. Seventy-eight percent?
Senator KERRY. Seventy-eight percent is to pay off that debt.
Chairman GREENSPAN. Our figures are quite a bit lower than
that.
Senator KERRY. What are your figures?
Chairman GREENSPAN. They're in the teens. You're talking about
the ratio of total consumer debt service?
Senator KERRY. I was talking about those people who fall in that
group that have the average of the four cards and the average of
that balance.
Chairman GREENSPAN. Oh, I see. No, I'm not familiar with it.
The CHAIRMAN. Senator Gramm.
Senator GRAMM. Thank you, Mr. Chairman.
Alan, I want to respond to the GAO study and to this whole economic growth debate because I think it goes to the heart of something that I am very concerned about and I know you are, and I
would like to make my comments and then get you to respond.
It seems to me that one strong element of the GAO study is
somewhat related to this debate about economic growth, that it
never ceases to amaze me that we have debates in American Government about economic growth as if it is just an accident that
somebody decided to have low growth and all we have to do is to
have somebody decide to have high growth and that we could just
make it happen. It's sort of cheerleader economics. It's sort of a free
lunch approach which has its proponents in both parties I might
add, and one of the things that worries me is that to some extent
this, and I see the GAO study is maybe building into it, could become sort of an assault on the independence of the Federal Reserve
Bank.
The real power of Congress, as we all know, is the power of the
purse, and I think part of the genius of the Federal Reserve Act
and the system as it has evolved is the fact that the Fed is a revenue generator and as a result you don't have to come to Congress
and present budgets because there is no doubt about the fact that
our ability to control your budget could and would over time have
a corrosive impact on your independence.
I have opposed self-funding for the SEC, and I have opposed it
because I don't think regulatory agencies ought to be self-funding.
But there is one thing that is different about the Federal Reserve
Bank, and it is the reason that I am totally in favor of self-funding
for the Fed, and that is you have the power to create money. I
think that if you look at the long history of the system, especially
under your tenure, you see the genius of the system in taking poli-




23
tics and partisanship out of setting the monetary base and conducting monetary policy.
I would just like to say that I think it is important that you go
through the GAO's study. I think it is important that you take an
objective look at the spending patterns of the Fed. I think there obviously are always problems when you're dealing with a self-funding agency where you're not having to justify to an outside group
the expenditure of funds.
I think it is very important that this be looked at internally because I don't want to see the Congress expand its power to get in
the business of setting your budget because I would see that over
the long pull as endangering the independence of the Fed. So if this
cheerleading section of both parties ever gain dominance that you
might actually see an effort by Congress to manipulate monetary
policy, and if we know anything about world history, it is that no
legislative or executive government has ever had the unbridled authority to print money that they haven't abused it.
I would just like to get your comments on that whole subject.
Chairman GREENSPAN. I certainly agree with you with respect to
a central bank and that issue. It is very difficult to differentiate
monetary policy from all of the other functions that we engage in
and they are interrelated. It is precisely the issue that we are given
autonomy in making key decisions, and especially because of that,
effectively having our own budgetary processes, that we have a special obligation.
While we are not subject to the appropriation process, we do publish in very great detail all of our expenses in every way that we
can. We have ongoing GAO audits of everything that we do with
the exception of monetary policy. There are people from GAO stationed permanently in our organization to make certain that what
it is we do is being done correctly to the extent that we can.
I would be the last one to say that we do not make mistakes. We
do, and hopefully when we find them we correct them. But the one
thing I can assure you, Senator, is the fact that we take the issue
of the fact that the Congress has given us our own budgetary authority very seriously as a special obligation which requires us to
be scrupulous beyond what we would probably be were we going
through the appropriations process.
Senator GRAMM. Dr. Meyer, would you comment for me on your
view on the independence of monetary policy?
Mr. MEYER. I think history, as I said, speaks rather eloquently
on this. When a central bank is not independent, then it is too easy
for the Federal Government to finance its deficits through money
creation. We see that particularly in developing economies without
independent central banks and how that can lead to run-away inflation. So. an independent central bank is essential. If a government is serious about price stability it has an independent central
bank, period.
Senator GRAMM. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Shelby.
Senator SHELBY. Thank you.
I would like to start with Dr. Meyer since you have not served
that we know of up here in Washington like the other two have.
You have made a mark in the economic field on economic forecast




24
trends and you have certain equations that you use. What are the
three most important of those equations to forecast inflation?
Mr. MEYER. It's a very good question, and I think it's important
because it turns out that when one does a forecast the model often
disciplines one's judgment, but there is often a lot of judgment as
well. In the case of inflation, however, I would say that our model
did most of the work. Over the years I learned not to use my judgment to try to improve the inflation forecast because the model
does such a good job with it.
Senator SHELBY. The model is facing the truth.
Mr. MEYER. The single equation, and I am sure it will come as
some surprise to you, but the equation that is the single most important in forecasting inflation in the short run is what we call the
Phillips Curve equation which relates wage change to expected inflation and to the gap between unemployment and some critical
threshold.
What I would argue is that equation tells us about the process,
the structure. That model is fully consistent with the view that the
only thing that determines inflation in the long run is monetary
growth, but monetary growth operates by affecting aggregate demand, unemployment rates, overheating the economy and generating higher wage change which is then passed on in terms of higher
inflation. That's the single most important equation.
The second most important equation would be the equation that
links wages to prices. We go from demand slack to wages to prices.
I really couldn't pick out a third equation. The third most important thing is everything else, because everything else really gives
us the aggregate demand forces that links monetary policy to aggregate demand.
Senator SHELBY. Along those lines just following up on that, so
would you or would you not put a lot of importance on the recent
rise in the various commodity prices?
Mr. MEYER. I think one always tracks all available data on inflation, but I think we have to put in perspective the role of commodity prices. If you look at their role in overall prices we find on a
value-added basis they only contribute about 5 percent. In addition,
they are very volatile, and because they are so volatile when they
move rapidly firms aren't in a hurry to pass them on in the form
of higher prices because they will have to lower their prices next
month when they reverse.
I think we have a lesson in the last year, for example. Go back
to about March or April and you take a look at crude prices net
food and energy. They increased at a 19 percent rate on a yearover-year basis, stunning, extraordinary, and many, many people
were very worried. In the period that followed we had one of the
lowest inflation rates we've had in the last 20 years.
Senator SHELBY. Why?
Mr. MEYER. Because commodity prices are very unimportant
compared to other considerations like compensation per hour.
Senator SHELBY. Wages?
Mr. MEYER. Exactly. Take a look at the Employment Cost Index,
for example. Over the last year it has increased by less than 3 percent. So now you're talking about something that's two thirds and
not 5 percent, but two thirds of the cost of production. That's what




25
really matters. So we keep our eye on wage change, specifically
what we call unit labor costs, and that's the most important factor.
Senator SHELBY. Are we in this economy that is mature, to say
the least now, are we about close to what some economists, the
three of them at the table here, would say is full employment, close
to full employment?
Mr. MEYER. My judgment would be that we are basically at capacity now.
Senator SHELBY. DO you agree with that, Dr. Rivlin, capacity,
close to it?
Ms. RIVLIN. Yes, I think it is not so much a question of capacity
in the usual sense as it is that the unemployment rate is as low
as we've seen it in a very long time. As I said in my opening statement, a lot of us wouldn't have thought it could get this low without igniting inflation. Although we aren't seeing accelerating inflation, we aren't seeing decelerating inflation either. So that's sort of
an indicator that we are about at the fullest employment that this
economy given its potential can attain.
Senator SHELBY. Dr. Meyer, as a soon-to-be member of the Board
of Governors of the Federal Reserve, what are your thoughts on the
most important thing the Federal Reserve does or should do?
Mr. MEYER. Well, you know, that really is a difficult question
when you ask for a single thing. I would say, and I want to go back
to my opening statement, that the single most important objective
in the long run is protecting the value of the dollar.
Senator SHELBY. Are you saying inflation?
Mr. MEYER. Inflation is No. 1 in the long run. But I am not prepared to leave here and say I've said everything I need to say about
monetary policy, that I've told you everything you need to know
and that's the only thing I am going to look at because I would be
less than honest.
Senator SHELBY. Because there are other things.
Mr. MEYER. Absolutely. I care deeply about whether or not this
economy is at full employment just to give you an example. If I told
you, for example, that my forecast was different and I thought the
economy was slipping into a recession, that the inflation rate is 2V2
percent and it had been that way for the last couple of years, would
you tell me don't worry about it, ignore it, and be indifferent about
it? Well, I won't be.
Senator SHELBY. Don't be.
Dr. Rivlin, what's your conception of the most important thing as
a member of the Board, a Vice Chairman of the Board, too, that
the Federal Reserve should do?
Ms. RIVLIN. Well, I think that the goal of economic policy, monetary policy, fiscal policy, and all other kinds of policy should be the
maximum sustainable rate of growth of the economy. There are
several things that could make growth unsustainable. One of them
obviously is inflation. The primary goal, because it has the right
tools, that the Federal Reserve has to keep its eye on is keeping
the price level stable so that growth can be as high as possible.
Senator SHELBY. Chairman Greenspan, do you want to comment?
Chairman GREENSPAN. I don't think I need to.
Senator SHELBY. Because they are doing great.
[Laughter.]




26
I think you're going to be joined by two outstanding colleagues.
Chairman GREENSPAN. I am delighted at their nomination and
trust that in the Senate's good judgment you will act hastily.
Senator SHELBY. After yours we can vote on theirs, right?
[Laughter.]
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Mack.
Senator MACK. Thank you, Mr. Chairman.
I want to welcome Chairman Greenspan, but I do want to direct
some of my thoughts to Dr. Meyer. Again, I want to express to you
how much I appreciated our discussion the other day with respect
to your thoughts and ideas about monetary policy, and I commend
you on your statement this morning.
I do want to pick up on one area of it. Someone asked a question
and I have forgotten who it was now that had to do with the issue
of growth and where does it come from. In your answer you referred to the trend rate of growth and I think you referred to it as
being modest. In your testimony you made the following comment,
that the Federal Reserve cannot itself raise trend growth and said
that the Congress ought to be addressing these issues. In essence
how do you raise the potential of economic growth in the country,
and you gave a series of areas that we could look at. One of those
had to do with tax policy, and let me just read that: "And in sensibly reforming the Tax Code to lower marginal tax rates and ensure adequate incentives for investment."
One of the areas where there has been a lot of attention given
to over the last year or so has been the issue of the flat tax, and
I believe that you have done some modeling work on the flat tax.
I wonder if you would share with us as to whether you think a flat
tax, put together properly, would affect the trend that I referred to
a moment ago with respect to economic growth.
Mr. MEYER. I don't yet have any firm quantitative numbers there
because we haven't run a full simulation of that at this point, but
the early results do suggest that flat tax type of proposals have
some very positive impacts on the economy by stimulating investment and raising capital formation, et cetera.
I have also felt that tax reform, lowering marginal tax rates and
providing incentives for investment, is one of the most powerful
tools that we have and that we don't want to throw away. I would
say, in particular, that when it comes time to consider tax changes,
I would like to see those tax changes as part of the reform effort.
It's just too important an objective.
Do you want anything further on that score?
Senator MACK. NO, unless you feel compelled.
Mr. MEYER. AS an economist I believe that economic incentives
matter. Marginal tax rates are a very powerful economic incentive,
and I believe strongly in that.
Senator MACK. Well, I happen to share that feeling and I appreciate those comments.
I am going to raise another question and, Dr. Rivlin, you might
want to comment on this as well. As you know, I have stated a position over and over again about the importance of price stability
to the point of saying that I see the Fed's responsibility as being
focused on price stability narrowing and singularly. Critics have




27
suggested that there are certain things that could happen to the
economy for which the Fed ought to respond to. I am thinking of
things like how most people would refer to an oil shock, for example, and what does that do to the economy and how should the Fed
respond.
So I want to raise a hypothetical question and ask both of you
how you would react to it, and again this is a hypothetical question, or I hope it's a hypothetical question. If the Congress passed
legislation to increase the minimum wage to $50 an hour, again a
hypothetical question, I am certain that you would agree that that
would boost unemployment sharply, or at least I would assume
that you would. My question then is should the Federal Reserve
feel a responsibility to reduce unemployment caused by that hypothetical legislation?
Mr. MEYER. There are two issues here. The first is if you have
a major increase in the minimum wage like that I certainly believe
that there is some cost in terms of a higher equilibrium unemployment rate. The Federal Reserve cannot undo the damage that you
would have done by raising the equilibrium unemployment rate in
that case. That would be my judgment. On the other hand, there
are also short-term effects, a spurt of inflation that occurs that if
the Fed does not change its policy. This will lower the real money
supply, raise interest rates, et cetera, and could have a damaging
impact on the economy. So, on the one hand, it does not mean that
the Fed has no job at all in terms of smoothing the transition
there. To the extent, however, that there is a change in the equilibrium unemployment rate, the Federal Reserve does not determine the equilibrium unemployment rate in the economy.
Senator MACK. It sounded like in your second response that the
Fed's action would be one taken with respect to price stability.
Mr. MEYER. Well, not necessarily. I mean not in quite the way
you might phrase it. Let's say that the impact of this was not only
an increase in the equilibrium unemployment rate, and an increase
to $50 an hour would result in a major increase in the unemployment rate, but let's say that as well there was a burst of inflation.
If the Fed fought that higher inflation immediately by tightening
monetary policy at the same time the equilibrium unemployment
rate were going up, then there would be a double impact on unemployment that might not be wise. Maybe what the Fed ought to do
would be to initially accommodate some of that inflation to limit
the near-term hit on the economy of that action. But it can not unwind any change in the equilibrium unemployment rate and it
ought to quickly move to restore a sense of discipline in terms of
inflation and return toward price stability. I don't think that is inconsistent.
Senator MACK. Dr. Rivlin.
Ms. RIVLIN. I think that's about right. It is a very difficult hypothetical to think about because it's so extreme. But it is an illustration of hard problems caused by some kind of shock to the system,
like an oil shock, which changes the parameters and leaves the Fed
with a dilemma as to how much to accommodate and how much to
restrain.
Senator MACK. One last comment. The reason that I really get
concerned about the issue of Humphrey-Hawkins stating a policy




28
of growth and unemployment is because I really do believe that addressing those issues is a legislative Congressional action. By saying to the Fed that you ought to have that responsibility allows
those, as Senator Gramm referred to a moment ago—what was
that term that he used?
Senator BENNETT. Cheerleader.
Senator MACK. Cheerleader, whatever—that we use then the
Humphrey-Hawkins Act as a means to hammer at the Fed that
they ought to be addressing the issues of growth and we take the
spotlight off ourselves. We are the ones that affect where that potential growth rate is. If we've got a higher level of taxes on business in America and if we've imposed higher burdens as when you
referred to the regulation, we've increased the cost of doing business. We've made it more difficult for us to compete, and yet with
the way that the law presently is written politicians can say it's not
our fault. We just have a Fed that's not doing its share with respect to growth in the economy.
I thank you for listening to that last comment.
The CHAIRMAN. Senator Sarbanes.
Senator SARBANES. Thank you very much, Mr. Chairman.
First, I just want to make an observation and I'm not really
going to put a question. I'll put some subsequent questions. The
statute under which the Federal Reserve is now operating, the law
say that the Board of Governors of the Federal Reserve and the
Federal Open Market Committee shall maintain long-run growth of
monetary and credit aggregates commensurate with the economy's
long-run potential to increase production so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
Now, I just underscore that. Some of my colleagues want to
change the law to give the Fed a single goal, and I would oppose
that and I think it would be potentially disastrous for the economy.
I think the Fed does have a balancing role, but in any event how
one comes down on the substance of that issue, until that becomes
law the governing policy for the Fed as set out by the Congress is
what is now in the statute which embraces maximum employment,
stable prices, and moderate long-term interest rates. I just want to
put that on the record.
Actually I think we've done a pretty good job in the post-World
War II period through I think in part an effective combination of
fiscal and monetary policy in affecting the fluctuations of the business cycle.
[Chart shown.]
This is the Great Depression and this is just at the end of World
War II in 1946, and this is what we have experienced ever since,
and we've shortened the fluctuations and we've kept them almost
without exception in a positive growth range, not quite, but almost
without exception, as contrasted with what we were experiencing
in the first half of the century, and I submit this is a far healthier
cycle and economic picture than what we are experiencing since
1890.
Having said that, Chairman Greenspan, I have a couple of questions I would like to put to you, as I am sure you anticipated. If




29
I am short on the questions and you're short on the answers maybe
well get through them all. So let's see if we can do that.
First, in early 1994 the Fed for the first time I believe after Federal Open Market Committee meetings issued a statement summarizing the decision taken and has continued to do so; is that correct?
Chairman GREENSPAN. Yes.
Senator SARBANES. Did you issue one today?
Chairman GREENSPAN. Yes, we did.
Senator SARBANES. What did it say? Do you have it with you?
Chairman GREENSPAN. I don't know what it said specifically, but
the Federal Open Market Committee adjourned without taking any
action.
Senator SARBANES. NOW, the question I have to you is these explanations have been very brief indeed and there is some discussion in the economic press and elsewhere that it would be helpful
to the economy if we had as it were more transparency from the
Fed and therefore a more complete statement as to the basis of
these decisions, that that would give people all across the country
more guidance as to how the Fed was perceiving the economy. Do
you have any reaction to that?
Chairman GREENSPAN. Yes, I do, Senator. We indeed successfully
do that I hope with the minutes we release a number of weeks
after the meeting after we have essentially vetted them through
the Full Committee to make certain that they were correctly characterized. The difficulty with trying to do that very quickly even
though we come to decisions fairly quickly in the sense that we
vote and we know what we're doing in the sense that we have a
vote, but were we to try at that time to agree on a much longer
statement of what it is we did and why we did it, I think we would
find that our meetings lasted way beyond expectations and we
would spend an inordinate amount of time instead of debating policy trying to agree on a communique.
Senator SARBANES. Let me make two suggestions to you for consideration. First is that the Fed do give thought to having a fuller
explanation. I mean it's a one-paragraph thing now, and it seems
to me that without tying up your meeting an inordinately long time
the Fed could give us three or four or five paragraphs that spelled
things out. The second is what are the chances of getting the minutes released before the next meeting of the Open Market Committee? Now, I understand that they are inevitably released after the
next meeting of the Open Market Committee and therefore they become less relevant, and it would be helpful if they were released
in the period in between because it would help to shape people's
thinking as you approach the next Open Market Committee meeting.
Chairman GREENSPAN. Senator, the reason we've chosen not to
do that is in the minutes themselves are the various contingencies
that were discussed during the meeting as to how we may or may
not act in the inter-meeting period. Our concern is if those were
made public to the market, the markets would adjust to them in
a manner which would make it difficult for us to implement policy
as we see it in the most effective manner.

24-529

0 - 9 6 - 2




30
Senator SARBANES. Well, you're making it hard to educate us all
about the economy in terms of a contribution from the Fed. Let me
leave that to one side and ask you this question. Former Governor
LaWare in a recent article was quoted as saying:
I often said that when we were assembled together in a meeting that the Governors worked for the staff instead of the other way around.

The same article quoted an unnamed senior Fed official as saying:
You have an institution here with a Board of Governors that supposed by design
of legislation to run the place. It is really run by the Chairman and the senior staff
with the Board having a certain rubberstamp authority.

Now, my first question is do you have staff at the Federal Reserve who make larger compensation than the Chairman and members of the Board of Governors?
Chairman GREENSPAN. Yes, we do.
Senator SARBANES. DO you know how many?
Chairman GREENSPAN. A significant number, and I will put it in
for the record. It's not a small number.
Senator SARBANES. If you could do that it would be helpful.
Chairman GREENSPAN. I will be glad to do so.
[Chairman Greenspan subsequently submitted the following information for the hearing record:]
Of the 1,722 employees of the Federal Reserve Board, 49 have salaries that are
higher than the Chairman.

Senator SARBANES. What do you say to the more general observation that the Fed and the Board of Governors are staff dominated,
and particularly as it may affect the members of the Board as opposed to the Chairman?
Chairman G R E E N S P A N . Well, I must say that I almost wish that
statement were true, but I fear that it is not in the sense of being
somewhat less facetious. The individual members of the Board are
major contributors to all aspects of policy. Indeed a substantial
part of the policy of the Fed is run through subcommittees, and the
subcommittees are chaired by various members of the Federal Reserve Board.
While it may appear that I take action unilaterally with the
staff, that is never done without consultation with each individual
member of the Federal Reserve Board because all of the authority
of the Federal Reserve Board is within the Board members themselves. I as Chief Executive Officer have one statutory authority.
I run the meetings, and that is the only authority that I have that
comes from the statutes. All of the rest of my authorities come from
a majority of the Board of Governors and they can take them away
if they so choose. And if I were foolish enough not to recognize
where the authorities lie, I would suggest to you that I would be
far less capable of implementing policy or running meetings as I
think they ought to be run.
Senator SARBANES. Mr. Chairman, I see that my time is up.
When the others conclude I may have one or two other questions.
The CHAIRMAN. Certainly.
Senator Faircloth.
Senator FAIRCLOTH. Thank you, Mr. Chairman.




31
Chairman Greenspan, one of my concerns always before the Senate and after has been the growth of Government. Nearly one in
six people who hold a job today work for the Government and this
doesn't even take into account those that are employed because of
Government spending. This number has been growing continuously. What can we do in the Congress to stimulate growth in the
private sector, and I hope we would know what to do to decrease
it in the public sector, but we don't seem to?
Chairman GREENSPAN. Senator, in the number of years I've had
in the private sector as a consultant and as a businessman myself
and effectively running modest-sized organizations it's clear that
where growth comes from in the abstract is competition, that is you
need a set of competitive forces in a society to create incentives for
people to do the best they are capable of doing. When you leave
markets open to full competition you invariably get the maximum
growth that is the potential for that type of economy.
There are other factors which exist. For example, if you are in
an emerging economy whose technology as applied is so below the
applications in well-developed economies you have a wide gap to
catch up, and if you obtain the knowledge of how the technology
is implemented, you have the capability of expanding growth at a
fairly rapid pace. But if you're in the forefront of technology, in the
outer edge of the best practice, the increments to increased growth
are relatively modest.
I think that despite the extraordinary changes that are currently
going on, as I indicated in the Humphrey-Hawkins testimony a
month or so ago, it is not clear that that very rapid state of change
and turmoil is more wheel spinning or true productivity growth.
Ultimately, I think we get productivity growth, but the process
which we're looking at now where there are very strong competitive
forces, and especially in the high technological areas, strikes me as
the model we should be looking to to create growth generally, and
what that means basically is to create an element of incentives in
the system, in the tax codes, in the regulatory codes, and in all of
the various other elements in which Government interfaces with
the private industry sector and that we try to have a Government
policy along with a monetary policy which is best described as a
noninflationary environment. If we can create that sort of system
I think we will get the maximum growth that this country is capable of engendering.
Senator FAIRCLOTH. Thank you.
Dr. Meyer, one question that has been on the minds of many is
whether the stock market will continue to be a bull market going
up and up, but the question has more than that. Some think it has
to stop. Will this trend in the market continue, and what can the
Congress do to make sure that the market is strong? I mean I ask
this question because you won an award for economic forecasting,
and what should we be doing to make sure that the market is not
in a run-away position and continues to be strong and not to cut
the growth?
Mr. MEYER. Senator, I will point out that I won that award by
being smart enough not to try to forecast the stock market.
[Laughter.]




32
But I think I can point to at least one aspect here. One of the
things which certainly helps the stock market are polices such as
deficit reduction which lower long-term interest rates. Those are
very buoyant to the stock market. We saw, for example, as a lot
of credibility was building about a full compromise on deficit reduction and balancing the budget, there was a really remarkable decline in interest rates over 1995. Some of that was due to this credible deficit reduction story. Now that we've seen the bond markets
become more skeptical that this in fact is going to occur, we've seen
long-term interest rates back up some.
So if you want to know what you could do to support continued
increase in the wealth of households through the stock market, one
thing that Congress could obviously do would be to pass a deficit
reduction and balance the budget.
Senator FAIRCLOTH. In your opinion, would a balanced budget
amendment to the Constitution add to a strengthening of the economy and the markets?
Mr. MEYER. Well, here is where we're going to part company I'm
afraid. I do not support a balanced budget amendment, and I think
there is no inconsistency for me in supporting a balanced budget
and rejecting a balanced budget amendment. Let me explain why.
I said earlier that I'm very concerned about Government's role in
maintaining full employment. I worry about the employment side
of our objectives. The most powerful thing that fiscal policy does to
promote that is through the built-in fiscal stabilizers. When the
economy weakens tax revenues fall and the deficit increases. That
kind of an increase in the deficit a cyclical increases in the deficit,
is not a concern. That's part of the stabilization process.
I would not want to see a balanced budget amendment create an
environment in which Congress felt compelled to raise taxes or cut
Government spending when the economy moved into a recession,
sending the economy even deeper into recession. While I understand that in some of the balanced budget amendments there are
escape hatches, to me there shouldn't be any hurdles that you have
to jump over to maintain built-in fiscal stabilizers.
Senator FAIRCLOTH. My time is up.
The CHAIRMAN. Senator Bennett.
Senator BENNETT. Thank you, Mr. Chairman.
Dr. Meyer, I understand while I was out you had some things to
say about the Phillips Curve generally complimentary. I have
things to say about the Phillips Curve that are generally not complimentary. Do you want to talk about that a little bit in terms of
the iron-clad nature of the notion that the only way you get employment down is to get inflation up and vice versa.
Mr. MEYER. No, that is really not what it says. When people ask
me what is the equation that has the most stable predictive power
and what is the equation we can rely on most without judgment,
as I pointed out earlier, it is the equations in the inflation section
sector of the model, specifically the Phillips Curve. I know that
comes as a surprise to many who do not deal day-to-day with estimating equations and looking at the data. Many of my colleagues
in economics are surprised when I tell them that.
But the fact of the matter is that this particular relationship, the
so-called infamous Phillips Curve, is a powerful predictive compo-




33
nent of my forecasting ability. I must say that I doubt that I could
have possibly won the forecast award over this period had I not relied so completely and depended so heavily on the Phillips Curve
in our model.
Senator BENNETT. But is that a short-term phenomenon, or are
the two inextricably linked so that you have to make policy on one
area to affect the other? That's a more significant issue for you as
a member of the Fed.
Mr. MEYER. The Phillips Curve describes the structure of the inflation process. It is not at all inconsistent with the view that I
hold very firmly, that money growth in the long run is the principle
and virtually exclusive determinant of inflation. But when monetary growth picks up how does it get transmitted to higher inflation? The answer is that higher money growth stimulates aggregate demand, lowers the unemployment rate, and raises wage
change, which gets passed on in the form of higher prices. That is
how the inflation engine begins. Something has got to start the
process, and it is monetary growth that starts the process. This is
part of the structure of the economy and, as I say, it is a very, very
stable part of that economic structure. If you were to tell me to
leave that Phillips Curve home, I would be a lot less valuable as
an economic forecaster.
Senator BENNETT. But that's not the point I am getting at. I understand some people say well, if unemployment is going up that
means we have to fight that and we have to bring full, and if we
have to pay an inflationary price to get full employment we're willing to do that as a matter of policy. That is what scares me.
Mr. MEYER. That's not the way our model works. The way our
model works is that there is absolutely no long-run tradeoff between inflation and unemployment. In the long run the model gets
back to this full employment point, and the Federal Reserve
through its policy will determine at full employment what the inflation rate will be. That's the way the model works. There is absolutely no long-run tradeoff, and there are absolutely no benefits to
be derived for the economy by speeding up inflation in the prospect
that you could sustain a permanently lower rate of unemployment.
The model says that just can't be done.
Senator BENNETT. I agree. I'm glad to hear that.
Let's talk a little bit about unemployment and its connection
with interest rates and monetary supply. My experience tells me
that some unemployment has nothing whatever to do with interest
rates and the monetary supply, and that's increasingly becoming
the case. For example, we've gone through a round of BRAC hearings in the Congress downsizing the Defense Department.
The President in his State of the Union message makes a great
point out of the number of civilian employees that have been laid
off since he has been President, and his aggregate numbers are correct. The vast majority of those numbers come out of the Defense
Department, and if you close a defense facility, as we have done
through BRAC, and I agree with the fact that they should be
closed, and I am not one of the ones who says keep facilities open
just because they provide jobs.
But you have enormous dislocations that occur at least in the
short run, and in this case the short run in terms of the individuals




34
concerned seems pretty long because if you've been a career Defense Department employee at a defense facility for 20 years and
then you're told, OK, hallelujah the cold war is over and you're laid
off now, that has nothing to do with interest rates and it has nothing to do with monetary supply. That is just the reality of what has
happened, and that's where most of the downsizing in the Government .has come is in the Defense Department.
Then you have the circumstance that I think the Chairman was
alluding to the tremendous changes in the economy by virtue of
technology, and what do you need middle management for. Well,
middle management provided a very worthwhile service in the corporations of the 1950's, 1960's, and 1970's because middle management existed to manage information.
Now with the PC on the factory floor the team that is assigned
to building the automobile or whatever it is can get information
with a key stroke more rapidly than an army of MBA's used to be
able to process it, and this has nothing whatever to do with monetary policy. The unemployment is coming because all the MBA's
are laid off. They have been made obsolete by Bill Gates, if you
will, and of course by Novell that's located in Utah. It's a competitor to Microsoft.
Do you take those things into consideration, or is the economic
model locked into the computer and it says these things are all
intertwined and if you see a change in this number we change it
in that number and that drives everything, or do you look at things
like defense closings and the downsizing of the defense budget and
the impact of technology on unemployment?
Mr. MEYER. I certainly look at that qualitatively. The kind of
structural adjustments that you're talking about, massive changes
between defense and nondefense sectors and corporate downsizing,
can lead to dislocations and raise the average unemployment rate
for a period, having nothing to do with the state of aggregate demand. As some jobs are eliminated, these people have to find
places elsewhere in the economy. Think how remarkable is it nevertheless that in this period of incredible change and corporate
downsizing and structural adjustment that the unemployment
today is 5Y2 percent.
The economy is extraordinarily resilient. We are creating a lot of
jobs, because not only are we creating jobs for people coming into
the labor force, but we're also creating jobs for all these people who
are being downsized and who are moving out of defense, et cetera.
So the economy is really doing a quite outstanding job, and I think
the credit goes in part to monetary policy for keeping the economy
on a steady keel during this period of significant transition.
Senator BENNETT. Thank you. My time has expired.
The CHAIRMAN. I want to apologize to my good friend, Senator
Domenici, Chairman of the Budget Committee, who is sitting next
to me. I just skipped over him. That is what he gets for sitting next
to me.
Senator Domenici.
Senator BENNETT. That makes the second time I have gone out
of turn.
The CHAIRMAN. The Chairman did this one.




35
Senator DOMENICI. I want to talk about three different topics,
but do it as quickly as I can. My staff tells me that on TV the other
night in a 20-minute timeframe there was a TV piece on buying a
car over the Internet. The transaction involved shopping for the car
on the Internet, paying for the car through electronic banking, and
then transferring the title electronically. So those who don't like
used car salesmen, we're about to get rid of them, right.
On the other hand, within that same 20 minutes a story was on
about people having their bank accounts emptied, and emptied
electronically just by giving an unscrupulous person their account
number. The computer was the accomplice to that crime.
Now, Mr. Chairman and Members, we rely heavily upon the Federal Reserve's capacity to avoid systemic risk in the banking system of America, and we charge you with being our watch dogs in
that regard. I would submit to you that the chance of something
going wrong with the banking system big enough to affect America's economy is not going to go wrong in the old conventional way,
but it's going to go wrong because of new equipment and technology.
You said a month-old balance sheet is out of date, and that really
means things can happen like that, and I just want to suggest that
we place our confidence in you and it is absolutely imperative that
you get the very best technical advice on computers and software
so that you're on the right wavelength with reference to regulating
banks with new technologies.
Could I just have an observation from any of the three of you,
perhaps you, Mr. Chairman?
Chairman GREENSPAN. Senator, we do have highly skilled people,
and it is essential that we have those people who understand the
process, the software and the technology for precisely the reason
that you make.
The structure of our staff has changed I would say quite dramatically in the last 20 years. We used to have a number of people who
were involved in moving paper around, clearing checks and large
numbers of people counting currency. What has happened is a dramatic change which effectively has mirrored the technological
changes in the financial system and in the economy in the central
bank.
One of the reasons why we've had a rise in costs which the GAO
is concerned about is not only have we had our mandate increased
by the statutes which I alluded to, but we also have an extraordinarily important increase in the technical skills of the staff of the
Federal Reserve, we have a very large number of people who know
how these systems work and a large cadre, as you know, of Ph.D.'s,
not only economists but others, and we are there just because we
have to backstop the problems that you're concerned about.
We're not going to get them all because the change in technology
is really quite extraordinary. We've spent recently, for example, a
good deal of time and concern on what is called E-cash which is related to the type of Internet transactions that you are concerned
about. If we found ourselves inadequately prepared to understand
the system as well as those who use it for purposes of fraud, I
think we would end up with a level of fraud which would be utterly
mind boggling.




36
While we don't have cryptographers as such as full-time staff
members to create the nature of the software which would basically
block the use of various different types of programs to infer what
people's code numbers were, we know where to get it and we know
what it is when we look at it. Whatever it is we're doing now, the
job is going to become twice as difficult 10 years from now.
Senator DOMENICI. Dr. Meyer, do you have an observation?
Mr. MEYER. NO, not beyond that.
Senator DOMENICI. I have one parochial question, and then I
want to ask you about growth and wage stagnation. We've experienced an increasing number of bank consolidations. In my State,
which is a small State as you know, we have had a number of consolidations there. Do you see any evidence that suggests that bank
consolidation is adversely affecting the credit availability to small
businesses and to small communities?
Chairman GREENSPAN. I do not. There are others, especially a recent study by a member of the Federal Reserve who in an analytical way concluded that that might be possible. I have not seen any
evidence of it, and I must say it's a highly disputable conclusion.
Senator DOMENICI. It's important that you do everything to make
sure it's not happening, right, so that we'll know about it.
Chairman GREENSPAN. Yes, sir.
Senator DOMENICI. Let me take a couple of minutes on the issue
of wage stagnation. It seems to be the issue in our country right
now and the politics of the Presidential election center around
wage stagnation. Everybody is suggesting in their campaigns that
corporations ought to do things differently the idea apparently
being that if they did things differently on downsizing and other
reorganizations maybe wage stability and anxiety about jobs might
ameliorate.
Let me ask each of you in your expert capacity, first, is wage
stagnation over the last 15 years true or false and, if it is true,
what should the United States be doing about it?
Let's start with you, Dr. Meyer.
Mr. MEYER. Well, the data is clear. If you look at the aggregate
data basically wages are about productivity growth, and productivity growth has increased about 1 percent per year from the early
1970's onward.
Senator DOMENICI. Could we be measuring productivity improperly?
Mr. MEYER. Certainly it's very difficult to measure, and let me
say this. The economy could be growing more rapidly than we currently believe it is, but that would be very inconsistent with the
widespread insecurity. So I don't know that you really want to
press on that score. I mean when you talk to your constituents and
they tell you that they're concerned about their living standards,
they know the truth. We don't need to go there and tell them
what's happening to their wages. They know what's happening to
their wages and they know what's happening to their standard of
living, and there is a problem out there.
So we are in a period, as I indicated, of very modest average
growth in productivity. In addition, we have increasing income inequality so that many families have been facing a stagnation in
their real wages, and a significant portion of the population has




37
been facing declines in their real wages. This is the reality, and
this is certainly a serious challenge for public policy.
Senator DOMENICI. SO am I reading you right that you are suggesting the only way to do this without inflation is to increase productivity substantially more than we are now?
Mr. MEYER. That's the game. The standard of living is about productivity.
Senator DOMENICI. DO you have any suggestions as to how we
might increase productivity?
Mr. MEYER. Well, I think that productivity is basically about two
things: Capital per worker or the capital stock and knowledge. We
can increase capital formation by increasing national savings via a
reduction in the budget deficit. We can increase labor productivity
by increasing the skills through education and training. Those are
other areas that are certainly very important.
Senator DOMENICI. Some people seem to imply in this debate
that corporate stock prices are too high and it ought not be so high
and that in some ways that's detracting from what is being paid
to workers. Is there any reality to that?
Mr. MEYER. I really do not see this as a battle between the holders of equity and workers. Workers on average get paid at a rate
consistent with their productivity, and if we want to increase the
standard of living of American workers then we've got to work very
hard to increase their productivity. We have to work very hard to
avoid reducing their productivity through bad legislation and we
have to work very hard to increase their productivity through good
legislation. That's what it's all about.
Remember, too, that a lot of the declines we have seen in the
rate of productivity growth occurred from in the 1960's to now. In
the 1960's productivity was growing around 3 percent or 3Vi percent. It is about a third that rate now, and we can't even explain
why most of that decline happened. So I can't tell exactly how to
reverse it because I can't explain why it happened in the first
place. I also want to note that there is a limit to how much you
can raise productivity with policy. But you can do something and
we've got to try.
Senator DOMENICI. Dr. Rivlin.
Ms. RIVLIN. I would agree with the general thrust of Larry's remarks. Clearly productivity is the key to raising wages, and we
need to try everything we can think of to raise productivity. As to
raising savings, the most obvious means is the one you've been
most concerned with, and that is getting the budget deficit down.
We know how to decrease Government dissaving, but we don't
know very well how to increase private savings. We ought to do
first the things we know how to do. I think more effective training
and education and more investment in science and technology are
the things we need to be doing.
There is the additional problem that even if average wages are
rising, wages at the low end have not been. We need to focus the
investment there, the training and the education. There are also
other things that we can do with the tax system. The earned income tax credit helps improve the incomes of low wage earners.
Senator DOMENICI. Mr. Chairman.




38
Chairman GREENSPAN. I am in general agreement with what has
been said with respect to the causes of productivity, including Dr.
Meyer's concern that we don't know fully why the productivity
rates have fallen from where they were in the 1960's unless we
argue that the 1950's and the 1960's were largely a catch-up from
the unemployed knowledge, if I may put it that way, of the 1930's
and the 1940's, and that the unusual period was the immediate
post-war period and not the period in the last 20 years. Nonetheless, there is no doubt that unless and until we can move productivity up more than it appears to be rising there is very little out
there in the way of long-term economic growth.
The only area which I would merely raise, which has got really
nothing to do with the real world but just the perception world, is
that it is likely that we do underestimate the rate of growth in productivity in the sense that we expense a number of items that we
should be capitalizing, an issue which I raised in my HumphreyHawkins' testimony, but there is no question that if you wished to
increase productivity certainly a necessary condition is the low cost
of capital, and for that the most important thing that Government
can do is not only bring the budget deficit down to balance and
even into mild surplus, but keep it there, and that is very important and perhaps the most important current issue which I believe
Government can do and should do as quickly as we can find a way
of doing it.
Senator DOMENICI. Dr. Meyer, you mentioned a while ago on the
flat tax that you had some analysis, and that while your model
wasn't complete that there might be a positive impact on the economy from a flat tax. Have you happened by any chance to have
looked at the USA tax that Senator Nunn and I have proposed
with reference to a whole new way of creating an incentive for investment and savings and do you have any thoughts about it?
Mr. MEYER. I'm somewhat familiar with that tax, but we haven't
made any efforts at this point to simulate its effects. I do want to
go back to the flat tax because I don't want to leave any misimpressions. If I were to put the flat tax into the model I believe it
would generate some positive economic results, but I would not be
oblivious to or ignore some of the impacts on the distribution of the
tax burden, and I wouldn't want to be on record as supporting the
flat tax at this point by any means.
Senator DOMENICI. I have one more question if you would permit
me, Mr. Chairman. There is some discussion about American corporate activities as they relate to growth and size. Some seem to
be suggesting that American corporations, because they're getting
too big, are not necessarily good for the working men and women
who work for them. Would somebody just tell me if there is any
evidence of that? Some seem to be suggesting that there's a problem with American companies. I remember 15 years ago they were
not able to compete in the world and everybody was worried about
whether American jobs were going to disappear because of a lack
of productivity and quality of product. We have solved most of
those. Is corporate America doing a reasonably good job in that respect in paying their workers and putting people to work and those
kinds of things, or are they part of the problem?




39
Mr. MEYER. I think that corporate America and American workers together have moved the United States into a very powerful
competitive position in the world economy. Bar no one, we are a
very competitive economy in terms of selling goods abroad, and we
can see that in terms of the buoyancy of our export growth recently. So I don't see that there is a particular issue there. Remember these problems began in the early 1970,s well before the phase
of corporate downsizing that we're seeing now. So we have a longstanding problem with slow productivity growth that well predates
the issues I think that you're referring to.
Ms. RIVLIN. Could I add to that. The place where we are doing
quite well with respect to productivity is the manufacturing sector,
and there we should be very pleased at what has happened over
the last few years. That's where most of our big corporations are.
What is more worrisome I think is the productivity of the rest of
the economy, the service economy and the small enterprise economy where some are doing very well and some are not.
Senator DOMENICI. Dr. Greenspan.
Chairman GREENSPAN. Senator, I am very suspicious of the data
that we have largely because it's hard for me to believe that when
you subtract what Dr. Rivlin was mentioning, namely an exceptionally strong manufacturing productivity, from the implicitly measured aggregative productivity you get a very slow pace of productivity growth in nonmanufacturing. Nonetheless, profitability in that
area is quite significantly improving, and it just strikes me that
there is something wrong with our data system which is not internally consistent with what one sees on a day-by-day basis in corporate America.
Senator DOMENICI. Mr. Chairman, thank you for letting me go
over a couple of minutes, and I want to add my words to the three
of you on the one thing that since I've been here has convinced me
that we need an independent Federal Reserve, and I hope you all
know how important that is to America's future as most of us understand it. Frankly when we consider how difficult it is for Congress to lead on matters of long-term significance, and we're pretty
good on the crises, but we're pretty weak on the long-term strategic
thinking, I think we ought to be very pleased that a long time ago
we created an independent Federal Reserve.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator.
I wanted to return, if I might, and I raise this with the Chairman, Ms. Rivlin, and Mr. Meyer, to the issue that Senator Domenici touched on as it related to a recent paper which was submitted
by, I think, one of the Federal Reserve economists. An article appeared in the American Banker a week ago Thursday on March 14
in which Allen Berger, who is this economist, said that the fall-off
in small business lending is the result of thousands of bank mergers that have taken place.
Berger goes on to say that the banking industry consolidation
will further depress and undermine small business lending. Berger
declared that large banks historically commit less of their assets to
small business loans than do small banks. He said this held true
in 1994 when the big banks devoted just 2.5 percent of their loan
volume to small business lending while contrasting that with the




40
smaller banks that made 82 percent of their volume to small business. Berger co-authored this paper with an economist from the
University of Chicago, Anil Kashyap and another Fed economist,
Joseph Scalise. They found a clear relationship between the creation of the first interstate banking companies and the drop in
small business lending.
Now I know, Mr. Chairman, that you have indicated that you
have some doubts with respect to their findings. Do you care to
comment on that? And let me suggest this. I think it is terribly important for the Fed to look at this issue. I believe that maybe one
of the branches, maybe New York, did a study that is contrary to
this. But we really need to look at this issue very closely because
if we believe that the engine of economic growth and opportunity
is small business, we've got to assure that those capital markets
are open.
Chairman GREENSPAN. I certainly agree with that, Mr. Chairman
Let me just say first that if the figure is 82 percent of the loans
of small banks are to small business, the answer is that's precisely
what one would expect because it's very difficult for a small bank
to make a sufficiently large loan to large business.
The crucial issue really rests with the large banks making loans
to small business. Where we do not know and cannot know what
will happen as institutions merge, if in effect you eliminate small
bank lenders and therefore tighten the loan market, the issue is
whether you will get other lenders coming in. All the evidence that
we have says that they will.
Certainly if you look at the surveys of the National Federation
of Independent Business, which is the trade association for small
business, they always ask on their monthly survey whether they're
having credit problems, and there is no evidence of that for a long
period of time.
My own suspicion is that what we are looking at is a statistical
artifact analysis here. As I said in my answer to the previous question on this subject, there are a number of people within the Federal Reserve staff who disagree with the results that Allen Berger
and his colleagues produced. It's a disputable issue, but far more
importantly if we see that there are in fact small business lending
problems as a result of the consolidation process that is underway,
I can assure you it will get our attention very quickly and we will
look for remedial measures.
The CHAIRMAN. Ms. Rivlin.
Ms. RIVLIN. I am not familiar with the article, but I will certainly
read it with interest and see what I can make of it.
The CHAIRMAN. Well, I think it's just terribly important that we
be very sensitive to the impact of consolidation. I'm not coming out
against consolidations, but I'm just suggesting that we had better
be very mindful that we don't choke off credit or make it disproportionately difficult for the small business entrepreneur.
Ms. RIVLIN. Absolutely.
The CHAIRMAN. Mr. Meyer.
Mr. MEYER. I agree. This needs scrutiny and attention, and I will
look forward to looking over that study and worrying about this
problem. It's a significant and an important one.




41
The CHAIRMAN. We would be very appreciative. I'm pleased that
the Chairman indicated that the NFIB has some kind of a monitoring system. I think I'm going to ask the staff to keep in contact
with them specifically as it relates to assuring or trying to get some
measure as to what impact this has with respect to available credit
through those small business communities.
Senator Sarbanes.
Senator SARBANES. Well, Mr. Chairman, I'll be very brief because
I know you're drawing this panel to a close. I have a couple of observations.
First, Chairman Greenspan, I would hope that the Fed might
pay attention to the problems of small business and getting credit
without necessarily linking it to as a result of the consolidation or
merger process. I mean there may be a problem in any event.
I note that Governor Lindsay has been very active with the
neighborhood housing services movement across the country, the
consequence of which has been through a combination between the
banks and community groups to develop rather exciting programs
to enable people to become first-time homeowners. In fact, the
American Banking Association has prepared specific like little textbooks to lead people into home owning that addresses a lot of the
questions and they're very well done, and I think this is an example that there really is a market there if people will just recognize
it and work a little bit at developing it.
I'm just raising the possibility that the same prospect may exist
to some extent in the small business area, and perhaps the Fed
should address it in a more affirmative way rather than looking to
see whether there has been a detrimental impact.
Second, on the wage issue I think I'm correct, and, if not, I would
like to be corrected by people on the panel, that while the share
of the national income going to the wage and salary accounts has
not changed much over this period of time that we were making
reference to before when we talked about wage stagnation, that
there have been notable shifts within the wage and salary account
that suggest that the benefits of whatever increase in productivity
has taken place have gone very much to the upper end of the wage
and salary accounts, which of course would explain—I mean it is
reflected in part by the growing disparity in ratio between what the
worker on the shop floor makes as compared to the chief executive,
and it is reflected in these very high compensation packages for
chief executives, and I think I am correct that the studies have
shown that that kind of shift within the wage and salary accounts
is taking place to the detriment of low- and middle-income workers.
Is that correct?
Ms. RIVLIN. That is substantially correct, but another way to look
at it is the extremely high compensation of executives doesn't matter much in the aggregate statistics because there aren't enough of
them. What does matter is that people with substantial skills and
education are earning more relative to people in the middle and
with little education. That's a hopeful sign in some ways in that
it suggests something we can do about it, that increasing education
and improving the quality of education may be keys to increasing
incomes generally and incomes at the bottom of the scale in particular.




42
Senator SARBANES. Finally, Mr. Chairman, I'm a little concerned,
and I'm not sure, but I hope this GAO report is not simply being
dismissed. I understand it's a draft report and you're going to have
the opportunity to comment on it, but it seems to me it does need
to be taken seriously and addressed in a serious fashion.
The New York Times story says that:
Contracting and procurement practices at some of the Reserve banks favored certain sources over others despite systemwide guidance that prohibits this. Such practices raise questions about conflicts of interest and favoritism and whether the system is receiving the most favorable prices.

The Wall Street Journal story says:
Some Fed inefficiencies identified by the GAO result from its decentralized and
quasi-private structure the investigator said. They also said many shortcomings
identified in the reports are being addressed by the Fed with some already corrected.

That raises the question of not only the operations of the Fed
here in Washington, the central office as it were, but the operations
of the regional banks and the need perhaps for the Board of Governors to scrub down those operations more carefully.
I am not trying to argue the point, but I'm just suggesting that
you've got this study and I think it needs to be treated with some
seriousness, and to the extent that the criticisms rendered therein
have any validity obviously I would assume the Fed would intend
to address them.
Chairman GREENSPAN. Yes, that's certainly the case, Senator. As
I indicated in my earlier answer to this, there is a lot in the report
which I think is useful. I thought, for example, the particular suggestion about whether or not we could use our bargaining power
to obtain better medical costs by bringing the 12 banks together
rather than each of them negotiating separately is well worth looking into.
The issue of contracting inefficiencies we will look at, but let me
just say for the record that it is true that we do have guidelines,
and they are guidelines in the sense that they're not mandatory
structures for how contracting should be done. We interact with
each of the individual 12 banks on all of the contracting, and the
reason there is this problem about when do you have competitive
bidding and when do you not is really a business judgment as to
whether in fact for certain relatively small types of ongoing services does one really gain by changing the vendors all the time, and
that's a business judgment. In some instances I think it is a mistake to have competitive bidding and change your vendor each
time, and in other conditions it is mandatory that you do because
you have the possibility, as was indicated, of special interests creating what is clearly a wholly inappropriate process. It is a very complex issue and one which is not simply defined in terms of a rigid
code which can apply to everything. We do at the Board oversee all
of this, and as best I can judge it seems to be going rather well.
Having said all of that, I do nonetheless think that when we
have a number of people as skilled as the people at GAO are and
experienced looking at our various different structures it is incumbent upon us to take a close look. I think it is quite conceivable to
me that some of the issues that they have raised when we examine
them we're going to find out that they are right and we are wrong.




43
My basic objection to the report is not some of the individual recommendations, which are subject to business judgment and subject
to questions of whether one can improve and one certainly can, but
it's the overall conclusion. We have been confronted with a very extraordinary expansion in what we're looking at with respect to our
mandates statutorily and a very rapidly changing technological system and our basic objection is that the report looks at our costs and
measures them, in my judgment, in an inappropriate way. My own
suspicion is that were we to sit down with GAO and go over in considerable detail as to where our costs could have been different, I
suspect we'll get a change in the tone of that report.
What is clearly not the case is you cannot basically take the total
discretionary part of the Federal Government or the fact that commercial banking is under considerable cost squeeze and contraction
in a goodly part of the 1988 to 1994 period and argue that we
should have had significantly lower costs. I have looked every year
at how we could cut costs and I must say to you that I have found
great difficulty.
But also when we look at such things as our building projects,
I went through that Dallas Bank thing quite extensively and we
came in way below budget saving considerable amounts of money.
I think the actual costs were more than $15 million less than originally budgeted.
It is true that we ended up with a larger amount of square footage than we originally had anticipated largely because when we
started to look at the building codes that were involved and we got
the details we had to move some of the security areas of the bank.
Instead of using streets outside of the bank to move trucks around,
we had to do it inside, which meant we had to add more square
footage to the total project. To say that we also had 2 acres more
than we originally contemplated, the answer is yes, it is true, because we couldn't get other square footage which was exactly what
we had in mind. We didn't expend as the report says. It didn't cost
the taxpayers $7 million more. That property is worth a lot more
today, and if we were to sell it off we would make a profit. It's not
a cost. It's an investment.
It's those sorts of things in the report which as I go through it
I must tell you having worked so diligently to try to keep our costs
down makes me discouraged that we didn't have a shot at trying
to bring to the GAO people our perspective.
The CHAIRMAN. NOW in fairness to the G A O I must say, Mr.
Chairman, that I do not believe that they anticipated that this report would be made public and that they fully intended to have an
opportunity to sit down with you, that's what I've been given to understand, to review this. So it's unfortunate that it was made public I think precipitously so that you didn't have an opportunity to
meet with them and resolve some of these matters.
Chairman GREENSPAN. Let me say I suspect at the end of the
day that GAO report is going to be very worthwhile because it's
very useful to have somebody look over your shoulder periodically
at all of the things you've been doing on a day-by-day basis. As I
indicated very early on, my experience on the audit committees of
a number of major corporations suggested to me that that is a very
valuable activity. While I may disagree with some of the broad




44
thrust and some of the broad conclusions and a number of the details, that is not to say that I think the report is something which
may not be of very significant benefit to our management.
Senator SARBANES. There may be a problem in terms of the review within the system of the activities of the Federal Reserve
Banks as opposed to activities of the Board itself. I note that the
number of people who make more than the Chairman or the Board
of Governors is significantly greater out amongst the Federal Reserve Banks than it is within the Washington staff.
The thing that I thought was interesting is the article that says:
"The size of the staff rose 4 percent from 1988 to 1994, but total
compensation costs rose 53 percent in the same period." Then it
goes on to say: "With respect to benefits the cost increase during
that period was 91 percent while the increase for Federal employees generally was 62 percent." So there is a difference there.
Chairman GREENSPAN. There is, Senator. First of all, the reason
for the average salary increase, as I indicated before, the nature of
the people who work in the Federal Reserve System has really
quite dramatically changed because of technology, but the very
large numbers of people who used to be at the banks in moving
currency and checks are no longer there because it has all been replaced by equipment. So that you would expect as the technical
skills of the work force move up, as indeed they have, that the average salary has moved up quite appreciably, although the fixed
weight average increase in salary has not. It has been very close
to the average of various competitive models.
On the benefits issue we found the number that is in there difficult to understand. We think it's probably arithmetically correct,
but people in our organization who are in charge of that are looking at the numbers in detail because it struck them as a little bit
out of line from what their expectations were. In any event, we will
examine it and take a look at it and double check it with GAO.
The CHAIRMAN. Well let me at this point assure my colleague
that it is my intent to see to it that the Banking Committee will
review the final GAO report and incorporate it into our oversight
responsibilities. I think that's important. I would hope to invite
GAO to come in after they have a meeting with the Fed to brief
our staff and then hold hearings if necessary. I want to commend
the Chairman for his enlightened approach to this, and that the report may be a very useful tool in increasing the efficiency and the
effectiveness of the work that is carried on. So I commend the
Chairman.
I want to thank our three nominees for coming in today, for making themselves available and for their forthrightness and candor.
At this point in time we thank you, and it is our intent to move
the nomination process as expeditiously as possible.
Thank you.
We have another panel. I would ask that those who are going to
leave hold it down so that we can continue to move the process.
[Pause while Ralph Nader comes forward.]
The CHAIRMAN. Our next witness is Mr. Ralph Nader.
We're pleased to receive your testimony.




45
OPENING STATEMENT OF RALPH NADER
ON THE NOMINATION OF ALAN GREENSPAN
AS CHAIRMAN OF THE FEDERAL RESERVE BOARD

Mr. NADER. Thank you very much, Mr. Chairman and Members
of the Senate Banking Committee, for the opportunity to comment
on the nominations and the Federal Reserve Board policies in general.
I believe there is a need for change at the Federal Reserve not
only to make the agency less wasteful and more open and more effective and more responsive to a broader segment of the American
economy, but also to raise the issues of how remote the indicators
are now from empirical reality.
I think there are an increasing number of economists who are
troubled by the narrow range of the national income accounts, who
think that the unemployment rate masks a great deal of underemployment and people who have given up looking for employment
and who would like to broaden the indicators for the GNP and
other measurements of economic progress or regress to look for the
depleting data, the so-called quality of the economy and not just in
its distribution of its fruits, but also in terms of what it ignores lie
the sustainability debate.
When I hear, for example, Mr. Meyer talk about 5 to 6 percent
unemployment, conventionally defined, meaning that the economy
is at capacity and that anything beyond that would raise inflation,
et cetera, I think of other data, that between 20 and 25 percent of
the children live in poverty in this country.
Are we really true to ourselves by restricting our narrow definition of unemployment in the first place to exclude underemployment, people who have given up trying to find employment and not
including an indicator like child poverty. It seems to me that this
is just one example of many which calls for broader frames of reference in evaluating both the Federal Reserve Board and the performance of the Governors of the Federal Reserve Board.
I am struck by the time that the Senate gives to analyzing the
record and performance of nominees to the Supreme Court compared to the time given to analyzing the record and views of Members of the Board of Governors of the Federal Reserve. True, they
do have different functions, but they both have very important
functions, and I thank you, Mr. Chairman, for at least shall we say
breaking precedent and allowing a bit of testimony from a different
perspective.
Looking at the Federal Reserve over the years I would have liked
to have seen more talk about precisely what is productivity and
productive capacity in an economy and precisely why the Federal
Reserve is behaving today as if the fiscal policy expansion of the
Federal Government is as it was in the 1960's and 1970's, which
it clearly is not. It's in a contracting stage.
I would like to have the Federal Reserve muse out loud why it
acts so much as a prisoner of the bond market, which is behaving
rather irrationally and goes down when there is good economic
news, and that's not a very good pattern of market behavior to be
a guide post for Federal Reserve concerns.
I would also like to see more focus on perhaps one of the central
economic issues of our time, the economics of the innercity in our




46
country and how the Fed can use its awesome powers to encourage
investment in the innercity by a variety of creative policies and
programs.
The Fed has massive research capacity and sometimes one
thinks that this research capacity is more designed to serving concentrated power rather than the proliferation of more productive
use of capital. We have an amazing economy where there are huge
pools of capital invested in abstract instruments, increasingly more
abstract, I would say, derivatives and so forth, and at the same
time we have huge capital needs in the real economy, in the empirical economy back home where people live and work.
Now my testimony I would submit in its entirety with your permission, Mr. Chairman.
The CHAIRMAN. SO ordered. We will receive your testimony and
it will be made part of the record as if read in its entirety, but you
proceed and take those parts out that you care to.
Mr. NADER. Thank you. I also would like to submit some supporting material as well.
The CHAIRMAN. SO ordered.
Mr. NADER. We have seen in recent weeks I think an increasing
public alert to the question of the quality of the economy, not just
aggregate data, but how it is finding its way or not finding its way
to the betterment of the majority of the people of this country. The
New York Times used hundreds of columns of inches recently to
chronicle the new era of economic insecurity in its seven-part series.
Now the President's decision to keep monetary policy reins in the
hands of Alan Greenspan, I think, is a decision to continue the
present status quo policies, and while disagreeing I have no illusions about the ultimate outcome of this nomination. For 8 long
years the Congress has seemed willing to accept most, if not all,
of Alan Greenspan's bland assurances when he visits Capitol Hill
twice each year to report on monetary policy.
But I would like to focus on the issues that people like Wright
Patman and other long-time Congressional critics have brought to
bear to the Federal Reserve.
The first issue needs to be considered in the context of what Senator Sarbanes properly remind us, that the specific mandate added
to the Federal Reserve Act on November 16, 1977, was:
To maintain the long-run growth of monetary and credit aggregates commensurate with the economy's long-run potential to increase production so as to promote
effectively the goals of maximum employment, stable prices and moderate long-term
interest rates.

Of course, all of this translates into good jobs. That's what leads
to adequate consumer demand and a productive economy. The
problem of course is that there is increasing rigidity about what
maximum employment is defined as, and I am astonished looking
back at what we thought was full employment in the 1960's to see
that a 5 to 6 percent or even higher rate of unemployment is now
considered acceptable, which brings along with it a 20 to 25 percent
rate of child poverty and even higher in California.
Structurally the Board makes key regulatory decisions affecting
the safety and soundness of taxpayer-backed deposit insurance




47
funds, and the Board has a critical say about what safeguards are
enforced for consumers in the financial marketplace.
For low- and moderate-income and minority citizens the Fed's
approach to the Community Reinvestment Act and Equal Credit
Opportunity Act can be the difference between opportunity and despair for many people. I don't think most consumers realize what
huge consumer responsibilities the Fed has that should never be
corralled under the umbrella of secrecy and independence and the
other shibboleths that the Fed has often arrogated to itself to avoid
public accountability.
The Fed has plenary power to set standards for deceptive practices of banks since 1975, and it has not issued one single rule in
that area, Mr. Chairman. It has of course rulemaking authority in
Truth-in-Lending, Truth-in-Savings, the Equal Credit Opportunity
Act, the Fair Credit Billing Act, Home Equity Lines of Credit, Electronic Funds Transfer, and the Home Mortgage Disclosure Act. Its
rulemaking activity has been extremely minimal in these areas,
and of course if you don't issue the rule you don't have very effective enforcement.
The independence of the Federal Reserve has become an article
of faith to be intoned rather than a proposition to be examined.
First of all, it has different functions, a monetary function, a consumer protection function, and a research function, and the rather
hidden world of the way it operates without any paper trail to deal
with such issues as the bailout of the Mexican Government.
There is an almost meta sphere between banking agencies and
the Treasury Department here, Mr. Chairman, on areas that are
not reduced to contractual arrangements, and they're not reduced
to observable or accessible to-the-Congress documentation, and, unfortunately, the Chairman of the Federal Reserve rarely gets asked
questions about that.
When Continental Illinois was about to go under and the discount window opened at the Federal Reserve we wanted to see
what paper was behind the loans and what the rationale was for
the bailout of Continental Illinois some years ago. It is almost impossible to get the paper, the documentation which indicates the
meta-type law that is operating or non-law that is operating in
these spheres.
And of course the claim of independence is a bit thin because the
claim is directed toward the Congress, toward the President, and
toward the American people. No one really can make a strong case
that the Federal Reserve is independent of the banks and other
large business establishments. So it's important to raise the issue
that is presented when the Fed defends what it does and repulses
official inquiries, not to mention civic inquiries by saying that it
has to maintain its independence.
The word "independent" does not appear in the Federal Reserve
Act, but the Federal Reserve has assumed it and given the word
a new and powerful definition. Proposals to change the Federal Reserve Act and Board operating procedures and other policies are always greeted with sounds of alarm from the Federal Reserve and
its apologists claiming a threat to independence of the agency. Any
call for accountability, openness, and even simply giving the rationale for their Open Market Committee deliberations is interpreted




48
as a threat to its independence and as an attempt to exert political
influence over its decision.
Let's face it, the Federal Reserve is an autocracy that remains
so as long as it doesn't particularly upset the established powers.
It is an autocracy unique in our American Government—keeping it
from accountability to the Legislative branch, not to mention the
Executive branch, and most importantly to the American people.
While the Federal Reserve may continue to parade its independence, we must recognize that it operates under a series of indicators and a series of definitions that are almost mocking the empirical reality of what's affecting the American people in terms of stagnant wages and declining real wages for the bulk of the working
people in this country.
In the final analysis the Fed's independence is a shield against
accountability. It shields the Fed from analysis of bad policy, outrageous mistakes, mismanagement and other problems. This socalled independence was never challenged even in the era when the
Federal Reserve was presiding over an extremely deteriorating
banking industry only a few years ago which required such ample
Congressional bailouts.
The second aspect of the Federal Reserve is secrecy, which I go
into in some detail here, and Senator Sarbanes has certainly properly made the point of the need to disclose the transcripts of the
Fed Open Market Committee. They are now withheld for 5 years.
So there is no way to judge the present Governors of the Federal
Reserve, including the Chairman, on these decisions until 1998—
1999 for the decisions to increase interest rates that were occurring
in 1994 and early 1995. Even the transcripts, in the words of the
Federal Reserve, are lightly edited. The full unedited transcripts
are locked away for 30 years.
I do not believe that this Committee would accept the same secrecy from other agencies and departments under its jurisdiction
and it would not tolerate hidden agendas and only vague sketches
of policy decisions from the Department of Housing and Urban Development or the Securities and Exchange Commission. To tolerate
it for the Federal Reserve would require the Federal Reserve to uphold a much greater burden of proof as to why business should continue as usual than has been tendered at hearings before the Senate Banking Committee.
I think that Senator Sarbanes' recommendations on trying to do
something about the conflicts of interest here involving the Federal
Reserve and its regional banks needs to be given far greater support here in the Congress.
Then you have Congressman Gonzalez who in early January issued some important disclosures about the Federal Reserve's contracts for overnight clearing and collection of checks. And it was his
inquiry that uncovered the fact that full verbatim transcripts did
exist of the Open Market Committee hearings.
Even with the tapings admitted, the Federal Reserve contended
that many of the tapes had been taped over and there were no complete transcripts in existence. Ultimately the hide and seek game
ended with a concession by Chairman Greenspan to Congressman
Gonzalez that indeed the tapes existed and that 17 years of full
transcripts were at the Federal Reserve.




49
Well, Congressman Gonzales has still not gotten an answer from
the Fed for his detailed report on the Fed's check clearing operations submitted in early January.
Secrecy, as we all know, in Government is a kind of power and
it should be seriously challenged and not simply accepted because
that's the way things have always been with the Federal Reserve.
I might say as an anecdote, Mr. Chairman, when I was at
Princeton University, and maybe Senator Sarbanes can corroborate
that, when we had Economics 101 under Professor Chandler, who
was on the Philadelphia Regional Board of the Fed, when it came
time to study the Federal Reserve we were distributed free a 180page booklet on the Federal Reserve. We learned about the Federal
Reserve from this booklet, and it was of course produced by the
Federal Reserve.
So the Fed, like Fannie Mae today, is exceptionally adroit in
terms of how it develops and implements its narrow frame of reference and its rigid indicators, not just here, but through the educational system. Of course, being independent of any budgetary reliance on the Congress, it is also independent of any kind of scrutiny that proceeds from the appropriations mechanism.
I would like to move on to the consumer issues, and I have just
outlined briefly how expansive the responsibilities of the Fed are
in the consumer area. I am very glad to have heard Chairman
Greenspan, and I never thought I would ever hear the words as he
enunciated it this morning, that he thought in reference to the
GAO: "It was very useful to have somebody look over your shoulder
on a day-by-day basis."
I think certainly whatever restraints are here in Congress of inquiring into monetary policy practices, procedures and policy, there
is no reason whatsoever for not examining its role in consumer protection, and I must say that a prime example of how the Fed is on
the sidelines here was in the news last week when the Federal
Trade Commission announced it was launching a major effort to
fight scam artists who were using demand drafts to rob consumers'
bank accounts of tens of millions of dollars annually.
The victims were consumers who had given out their bank account numbers and permission to use demand drafts for magazine
subscriptions, various membership fees and similar outlets. To
make the scams work obviously required wide utilization of the
banking system, right where the Federal Reserve's authority lies.
But it was left to the Federal Trade Commission, not the wellstaffed and well-funded Federal Reserve System, to take aggressive
action finally to protect the consumer even though the Federal Reserve shared identical enforcement power with the FTC under Section 18(F) of the FTC Act. When the contest over consumer regulations is between consumer and the banking industry the Fed can
find some creative ways to support the industry.
The Congress, for example, recently asked the Federal Reserve
to give it a report on regulations to limit the time that banks may
hold checks before crediting the consumer's account. I might add I
noticed that Chairman Greenspan thought it desirable for instantaneous settlements between business firms globally, but I would
only hope that he could pay as much attention to more expeditious
settlements when consumers are involved in the check hold matter.




50
Not only that, but as bank branches have been closed down in
the hundreds, Mr. Chairman, we have the emergence, and something you know very well, in poor areas in New York City of check
cashing stores and the horrible gouging that goes on there. Recently the head of a major insurance company called me up to complain about check cashing stores which refined my alert to a problem. that has been too long ignored.
In answer to the Congressional request, the Federal Reserve decided to survey the banks and prepared a one-sided questionnaire
that assures the results will be weighted to the bank's desire to
lengthen the time they could hold people's checks. I explain that
in my testimony.
The Fed's implementation of the Equal Credit Opportunity Act
(ECOA) provides a good example of the Fed's regulatory inertia
when it comes to consumer, community, and civil rights interests.
Although ECOA prohibits credit discrimination against small business persons as well as consumers the Federal Reserve has never
established any disclosure requirements that would permit monitoring of discrimination against small businesses. Now, I know you
asked about this a few moments ago.
Indeed, the Fed's Regulation B which implements ECOA perversely prohibits lenders from collecting data on the distribution of
their small business loans by race category. Civil rights groups,
community groups, and even the Clinton Administration have
asked the Fed to revise Regulation B, to require lenders to collect
and make public race data on their business lending patterns.
Under strong pressure from the Clinton Administration the Fed in
April 1995 proposed to modify Regulation B to permit voluntary
collection of race data on small business loans and other types of
credit. Yet 1 year later the Board has failed to act on even this extremely modest proposal.
Similarly the Fed is looking the other way on the convenience
and needs of communities. As mergers sweep across the Nation,
neighborhoods and communities are facing the loss of banking facilities while borrowers in low- and moderate-income minority
neighborhoods, already starved for credit, are seeing lending decisions moved through distant lines of management in these newly
merged giants.
Eight hundred community organizations turned out on the West
Coast recently to oppose the Wells Fargo/First Interstate merger on
the grounds that the closure of 345 branches would severely wound
local communities. The Fed heard the arguments and received the
documentation, but in the end the wishes of Wells Fargo were
granted and the 345 branches will be closed.
Mr. Chairman, interstate branching and the vast increase in
mergers is creating a new generation of problems for communities,
but the Federal Reserve is not meeting its responsibility to examine fully the convenience and needs of communities as required by
the Bank Holding Company Act and the Bank Merger Act.
The final point I want to make is that dissent isn't allowed on
the Greenspan Board. Dissent is very critical as a climate of regulatory and other decisional deliberation by Government agencies.
Alan Blinder, the Vice Chairman appointed by President Clinton
unexpectedly resigned and returned to his job at Princeton remov-




51
ing a voice from the Board for more openness and more concern
about employment and consumer issues than may have been compatible with the Greenspan party line. There were published reports, including one in the Columbia Journalism Review, that
Greenspan's staff had leaked unflattering remarks to the media
that led to stories that Blinder was "soft on inflation," an episode
that undoubtedly increased Blinder's frustration and desire to
leave the Greenspan Board.
Take someone like Felix Rohatyn, who we interviewed extensively years ago for our book, "The Big Boys." Even he is considered too radical and too focused in the Blinder fashion on the full
employment role, stimulatory role of the Federal Reserve. Someday
the way that nomination was bungled will, I'm sure, come out in
the reputable press. It does seem to me rather a serious attribute
of the Federal Reserve that we get such reluctance on the part of
members of the Board of Governors to disagree publicly even on issues that don't immediately ruffle the money markets. The pressure for consensus, and the pressure for unanimity is facilitated by
the absence of disclosure of the transcripts, for example, of the
Open Market Committee.
In conclusion, I did point to a number of areas that were never
brought to the nomination hearing process involving Chairman
Greenspan's poor judgment in dealing with his clients when he was
in private life as a consultant. He was a consultant to a number
of savings and loan associations, including the ill-fated Lincoln
Savings and Loan which he stated publicly, at exactly the worst
time, that Lincoln Savings, "was a financially strong institution
that presents no foreseeable risk to the Federal Savings and Loan
Insurance Corporation," in a letter of February 13, 1985, to the
principal supervisory agent of the Federal Home Loan Bank of San
Francisco.
These and other episodes in Mr. Greenspan's background make
it all the more important for the Congress to weigh in more heavily
to make sure he and his colleagues pay more attention to the effect
of the Federal Reserve on consumer protection and to the effect of
the Federal Reserve on dealing with the imperatives of modern
technology that are working against consumers, to look at the bank
charges and fees and the unbundling of the consumer's bank statements these days, and, of course, to the effect of monetary policy
on labor.
It would also be interesting to know where the Federal Reserve
Chairman stands on the decision of the Federal Deposit Insurance
Corporation to cap the reserves of the Bank Insurance Fund and
allow the majority of banks to pay no premiums for Government
insurance.
Mr. Chairman, I don't think a $25 billion fund is an adequate
fund for any contingencies given the large size of banks today and
the likelihood that one or more of them is going to get in deep trouble and could easily absorb that amount. When banks are making
a lot of profit is exactly the time they should pay into the insurance
fund. When they do get in trouble, if there is a cyclical downturn
and the insurance fund is exhausted, we are not going to be politically able as a Nation to tap the banks to fill those insurance
funds—and the taxpayer will have to pay for the bailout, just as




52
the taxpayer has paid for the bailout of the Mexican oligarchy and
its corrupt regime.
It is important, finally, for this Committee to insist on changes
at the Federal Reserve as a condition for confirmation, particularly
changes that would remove some of the thick walls of secrecy that
separate the agency from the people and the Congress. Let us remember if Alan Greenspan is confirmed, as he probably will be
overwhelmingly, he will control the Federal Reserve into the Year
2000.

About all that can be said about that is it will give the Congress
a few more years to develop more specific frames of reference to
evaluate the Federal Reserve, to demand more specific disclosures
of rationale, and above all to expand the definition of market indicators to reflect the empirical reality that they now do not reflect,
and that is what characterizes their lack of humanity and their
lack of sensitivity to what millions of workers in this country know
is going on, and that is the downsizing of the middle class.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you.
Senator Sarbanes wishes to make a comment.
Senator SARBANES. Mr. Chairman, I have another engagement
which I should have been at quite some time ago, but I simply
want to say that obviously a great deal of thought and work has
gone into this statement which Mr. Nader has submitted for the
Committee, and I want to thank him for that work. There are a
number of points in here which I think attention needs to be given.
In fact, I asked about some of these points in the course of the previous panel as it just turned out, and I just wanted to thank him.
Mr. NADER. Thank you, Senator Sarbanes. I might add that if
you or the Chairman want more information my colleagues Jon
Brown and Jake Lewis would be very happy to go into greater detail.
The CHAIRMAN. Let me, if I might, touch on what I think is the
centerpoint of your concern about the operation of the Fed and its
claim that there is a need, and indeed I think many have echoed
this, for independence, particularly as it relates to the question of
monetary policy. Do you have any trouble with that theory, or the
theory advanced and held by many, that in order to keep the Fed
from acting in a very political manner, whether it be as a result
of the Congress or the Executive, that there be a certain degree of
independence?
Mr. NADER. Yes, a certain degree, and of course that is what the
debate is about. Let's separate the issues here. How much should
independence preclude you, as a Senator, from finding out what the
Federal Reserve did 1 year ago or 5 years ago or 10 years ago on
monetary policy? There is a long statute of limitation operating
here before secrecy is waived.
The CHAIRMAN. SO you're not contending, for example, that the
minutes from one Open Market Committee meeting be made available in the interim before the next meeting is held? I know you
were here and heard the Chairman respond to that question as to
why the minutes of the preceding meeting not be released, and I
think he gave a reasonable explanation. Is that an area, for example, that you would disagree with him?




53
Mr. NADER. Yes, because the objection that he gave could be
neatly excised from the minutes. When I heard that one of my colleagues said well that doesn't mean all of it has to be deferred in
terms of disclosure. There are some super-sensitive parts that can
be excised, but not the entire transcript.
The CHAIRMAN. Let me ask you this. What would be the harm
if the minutes were made available after the next Open Market
meeting? In other words, I am trying to look at this and get to this
in a manner which would encourage more openness. And recognize
that once we begin going down a certain path it is irresistible for
those in Government, whether it is the Legislative side or the Executive side, to act with restraint. They seem to want more and more
power, and then it does become a power grab. Are you necessarily
opposed to the release of the information after the second meeting?
Mr. NADER. The problem is if you release it after the second
meeting you reduce the timeliness of the opportunity for the public
and Congress to analyze what they did in the first meeting before
the second meeting occurred, and you reduce the interest. The very
interest in it becomes obsolete. I think the reliance of the markets
on every single word and phrase of the Chairman is unhealthy, and
I think he would be the first to agree.
The CHAIRMAN. We have seen the overreaction in the marketplace, and it has been something that has been I think historical.
1 remember when Paul Volker would come in and talk about or
even mention the money supply and there would be a mad dash
out of this room, and you didn't want to get caught at the door with
the reporters racing to put over the wires what had taken place.
The gyrations in the marketplace were incredible. I happen to
think that that was a very unhealthy kind of presentation, and of
course I think that in many cases there was a total overreaction.
You would see a drop of 30 or 40 or 50 points in the market, and
2 days later the market would come back up. On many occasions
when the Chairman made these kinds of announcements as to
whether or not they hit their target, I thought too much emphasis
was placed on it, and that emphasis was very unhealthy.
You see, I do believe that we should have, and I think it enures
to the credit of the Chairman, better oversight in a number of
areas. I am particularly concerned with respect to policies that do
not involve the day-to-day activities of the marketplace and would
not create consternation, after a reasonable period of time, to have
the information be made available. For policies which involve billions of dollars of taxpayers' money, whether it's through the IMF
or to foreign countries, and Mexico is one of those that comes to
mind, it just seems to me that there should be some form of accountability to the people of this country that does not become intrusive and does not have Congress attempting to second-guess.
If you subscribe to the philosophy that we should not have the
independence over our monetary policy threatened by undo interference or interference by the Congress or the President, then how
would you achieve a balance if you think that's an objective that
has to be maintained?
Mr. NADER. First of all, if we're going to preserve monetary policy from undo interference by Congress or the White House we
should preserve it from undo interference by the banking industry




54
and by the corporate executives and bankers who are on the Regional Boards of the Federal Reserve and the conflicts of interest
are ripe. So let's at least try to be consistent on that. I don't think
the Federal Reserve is as independent of the banking and corporate
community as it is of the Congress and the President.
Second, I would demark the area where there is the greatest insistence here on Capital Hill of independence for the Federal Reserve and treat the rest of it like any ordinary regulatory agency.
The CHAIRMAN. SO you're willing to concede that maybe there
would be some kind of a demarcation?
Mr. NADER. Right, but narrowly drawn.
The CHAIRMAN. One area would be maintained and be, and I
don't like to use this word, but it's the best one that I have at
hand, independent or off limits to the Government. Obviously we
have a right to say what we want, but not to be able to effectuate
that is another matter, and to maintain that independence but
then have clear oversight and responsibilities into other areas.
Mr. NADER. But always keeping in mind that we still must have
greater public understanding of the role of money in our society
and the role of the Federal Reserve, and whatever is forbidden
tends to provoke conspiratorial theories around the country about
the Federal Reserve, and there is insufficient public debate and
discussion compared to the 1890's in our country when ordinary
folk discussed the gold standard and the silver standard in ways
that most people in this country now would not understand.
So even within monetary policy if there is going to be an independence it should be not only to the public sector here on Capitol
Hill and the White House, but the private corporate sector as well,
and I hope Senator Sarbanes' proposal on conflict of interest reform
is given greater attention.
But I would also point to an area that you have tried to probe
during this Mexican bailout situation a while back. There is too
much that the Federal Reserve does that is straight out political,
and there is nothing more political than the Administration's bailout of the Mexican oligarchy and its corrupt regime, and it got its
hands quite deep in it, and I have it on reasonably good authority
that Paul Volker was quite upset, and he may deny this, but that
he's quite upset that the Fed got so deep into the political negotiating and wheeling and dealing processes behind closed doors relating to the Mexican bailout.
So that's a whole area that to me is almost the most extensive
arena of unbridled Government discretion in our history. I mean
the Executive Privilege invocation by the White House over the
years is tame compared to the unbridled discretion that the Fed
has had in so many areas. That means there is no rule of law, and
that means there is no accountability, but more basically there is
no public understanding to evaluate this bureaucratic beast, so to
speak.
The CHAIRMAN. Can I take you into another area? I know you
came to testify with specificity and I want to address that before
we close the hearing.
I believe that you're absolutely deeply concerned about the problems of our inner cities, about the problems of underemployment
and about the problems of lack of job creation. It seems to me that




55
one of the areas in which we can do a great deal, although there
are some abuses, is the giving of tax credits for people at certain
income levels to encourage people to become part of that economic
system. It's one thing to say that we will give you an opportunity,
and then the people don't really have an economic opportunity and
it's just lip service, and I tell you it's probably the single reason
that I voted for that horrible 1986 tax bill. I mean it was just a
horrible bill, and it was one filled with retribution, I won't get into
it, but I recall very vividly some comments that I didn't feel were
justified.
So that's taking it at a certain level saying that people can earn
up to a certain level and be permitted to keep the fruits of their
labor, but it also seems to me that there may be trillions of dollars
that are locked up because of undue capital gains taxes.
Have you considered what the impact might be on bringing more
capital into the marketplace by lowering the rates or eliminating
capital gains taxes? I don't know if you've considered that. I'm not
going to press you for an answer, but if you would like to, I would
be interested in your response. If you haven't looked into it, I
would be interested in your sharing that with me.
Mr. NADER. The principal area of tax waivers for poor areas in
our country historically has been Puerto Rico. Going back to when
I went down there back in the 1950's and my modest familiarity
with the situation until now, it hasn't worked very well and there
is massive unemployment.
The CHAIRMAN. It has been abused, too, in certain cases.
Mr. NADER. Abused, massive unemployment and if it wasn't for
the exodus of Puerto Ricans to the mainland it would be even
worse, not to mention the terrible pollution problems.
Here is what I think has worked in other poor areas and not just
in the United States. The key is providing credit and capital to indigenous entrepreneurs who live there and who are going to build
job-intensive businesses. That requires a semblance of law and
order of course, a physical security in these areas, but the idea of
getting one big plant into a large area where the underclass live
with a tax break is just more Puerto Rico all over again. It has also
a lot of instability accorded to it.
Imagine the poor workers in Puerto Rico when they hear Members of Congress say they want to get rid of the tax break for companies that go to Puerto Rico. They're very much strapped.
Have you heard about this little bank I think in Bangladesh
which loans small amounts of money to women that has been so
spectacularly successful?
T h e CHAIRMAN. Y e s .

Mr. NADER. Well, on a large scale if the Fed through its research
and through a heightened sensitivity would pay attention to how
it could develop loan/loss reserve funds the way Michigan is experimenting with to get the capital and credit into the poor areas and
other ways of providing capital and credit I think it could perform
a great service. I'm not that impressed by the tax expenditure.
The CHAIRMAN. Then you don't think capital gains tax cuts are
the answer?
Mr. NADER. NO. Even to the extent it works it is absentee ownership and it can be pulled out by other venue that gives them dif-




56
ferent kinds of corporate breaks or welfare. What you want is not
only job producing businesses in the poor areas, but you want the
neighborhood itself with all the collateral development to revive
once again.
The CHAIRMAN. I am impressed by your observation, and I think
it is an absolute reality and truism, that absent public safety and
security you can't make it, whether it is in business, whether it is
in school, or whatever it is. That is an absolute essential ingredient
for any hope of success.
Mr. NADER. That's right. You can have the desire, but if you
don't have the water, and the water is in effect the physical security of these neighborhoods it isn't going to work.
The CHAIRMAN. Let me say this, I am going to ask our staff to
meet with the colleagues that you've suggested in attempting to develop those areas where we might, and I guess this would be very,
very provocative but I'm kind of used to that, want greater accountability and those areas where there is no question that we would
not want to interfere with monetary policy. We do not want a situation where Congress or the President decide to jack up the interest rates or drop them down to score political points, et cetera, because we want to recognize that there are areas where we should
be concerned about political influence.
I also want to say that I think that you have brought to us some
very valid concerns. We will look at them because I do believe we
have to exercise proper oversight, not to be intrusive and not to
have a power grab because that is not our intent.
And last, but not least, I am wondering if you might want to consider how we could work to enhance credit opportunities particularly to small businesses both in distressed and nondistressed
areas. I am interested in this area and sponsored the securitization
of loans for small businesses. We haven't gotten a study, and we
should be able to get that information fairly easily, as to where
securitization has been effective and whether banks are involved
because the marketplace takes time to adjust.
But I am very much concerned that there is not an adequate capital flow into distressed economic areas and into small business
communities. I recognize that if we fail to provide public safety in
these areas there is not going to be capital flow. As a person who
cares deeply about a community, you wouldn't try to invest in an
area where you saw that that business would have no chance of
surviving. It just seems to me that this is one of the areas that we
just really have to do more and do a better job without political
grandstanding.
Mr. NADER. I think your concern earlier to Chairman Greenspan
was not adequately responded to by the Chairman about the effect
of mergers reducing loans to small businesses. Jon Brown can provide a very careful critique of the Chairman's response if you would
like it, but I would just like to make this point.
When small business works with smaller banks there is a whole
pattern of relationships that buildup. They're not all quantified and
monetized the way the big banks do when they decide who gets it
and who doesn't. Character, confidence, knowledge of the families,
et cetera, that has been severely impaired by the merger wave that
has been going on.




57
The CHAIRMAN. Have you examined at all the necessity to continue providing Federal deposit insurance in the manner in which
we do it now?
Mr. NADER. Yes. Without going into any detail, we have made
observations about how it provided too much of an incentive for the
capital pools in the savings and loan crisis and how it's extremely
risky to in effect cap that fund at $25 billion at a time of spectacular problems.
The CHAIRMAN. Well, let me ask you this. Have you thought
about eliminating the insurance, except for limited amounts, and
returning to maybe the $20-$25 thousand or $50 thousand per individual limit, and I don't mean at an individual institution, but
throughout the system. You would probably have to charge a minimal amount because the institution would then be in a position of
acting as a broker because you would be restricted to investing in
Federally-insured instruments. This would give the people a guarantee, those who did not have the capacity to buy Treasury securities, and the bank could make a small service charge for handling
that. Now some people in the industry may not be happy, although
I hear everybody tell me they want competition. They don't want
Federal regulation, et cetera.
Why should the Federal Government be insuring, and not only
billions, but trillions of dollars worth of business activity that it
has very little control over and place taxpayers' money at risk?
Mr. NADER. First, I think it should have some control attendant
to its insurance function. I think it is a recognition that bankers
can get out of control. They get too greedy, too risky, and too speculative and damage a lot of innocent people in the process.
The CHAIRMAN. HOW do you supervise it? What I am saying is
I think it is impossible to supervise adequately given the risk attendant and given the technological developments that have taken
place and continue to take place and the different kinds of instruments, et cetera.
Mr. NADER. Well, one is given the S & L experience—it is the old
fashioned supervision of crooks. I mean they were just crooks, the
heads of these banks who behaved in the old fashioned way of
crime, and that was not prevented by the Federal or the State
banking agencies. They knew what was coming, but they looked
the other way, as well, by the way, as did the Board of Directors,
the outside law firms, and the outside accounting firms.
Second, you could have risk weighted insurance functions. There
is a principal concern I have about getting rid of Federal insurance
all together, and that is it will reduce the ability of new entries
into the banking business. I think the fact that a new bank could
start with that insurance of the FDIC allowed some new entries,
and maybe that's not even a worry any more, and maybe we're
going to end up with eight giant mega-bank corporations, but there
is a question of the stimulus to competition, new entries, when you
have a Federal deposit guaranteed system.
The CHAIRMAN. Maybe you'll take a look at it.
Mr. NADER. Sure.
The CHAIRMAN. I mean we're going to examine it. I think we owe
it to the people, I think we owe it to the Committee, and I think
we owe it to the industry to do that, to take a comprehensive look




58
at what role, and I'm not suggesting we're going to eliminate it entirely, but what role should deposit insurance play. Should it be restricted to certain kinds of institutions that will be limited in terms
of the investments they can make? Why should we be insuring all
kinds of activities that the regulators themselves have very little,
if any, experience with, derivatives, et cetera. One of these days we
may walk into a situation where we find out that there are some
serious problems.
Mr. NADER. The problem is as long as you have this too big to
fail unwritten policy of the Federal Government if these banks misbehave and aren't prudently controlled through any kind of insurance function or auditing function and they're big enough, is there
anybody bold enough to say that the taxpayer will not be forced to
bail them out?
The CHAIRMAN. That's a legitimate question, and, second, even
with the most prudent oversight today given the complexity and
the magnitude of some of these transactions are we able to adequately supervise these transactions?
Mr. NADER. Here is where I come with my final suggestion.
When the savings and loan bailouts were first being proposed in
the Congress, you were here, it was thought about $50 billion a
year that would be needed. Some of us proposed that to prevent
this from happening again that the savings and loans, since they
had such a Federal backup and bailout, be required to put an insert in their envelope at no cost to themselves and no extra postage
which would invite financial consumers to band together in what
are called Financial Consumer Associations (FCA's). Congressman
Schumer championed this early on. Here is how this would work.
Bank customers would get this insert periodically in their bank
statement. If they wanted to they would fill out a coupon and send
in $5 or $10 or whatever the annual dues were, have a vote to elect
the Council Directors of this Statewide Financial Consumer Association which would hire a full-time staff, not just to watchdog, but
also to negotiate with the banks and also to provide more information to consumers about all of these different laws and protections
such as equal credit opportunity and Truth-in-Savings.
I was very, very upset when there was such a poor response, six
Members of the House Banking Committee supported this, because
it doesn't cost the taxpayer anything, it's voluntary to the consumer
and it's universally accessible, and it redresses that imbalance between the banks and the unorganized customers, especially nonbusiness customers. Yet the taxpayers who had nothing to do with
this savings and loan debacle were forced over a period of 25 years
to pay half a trillion dollars in principal and interest.
Once you develop a community intelligence back home where a
sufficient number belong, this idea can work for the people. I am
waiving this insert in front of you because this comes from Illinois
where, in the residential ratepayer area, this was done in 1983 for
electric, telephone, and gas companies in the billing envelopes and
in later years it is included in State government mailings. It has
worked beautifully. The consumer is represented by competent
staff, there are 200,000 members of the Illinois Citizen Utility
Board and they joined voluntarily and have a $1.5 million budget.




59
Just to give you one example of their victory, in September 1993
they privately negotiated a $1.3 billion refund from Commonwealth
Edison for overcharging the residents of Northern Illinois in terms
of excessive capacity of their nuclear power plants, which they
charged to the consumer instead of to their investor. In areas of
telecommunications, gas pipelines, electricity there is someone
there for the consumer. There is a watchdog. It's not just an easy
idea, but such a powerful one, and it's not regulation. It's just facilitating and making it easier for financial consumer associations
to band together. Your good friend, the former Governor Mario
Cuomo was a supporter of that.
The CHAIRMAN. Let me tell you, he should have been thinking
about the bailout of LILCO with $6 billion that the taxpayers and
ratepayers got stuck paying which is making our Island an economic wasteland with the highest utility rates in the country. If
you want to talk about a bailout, we bailed out the stockholders,
we bailed out the bondholders and we absolutely drowned the ratepayers of Long Island. This is about as bad as the Mexican situation. People buy stock and they buy bonds and they build this
plant, $6 billion. They come and say, no, you can't open it. All
right. It seems to me that if you bought stock in it and you have
bonds in it the ratepayers shouldn't now be called to pay for this
plant that was never operated. Incredible.
Mr. NADER. I submit that if you had these kinds of associations
it would have been better for you.
The CHAIRMAN. I only got into that because you know who the
architect of that was. That was Governor Cuomo. Now I have to
tell you that I think our State Legislature went along with him,
and the Public Service Commission, where were they? They actually went along with this thing, too. There was no public representation there. I think we ought to get a Nader lawsuit going.
[Laughter.]
I mean I don't know if the statute of limitations has run. I'll have
to check that out.
Seriously, I want to thank you for coming in and for making us
aware of your concerns and the manner in which you attempted to
deal with some of the issues that you brought forth.
We stand in recess.
[Whereupon, at 2:52 p.m., the Committee adjourned, subject to
the call of the Chair.]
[Prepared statements, biographical sketches, and additional material supplied for the record follow:]




60
PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
Mr. Chairman, thank you for the opportunity to gather insight from these wellrespected economists and Federal Reserve Board nominees. I believe President Clinton has done himself a favor by nominating Laurence Meyer and Alice Rivlin. I also
believe the renomination of Alan Greenspan as Chairman of the Federal Reserve
is imperative to the continuity of monetary policy and certainty of financial markets.
I continue to believe the best monetary policy a country can have is one that
strives for price stability and zero inflation. Inflation is a tax plain and simple.
Americans are taxed too much already and should not have the purchasing power
of their dollar stolen from them. Hard working Americans deserve to bear the fruits
of their labor, and a strong, sound, independent bank is essential to that goal.
Lately, the Federal Reserve has been criticized for not being accountable to Congress. Some Members have even suggested we politicize the Federal Reserve Bank.
Let me say that I believe that would be the biggest mistake we could ever make.
Congress and the President cannot even agree on a balanced budget deal, much less
the rate of growth of monetary aggregates or the correct Federal funds rate. Monetary policy should not be subject to the whims of the political cycle. Without qualification, the Federal Reserve Bank should maintain its independence.
Last, I want to say that I was intrigued by Chairman Greenspan's recent testimony on the Hill. In particular, I enjoyed his comments on increasing the growth
potential of the U.S. economy. At a time of job insecurity and less than promising
economic expansion, I look forward to talking with the nominees and gathering their
insights on how to best increase the noninflationary growth potential for the United
States.
Thank you Mr. Chairman.




61
STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES

Name:

RIVLIN, ALICE MITCHELL

Position to which
nominated:

Member & Vice Chair, Federal Reserve Board

Date of nomination:

March 15,1996

Date of birth:

4 March 1931

Place of birth:

Philadelphia, Pennsylvania

Marital status:

Married

Full name/Spouse:

Sidney Graham Winter

Name and ages
of children:

Catherine Amy Rivlin, 39
Allan Mitchell Rivlin, 37
Douglas Gray Rivlin, 32

Institution

Dates
Attended

Degrees
Received

Radcliffe College

1953-57

Ph.D/Economics
MA./Economics

1958
1955

Bryn Mawr College

1948-52

B.A./Economics

1952

Madeira School
University School
Madeira School

Education:

Dates of
Degrees

1944-46
1946-47
1947-48

High Sch Diploma

1948

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.
1983-87:
1984:
1984:
1976:
1975:
1975:

Fed Nomination,

24-529

MacArthur Foundation Prize Fellowship
LLD, Yale University
Harvard University's Godkin Lecturer
Doctor of Science, University of Indiana
LLD, University of Maryland
LLD, University of Michigan

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Committee

March 22, 1996

62
Memberships: List below ail memberships and offices held in professional, fraternal, business,
scholarly, civic, charitable and other organizations.
Office held
(if any)

Organization
American Economic Association

Member (National President, Vice
President, Member of Executive Committee)

Committee for A Responsible
Federal Budget

Director

Congressional Budget Office

Panel of Economic Advisers

Council on Foreign Relations

Member, Director

Eugene and Agnes E. Meyer
Foundation

Director

Madeira School Alumnae Assoc.

Member

Bryn Mawr Club of Washington

Member

Radcliffe Club of Washington

Member

TJ International

Director

Union Carbide Corporation

Director

Unisys Corporation

Director

The Wilderness Society

Member, Chair, Governing Council

The Los Angeles Times Board
Of Economists

Member

Time Board of Economists

Member

Fed Nomination,

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Committee

2

March 22, 1996

63
Newspaper Columnist: The
Washington Post, New York Times,
Atlanta Constitution, other papers
and magazines
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.
10/94 - Present:

Director, Office of Management and Budget, Washington, D.C.

1/93-10/94:

Deputy Director, Office of Management and Budget, Washington, D.C.

1/92-1/93:

Hirst Professor of Public Policy, George Mason University, Fairfax, VA
(on leave Brookings Institution)

1987-1/93

Senior Fellow, Economic Studies Brookings Institution, Washington, D.C.

Spring Semester

Visiting Professor, John F. Kennedy School of Government, Harvard

1988:

University, Cambridge, MA

1983-87:

Director, Economic Studies, Brookings Institution, Washington. D.C.

1975-83:

Director, Congressional Budget Office, Washington, D.C.

1969-75:

Senior Fellow, Economic Studies Program, Brookings Institution,
Washington, D.C.

1971:

Editorial Writer, The Washington Post (4 months leave from Brookings
Institution)

1968-69:

Assistant Secretary for Planning and Evaluation, U.S. Department of
Health, Education and Welfare, Washington, D.C.

1966-68:

Deputy Assistant Secretary for Program Coordination, U.S. Department of
Health, Education and Welfare, Washington, D.C.

1958-66:

Economist, Economic Studies Program, Brookings Institution,
Washington, D.C.

1961-62:

Staff Member, Advisory Commission on Intergovernmental Relations (on
leave from Brookings Institution)

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64
1957-58:

Research Fellow, Economic Studies Program, Brookings Institution,
Washington, D.C.

1954-57:

Teaching Fellow and Tutor in Economics, Harvard University,
Cambridge, MA

1952-53:

Research Assistant, U.S. Mutual Security Agency, Paris, France

Government experience: 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.
1994-present:

Director, Office of Management and Budget

1993-94:

Deputy Director, Office of Managment and Budget

1989-90:

Chair, Commission on Budget and Financial Priorities of the District of
Columbia

1983-92:

Panel of Economic Advisers, Congressional Budget Office

1975-83:

Director, Congressional Budget Office

1968-69:

Assistant Secretary for Planning and Evaluation, U.S. Department of
Health, Education and Welfare

1966-68:

Deputy Assistant Secretary for Program Coordination, U.S. Department of
Health, Eduation and Welfare

1961-62:

Staff Member, Advisory Commission on Intergovernmental Relations (on
leave from Brookings Institution)

Published writings: List the titles, publishers and dates of books, articles, reports or other
published materials you have written.
See Appendix 1
Political affiliations and activities: List all memberships and offices held in and services
rendered to all political parties or election committees during the last 10 years.
Occasional consultation on issues with Clinton Campaign, 1992.

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65
Political contributions: 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.
1988:
Democratic Victory Fund (Dukakis campaign)

$ 1,000.00

1989:
Emily's List

500.00

1990:
Emily's List
Josie Heath for Senate (Colorado)
Hoosiers for Long (Indiana)
Bellamy for the '90's (New York)
Jolene Unsoeld Campaign
Sandy Scofield for Congress
Friends of Senator Carl Levin

1,000.00
500.00
500.00
500.00
500.00
500.00
1,000.00

1991:
Citizens for Eleanor Holmes Norton
Jim Hunt Committee
Citizens for Senator Wofford
Wholey for State Legislature
Yrun for Congress Committee
Mikulski for Senate

500.00
500.00
500.00
500.00
500.00
500.00

1992:
Democratic National Committee
Emily's List
Levin for Congress
Owens for Senate Committee
Yeakel for Senate
Eshoo for Congress
Boxer for Senate

1,000.00
3,000.00
500.00
500.00
500.00
500.00
500.00

1993:
Democrats 2000
Fed Nomination,

Senate Banking




1,000.00
Committee

5

March 22, 1996

66
Terry for Governor (MarySue Terry, VA)
Emily's List

500.00

1,000.00

1994:

1,000.00

Emily's List
Citizens for Wofford

500.00

1995:
Emily's List
Minnick for Senate
Clinton-Gore Campaign

1,000.00
1,000.00 (Idaho)
1,000.00

Qualifications: State fully your qualifications to serve in the position to which you have been
named.
I believe I am well qualified to serve as the Vice Chair of the Federal Reserve Board of
Governors by virtue of my training, experience, and deep commitment to strengthening the
American economy and making public institutions work more effectively.
I was trained as an economist and have focused my attention over four decades on public
policy issues at the national level. For part of that time, I did research and policy analysis or directed others doing such research and analysis - at the Brookings Institution in
Washington, a public policy "Think Tank". There I dealt with fiscal and monetary policy,
budget process, international trade matters, investment in human resources, health care, and a
wide range of other issues. I did studies, wrote books, and interacted with the academic and
policy communities in Washington. I also served on the boards of directors of several major
corporations, one regional bank, and several non profit organizations.
I have also served in the Federal government several times in difference capacities. I helped
set up the policy/planning staff at the Department of Health, Education, and Welfare in the
late 1960's, serving as Assistant Secretary for Planning and Evaluation. In 1975,1 was asked
by the U.S. Congress to be the first Director of the newly created Congressional Budget
Office. I worked with the Budget Committees and the leadership of Congress to figure out
what that office should do and how to do it. I hired a staff to produce the analysis that the
Congress needed to make better budget and economic decisions. We created a strong,
credible and respected economic institution, of which I remain extremely proud.
Since January 1993,1 have served President Clinton at the Office of Management and Budget,
first as the Deputy Director and then as the Director. In that capacity I have helped the
President make budget proposals and manage the government more effectively. It has been a

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67
difficult period for budget policy, but I am proud of the Administration's record of deficit
reduction and improved functioning of the federal government.
My years of work on fiscal and budget policy have reinforced my understand of the Federal
Reserve as a crucial institution in enhancing the strength and stability of the American economy.
If confirmed by the Senate, I would look forward to making a contribution to the decisions and
activities of the Federal Reserve Board.
Future employment relationships:
1. Indicate whether you will sever all connections with your present employer, business
firm, association or organization if you are confirmed by the Senate.
My present employer is the U.S. Government. I have already severed all business
connections.
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.
No.
3. Has anybody made you a commitment to a job after you leave government?
No.
4. Do you expect to serve the full term for which you have been appointed?
Yes
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 nominated.
None.
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.
None.

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68
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 constitute or result
in a possible conflict of interest with the position to which you have been nominated.
None.
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.
As Director of the Office of Management and Budget, I have engaged in discussions with
members and staff to explain and promote the President's program.
5. Explain how you will resolve any potential conflict of interest that may be disclosed by
your responses to the above items.
Any potential conflicts that arise will be resolved through recusal or other appropriate action.
I have established a qualified diversified blind trust and I have divested all assets that could
pose a conflict.
Civil, criminal and investigatory actions:
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.
None.
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.
None.

Fed Nomination,

Senate Banking




Committee

8

March 22, 1996

69
APPENDIX I

PUBLICATIONS
BOOKS
Reviving the American Dream: The Economy, the States and the
Federal Government. Washington, D.C.: The Brookings Institution,
1992.
Caring for the Disabled Elderlv: Who Will Pay? (with Joshua
Wiener), Washington, D.C.: The Brookings Institution, 1988.
Economic Choices 1987 (with Henry J. Aaron, Harvey Galper, Joseph
A. Pechman, George L. Perry, Charles L. Schultze), Washington,
D.C.: The Brookings Institution, 1987.
The Swedish Economy (co-editor with Barry P. Bosworth),
Washington, D.C.: The Brookings Institution, 1987.
Economic Choices 1984 (editor and contributor), Washington, D.C.:
The Brookings Institution, 1983.
Ethical and Legal Issues of Social Experimentation (co-editor
with Michael Timpane), Washington, D.C.: The Brookings
Institution, 1975.
Planned Variation in Education: Should We Give UP or Trv Harder?
(co-editor with Michael Timpane), Washington, D.C.: The
Brookings Institution, 1975.
Setting National Priorities: The 1974 Budget (with Charles L.
Schultze, Edward R. Fried, Nancy H. Teeters), Washington, D.C.:
The Brookings Institution, 1973.
New approaches to Public Decision-Making. Canada:
Council of Canada, 1972.

Economic

Setting National Priorities: The 1973 Budget (with Charles L.
Schultze, Edward R. Fried, Nancy H. Teeters), Washington, D.C.:
The Brookings Institution, 1972.
Setting National Priorities: The 1972 Budget (with Charles L.
Schultze, Edward R. Fried, Nancy H. Teeters), Washington, D.C.:
The Brookings Institution, 1971.
Systematic Thinking for Social Action. Washington, D.C.:
Brookings Institution, 1971.

The

The U.S. Balance of Payments in 1968 (with Walter Salant and
others), Washington, D.C.: The Brookings Institution, 1963.
Measures of State and Local Fiscal Capacity and Tax Effort (with
Susan Mushkin) , U.S. Advisory Commission on Intergovernmental
Relations, 1962.




70
Microanalysis of Socioeconomics Systems: A Simulation Study
(with Guy Orcutt and others), Harpers, 1961.
The Role of the Federal Government in Financing Higher Education,
Washington, D.C.: The Brookings Institution, 1961.
SUPERVISED PREPARATION OF...
Financing the Nation's Capital (The Report of the Commission on
Budget and Financial Priorities of the District of Columbia),
November 1990.
Numerous reports of the Congressional Budget Office, 1975-83.
Toward a Long-Range Plan for Federal Financial Support for Higher
Education (U.S. Department of Health, Education and Welfare),
January 1969.
Toward a Social Report (U.S. Department of Health, Education, and
Welfare), February 1969.
Medical Care Prices. A Report to the President (U.S. Department
of Health, Education, and Welfare), February 1967.
SELECTED ARTICLE8. PAPERS > ETC.
"Beyond Alliances: Global Security Through Focused Partnerships"
(with General David C. Jones (USAF, Ret.) and General Edward C.
Meyer (USA, Ret.). A Study Funded by the John D. and Catherine
T. MacArthur Foundation and the Rockefeller Foundation. October
1990.
"Simulating Policy alternatives for Long-Term Care: An Example
of the Orcutt Approach," Journal 6f Economic Behavior and
Organization, Vol. 14, No. 1, September 1990.
"Understanding Economic Policy: A Citizen's Handbook" (with
Carol G. Cox), Washington, D.C.: League of Women Voters
Education Fund, 1990.
"The Case for common Shared Taxes,"

NTA Forum, Fall 1990.

"Wanted: A New State-Level Tax to Prepare Us for the 21st
Century," A Commentary, Governing. April 1990.
"The Continuing Search for a Popular Tax," The American Economic
Review Vol. 79, No. 2, May 1989.
"Insuring Long-Term Care," (with Joshua M. Wiener). George L.
Maddox and M. Powell Lawton, eds., Annual Review of Gerontology
and Geriatrics. Vol. 8, 1988.




2

71
"Economic Policy," (with Paul H. O'Neill, W. Michael Blumenthal
and James D. Robinson, III), American Agenda: Report to the
Forty-First President of the United States of America.
Washington, D.C.: America Agenda, Incorporated.
"Who Should Pay for Long-Term Care for the Elderly?"
Brookings Bulletin. Vol 6, No. 3, Summer 1988.

The

"Systematic Analysis of Defense Issues: The Role of the
Congress," Naval War College Review. Vol. XLI, No. 4, Seq. 324,
Autumn 1988.
"Economics and the Political Process," (Presidential address
delivered at the ninety-ninth meeting of the American Economic
Association, December 29, 1986, New Orleans, Louisiana), The
American Economic Review. Vol. 77, No. 1, March 1987.
"The Tax Reform Act," The Senior Economist. Vol. 2, No. 2, Spring
1987.
"Unsnarling the Process: Seven Ways to Improve Economic
Policymaking," Public Welfare. Vol. 45, No. 3, Summer 1987.
"The Need for a Better Budget Process," The Brookings Bulletin.
Vol. 4, No. 3, Summer 1986.
"Thoughts on Public Expenditures," Eastern Economic Journal. Vol.
XI, No. 1, January-April 1985.
"Reform of the Budget Process," The American Economic Review. May
1984; available as the Brookings Institution General Series
Reprint No. 402.
"Why and How to Cut the Deficit," The Brookings Bulletin, Vol. 2,
No. 4, Summer 1984.
"The Political Economy of Budget Choices:
The American Economic Review, May 1982.

A View from Congress,"

"Income Distribution—Can Economists Help?" The American
Economic Review. May 1975; available as the Brookings Institution
General Series Reprint No. 307.
"How Can Experiments Be More Useful?" The American Economic
Review. May 1974; available as the Brookings Institution General
Series Reprint No. 290.
"Social Policy: Alternate Strategies for the Federal
Government." Presented and published as Woytinsky Lecture No. 3.
Michigan: The University of Michigan, 1973; available as
Brookings Institution General Series Reprint No. 288.




3

72
"Experimentation in Urban Education" (Spaulding Lecture delivered
March 1971), Issues in Urban Education, New Haven, Connecticut:
Yale University, 1972.
"New Approaches to Public Decision-Making," Special Study No. 18
prepared for the Economic Council of Canada, January 1972.
"Why Can't We Get Things Done?" The Brookings Bulletin. Vol. 9,
No. 2, Spring 1972.
"Rethinking The Role of
Secondary Education for
Needs of Elementary and
Washington, D.C.: " U.S.
March 1970.

the Federal Government in Elementary and
the Seventies," with Robert W. Hartmanm
Secondary Education for the Seventies.
House Committee on Education and Labor,

"Growth and Change in Higher Education," with June O'Neill,
Proceedings of the Academy of Political Science. Spring 1970.
"Education, Politics, and Federal Aid," The Progressive. October
1970.
"Social Goals and Federal Support of Higher Education: The
Implications of Various Strategies," with Jeffrey H. Weiss, U.S.
Joint Economic committee, Compendium of Papers on The Economics
of Higher Education in the United States. 1969.
"The Planning, Programming, and Budgeting System in the
Department of Health, Education, and Welfare: Some Lessons from
Experience," Subcommittee on Economy in Government of the U.S.
Joint Economic Committee, 91st Congress, 1st Session, Compendium
of Papers on the Analysis and Evaluation of Public Expenditures:
The PPB System, (Vol. 3, Pt. V, 1969); available as the Brookings
Institution Reprint No. 162.
"Population Growth and the American Economy," F.X. Quinn (ed.)
Population Ethics. Corpus Books, 1968.
"Privacy, Poverty, and Old Age," with John C. Beresford,
Demography. Vol. 3., No. 1., 1966. Reprinted in Jeffrey K.
Hadden and Marie L. Borgatta, Editors, Marriage and the Family:
A Comprehensive Reader. F.E. Peacock Publishers Inc., 1969.
"Critical Issues in the Development of Vocational Education,"
Unemployment in a Prosperous Economy (William G. Bowen and
Frederick C. Harbison, eds.), Princeton, 1965; available as
Brookings Institution Reprint No. 112.
"Characteristics of 'Other' Families," with John C. Beresford,
Demography. Vol. 1, No., 1964.




4

73
"Research in the Economics of Higher Education: Progress and
Problems," Selma J. Mushkin (ed.) Economics of Higher Education.
Washington, D.C.: U.S. Department of Health, Education, and
Welfare, 1962; available as the Brookings Institution Reprint No.
63.
"An Economic and Demographic Model of the Household Sector: A
Progress Report," (with Guy H. Orcutt), National Bureau of
Economic Research, New York, Demographic and Economic Change in
Developed Countries. Princeton: Princeton University Press,
1960.




5

74
PREPARED STATEMENT OF LAURENCE H. MEYER
Mr. Chairman and Members of the Committee, it is a pleasure for me to appear
before you today as President Clinton's nominee to serve on the Board of Governors
of the Federal Reserve System.
If confirmed, I pledge to work with the other Members of the Board to carry out
the objectives that you, the Congress, have established for monetary policy and the
responsibilities you have entrusted to the Federal Reserve with regard to protecting
the safety and soundness of the banking system in particular and financial markets
in general, ensuring the efficiency and integrity of the payments process, and enforcing fai,r lending laws and other consumer legislation. These are wide-ranging and
important responsibilities and I look forward to an opportunity to serve the Nation
in their pursuit.
Background and Qualifications
I must say at the outset that I believe I have been preparing for this opportunity
my whole life. I hold a B.A. in economics from Yale University and a Ph.D. in economics from MIT. Since 1969, I have taught at Washington University, where I am
currently a Professor of Economics and Research Associate in the University's Center for the Study of American Business. I have also been a principal in an economic
consulting firm, Laurence H. Meyer & Associates, which I began and have participated in since 1982 with two of my former students. The firm provides modeling,
forecasting, and policy analysis to Government agencies, trade associations, and private firms. Along the way I have had the opportunity to spend a year at the Federal
Reserve Bank of New York and another year at the Federal Reserve Bank of St.
Louis.
I have published research on a range of topics in macroeconomics, a textbook on
macroeconomic modeling, and numerous studies on policy-related topics, for the
most part with my partners in my consulting firm, with a special focus on the economic consequences of deficit reduction and tax reform.
The model developed by my firm has been in use at the Council of Economic Advisers, the Office of Management and Budget, and the Department of Treasury in
this and the preceding two Administrations, is used by both the nonpartisan Congressional Budget Office and the Board of Governors of the Federal Reserve System,
and, more recently, has found a home at the House Budget Committee and the Joint
Tax Committee. Our interpretation of the economic outlook and our analysis of policy initiatives is widely appreciated. In two of the last 3 years I have received the
Annual Forecast Award, on behalf of my firm, recognizing the most accurate forecaster on the Blue Chip Economic Indicators forecast panel. The first award was for
the period 1989-1992 and the second for the period 1991-1994.
Monetary Policy Objectives
I stated earlier my affirmation of the objectives for monetary policy detailed in
the Federal Reserve Act. These objectives are "maximum employment, stable prices,
and moderate long-term interest rates." Such an affirmation, however, may leave
open in your minds important questions about my view of the role of monetary policy and you deserve a more detailed statement from me.
Economists usually identify three objectives as central to excellent macroeconomic
performance. These objectives are price stability, full employment, and adequate
growth. I want to address the role of monetary policy in relation to each objective
and also indicate my perspective on how we are doing at the moment with respect
to each.
I have chosen an ordering of the objectives that reflects the degree of control and
therefore responsibility that the Federal Reserve has over each. One of the themes
I want to develop here is that you should never expect more of policy than it can
deliver.
Price stability comes first because it is the singular goal for monetary policy in
the long run. Inflation undermines the efficiency of the economy and may also,
through its interaction with our tax system, discourage saving and investment. Promoting price stability is the principal contribution monetary policy can make toward
achieving high living standards in the long run. Macroeconomic theory tells us that,
in the long run, inflation is principally caused by money supply growth which in
turn is determined by the Federal Reserve System. When it comes to price stability,
therefore, the buck literally stops at the Federal Reserve. To be sure, in the short
run, inflation can be affected by a variety of other factors, including the degree of
slack in labor and product markets and external supply shocks such as weather-induced surges in food prices or politically-inspired jumps in oil prices. None of this
overrides the ultimate responsibility of the Federal Reserve for containing inflation
in the long run.




75
Chairman Greenspan has suggested that price stability is achieved when inflation
expectations no longer influence household and business decisions. This statement
of the objective does not link it to a specific price index (there being several measures of inflation deserving of consideration), nor does it identify a specific quantitative target (a task compromised by the now well appreciated but still quantitatively uncertain biases in many of our price indexes). And, yet, no one on the
Committee, I expect, doubts the seriousness of the Chairman's commitment to price
stability. I hope you will come to trust my commitment as equal to the Chairman's.
We have made continuing and impressive progress toward achieving price stability. The inflation rate for the CPI, for example, has been near 2V2 percent over each
of the past 2 years. Let me also note that, unlike most private forecasters, I have
shown great confidence in the Federal Reserve by projecting inflation at 2 percent
or lower over 5 years, compared with consensus forecasts closer to 3 percent. It will
be my pleasure to serve on the Board, if confirmed, during a period when price stability is at last within reach.
A brief comment about the objective of "moderate long-term interest rates" is in
order before moving on to the full employment and growth objectives. In the long
run the major influence of the Federal Reserve on nominal interest rates arises from
it's effect on inflation and hence on inflation expectations. Therefore, meeting the
price stability objective directly ensures that the Federal Reserve will be promoting
moderate long-term interest rates. Real interest rates, on the other hand, are influenced, at least in the long run, principally by saving and investment propensities
in the private sector and by fiscal policy decisions related to both the tax structure
and the deficit. Monetary policy, in contrast, has little influence on real interest
rates in the long run.
The second (independent) goal, full employment, is the basis for the commitment
in the Federal Reserve Act to "maximum employment." The language in the Act
leaves much to be desired from the standpoint of precision. But if we accept that
"maximum employment" can be translated as "achieving and maintaining full employment," then "all" we have to do is to define full emplo^pient. The conventional
wisdom, which I fully endorse, holds that full employment is the maximum level of
employment that can be sustained without suffering increasing inflation. We, therefore, refer to the unemployment rate at full employment as NAIRU, the non-accelerating inflation rate of unemployment. Below this threshold, inflation increases
progressively and indefinitely. Above this threshold, we achieve continuous disinflation. At NAIRU, and only at NAIRU, inflation is constant.
This view implies that there is no long-run tradeoff between inflation and unemployment. Therefore, there is no conflict in the long run between the objectives of
price stability and full employment. The unemployment rate is 5V2 percent today.
That is at the bottom end of the 5V2 percent to 6 percent range for NAIRU that
most students of this subject, including myself, feel comfortable with. Nevertheless,
NAIRU has to be estimated, not measured, and is subject to variation through
structural change in the economy. I constantly monitored and occasionally adjusted
our estimation of NAIRU at Laurence H. Meyer & Associates and will continue to
be open to new evidence on this subject.
The third goal, adequate economic growth, has certainly received its fair share of
attention of late. As you know, the President has focused considerable attention on
this goal, and appropriately so, in light of the disappointing rate of growth in GDP
on average since the early 1970's and the near stagnation in the real spendable income of the median family over the past 20 years. Before I present my views on
the role of monetary policy with respect to growth, let me clarify this goal and distinguish it from that of full employment. By growth, I mean the growth in the
economy's productive capacity: This is the rate of growth possible once the economy
has achieved full employment. It will also be very close to the actual growth observed over periods long enough to wash out the effect of business cycles. I will refer
to this as "trend growth." Trend growth is the result of the growth in the labor
force, the growth in the capital stock, and the advance in knowledge.
The Federal Reserve cannot, itself, raise trend growth. Growth is predominately
the outcome of private sector decisions related to work effort, education, research
and development, saving, and investment. Yet public policy can make a difference.
Without meaning to overstate the degree to which Congress can raise the economy's
growth potential, your success in balancing the Federal budget, in weeding out public investments with low rates of return while funding amply those with high rates
of return, in complementing good intentions in regulatory intervention with the discipline to minimize the costs to the private sector, and in sensibly reforming the tax
code to lower marginal tax rates and ensure adequate incentives for investment will
be the policy decisions that have the potential to make a difference.




76
What then is the role of the Federal Reserve with respect to growth? I would term
this role "accommodative" and stand with Chairman Greenspan in his comments on
this subject in his recent Humphrey-Hawkins testimony. The Federal Reserve
should support the full measure of growth that the economy's increase in productive
capacity permits. Growth, as I have defined it here, does not cause inflation. It is
not a threat. It is the vehicle for higher living standards that we all want to achieve.
It is not very difficult to compute the trend rate of growth in the economy over
some historical period. For example, the rate of growth in real GDP from the third
quarter of 1990 to the third quarter of 1995 (both associated with identical 5.5 percent unemployment rates) and 2.0 percent. Projections of future growth are typically
just extrapolations from recent historical experience, with adjustment, for example,
for changes in labor force growth based on Census Bureau population projections.
We can hope for—and some may even feel comfortable in projecting—a speed-up in
trend growth going forward. My responsibility on the Board, if confirmed, will be
to ensure that monetary policy would support any improvement in growth that may
lie ahead.
While there is no conflict among the three objectives in the long run, there can
be conflicts in the short run and it is in such a situation where tough choices are
made and good judgment is required. Consider a set of initial conditions where inflation is above its long-run target level. The only sure way to reduce inflation is
to endure a period of unemployment above the full employment level and this higher unemployment would be produced, in turn, by a period of below-trend growth.
The Federal Reserve in recent years, however, has developed a strategy that minimizes the conflict between the objectives under these circumstance. I have referred
to this strategy as "opportunistic disinflation" and applauded its implementation.
The Federal Reserve moved aggressively, under this strategy, to prevent a breakout of inflation as the economy approached full employment in the current expansion. The result has been well-contained inflation and an unemployment rate of 5V2
percent today. At this point, this strategy calls for the Federal Reserve to patiently
support a continued expansion at full employment and at the trend rate of growth.
Recessions, however, are inevitable, despite the efforts of the Federal Reserve to
promote continued growth at full employment. When the next recession arrives,
whatever the timing, inflation will ratchet down another notch. This strategy gradually and at low cost lowers inflation over time until price stability is achieved.
Independence and Disclosure
I support the independence of the Federal Reserve System. History speaks clearly
to the point that central bank independence is a critical ingredient to ensuring a
steady commitment to price stability.
Finally, it serves the ends of monetary policy well to communicate Federal Reserve decisions in a clear and timely fashion. I applaud the recent innovation of ending each FOMC meeting with a statement that summarizes the decision taken and
that includes at least a brief explanation of any policy change that has been taken.
Regulation
Whereas I have studied and written about monetary policy throughout my entire
career, I have invested less time in and, as a result, have been quiet about the regulatory side of the Federal Reserve's responsibilities. I am now involved in a crash
course in these areas. These are important responsibilities.
I shall present here only a broad perspective on the fundamental principles that
will shape my views with respect to specific issues. I believe strongly in the value
of cost-benefit analysis in the development and implementation of Government regulation. Good intentions are a good start, but they are not an excuse for disregard
for the private sector costs of regulatory intervention.
But neither is the concern over the cost of compliance an excuse for failing to
serve the public good through appropriate regulatory policies. Balance here, as in
all such situations, is the rule of reason and the rule I shall strictly apply in these
matters if you confirm my nomination.
Conclusion
I want to thank this Committee for the speed with which this hearing has been
scheduled. I shall be happy to answer any questions you may have.




77
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
Name:

Meyer, Laurence Harvey

Position to which nominated: Member, Board of Governors, Federal Reserve System
Date of nomination: February 22, 1996
Date of birth:
Place of birth:

8/3/44
Bronx, NY

Marital status: Married
Full name of spouse: Florence Krauser Meyer
Names and ages of children:

Kenneth Michael Meyer, 25
Stephanie Alix Meyer, 22

Education:
Massachusetts Institute of Technology

1965 - 1969

Ph.D.

1970

Yale University

1961 - 1965

B.A.

1965

The Kew-Forest School

1957-1961

diploma

1961

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.
Charles Heber Dickerman Memorial Prize, best senior honors essay in economics, Yale
University, June 1965
Omicron Delta Epsilon, honorary society in economics, 1965
Phi Beta Kappa, 1965
l




78
Wood row Wilson Fellowship, 1965/6
National Defense Education Act (NDEA) Fellowship, 1966/69
Washington University Council of Students of Arts & Sciences Teaching Award, 1977/8
Washington University Inter-Fraternity Council Excellence in Teaching Award, April
1987
Annual Blue Chip Economic Forecasting Award, 1993, 1995
Fellow, National Association of Business Economists, 1994

Memberships:
List below all memberships and offices held in professional,
fraternal, business, scholarly, civic, charitable and other organizations.
Midwest Economics Association

First Vice President, 1990/91

American Economic Association

None

Congregation Bnai Amoona

1969-Present
1970 - Present

Chair, Adult Education Committee

1984

Bnai Amoona Men's Club

1975-Present

Yale Club of St. Louis

1970 - Present

Yale Alumni Schools Committee

1971-74

Yale Alumni Representative

1994/5

Friends of the St. Louis Zoo
Friends of the Botanical Garden
Friends of KETC Channel 9
Friends of KMUW
Friends of the St. Louis Art Museum
2




1977- Present
1980- Present
1980-Present
1985-Present
1980-Present

79
Friends of Jewish Center for the Aged

1985 - Present

Freinds of the Science Center

1982 - Present

U.S. Holocaust Memorial Council

1994-Present

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.
Research Assistant to Professors Albert Ando and Franco Modigliani, 1966 - 1969
Assistant Proressor, Washington University, 1969 - 76 (on leave, 1975/6)
Economist, Federal Reserve Bank of New York, 1975/6
Visiting Professor, Pace College, 1975/6
Visiting Assistant Professor, Graduate Center, City College of New York, Fall 1975
Visiting Professor, New York University, Spring 1976
Associate Professor, Washington University, 1976 - 82
Visiting Scholar, Federal Reserve Bank of St. Louis, 1979/80
Visiting Lecturer, Queen Mary College, University of, London, Fall 1978
Chairman, Economics Department, Washington University, 1980/83
Professor, Washington University, 1982 - Present
President, Laurence H. Meyer & Associates, Ltd., 1982 - Present
Research Associate, Center for the Study of American Business, 1984 - Present




80
Government experience: 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.
Consulting relationships through Laurence H. Mever & Associates
Council of Economic Advisers
The Office of Management and Budget
The U.S. Department of Treasury
The Department of Commerce
Congressional Budget Office
The House Budget Committee
The Joint Economic Committee
The State of Missouri, Division of Budget and Planning
Illinois Department of Employment Security
Published writings: List the titles, publishers and dates of books, articles, reports
or other published materials you have written.
Journal articles, books, and chapters of books
"A Test of the Specification and Channels of Monetary Policy in the FRB-MIT-Penn
Model", 1971 Proceedings of the Business and Economics Statistics Section of the
American Statistical Association.
"The Response of Interest Rates to Monetary Change: A Simulation Study", 1972
Proceedings of the Business and Economics Statistics Section of the American Statistical
Association.
Review of E.S. Phelps, "Inflation Policy and Unemployment Theory", Journal of
Finance. June 1973.
"Wealth Effects and the Effectiveness of Monetary and Fiscal Policies, Journal of
Money. Credit, and Banking. November 1974.
"Lagged Adjustment in Simple Macro Models", Oxford Economic Papers. November
1974.
"The Balance Sheet Identity, the Government Financing Constraint, and the CrowdingOut Effect", Journal of Monetary Economics. January 1975.

4




81
"Optimal Coordination of Aggregate Stabilization Policy and Price Controls: Some
Simulation Results" (withS.K. Gupta, F.Q. Raines, and T.J. Tarn), Annals of Economic
and Social Measurement. Spring 1975.
"The Effects of Fiscal and Monetary Policy: Completing the Taxonomy" (with W.R.
Hart), American Economic Review. September 1975.
"Optimal Coordination of Aggregate Stabilization Policy and Price Controls: A
Sensitivity Analysis" Proceedings of the 6th Triennial World Congress of the.
International Federation of Automatic Control. 1975.
"Neutrality and Tax Discounting", Metroeconomica. December 1975.
"An Empirical Investigation of the Extent of Tax Discounting" (with J. Yawitz), Journal
of Money. Credit, and Banking. May 1976.
"Alternative Definitions of the Money Stock and the Demand for Money", Federal
Reserve Bank of New York Monthly Review. October 1976.
"Interest-Induced Wealth Effects and the Behavior of Real and Nominal Interest Rates:
A Comment" (with J. Yawitz), Journal of Finance. March 1977.
"The Demand for Money and Bonds in Continuous Time Models: A Comment", Journal
of Economic Theory. June 1977.
"Empirical Evidence on the Effects of Stabilization Policy" (with R. Rasche), in
Stahili?arion Policy: Lessons from the 1970's and Implications for the 1980's. 1980.
Macroeconomics: A Model Building Approach. South-Westera Publishing Company,
1980.
"On the Cost and Benefits of Anti-Inflation Policies" (with R. Rasche), Federal Reserve
Bank of St. Louis Review. February 1980.
"Financing Constraints and the Short-Run Response to Fiscal Policy", Federal Reserve
Bank of St. Louis Review. June-July, 1980.
The Supply Side Effects of Economic Policy, editor, Kluwer-Nijhoff Publishing
Company, 1981.

5




82
H
A Comparison of the St. Louis Model and Two Variations: Predictive Performance and
Policy Implications (with C. Varvares)", Federal Reserve Bank of St. Louis Review,
December 1981.

"Monetary Policy and Rational Expectations: A Comparison of Least Squares and
Bayesian Learning "(with C. Webster), in Carnegie-Rochester Conference on Public
Policy. Fall 1982.
Improving Money Stock Control: Problems. Solutions, and Consequences, editor,,
Kluwer-Nijhoff Publishing Company, 1983.
"The Cost of Imprecise Monetary Control" (with C. Webster), in Improving Money
Stock Control: Problems. Solutions, and Consequences. Kluwer-Nijhoff Publishing
Company, 1983.
The Economic Consequences of Government Deficits, editor, Kluwer-Nijhoff Publishing
Company, 1984.
"Financial Innovation and Monetary Targeting: Discussion", in Financial Innovations:
Their Impact on Monetary Policy and Financial Markets. Kluwer-Nijhoff Publishing
Company, 1984.
"Balancing the Budget in 1991: An Economic Analysis of the Gramm-Rudman-Hollings
Proposal" (with J. Prakken and C. Varvares), appendix to Toward an Economy Without
Deficits. A 1985 Yearend Report on the U.S. Economy. Joint Economic Committee of
the U.S. Congress, January 1986.
"The Political Economy and Macroeconomic Effects of Deficit Reduction in the U.S.",
in Policy Forum on the February 1986 Federal Budget. John Deutsch Institute for the
Study of Economic Policy, Queens University, Kingston, Ontario, April 1986.
"The Fisher Equation Controversy: A Reconciliation of Contradictory Results" (with A.
Sahu and R. Jha), in Southern Economics Journal. July 1990.
"Two Revolutions in Economic Policy: Growth-Oriented Macro Policy in the Kennedy
and Reagan Administrations" (with J. Prakken and C. Varvares), in The Economic
Legacy of the Reagan Years: Euphoria or Chaos?. Anandi P. Sahu and R.L. Tracy (ed.),
New York: Praeger, 1991.
"Tax Reform and Potential Output: A Retrospective Analysis of the Tax Reform Act of
1986" (with J. Prakken and C. Varvares), in Carnegie-Rochester Conference on Public
Policy. Volume 35, Autumn 1992.




83
"Defense Spending and Economic Growth: Spillovers vs. Crowding Out" (with F.Q.
Raines) in Defense Spending and Economic Growth. J. Payne and A Sahu, (ed.),
1993
"Policy Watch: Defining an Effective Investment Tax Credit" (with J. Prakken and C.
Varvares), in Journal of Economic Perspectives. Spring 1993.
Comment on Eric Leeper and Chris Sims, "A Modern Macroeconomic Model Usable
for Policy Analysis," NBER Macro Annuals 1994. National Bureau of Economic
Research, 1994
"Inflation Non-Neutralities and the Response of Interest Rates to Inflation" (with A.
Sahu), Eastern Economics Journal. Winter 1994
Monographs. LHM&A Special Analyses and Testimony:
"Deficit Reduction and the Mix of Monetary and Fiscal Policy", testimony presented to
the Finance Committee of the U.S. Senate, December 14, 1983.
The Washington University Macroeconometric Model of the U.S. Economy (with J.
Prakken and C. Varvares), 1984, 1986, 1989, 1994, 1995.
"Flat Taxes and Capital Formation," (with J. Prakken and C. Varvares), Center for the
Study of American Business, October 1984.
"Can We Grow Out of the Deficits?" (with Joel L. Prakken and Chris P. Varvares),
LHM&A Special Analysis, August 22, 1984
"The Treasury Department's November 1984 Tax Reform Proposal: Implications for
Capital Formation," (with J. Prakken and C. Varvares), study prepared for the Council
of Economic Advisors, December 1984.
"The President's Tax Reform Proposal: Implications for Capital Formation," (with J.
Prakken and C. Varvares), Center for the Study of American Business, June 1985.
"Tax Reform, Deficit Reduction, and Capital Formation", statement submitted to the
Finance Committee of the U.S. Senate, February 15, 1986.
"Thi Senate Finance Committee Staff Option for Tax Reform: A Macroeconomic
Analysis," (with J. Prakken and C. Varvares), Center for the Study of American
Business, March 1986.

7




84
"The Senate Finance Committee Proposal for Tax Reform: A Macroeconomic Analysis,"
(with J. Prakken and C. Varvares), Center for the Study of American Business, May
1986.
"Balancing the Budget: A Reconsideration of Gramm-Rudman," (with J. Prakken and
C. Varvares), LHM&A Special Analysis, February 1987
"Macroeconomic Consequences of the New Tax Law in the Short and Long Runs,"
LHM&A Special Analysis, September 1987
"The Federal Budget: Looking into the 1990's," testimony before the National
Republican Congressional Committee, February 29, 1988.
"The Implications of Iraq's Attack on Kuwait Analysis," (with J. Prakken and C.
Varvares), LHM&A Special Analysis, August 2, 1990
"Implications of War with Iraq for the U.S. Economy," (with J. Prakken and C.
Varvares), LHM&A Special Analysis, November 14, 1990
"Balancing the Budget: An Analysis of the Effects of Deficit Reduction Economy," (with
J. Prakken and C. Varvares), prepared for Chase Manhattan Bank, August 15, 1991
"What Policies Work to Promote Long-term Economic Growth?," prepared for the U.S.
Chamber of Commerce, January 16, 1992
"The Macroeconomics of Credit Card Interest Rate Caps," (with J. Prakken and C.
Varvares), prepared for the Credit Card Coalition, March 9, 1992
"Balancing the Budget: An Analysis of the Economic Effects of Deficit Reduction Caps,"
(with Joel Prakken and Chris Varvares), prepared for Chase Manhattan Bank. October
1992
"The Economic Effects of the Clinton Program," LHM&A Special Analysis, (with J.
Prakken and C. Varvares), November 7, 1992
"Macroeconomic Aspects of the Republican 'Contract with America'," LHM&A Special
Analysis (with J. Prakken and C. Varvares), February 28, 1995
"Economic Forecasts Deficit-Reduction and Productivity Growth," testimony presented
to the Committee on the Budget, U.S. House of Representatives. March 7, 1995

8




85
"The Benchmanrk Revisions of the NIPA and Implications for the Forecast," (with J.
Prakken and Chris Varvares), LHM&A Special Analysis, January 31, 1996
Political affiliations and activities: List all memberships and offices held in and
services rendered to all political parties or election committees during the last 10
years.
Consulted for Clinton Campaign Committee, 1992: studied the effect of an incremental
tax credit and other options to stimulate the economy.
Political contributions: 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.
None
Qualifications: State fully your qualifications to serve in the position to which you
have been named.
I believe my education, my research, my experience within the Federal Reserve System,
my talents in forecasting and policy analysis, and my experience interpreting the
economic outlook and analyzing monetary and fiscal polices has prepared me well for the
challenges associated with being a member of the Board of Governors.
I studied economics as an undergraduate at Yale University, graduating in 1965 manga
cum laude and with distinction in economics. I was also admitted to Phi Beta Kappa.
After Yale, I went to graduate school at MIT where I concentrated in macroeconomics
and monetary theory and was taught by an outstanding faculty including Nobel Laureates
Franco Modigliani, Robert Solow and Paul Samuelson. An important foundation for my
knowledge about macroeconomic models is the experience I had as a Research Assistant
to Professors Franco Modigliani and Albert Ando in connection with their work on the
MPS Model. This model, when completed, found a home at the Board of Governors
where research on it continues and where it remains an important input into the
forecasting and policy analysis by the staff at the Board. I received my Ph.D. from MIT
in 1970.
I have been on the faculty at Washington University since leaving MIT. My research
has focused on understanding the channels of monetary policy; modeling the role of
financial markets in the determination of output, prices and interest rates; on the response
of nominal interest rates to inflation; on policies to raise the growth rate of output over
the long run; and on the way in which credibility about monetary policy can lower the
9




86
cost of disinflation. Additional research, most of it joint with my two partners, has been
circulated as Special Analyses by my consulting firm, Laurence H. Meyer & Associates.
This work has focused principally on estimating the quantitative impacts of deficit
reduction and tax reform on the economy's intermediate term rate of economic growth.
My 27 years of teaching at Washington University has helped me learn how to
communicate effectively with both economists and non-economists.
My experience at Laurence H. Meyer & Associates has helped me to develop my skills
as an economic forecaster. Our record for forecast accuracy is well known and widely
appreciated. I was recognized as the top forecaster on the Business Week forecast panel
for LHM&A's 1986 forecast. In both 1993 and 1995, I won the Annual Blue Chip
Economic Forecast Award - in 1993 for LHM&A's forecasts over the period 1989 1992 and in 1995 for LHM&A's forecasts over the period from 1991 - 1994. At the
Board, the timing and aggressiveness of monetary policy decisions clearly are influenced
by perceptions about the cyclical strength of the economy and the underlying trend in
inflation. I have wrestled with these issues for my entire career, particularly intensively
in my work for Laurence H. Meyer & Associates. Through my work with LHM&A,
I have been a consultant to the Council of Economic Advisers, the Office of Management
and Budget, the Department of Treasury, the Congressional Budget Office, the House
Budget Committee, the Joint Tax Committee, and the Board of Governors. In this
capacity, I have had a chance to provide both forecasts, analysis of policies, and policy
recommendations.

Future employment relationships:
1. Indicate whether you will sever all connections with your present employer,
business firm, association or organization if you are confirmed by the Senate. Yes.
I will divest my financial interest in Laurence H. Meyer & Associates and take a leave
of absence from Washington University.
2. As far as can be seen, state whether you have plans after completing government
service to resume employment, affiliation or practice with your previous employer,
business firm, association or organization. I have no plans or commitments.
3. Efos anybody made you a commitment to a job after you leave government? No.
4. Do you expect to serve the full term for which yr u have been appointed? Yes.
Potential conflicts of interest

10




87
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
nominated. I have a Washington University retirement account with TIAA/CREF. The
University will, I expect, continue to make payments into this account (subject to some
matching by me) while I am on leave and dividends and interest will continue to be reinvested. I will roll over my profit sharing balance from Laurence H. Meyer &
Associates into an ERA managed by Buckingham Asset Management, Clayton Missouri.
The IRA will be invested in a variety of mutual funds.
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. Most of my other financial assets are and will continue to be managed in
the same way as my rollover IRA by Buckingham Asset Management. I will sell any
mutual funds that invest only in government bonds.
3. Describe any business relationship, dealing or financial transaction (other than
tax-paying) 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. I have consulted for many government
agencies over this period, but none of these consulting relationships would, in my view,
pose a conflict of interest problem. Nevertheless, to insure the most complete possible
disclosure for the committee's benefit, I report here the various government agencies for
which Laurence H. Meyer & Associates now or over the past 10 years has consulted.
The
The
The
The
The
The
The
The

President's Council of Economic Advisers
U.S. Department of Treasury
Office of Management and Budget
U.S. Commerce Department (International Trade Administration)
U.S. Department of Labor
Congressional Budget Office
Joint Committee on Taxation
House Budget Committee

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.
None

11




88
5. Explain how you will resolve any potential conflict of interest that may be
disclosed by your responses to the above items. I will do as instructed by the ethics
officer at the board of Governors and as required by the committee.
Civil, criminal, and investigatory actions:
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..
On November 1968, I was in an automobile accident in which my wife received a cut
on her forehead. Subsequently, my wife sued me to collect compensation for the injury
from the insurance company. The suit was sewed out of court. The details are available
in docket # 120475 for the Superior Court, New Haven County.
2. Give the full details of any proceedings, inquiry or investigation by any
professional association including any bar association in which you were the subject
of the proceeding, inquiry or investigation. None

12




89

STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
Name:

Greenspan

Alan
O S)
AT
(I S )
FR T
Position to which Chairman of the Board of Governors
nomin?ted:
of the Federal Reserve System
Date of birth:
Marital status:
Name and ages
of children:

06
03 •
26
(A)
DY
( OT ) (E R
M NH T A )
single

Place of birth:

(nmn)
1T M
0H )
Date of
nomination:

Bronx, NY

Full name of spouse:

none

.

Institution

Dates
attended

Degrees
received

Dates of
degrees

1940-43

diploma

New York University

1945-48

B.S.

1948

New York University

1948-50

M.S.

1950

New York University

1977

Ph.D.

1977

George Washington HS
New York, NY

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




University of Notre Dame,.DSetor of Laws (honorary), 1995
Wake Forest University, Doctor of Laws (honorary), 1989
Colgate University, Doctor of Humane Letters (honorary), 1987
Hofstra University, Doctor of Humane Letters (honorary), 1984
Pace University, Doctor of Commercial Science {honorary), 1981
Fellow of the American Statistical Association, 1989
Thomas Jefferson Award for the Greatest Public Service Performed by an
elected or appointed official, presented by the American Institute for
Public Service, 1976

90
Memberships:

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

Organization

(if any)

see page S-l attached

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.
Research Associate-; National Industrial Conference Board,
New York, NY, 1948-1953
Economic consultant, Tovnsend-Greenspan & Co., Inc., New York, NY,
1953-1974, 1977-1987; Chairman and President 1954-1974, 1977-1987,
Chairman June 1987-July 31, 1987
Chairman, Council of Economic Advisers, Washington, DC, 1974-1977
Chairman, Board of Governors of the Federal Reserve System,
Washington, DC, 1987-present

For additional, see page S-2 attached




2

91
Government
experience:

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.
Chairman, National Commission on Social Security Reform, 1981-1983
Member, President Reagan's Economic Policy Advisory Board, 1981-1987
Member, President's Foreign Intelligence Advisory Board, 1983-1985
For additional, see page S-3 attached.

Published
writings:

List the titles, publishers and dates of books, articles, reports or other published materials
you have written.
For list of representative articles written since 1980, see
page S-3 attached.

Political
affiliations
and activities:




List ail memberships and offices held in and services rendered to all political parties or
election committees during the last 10 years.
none

3

92
Political
contributions:

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.
none

Qualifications:

State fully your qualifications to serve in the position to which you have been named,
(attach sheet)

See page S-4 attached.

Future employment
relationships:
1. Indicate whether you will sever all connections with your present employer, business
firm, association or organization if you are confirmed by the Senate.
no

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.
no

3. Has anybody made you a commitment to a job after you leave government?
no

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




4

93
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
nominated.
Deferred compensation agreements with the following corporate boards:
General Foods Corp., Automatic Data Processing, Inc.
( F i n a l payment f r o m G e n e r a l Foods r e c e i v e d 2 / 2 7 / 9 6 . )

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.
none

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 copy of l e t t e r i n r e s p o n s e t o q u e r y i n J u n e 1987 by
t h e n Chairman P r o x m i r e .

5

24-529 O - 96




94
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 attached copy of letter in response to query in June 1987 by
then Chairman Proxmire.

5. Explain how you will resolve any potential conflict of interest that may be disclosed by
your responses to the above items.
I will recuse myself from any particular matter that would directly
affect Automatic Data Processing, rhc., the company with which I
will have a continuing relationship after February 27, 1996.
Civil, criminal and
investigatory
actions:

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 wirre
the subject of the inquiry or investigation.
none

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.




none

6

95
MEMBERSHIPS:
Organization

Office held (if any)

Oates

Gerald R. Ford Foundation

Board of Trustees

1981-1987

The Economic Club of NY

Vice Chairman, Board of Trustees

1984-1987

Council of Foreign Relations

Board of Directors
Member

1982-1987
1987-present

Committee For a Responsible
Federal Budget

Director

Institute For International
Econoai cs

Board of Directors

Hoover Institution

Board of Overseers

The Ronald Reagan Presidential
Foundation

Board of Governors

The Trilateral Commission

Member, Executive Committee

1982-1987

Century Country Club
Purchase, NY

Member

1979-present

1973-1974
1977-1987

Hillcrest Country Club
Los Angeles, CA

1975-present

City Midday Club
New York, NY

1983-1987
Meirber
Nonresident Member

1971-1987
1987-present

Conference of Business Economists

Member
Past Chairman

1963-1987
1974

National Association of Business
Economists

Member, Fellow
Past President

Early 60s-present
1969-1970

National Economists Club
Washington, DC

Member
Past Director

1969-present

Brookings Panel on Economic
Activity
Washington, DC

Senior Adviser

1970-1974
1977-1987

Chevy Chase Club
Chevy Chase, HO

Resident guest

1991-present

Harmonic Club
The University Club
New York, NY




S-l

96
EMPLOYMENT RECORD l
Director

Trans World Financial Co., Los Angelas, 1962-1974

Director

Dreyfus Fund, New York, 1970-1974

Director

Dreyfus Special Income Fund, New York, 1971-1974

Director

General Cable Corp., New York, 1973-1974, 1977-1978

Director

Sun Chemical Corp., New York, 1973-1974

Director

Dreyfus Liquid Assets, Inc., New York, 1973-1974

Director

Standard & Poor's InterCapital Income Securities, Inc.,
1973-1974

Director

Bowery Savings Bank, New York, 1974

Director

General Foods Corp., White Plains, 1977-1985

Director

J.P. Morgan & Co., Inc., New York, 1977-1987

Director

Morgan Guaranty Trust Company of New York, New York
1977-1987

Director

Mobil Corporation, New York, 1977-1987

Director

Aluminum Company of America, Pittsburgh, 1978-1987

Director

Automatic Data Processing, Inc., Roseland, NJ, 1980-1987

Director

Capital Cities/ABC, Inc., NY —
(CC/ABC) 1986-1987

Director

The Pittston Company, Greenwich, CT, 1985-1987

Director

The Rand Corporation, Los Angeles, 1986-1987

Member

Board of Economists —
1971-1974, 1977-1987




(ABC) 1984-1986,

Time Magazine, New York,

S-2

97
GOVERNMENT EXPERIENCE:
1970-1971 Member, Commission of Pinancial Structure and Regulation
1969-1970 Member, Commission on an All-Volunteer Armed Force
1969

Member, Task Force on Economic Growth

1977-1987 Consultant, Congressional Budget Office

PUBLISHED WRITINGS:
"The Great Malaise," Challenge (March/April 1980) pp. 37-40.
"Economic Policy," in Peter Duignan and Alvin Rabushka, eds.,
The United States in the 1980s (Board of Trustees of the Leland Stanford
Junior University, 1980).
"Weekly GNP," Roundtable of GNP Users, Studies in Income and Wealth.. No. 47
(University of Chicago Press, 1982).
"Competition Means Better Service," At Home With Consumer (The Direct Selling
Education Foundation, volume 5, number 3 (September 1984)].
"Risk, Safety and Bank Deregulation,"
Financial Network, 1985).

The

Sears

Sounding

Board

The Wall Street Journal (New York):
"Can the U.S. Return to a Gold Standard?", September 1, 1981.
"The Collapsing World of OPEC," March 11, 1983.
"Onward The Revolution in Financial Services," September 16, 1983.
"Payment Setup Can't Ensure Medicare's Fit," September 4, 1984.
"Takeovers Rooted in kFear," September 27, 1985.
"Coordination Could Be Washed Out," July 10, 1986.
The Washington Post, "Alan Greenspan:," December 4, 1983.




S-3

(Sears

98
QUALIFICATIONS:
I have been an economist for almost 45 years, first as an analyst,
and in recent years as a consultant.

My work has covered both

industrial and financial sectors of the United States and, to an
increasing extent, the rest of the world.
knowledge

of

President's
1971)

and

directors
Financial,

financial

Commission on
monetary

of

a

Financial

theory.

savings

and

I have
loan

I have considerable

structure

(I

Structure
served

holding

served
and

on

company

on

the

Regulation,

the

1962-1974) and a bank holding company

1977 to 1987).
Advisers

American

boards

of

(Trans-World
(J.P. Morgan,

My service as Chairman of the Council of Economic

(1974-1977)

offered

opportunities

experience beyond the private sector.

to

broaden

my

Finally, I have served as

Chairman of the Board of Governors of the Federal Reserve System
since August 1987.




S-4

99
At-AN

ORCCNflPAN

«ao « « u « r « < f r
NCW rOM< M. r. IOOO«

June 30 , 1987

The Honorable William Proxraire
Chairman
U.S. Senate
Committee on Banking, Housing,
and Urban Affairs
Was hington, D . C .
Dear Mr. Chairman2
The following is in response to your letter of
June
11th requesting
information
about
certain
client 'relationships.
Por purposes of accounting. Towns end-Green span & Co.
divides its various services into:
(1)
general
consulting,
which
reflects
our
forecasts and analyses of the economic outlook.
(2) Specifically designed client
presentations
on analytical subjects, such as facilities planning
techniques, the long-term world demand for oil,
etc.
(3)
What we call "advocacy projects,
which
reflect any analysis or presentation
that is
directed,
not
at
forecasting
but,
to
the
development of ideas, which lead to a particular
point of view on company, industry, or public
policy.
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 of some analytical research.
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
property
rights,
and
to
further
financial
deregulation.




100
Committee on Banking, Housincr,
and Urban Affairs
Page Z
June 30, 1987
to assist their client, Lincoln Savings and Loan
Association, in an evaluation of the desirability
of broadened savings and loan direct investment
powers. "This resulted in a published study submitted
to the Federal Home Loan Bank Board and was
subsequently the basis of invited "testimony before
the
Commerce,
Consumer
and
Monetary
Affairs
Subcommiutee of the House Committee on Government
Operations (February 27/ 1985).
Our total billing (including expenses)
Weiss, Rifkind, Wharton 6 Garrison, was:
1984
$
JL985
1986
1987
Total
$
This project is now complete.

to

Paul,

Sears Roebuck and Company is a regular general
consulting client for whom we also consult on various
aspects
of
financial
structure and regulation.,
We have been* asked to analyze and criticize a number
of their proposed initiatives in the financial
services area.
I have also made a number of
presentations on their behalf before various private
associations
and
groups outlining my views on
financial deregulation.
Our total annual retainer
from Sears has been $
It covers my personal
time devoted to presentations and analyses, as
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




101
PREPARED STATEMENT OF RALPH NADER
ON THE NOMINATION OF ALAN GREENSPAN AS CHAIRMAN OF THE
FEDERAL RESERVE BOARD
M a r c h 26,

1996

Mr. Chairman, thank you for this opportunity to comment on the renomination
of Alan Greenspan as Chairman of the Federal Reserve Board and the present state
of the Federal Reserve System under his tenure.
There is a need for change at the Federal Reserve. There is an overriding need
to make the agency less wasteful, more open, more effective, and more responsive
to a broader segment of the American population.
The nomination of Alan Greenspan for a third term as Chairman of the Federal
Reserve Board comes against a backdrop of growing unease about job insecurity and
corporate downsizing in a slow-growth economy characterized by wage stagnation
and decline and growing disparities of wealth.
Pollsters, the media, and political candidates are becoming increasingly aware of
the anger and disappointment of both blue collar and white collar workers who have
lost jobs or been forced to uproot their families in search of new jobs with less pay
and less satisfaction. In recent weeks, the New York Times used hundreds of column inches to chronicle the new era of economic insecurity in an unprecedented
seven-part series.
The President—and I assume shortly the Senate—appear willing to answer these
concerns with a "business as usual" message—or, more to the point, a "Federal Reserve as usual" response. The reappointment of Alan Greenspan—who has controlled a major share of the Government's economic policymaking machinery since
1987 can be interpreted only as a desire to maintain the status quo.
With two vacancies on the Board and with the Chairmanship open, the President
had a golden opportunity to reshape the Federal Reserve and, at minimum, open
a debate within the Board about monetary policy options. It was also an opportunity
to let sunlight in and turn the agency away from its obsession with secrecy and its
apparent unease with the right of the people to know what their Government is
doing. But, the President's decision to keep the monetary policy reins in the hands
of Alan Greenspan effectively closes the door on the possibility for change at the
Federal Reserve. And if the published predictions are correct, the Republican majority in the Senate will be happy to accept the President's decision that all is well
at the Federal Reserve.
While disagreeing strongly, I have no illusions about the ultimate outcome of this
nomination process. For 8 long years, the Congress has seemed willing to accept
most, if not all, of Alan Greenspan's bland assurances when he visits Capitol Hill
twice each year to report on monetary policy. These reports are invariably self-congratulatory messages from the Federal Reserve—reports from the battlefront
against real or imagined inflation. If Congress sees problems in the economy, the
Federal Reserve is quick to assign blame elsewhere.
In his testimony last month, Alan Greenspan was forced to concede that there
was, indeed, growing anxiety about job security among the Nation's middle class.
The blame, he contended, was essentially "technological change"—an analysis that
he hoped would send a message that neither the Fed nor the banks nor any large
companies are part of the problem.
While accepting no responsibility, he did nonetheless dust off the subject with a
note of what he must have regar<led as compassion for the workers caught in corporate downsizing in a slow growth economy. "The phenomenon of [corporate! restructuring," he told the Congress, "can be especially unfortunate for those workers
directly caught up in the process." A message to be read aloud when the corporate
personnel office announces a new layoff.
Some of these workers may feel it was "especially unfortunate" that Alan Greenspan's Federal Reserve decided to increase interest rates sharply in rapid fire actions between mid-1994 and early 1995.
As John Berry, the Washington Post's reporter on the Federal Reserve beat noted,
many economists believe this interest rate shock accounts for the exceedingly slow
economic growth last year. The inflation-adjusted gross domestic product rose just
1.4 percent from the end of 1994 to the end of last year—compared with 3.5 percent
in 1994. The economy is continuing to experience slow growth, not to mention how
the fruits of this growth are distributed. Asked about the reasons for the big interest
rate increases in the 1994-1995 period, Greenspan resorted to the Federal Reserve's
age-old excuse—"inflationary expectations."
In an attempt to refute charges that the Fed's vision of inflation had been illusory, Greenspan, using the analogy of a river, told the House Banking Committee




102
in February that he had seen a "flood crest" of inflation coming down the river and,
as a result, felt the need to pile up interest rate sandbags.
The analogy was less than convincing to Representative Maurice Hinchey of New
York who replied that, "many of us looked at that same river and saw a mere trickle
of a stream, not threatening anyone at all, and the placing of sandbags up around
such a benign trickle of a stream seemed in, itself, extreme . . . "
But, the Federal Reserve's repeated visions of inflation are nothing new. It is boiler plate to excuse monetary policy mistakes. The Federal Reserve's preoccupation
with fighting "inflation ghosts" ignores the broader and specific mandate added to
the Federal Reserve Act on November 16, 1977 to "maintain the long run growth
of monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum
employment, stable prices, and moderate long-term interest rates."
The ability of Alan Greenspan and his predecessors to ignore the Federal Re serve's broader responsibilities can be credited to the mystique that surrounds the
agency and the general failure of the media and the Congress to explain the role
of the Federal Reserve in anything but the most complex and confusing terms. Few
Americans are focused on the renomination of Alan Greenspan and even fewer understand the large power that the Federal Reserve exercises over their lives. The
Fed makes sure that such a condition remains undisturbed by any of its actions.
Whether workers have jobs or families can afford shelter or young people can go
to college depends, in a substantial way, on the decisions that are made on interest
rates and monetary policy behind the closed doors of the Federal Reserve Board.
The Federal Reserve, if it so chooses, can use monetary policy to literally negate—
veto—fiscal policies that may be undertaken by the Congress.
This is also a Board that makes key regulatory decisions affecting the safety and
soundness of taxpayer-backed deposit insurance funds. And a Board which has a
critical say about what safeguards are enforced for consumers in the financial marketplace. For low- and moderate-income and minority citizens, the Federal Reserve's
approach to the Community Reinvestment Act (CRA) and the Equal Credit Opportunity Act can be the difference between opportunity and despair.
The Chairmanship of the Federal Reserve has always defined Federal Reserve
policy, overshadowing the role of the other six members of the Board and the 12
Federal Reserve Bank Presidents. And the boards under most Federal Reserve
Chairmen have been relatively low-key with few public dissents.
This has been especially true under Chairman Greenspan. More and more, the
votes of the Board and the Federal Open Market Committee (FOMC) have taken
on a monolithic appearance. On the public record, at least, it is lockstep with the
Chairman in a manner that would have made the old Soviet Politburo proud. Many
believe that there are differences among the members, but that these are papered
over and kept secret while only the unanimous agreement appears in the votes released to the media and Congress.
Claims of Independence
The Federal Reserve's statutory powers are magnified by the lack of effective ongoing Congressional oversight, a heavy curtain of secrecy that builds the agency's
mystique and hides its mistakes, and the lack of accountability that other agencies
face in the budget and appropriations process.
But the biggest piece of armor in the possession of the Federal Reserve is its claim
of absolute "independence." Challenged in any forum—Congressional, Presidential,
or media—the Federal Reserve will invariably retreat behind its self-constructed
wall of "independence." The word "independence" does not appear in the Federal Reserve Act. But, the Federal Reserve has assumed it and has given the word a new
and powerful definition.
Proposals to change the Federal Reserve Act, Board operating procedures and
other policies are always greeted with sounds of alarm from the Federal Reserve
and its apologists proclaiming a threat to the "independence" of the agency. Any call
for accountability and openness is interpreted as a threat to its "independence" and
as an attempt to exert "political influence" over its decisions.
Never is the Federal Reserve's version of "independence" defined. Is it independence from the Government, the Executive Branch and the Legislative Branch—and
the American people? Tracking the expanding claims of "independence" leads one
to wonder if the Federal Reserve regards itself as almost a "separate government"—
autonomously setting its own rules without regard to the checks and balances tha t
control our democratic system.
While the Federal Reserve may regard itself as "independent" from the rest of the
Government, it seems much less "independent" from the banking industry and big
business. It appears quite solicitous of these areas of the economy. The majority of




103
the members of the boards of directors of the 12 Federal Reserve Banks and their
25 branches are drawn from banking and business.
It was instructive to observe the reactions of Wall Street and the banking industry when rumors rose earlier this year to suggest that President Clinton might
choose his own Federal Reserve Chairman. The word immediately circulated that
Wall Street would throw a full-scale tantrum unless Greenspan was reappointed.
Never mind that the President and the American people might want someone else—
Wall Street and the banks would riot. Clearly, the banks and Wall Street provide
a ready and powerful lobbying arm for the Federal Reserve and its Chairman—and
this might just suggest that "independence" has a limit.
As this Committee is aware, five members of the Federal Open Market Committee—the center of monetary policymaking—are Presidents of Federal Reserve Banks
elected [with approval of the Fed Board] by boards of directors dawn in large part
from banking and business corporations. (The President of the New York Federal
Reserve Bank is a permanent member of FOMC and four other presidents serve as
voting members of FOMC on a rotating basis.) Such links certainly do not suggest
"independence" from the banking and business corporations that hold seats on the
district banks' boards of directors.
Let me note here, Mr. Chairman, that Senator Paul Sarbanes, the Ranking Democrat on this Committee, has introduced legislation that would remove this conflict
of interest and limit the Open Market Committee solely to the seven members of
the Federal Reserve Board who are appointed by the President of the United States.
In the final analysis, the Federal Reserve's "independence" is a shield against accountability. Challenged on any front, the Federal Reserve retreats behind this
shield. Bad policy, outrageous mistakes, mismanagement can and are rendered immune from exposure by the Federal Reserve's invocation of "independence"—a device that exceeds even the most outlandish uses of "Executive Privilege" by Presidents down through history.
Secrecy
Going hand in glove with "independence" as a source of Federal Reserve power
is the agency's ability to maintain a CIA-like secrecy over virtually all of its operations. The meetings of the Federal Open Market Committee—the body that establishes monetary policy—are shrouded in secrecy despite the fact that its decisions
are critical to the well being of all Americans. The General Accounting Office (GAO)
—Congresses' watchdog over Federal agencies—is barred from examining anything
at the Federal Reserve that remotely involves monetary policy. And as one would
expect, the Federal Reserve stretches the definition of "monetary policy" as far as
possible to keep the GAO locked out and the Federal Reserve's secrets safe from
public scrutiny.
The real meat of monetary policy decisions—the debates of the Federal Open Market Committee (FOMC)—are withheld for 5 years. And even then the transcripts in
the words of the Federal Reserve are "lightly edited." The full unedited transcripts
are locked away for 30 years. What this means is that the thinking behind some
of the key decisions during Alan Greenspan's chairmanship will not be available to
this Committee when it considers the new nomination. And these decisions include
the controversial move to ratchet interest rates up in 1994 and early 1995 at a time
when inflation was relatively low.
I do not believe that this Committee would accept this same secrecy from other
agencies and departments under its jurisdiction. Would this Committee tolerate
"hidden agendas" and only vague sketches of policy decisions from the Department
of Housing and Urban Development or the Securities and Exchange Commission?
I doubt it seriously and it should not do so with the Federal Reserve.
With most of the "final votes" behind the closed doors of the FOMC recorded as
unanimous, it is critically important that the background, the debate, and the rationale contained in the FOMC transcripts be made available immediately after the
meetings. Whatever happened to the concept that people in a democracy should
know how and why their Government is making decisions?
Representative Henry B. Gonzalez, both as Chairman and Ranking Democratic
Member of the House Banking Committee, has made a valiant effort to break the
Federal Reserve's secrecy. It was his efforts that uncovered the fact that full verbatim transcripts did exist.
Representative Gonzalez's investigations uncovered that the Fed had long operated a taping system at the secret FOMC meetings—apparently without the knowledge of some of the participants. Even with tapings admitted, the Federal Reserve
contended that many of the tapes had been taped over and that there were no complete transcripts in existence. Ultimately, the hide-and-seek game ended with a concession by Chairman Greenspan to Representative Gonzalez that, indeed, the tapes




104
existed and that 17 years of full transcripts were at the Federal Reserve. But, they
still remain a secret from the public for at least 5 years after the meetings of the
Open Market Committee. This is an absurdity which serves only to protect the Federal Reserve. There can be no public purpose in hiding the facts from the public for
5 long years.
Why does the Federal Reserve maintain such tight secrecy even years after the
fact? And even after many of the participants have left the agency?
A quote in the January/February 1995 issue of the Columbia Journalism Review
from Ted Balbach, a former research director for the St. Louis Federal Reseirve
Bank, may provide the real answer: "Remember, secrecy is power."
Where's the Press? Where are the William Grieders?
The head of most Federal agencies that engaged in such an all encompassing
game of governmental secrecy would be virtually hounded out of office by the Washington press corps. But, not Alan Greenspan. He lives in a charmed world where
reporters don't demand press conferences and rarely complain about vague and confusing statements about policy issues. The very aura around the Federal Reserve
is, itself, a controlling process.
As James Risen, a reporter for the Los Angeles Times, noted, "Greenspan takes
great pride in his ability to reveal as little as possible."
This practice often delivers to the American public conflicting, if not totally inaccurate, information, about what a major governmental agency is doing. The latest
example of this was last June when the confusing double-talk of Chairman Greenspan in a speech in New York City resulted in directly opposite stories in two of
the major U.S. daily newspapers—The Washington Post and The New York Times.
The Post headline read: "Greenspan Hints Fed May Cut Rates." The New York
Times headline read: "Doubts Voiced by Greenspan on a Rate Cut."
To cover his tracks with the press, Greenspan often calls in selected reporters for
secret off the record sessions to give the Federal Reserve's special slant on the world
and to answer critics of the agency.
Paul Starobin, a reporter for the National Journal writing for the Columbia Journalism Review last year, described the Greenspan media strategy as "soft spin, no
fingerprints." In an article entitled, "The Lure of FEDTHINK," Starobin wrote:
"Under the hush-hush ground rules set by the Fed Chairman, the journalists are
not even allowed to report that they have had a talk with a senior Fed official. It's
as if the whole thing never happened."
Mr. Chairman, in passing on this nomination, I hope the Committee will consider
carefully where all of this massive game of secrecy, double-talk, and efforts to obscure what a Government agency does fits in a democratic society. Again, I do not
think the Members of this Committee, Republicans and Democrats, would accept
such extreme secrecy and such tactics of obfuscation from any other agency that appears before the Committee.
No Money Worries at the Fed
All of the claims of "independence" and all the convoluted tactics to ensure secrecy
would mean less if the Federal Reserve did not have its own pot of money which
allows it to bypass formal budget and appropriations processes.
Virtually all of the Federal Reserve's income comes directly from the U.S. Treasury in the form of interest payments on Government securities it buys and sells in
carrying out monetary policy through the Federal Open Market Committee.
That portfolio of Government securities now totals nearly $400 billion at the Federal Reserve and the income of the Fed is in excess of $20 billion annually. It is
free to spend whatever part of that sum it desires, no questions asked. The remainder is sent back to the Treasury each year.
The Federal Reserve is currently spending about $2 billion annually—and the figure is rising year to year. There are no limits on what the agency can spend out
of the Treasury's $20 billion in interest payments and the various fees collected for
services. No formal budget is submitted and there are no tough questions to answer
for appropriations committees on Capitol Hill. But every dime the Federal Resei-ve
spends is money that doesn't go back to the Treasury.
Under the secrecy strictures and the lack of full Congressional oversight, it is difficult to know how much unchecked waste there may be in the System. The Federal
Reserve System employs 25,000 people nationwide. This includes 730 economists on
average an additional $100,000 on contracts for outside economists and related researchers.
When the Federal Reserve System was established in 1913, the 12 Federal Reserve Banks were scattered across the Nation, many as political plums. Before the
age of jet airplanes and the advent of instant communications and computer net-




105
works, the scattered district banks and branches had a modicum of rationale. Today,
the bank buildings in many cities stand on expensive mid-city property, maintain
large staffs, and perform fewer and fewer essential functions. Former House Banking Chairman Henry Ruess proposed doing away with many of the banks and
branches and selling the property.
While some functions may be eliminated in an information age, the Federal Reserve's publications empire goes on unabated. Earlier this year, the Kansas City
Business Journal conducted a survey of Federal Reserve publications and described
the System as a "virtual publishing machine." The Kansas City Federal Reserve
Bank, alone, spent $295,000 on publications, the Journal said. The Journal quoted
Dan Schilling, an Associate Professor of Economics at the University of Missouri,
as saying that the, "Federal Reserve in essence talks to itself through its publications. I think there's an element of waste."
In dealing with complaints about waste and abuse in the System, Mr. Greenspan
has apparently resorted to the simple tactic of "stonewalling" in some cases.
On January 8, 1996, Representative Henry Gonzalez, the Ranking Democrat on
the House Banking Committee, submitted a 41-page report to the Federal Reserve
citing "waste and abuse" in the operation of the agency's system for clearing and
collecting checks.
The study, conducted by Dr. Robert Auerbach, the Democratic Staff Economist,
detailed improper contracting practices, gifts to nonperforming contractors, overcharges to the U.S. Treasury, violations of the Monetary Control Act of 1980, and
lack of controls over contracts for transporting checks across the Nation in fleets of
planes nightly. Backing up the allegations of waste and questionable practices were
signed statements from employees in the Interdistrict Transportation System operated in the Federal Reserve Bank of Boston, Representative Gonzalez told Chairman Greenspan. Was Mr. Greenspan concerned? Apparently not since Representative Gonzalez has yet to receive a reply—even an acknowledgment—to the report.
Mr. Chairman, I would like to submit a copy of the Gonzalez report for the record
so that this Committee will have an idea of how much concern the Federal Reserve
places on waste and abuse in the System. Before this Committee votes on the
Greenspan nomination, it should have an answer on this issue. A charge of waste
of public monies by a Ranking Member of the House Banking Committee should at
least have an answer, if not a remedy.
Consumer Issues
Under Alan Greenspan, the Federal Reserve Board is essentially passive on
consumer issues. If Congress gives the agency a consumer law to enforce, it will go
through the motions. But rarely does the Fed knock on the doors of the Legislative
Branch for solutions to consumer problems or put up battles to keep the banking
industry from weakening existing protections. And even rarer are initiatives in utilizing existing powers to give consumers a fair break in the marketplace.
A prime example was in the news last week when the Federal Trade Commission
announced it was launching a major effort to fight scam artists who are using "demand drafts" to rob consumers' bank accounts of tens of millions of dollars annually.
The victims were consumers who had given out their bank account numbers and
permission to use demand drafts for magazine subscriptions, various membership
fees, and similar outlays.
To make the scams work obviously required wide utilization of the banking system—right where the Federal Reserve's authority lies. But, it was left to the Federal Trade Commission, not the well-staffed and well-financed Federal Reserve System to take aggressive action to protect the consumer—even though the Federal Reserve shared identical enforcement power with the FTC under Section 18(f) of the
FTC Act.
When the contest over consumer regulations is between consumers and the banking industry, the Federal Reserve can find some creative ways to support the industry. The Congress, for example, recently asked the Federal Reserve to give it a report on regulations to limit the time that banks may hold checks before crediting
the consumers' account. In answer to the Congressional request, the Federal Reserve decided to survey the banks and prepared a one-sided questionnaire that
assures the results would be weighted to the banks' desire to lengthen the time they
could hold checks.
The survey allows the banks to "estimate" their check losses instead of providing
hard data—an open invitation for banks to exaggerate losses. And participation, the
Federal Reserve decided, would be "voluntary." This means that the returns are
likely to be heavier from those institutions most actively seeking changes in the
checkhold law, rather than providing representative data for a cross section of
banks.




106
The message for consumers from the Greenspan Federal Reserve: Don't expect
pro-active steps for consumers by the Federal Reserve and don't expect to win a battle with the industry over regulations when the Federal Reserve is the referee.
The Fed's implementation of the Equal Credit Opportunity Act (ECOA) provi des
a good example of the Fed's regulatory inertia when it comes to consumer, community, and civil rights interests. Although ECOA prohibits credit discrimination
against small businesses as well as consumers, the Federal Reserve has never established any disclosure requirements that would permit monitoring of discrimination
against small businesses. Indeed, the Fed's Regulation B, which implements ECOA,
perversely prohibits lenders from collecting data on the distribution of their small
business loans by race category.
Civil rights organizations, community groups, and even the Clinton Administration have asked the Federal Reserve to revise Regulation B to require lenders to
collect and make public race data on their small business lending patterns. Under
strong pressure from the Clinton Administration, the Fed in April 1995 proposed
to modify Regulation B to permit voluntary collection of race data on small business
loans and other types of credit. Yet, one year later the Board has failed to act on
even this extremely modest proposal.
Similarly, the Federal Reserve is looking the other way on the convenience and
needs of communities as mergers sweep across the Nation. Neighborhoods and communities are facing the loss of banking facilities, while borrowers in low- and moderate-income and minority neighborhoods, already starved for credit, are seeing
lending decisions moved through distant lines of management in these new merged
giants.
Eight hundred community organizations turned out on the West Coast to oppose
the Wells Fargo-First Interstate merger on the grounds that the closure of 345
branches would severely wound local communities. The Federal Reserve heard the
arguments and received the documentation, but in the end the wishes of Wells
Fargo were granted—and the 345 branches will be closed.
Interstate branching and the vast increase in mergers is creating a new generation of problems for communities—but the Federal Reserve is not meeting its responsibility to examine fully the convenience and needs of communities as required
by the Bank Holding Company Act.
Dissent—Is It Allowed On The Greenspan Board?
Are strong independent voices excluded from Greenspan's Federal Reserve Board?
Alan Blinder, the Vice Chairman appointed by President Clinton, unexpectedly resigned and returned to his job at Princeton, removing a voice from the Board for
more openness and more concern about employment and consumer issues than may
have been compatible with the Greenspan party line. And there were published reports (including one in the Columbia Journalism Review) that Greenspan's staff had
leaked unflattering comments to the media that led to stories that Blinder was "soft
on inflation"—an episode that undoubtedly increased Blinder's frustration and desire to leave the Greenspan Board.
President Clinton's choice for Blinder's replacement was Felix Rohatyn, a New
York investment banker, with a reputation for strong stands on economic issues and
a belief in pro-growth monetary policy. After the opposition rose, including some
from Members of this Committee, Rohatyn's name was dropped and the possibility
of counterweight to Greenspan's conservative views was removed.
Two years ago, Dr. Alicia Munnell was slated for a spot on the Federal Reserve
Board. But as an employee of the Federal Reserve Bank of Boston she had conducted a significant study on discriminatory lending patterns by commercial
banks—and this gained her the lasting enmity of the banking industry, a fact that
probably reduced her chances for a spot on the Board.
Conclusion
The public interest would be served by a change in the Chairmanship of the Federal Reserve Board. Alan Greenspan has served two full terms, stretching back to
President Ronald Reagan's Administration and including a reappointment by President George Bush. No other head of a major Federal agency today has served longer
than Alan Greenspan. As an agency cloaked in secrecy, term limits make particular
sense.
Many of the problems I have cited were not invented by Alan Greenspan. But,
he has done little to correct shortcomings and institute change that would open up
the Federal Reserve and make it a more response agency subject to the checks and
balances of a democratic system.
While the consensus is for approval of the President's choice, I urge this Committee to defer action until it has an opportunity to fully explore Alan Greenspan's ad-




107
ministration of the Federal Reserve Board. The confirmation process gives the Senate this opportunity and it should not be bypassed for the Federal Reserve.
In addition to his monetary policy duties, Alan Greenspan is also charged with
major responsibilities in the area of bank supervision. His earlier confirmation hearings have failed to explain fully his role as a consultant to a number of savings and
loan associations including the ill-fated Lincoln Savings during the 1980's and his
battle against Federal Home Loan Bank Board Chairman Ed Gray's efforts to curb
the investment powers of Lincoln Savings and other savings and loans.
The exhibits of the Special Counsel to the Senate Ethics Committee in the investigation of the five Senators involved with Lincoln Savings contain a number of letters, billings, agendas, and other items related to Alan Greenspan's activities during
this period. Among these is an endorsement by Mr. Greenspan of Lincoln Savings
as a "financially strong institution that presents no foreseeable risk to the Federal
Savings and Loan Insurance Corporation" contained in a letter of February 13, 1985
to Thomas J. Sharkey, Principal Supervisory Agent of the Federal Home Loan Bank
of San Francisco. These materials do not reflect the mind of a financial industry
leader who weighs heavily the integrity of a financial institution, effective Government regulations, and protection of taxpayer interests.
In light of the large regulatory role of the Federal Reserve, it is pertinent for the
Committee to examine this area and determine whether Alan Greenspan's approaches to the savings and loan problems in the 1980's reflect an insensitivity to
the overriding need to protect the deposit insurance funds and the taxpayers who
have paid for several hundreds of billions of dollars of losses, including at least $2
billion in the failure of Lincoln.
[And on the question of deposit insurance currently, it would be interesting to
know where the Federal Reserve Chairman stands on the decision of the Federal
Deposit Insurance Corporation (FDIC) to cap the reserves of the Bank Insurance
Fund (BIF) and allow the majority of banks to pay no premiums for Government
insurance.]
Beyond these issues, it is important for this Committee to insist on changes at
the Federal Reserve as a condition for confirmation—particularly changes that
would remove some of the thick walls of secrecy that separate the agency from the
people and the Congress. If Alan Greenspan is confirmed, he will control the Federal
Reserve into the Year 2000. It is unlikely that there will be change in the agency
unless the Committee insists on it now.
Thank You.
[Additional attachments supplied by Mr. Nader will be held in Committee files.
The cost to reproduce these documents would be prohibitive and when reduced to
fit page format the documents would be illegible.]







Real Economic Growth

Annual Change in Real GDP or G N P

Source: U.S. Department of Commerce

109

BOARD OF GOVERNORS
OF THE

F E D E R A L R E S E R V E SYSTEM
W A S H I N G T O N , D . C. 2 0 5 5 1
ALAN

GREENSPAN

April 11, 1996

Mr. James L. Bothwell
Director, Financial Institutions
and Markets Issues
United States General Accounting Office
Washington, D.C. 20548

Re:

Draft report of the General Accounting Office entitled
"Federal Reserve System: Current and Future Challenges
Require Systemwide Attention," prepared pursuant to the
request of Senators Harry Reid and Byron Dorgan.

Dear Mr. Bothwell:
The Board of Governors takes exception to the broad implication of the
draft report that the Federal Reserve has not exercised appropriate budget constraint and
that it has not adequately addressed the changing technological and financial environment
within which it operates.
We at the Federal Reserve recognize that expending taxpayers' funds
outside of the appropriations process places a special obligation on us to be particularly
diligent in the use and application of such funds. We believe our diligence has resulted in
a level of cost effectiveness and performance that equals that of the most efficient public
and private sector institutions.
In order to fulfill its mandates, the Federal Reserve has had to undertake
significant and often costly new initiatives since 1988 (the starting point of the GAO
analysis). Among others, these have included the expanded supervision of U.S. operations
of foreign banks and a major upgrading of our computer systems and personnel to adapt
our surveillance and payment technologies to the major changes that have occurred in
private financial markets. This upgrade involved significant consolidation within t H
Federal Reserve System, but it also enhanced our ability to ensure the smooth functioning
of our financial markets, even during periods of financial or operational disruptions. To
hold the risk of systemic crises to acceptably low levels for both U.S. markets, and U.S.
dollar markets abroad, requires some redundancy of resources. We believe that the




110

benefits of this redundancy far exceed the associated incremental costs. In light of these
initiatives, as well as others required by the Financial Institutions Reform, Recovery and
Enhancement Act (1989) and the Federal Deposit Insurance Corporation Improvement
Act (1991), we believe the control of our operating costs has been very effective.
Federal government non-defense discretionary expenditures, which the
GAO draft report employs, is particularly useful as a rough standard of comparison, as
these expenditures have been subject to increasing Congressional restraint in recent years.
During the fiscal years 1988 to 1994, these costs increased 50.9 percent. Over the same
years, despite the very considerable expansion of the Federal Reserve's role, our costs (on
a calendar-year basis) increased 47.6 percent. Similarly, over this period, non-defense
executive branch civilian employment grew by 5.5 percent compared to an increase in total
employment at the Federal Reserve of 3.7 percent.
As further evidence of effective cost control, the Federal Reserve's
provision of financial services to depository institutions in a competitive market
(accounting for about one-third of Federal Reserve costs) has consistently earned money
for the Treasury by recovering not only its direct and indirect costs, but also a rate of
return and imputed taxes commensurate with our competitors in the private sector.
Nonetheless, the Board recognizes that the Federal Reserve System, like
any organization, can be made more efficient and effective. The GAO draft report does
include some specific recommendations regarding the management of certain costs that we
consider potentially quite helpful and that we will evaluate and implement where
appropriate. We will also continue to identify other opportunities to contain costs, while
end A'oring to carry out our mission in a effective manner.
One difficult issue that has and will confront the Board in our oversight of
the System is the appropriate degree of consolidation of various activities. Certain
Systemwide activities do appear to be more cost effective if consolidated. But it is also
evident that the element of autonomy that is accorded to the Reserve Banks has created a
competitive environment within the Federal Reserve that attracts highly qualified staff who
contribute importantly to the effectiveness and efficiency of the Federal Reserve System
over the long run. The advantages of this environment must be balanced against the
expected savings from consolidation.
Our responses to a number of the specific GAO recommendations and
observations are included in an enclosure to this letter.




Ill
Enclosure

Board of Governors of the Federal Reserve System
Comments on GAO Draft Report
"Federal Reserve System: Current and Future Challenges Require Systemwide Attention"

The Federal Reserve's Role in Providing Financial Services
The draft report recommends that the Board undertake a fundamental review of
the Federal Reserve's role in providing financial services to banks and government agencies.
Such reviews are an ongoing and integral part of our oversight of the Federal
Reserve System. Moreover, it is important to recognize that the Federal Reserve's financial
services and, in particular, its priced services, are continually tested by the marketplace.
Institutions choose payments service providers based on the cost and quality of the alternative
services available to them. The Federal Reserve Banks have been successful in providing services
that are attractive to their customers by controlling costs while maintaining high quality standards.
The Federal Reserve fully recovers its cost of providing services to depository
institutions over the long run. The Monetary Control Act (1980) requires that the Federal
Reserve set fees for priced services to recover not only all direct and indirect costs incurred in
providing the services, but also imputed costs, such as taxes that would have been paid, and the
return on capital that would have been earned, had the services been provided by a private
business firm. Over the past ten years, 1986 through 1995, the Federal Reserve Banks have
recovered 101 percent of their total costs of providing priced services, including the targeted
return on equity and other imputed costs.
Because the revenue from the Reserve Banks' priced services recovers imputed
costs that are not actually incurred, the Federal Reserve's provision of priced services has
consistently had a positive effect on the level of earnings transferred by the Federal Reserve to the
Treasury. Over the past ten years, priced services revenues Irve exceeded operating costs by
more than $872 million. Priced services revenues exceeded operating costs by more than $570
million during the period 1988 through 1994 reviewed for this draft report. This net revenue
contributes to the amount transferred to the Treasury.
As acknowledged in the draft report, the Federal Reserve has a strategic focus for
its financial services activities. The mission of the Federal Reserve in the payments system is to
foster the integrity, efficiency, and accessibility of U.S. dollar payments and settlement systems in
support of U.S. financial stability and economic growth in a global context. The Federal Reserve
pursues this mission through a combination of the financial services provided by the Reserve
Banks, the policies and rules adopted by the Board, and the leadership in financial markets exerted
by the Federal Reserve on a variety of payments-related matters.




112
- 2 -

This strategic focus includes an ongoing assessment of the appropriate operational
role of the Federal Reserve in the payments system. The Board has adopted guidelines to
evaluate both the Reserve Banks' introduction of new services and their withdrawal from existing
services. The Federal Reserve's ability to recover the costs of providing priced services over the
long run is an important consideration in assessing its future operating role. For example, in 1993
the Reserve Banks withdrew from the priced definitive securities safekeeping service, which had
been subject to rapidly declining volumes due to the issuance of new securities in book-entry
rather than physical form and the banking industry's increasing use of private depositories.
The Reserve Banks' check service has also been subject to volume declines. These
declines are attributable largely to the same-day settlement rule adopted by the Board. This rule
improves payments system efficiency by increasing the legal rights of correspondent banks that
compete with the Reserve Banks in the check collection business. Although the Board anticipated
that the rule would erode the Reserve Banks' check volume, it adopted it as being in the best
interest of the payments system. The Reserve Banks have taken steps to reduce substantially their
operating costs during the past several years in response to these volume declines. For example,
during the 1993 through 1995 period, the Reserve Banks reduced check staffing levels by almost
600 employees, or by more than 10 percent. Additional staff reductions are planned for 1996. It
is reasonable to expect that reductions in Reserve Bank resource levels would follow, rather than
be contemporaneous with, significant volume declines.
The Federal Reserve's strategic focus has also resulted in the re-engineering of the
manner in which it provides many of its financial services and the implementation of other
productivity improvements. For example, the Reserve Banks are centralizing the processing of
their electronic payment services; centralisation of Fedwire funds transfer processing is
substantially completed and centralization of the ACH and Fedwire book-entry securities transfer
applications is underway. As part of this initiative, the Federal Reserve has significantly enhanced
the level of contingency backup of its critical applications, including Fedwire. High operational
reliability of the Fedwire applications is especially critical to the continued smooth functioning of
the financial markets due to the value of transfers processed, which is currently $1.5 trillion per
day.
The Reserve Banks have also sought ways to improve the efficiency of their paperbased services. They have consolidated processing of their noncash collection service for
maturing coupons and bonds from 27 to 2 sites, and also have consolidated their savings bond
operations by reducing the number of sites from 24 to 5. Moreover, they have sought to improve
the efficiency of the check collection process by promoting electronic check presentment and have
significantly improved the efficiency of their ACH service by accepting ACH transactions from,
and delivering transactions to, all depository institution endpoints electronically. Finally, the
Federal Reserve, working with the Treasury, has introduced automated processing to the
previously paper-based Treasury auction system, improving the accessibility, integrity, and
timeliness of the Treasury securities auction process. The Reserve Banks are currently
consolidating the handling of commercial tenders from 13 to 3 sites using this automated system.




113
-3 These and other changes have improved the reliability and security of many
Federal Reserve services and have enabled the Reserve Banks to respond more quickly to changes
in business requirements. At the same'time, many of the initiatives described above have resulted
in one-time transition costs. Nevertheless, the Reserve Banks have been able to contain the
aggregate unit cost of providing financial services. While the quality of Federal Reserve services
has improved, the cost per transaction of providing all of these services has increased far less than
the rate of inflation. Moreover, we expect the unit cost of our electronic payment services to
decline as transition to the centralized environment is completed.
The draft report recommends that the Federal Reserve's review of its role in
providing financial services include its role in providing services to the government. As fiscal
agents of the United States, the Reserve Banks do not dictate the scope of their role in providing
fiscal and depository services to the federal government. Instead, the Reserve Banks provide
financial services to the government at the direction of the Treasury and other federal agencies.
We endeavor to provide high-quality, cost-effective services to the federal government and work
in concert with ihe Treasury and other federal agencies to achieve this objective. Several of the
examples noted above illustrate some of the efficiency and quality initiatives undertaken by the
Federal Reserve in its role as fiscal agent. We are also continuing to work closely with the
Treasury to determine how the federal governmem can best meet its future payments and debt
processing needs.
Management Structure and Consolidation of Operations
The draft report recommends that the Board assess the cost saving opportunities
that could result from streamlining the Federal Reserve's existing management structure and
consolidating operations, including the possible merger of some of the 12 Reserve Banks and 25
branches.
We agree that it is important that the Federal Reserve assess how it can best fulfill
its mission, particularly given the evolution in technology, banking structure, and consumer
demand for financial services. As discussed above, the Federal Reserve has consolidated or is
planning to centralize or consolidate the provision of many of its financial services. In addition,
System staff is currently evaluating possible infrastructure changes that may have the potential to
increase the efficiency of the Reserve Banks' check and cash services. Our analyses suggest that
significant scale economies exist in electronic payment functions, with much more modest
economies of scale apparent in paper-based systems. Further, as long as currency or checks are
physically transported to and from depository institutions, proximate physical location will
continue to be important in providing these services.
While the location and territory of some of the 12 Federal Reserve Bank head
offices and their 25 branches would likely be different if they were established today, relocation of
facilities or substantial realignment of office territories generally is very costly, and the long-term
savings would have to be substantial to offset the transition costs.




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The Use of Technology to Streamline Work Processes
The draft report recommends that the Board assess the potential for technology to
support streamlined work processes in the Reserve Banks, reduce costs, and improve quality.
We agree that an ongoing assessment of technologies is essential in identifying
possible means of improving operations; the Federal Reserve has a long-standing position of
leadership in developing and applying technology in the financial sector. We routinely assess
technologies for their ability to reduce costs and improve quality, reliability, contingency backup,
security, risk control, and customer service.
To advance these goals, some initiatives taken during the period covered by the
draft report include the consolidation of Reserve Bank mainframe processing at Federal Reserve
Automation Services (FRAS), the implementation of a new unified communications network,
Fednet, which connects the Federal Reserve offices and approximately 13,000 depository
institution endpoints, and the development and implementation of the National Information Center
(NIC), a central repository for bank structure, financial, and supervisory information on all
domestic and foreign banking organizations with a U.S. presence. The NIC facilitates the
monitoring and analysis of individual organizations as well as of the banking industry as a whole
and helps us streamline and enhance the effectiveness of our supervisory activities. Although
expenses have been incurred exclusively by the Federal Reserve, the NIC system is available to
other federal regulators and to state banking agencies.
In addition, the Federal Reserve provided the research and development that was
critical to the development of high-speed check image capture capability. Moreover, together
with the Treasury, the Federal Reserve has developed and implemented sophisticated currency
counterfeit-detection processes and systems. The Federal Reserve has also implemented FEDMail, which provides a more cost-effective and timely electronic delivery mechanism for the
dissemination of information to depository institutions.
These are but a few examples of the Federal Reserve's application of technology
to improve the security, quality, and cost effectiveness of its operations.

Control and Oversight Mechanisms
The draft report concludes that the combination of the Board's general supervisory
responsibilities for Reserve Bank operations and the autonomy of the Reserve Banks has resulted
in oversight that, in some cases, appears fragmented, inefficient, or lacking in independence. The
draft report indicates that the GAO found issues that were either not adequately covered or were
reviewed by both the Board's and the Reserve Banks' oversight organizations.




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The Federal Reserve's audit structure has long proven to be very effective. Audit
coverage for Federal Reserve Banks is multi-faceted and appropriately reflects the structure of the
Federal Reserve System and the statutory roles of the various entities and their respective
auditors. The different audit approaches result in a thorough and balanced perspective of the
entire Federal Reserve environment. Each of the responsible entities (Federal Reserve Banks and
Board of Governors) has its own independent auditing function reporting to its respective board.
The Reserve Banks have adopted and follow the Institute of Internal Auditors
Standards for the Professional Practice of Internal Auditing, the world-wide standard for the
internal auditing profession. The internal auditors of each Reserve Bank report to the audit
committee of that Bank's board of directors. Consistent with current business practice, all audit
committee members (in fact, all members of the boards of directors) are outside directors who are
independent of management. The audit committee selects the Bank's General Auditor, approves
the annual audit plan, budget, and staffing level, and evaluates the General Auditor's performance.
In addition, the General Auditors provide information about audits and miscellaneous items to the
Board of Governors at least quarterly.
The draft report notes potential overlap of audit coverage, citing the audit
attention to FRAS as an example. The FRAS auditing for the System is overseen by the
Conference of General Auditors (COGA), which is comprised of the General Auditor of each
Reserve Bank and a Board liaison, and is administered by the Richmond General Auditor, because
FRAS is part of the Richmond Federal Reserve Bank. While audits are performed by Richmond's
internal audit function and by the Board's financial examiners, each party carefully plans its audit
work to avoid unnecessary duplication. The Board's Inspector General (IG) also reviewed the
effectiveness of the Board's oversight in this area.
Moreover, each Reserve Bank is also examined by the Board's financial examiners,
who report to the Board of Governors. The financial examination program is an essential part of
the statutory scheme for the oversight structure of the Board of Governors for the Reserve Banks.
The Board is responsible for assessing financial, operating, and procedural controls as well as
reviewing the efficiency of Reserve Banks and the quality of their services. This Board-based
examination program provides a centralized focus. The Board also engages an outside audit firm
to conduct audits and certify the combined financial statements of the Reserve Banks, a step that
the GAO draft report commends.
The GAO draft report recommendations for addressing its concerns in this area
include taking steps to better assure the independence of its internal audit function, and extending
the IG's authority to include responsibility for auditing Reserve Bank and Systemwide projects.
We believe that the audit process described above, including the use of outside audit firms,
assures adequate independence. We believe that extending the IG's authority would not improve
the audit focus and would be less desirable than the current audit approach. For example, if the
IG becomes an integral part of the Board's oversight process, it would lose its "arms length"
ability to audit such processes.




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Budget Process
The draft report indicates that the Federal Reserve's budget process has
weaknesses in that it uses a current services approach that assumes that existing functions would
be retained and continued through incremental budgetary growth. The draft report also indicates
that this approach provides inadequate support to top management in constraining costs and
imposing internal self-discipline necessary for the Federal Reserve to respond effectively to future
priorities.
The Federal Reserve's budget process does not use a current services approach.
The Reserve Bank and Board budgets are strategy-driven and reflect a decision-making process
that focuses on priority setting, continual re-examination of the need for existing programs, and
phasing out activities and processes as appropriate. As previously discussed, many changes have
occurred in Reserve Bank operations during the period covered by this draft report. In addition,
the Federal Reserve has actively engaged in improving the efficiency of its output services as well
as its support and overhead activities. Moreover, as the GAO correctly states, a significant
portion of the increase in Federal Reserve expenses has been the result of legislative mandates in
the supervision and regulation area, such as the Financial Institutions Reform, Recovery and
Enhancement Act of 1989 and the Federal Deposit Insurance Corporation Improvement Act,
including the Foreign Bank Supervision Enhancement Act, which have had a major impact on
Federal Reserve System expenses.
The budget process used by the Federal Reserve System focuses on a number of
factors, including workloads associated with volume projections, the effect of legislation on the
scope of the Federal Reserve's responsibilities, the use of technology, and projected changes to
pay, benefits, rents, travel, and other costs. This process is reflected in the variations among the
individual Reserve Bank and Board budgets and the significant re-engineering of work processes
and downsizing of selected functions that has taken place. As noted earlier in our response, some
functions have been eliminated or consolidated to improve quality, consistency, and efficiency.
Such downsizing and re-engineering is not indicative of a current services budgeting approach.
Finally, it should be noted that the Federal Reserve budget process is but one part
of a larger process. The System engages in strategic planning; the strategic plans are reviewed
each year with a view to ascertaining whether the strategic directions are still appropriate.
Strategic plans are then implemented through action plans and annual objectives. Our, or any
other, strategic planning process can be continually improved, and we are in the process of doing
that, as is discussed below. But we believe that this forward-looking planning process helps
ensure that our activities, be they monetary policy, bank supervision, or financial services, will
continue to best serve the public's needs.
Federal Reserve Pay and Benefit Levels




117
-7The draft report recommends that the Board review pay and benefits levels at the
Board and the Federal Reserve Banks to determine if current levels can continue to be justified in
today's environment of increased governmental and private-sector cost containment. It also
recommends that the Board assess whether managing the System's health care coverage on a
Systemwide basis could reduce health care costs.
In order to acquire and maintain personnel with the degree of skills necessary to
accomplish our mandate, the Federal Reserve strives to provide salaries and benefits competitive
with local private-sector markets. We use a number of approaches to evaluate our compensation
programs, including participating in local and national salary surveys, contracting with
compensation consultants, and using published wage data. Our analysis of this information
indicates that Federal Reserve System base pay generally is competitive at non-officer employee
levels with the average base pay of comparable positions in our local labor markets. Base pay
lags the market, however, for certain positions, including Federal Reserve System senior level
officers and, in terms of total compensation (i.e., base pay plus other forms of cash including
bonus and incentives), most Federal Reserve officer levels lag the market, some very significantly.
Our presumption is that for our officers the nonmonetary rewards of working in the Federal
Reserve System compensate for the often significantly higher monetary compensation available in
the private sector.
The draft report indicates that the increase in Federal Reserve benefits from 1988
to 1994 was significantly higher than that of the federal government. This does not appear to be
the case. As noted in the draft report, the Reserve Banks monitor and control costs computed on
an accrual basis rather than the cash basis used by the federal government. Particularly as it
relates to retiree benefits, the cash basis of accounting is clearly an inferior accounting
methodology to the accrual basis. Because we are unable to adjust federal government benefits to
an accrual basis, in an effort to facilitate a comparison, we have reversed the most significant
accruals in the Federal Reserve accounts. 1
After adjusting for these accruals, the cost of benefits per employee for the Federal
Reserve and the federal government increased by approximately the same percentage during the
1988 to 1994 period; i.e., 64 percent and 62 percent, respectively. Based on this adjustment, the
increase in total compensation per employee for the Federal Reserve also appears to be similar to
that of the federal government for the period reviewed in the draft report.
The Federal Reserve continually assesses Federal Reserve benefits to identify
benefit design, cost containment, and productivity enhancements. As a result o f these and other
efforts, we have implemented effective cost containment techniques, such as managed care
medical programs, which were introduced some years ago. As part o f this ongoing effort, we will
continue to explore whether managing some parts of our health care programs on a Systemwide

'Specifically, we reversed the effects of Financial Accounting Standards (FAS) 87 and
FAS 106 on the Federal Reserve's calculated cost of benefits.




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- 8 -

basis, as the GAO draft report suggests, would improve efficiency and reduce costs, while
retaining the quality of these benefits.
The draft report also states that "a few Federal Reserve benefits are more generous
than those available to the OCC and FDIC and many are more generous than civil service benefits,
such as those available to SEC." We believe that the comparison of overall benefit costs cited
above is more meaningful. Nevertheless, with respect to specific benefits, the FDIC pays more
for health insurance premiums per capita than the Federal Reserve; the FDIC and OCC provide
greater dental insurance subsidies; and the OCC and FDIC contribute more to employees' savings
plans.
In addition, the draft report highlights six Federal Reserve benefits as being more
generous than civil service benefits, but we bel;eve several of these comparisons are misleading.
The Federal Reserve contributes less to its employees' savings plan than the Federal government
under FERS, and many federal agencies also offer mass transit subsidies to their employees.
Although the Federal Reserve offers premium conversion accounts and flexible spending
accounts, the contributions to these accounts are made by employees and the Federal Reserve
incurs only a small administrative cost in providing the services.
Surplus Account
The draft report states that a reduction in the Federal Reserve's surplus account
would have a positive effect on the federal budget by increasing the amount returned to the
Treasury in the years the reductions occur. Therefore, the report recommends that the Board
assess whether there is any compelling need for the surplus account, and whether the size of the
account can be safely reduced.
We agree that the appropriate level of the Federal Reserve surplus is open to
debate. But consideration of the surplus should recognize that its transfer to the Treasury would
have no meaningful effect on the gap between receipts from, and outlays to, the general public ~
that is, it would have no economically relevant meaning for the federal budget deficit in this
context. Moreover, reducing the Federal Reserve surplus to very low levels or eliminating it
could have certain disadvantages.
To be sure, transferring the approximately $4 billion surplus to the Treasury would
increase "unified receipts" and reduce the "unified budget" deficit, as these measures have been
defined for budget accounting purposes. The Treasury would have $4 billion less in debt
outstanding, and its gross interest payments would drop by the interest on that debt. But this is
an artifact of an accounting convention, and does not represent a change in the government's true
economic and financial position. These are intra-governmental transfers. The Federal Reserve
holds government securities as the asset counterpart to the surplus in its capital accounts, interest
on which it returns to the Treasury. If the Federal Reserve decreases its surplus by $4 billion it
would have to decrease its government security holdings by the same $4 billion. Consequently,




119
-9the Federal Reserve's payment to the Treasury would decline into the indefinite future by the
amount of interest on the $4 billion, exactly offsetting the Treasury's savings on gross interest
payments. The debt in the hands of the public (excluding the Federal Reserve) and consequently
the net interest cost to the Treasury of financing that debt would be unchanged.
Thus, transferring the surplus to the Treasury, to repeat, would be only an
exchange of intra-governmental claims involving no net transactions with the public. Recognizing
the anomaly between the accounting in the unified deficit and financial reality, Congress instructed
the Congressional Budget Office not to count any transfer of Federal Reserve surplus as real
deficit reduction for budget scoring purposes for FY 1996.
Moreover, using Federal Reserve surplus to finance government expenditures
would have potential disadvantages. By law, Federal Reserve notes must be collateralized by
specified types of assets, including gold, U.S. government securities, foreign currencies, and
certain other instruments (though the Federal Reserve has raised questions about the economic
rationale for this law). The margin of available collateral has shrunk over the years, partly
reflecting the declining volume of reserve balances and the associated drop in Treasury securities
corresponding to those balances. By reducing the Federal Reserve's holdings of government
securities, a transfer of surplus would further narrow the margin of excess collateral. A sizable
increase in any assets not eligible to serve as collateral - such as loans to a troubled bank secured
by the bank's loans - could require the use of foreign currencies, which have seldom been used
for this purpose in the past. In an extreme case, the Federal Reserve could have difficulty
complying with the collateral requirement while conducting an appropriate monetary policy.
Finally, elimination of the surplus would increase the risk that a loss of asset value
could seriously impair capital that has been paid in by member banks and possibly result in a
negative capital position for the Federal Reserve. Although the Federal Reserve has never had an
annual loss, it has had on many occasions short-run losses that have necessitated temporary
withdrawals from surplus. The Federal Reserve publishes its balance sheet weekly, and therefore
temporary capital impairment would be publicly known. The Federal Reserve's earnings would
remain quite substantial, permitting its capital to be rebuilt fairly quickly, and, in principle, low or
temporarily negative capital should have no adverse effects on the Federal Reserve's ability to
meet its financial or public policy obligations. Nonetheless, such a situation could prompt
questions in the minds of some investors in dollar assets, including holders of Federal Reserve
notes, about the continued ability of the central bank to conduct a sound monetary policy. Even
though such concerns would have little merit, if investors acted on them, real economic effects
would be felt.
Charges for Bank Examinations
The draft report recommends that the Board reconsider its policy of not
charging for bank examinations.




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1 0 -

Although state examination fees are currently approximately half those of the
OCC on average, the fact that there has been little shifting to state charters in recent years
reinforces the view that national charters have superior franchise value for some banks.
Interstate banking may increase this disparity. Accordingly, additional fees imposed by the
Federal Reserve on state member banks, and presumably by the FDIC on state nonmember
banks, could tip the scales further toward national charters, thus calling into question the longterm viability of a valuable dual banking system.
Contracting and Procurement Practices
The draft report states that the Reserve Banks could better ensure the purchase
of goods and services at reasonable cost through increased compliance with their uniform
acquisition guidelines and adoption of best practices in procurement and contracting.
We agree that Reserve Bank contracting and procurement practices should be
reviewed to ensure that they are consistent with Federal Reserve policy and result in costeffective contracts and we will strengthen our oversight in this area. While informal
communications between Reserve Bank officials currently provide for the sharing of
information on best practices in procurement and contracting, we will encourage the Reserve
Banks to establish a more formal forum for exchanging this information.
Travel Policies
The draft report states that the Board's general policy directive for Reserve
Bank travel expenditures allows for variations in Bank reimbursement procedures, which can
result in unnecessary expenditures.
A recent Board survey indicates that, for the most part, the Federal Reserve
Banks' and the Board's travel rules are consistent with General Services Administration travel
rules. The Board's practice is to provide guidance to the Reserve Banks in areas such as
travel, without providing rules on every detail of the Reserve Banks' operations. The Board
requires that each Reserve Bank have a written policy regarding permissible expenditures for
travel, including purpose, method, and class of travel. Travel policies may provide for a daily
per diem allowance, for reimbursement of actual expenses, or a combination of the two.
When provision is made for reimbursement of actual expenses, the provision should be in line
with sound business judgment, community standards, and applicable Internal Revenue Code
provisions. Explanations of any unusual and extenuating circumstances are required. Both the
Reserve Banks' internal auditors and the Board's financial examiners review expenditures for
their propriety and conformance with Bank and Board guidelines. We will review Reserve
Bank travel policies to determine whether modifications indicated by the GAO draft report, or
any other modifications, are warranted.




121
- n Management of Reserve Bank Building Projects
The draft report states that opportunities were overlooked to reduce the costs of
the new Dallas Head Office building project and cited as examples the sizes of the overall
building, the lobby, the computer facilities space, and the land on which the building is sited.
This building project was completed on time and $15 million under its original
budget. This result was achieved in spite of the fact that the overall size of the building
increased by approximately 35,000 square feet from the initial program to the final design
approved by the Federal Reserve Board. The increase was due primarily to the need to
enclose the delivery courts inside the building. The City of Dallas would not permit delivery
trucks to maneuver on a city street and required that the maneuvering space be provided on the
Bank's property. Because the building's floor plate occupied most of the 6.2 acre portion of
the site dedicated to the building, the delivery courts were relocated inside the building.
The main lobby and exhibit space on the first floor comprise 6,671 square feet
of floor area, which is less than the 7,800 square feet included in the initial program. The
GAO also appears to be referring to the second floor corridor or hallway as lobby space. The
second floor "lobby" is provided for employees entering the building from the parking garage
and serves as a controlled entry and corridor to the building's elevators. This corridor leads
from the elevators along the meeting rooms and assembly room to the cafeteria. As the design
evolved, the corridor was widened, at a very low cost, to function as the main breakout area
for the meeting and assembly rooms; this enabled the Bank to avoid building a dedicated
reception area to accommodate large numbers of people.
During the planning and design phase of the building, the decision to
consolidate Federal Reserve mainframe automation had not been made and the details on space
needs were unknown. Although the initial program identified approximately 70,000 square
feet of floor area for the Bank's computer services function, additional space was identified
within the overall space program for the possible installation of a consolidated data ccnter.
This was accomplished by providing raised flooring on an additional floor to accommodate
easy conversion of that space from office to data center space. When the building was later
modified for one of the FRAS computer centers, that space was easily converted at a cost
significantly lower than would have been the case otherwise.
Although the building plan was based on a site requirement of approximately
6.2 acres, parcels were not available in the configuration needed to develop the site.
Therefore, it was necessary to acquire approximately 8.0 acres in order to obtain the necessary
acreage. Siting of the building was carefully planned so that, in the future, if the property is
not needed, it can be sold.




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12-

Svstemwide Strategic Management Process
The draft report indicates that, if the Federal Reserve is to meet the challenges it
faces and streamline operations effectively, the Board and the Reserve Banks must work
together to plan strategically for the future.
The Federal Reserve System has engaged in strategic planning efforts for many
years. As a result of plans and strategies developed from these planning efforts, we have
successfully met significant challenges in supervision, financial services, and monetary policy.
More recently, the Board established a System Strategic Planning Coordination Group
consisting of selected members of the Board, Reserve Bank Presidents, and staff. As the name
implies, the group provides a System wide focus for coordinating the forces affecting how the
Federal Reserve can carry out legislated mandates and the most effective and efficient ways of
meeting its public policy objectives into the twenty-first century. This group has a broad
mandate, but it is important to note that it is only the latest manifestation of an ongoing
process in the Federal Reserve.




123

Waste and Abuse in the Federal Reserved Payment System

Prepared by the Democratic Staff
of the

Committee on Banking and Financial Services
Rep. Henry B. Gonzalez (D-San Antonio, Texas)
Ranking Democrat

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

January 5,1996
This report has not been officially adopted by the Committee on Banking and Financial Services and may not,
therefore, necessarily reflect the views of its members.




124
Contents
Summary

1

1.) Interdistrict Transportation System

4

2.) Possible Violation of the Monetary Control Act of 1980

9

3.) Improper Contracting Practices

13

A.) The Federal Reserve awards contracts without competitive bidding
B.) Extension o f three ITS contracts without competitive bidding
C.) Allegations of non-competitive bidding for a contract

4.) "Gifts" to Nonperforming Contractors

13
15
15

17

A.) $ 1.5 Million for a missing backup aircraft
B.) $425,000 for a missing backup aircraft
C.) Payments for services of grounded aircraft
D.) Failure to pursue repayment

17
24
26
29

5.) Federal Reserve Overcharging the U.S. Treasury

30

6.) Waste, Deception, and Insufficient Controls

32

A.) Fed misleads Committee about fuel provided for non-ITS uses
B.) Inadequate controls to monitor fuel use
C.) Budget dumping
D.) Payment o f $584,375 deemed a "wasteful" expenditure
E.) $387,000 for a useless report and computer software

Conclusion




32
35
.37
38
39

41

(ID

125
Summary
After receiving complaints about the Federal Reserve's operation of the U.S. payment
system, U.S. Representative Henry B. Gonzalez, Ranking Democratic Member of the Committee
on Banking and Financial Services, directed the Democratic staff of the Committee to investigate
the Federal Reserve's Interdistrict Transportation System (ITS) which operates the Fed's paper check
clearing services. The ITS contracts a fleet of airplanes and auxiliary ground services to transport
paper checks to each respective Federal Reserve Bank for clearing. The ITS transports U.S. Treasury
checks as well as private sector checks and charges for this service on a volume basis. The Federal
Reserve is required by the Monetary Control Act of 1980 (MCA) to match its revenues with its costs
over the long run so that the prices for the services it sells are not subsidized. Evidence gathered by
the Committee in the course of this investigation suggests that the Federal Reserve is in violation of
the Monetary Control Act.
The following summarizes additional problems the Committee found with the Federal
Reserve's Interdistrict Transportation System:
Explanation of the Interdistrict Transportation System
The Federal Reserve Bank of Boston supervises the ITS, a multi-million dollar operation
which contracts airplanes and ground services to transport checks across the country.
Possible Violation of the Monetary Control Act
The Federal Reserve may have violated the Monetary Control Act of 1980. This law requires
the Federal Reserve to charge competitive prices by matching its costs and revenues for its priced
services, thus permitting private enterprise to compete with commercial operations of the Federal
Reserve. Although the Fed reported near 100 percent cost/revenue matching, the ITS staff stated its
revenues accounted for only 80 percent of ITS costs for the past four years, or 75.5 percent if the
FRBB had not collected extra revenue by overcharging the Treasury. ITS staff said they were
ordered to manipulate the data to project higher cost/revenue ratios.
Improper Contracting Practices
The FRBB officers supervising ITS paid millions of dollars to private companies without any
competitive bidding even though it has used competitive bidding for these contracts in the past The
Fed circumvented the competitive bidding process in some cases by making prior arrangements to
pay favored, low bidders additional funds after the contracts were awarded. The ITS staff told the
Committee it may have been supplied with a "bogus" bid to make it appear there had been
competitive bidding for an ITS freight forwarding contract.
"Gifts*1 to Nonperforming Contractors
In mid-1995 the FRBB officers supervising ITS extended the contracts of three private
carriers without competitive bidding. These extensions included payments for non-existent spare
planes that were unavailable to ITS despite a contractual obligation. All of these contracts were

1

24-529

0 - 9 6 - 5




126
extended at substantially higher rates (5 to 11 percent higher than previous amounts), according to
Federal Reserve officials. Two ITS staff members estimated a 14.57 percent increase for one
vendor. Approximately $2 million of taxpayers' funds were paid for services that were, in large part,
not rendered by private companies. For example, FRBB supervisors paid $66,146.92 to a private
air courier company, North Coast Aviation (NCA), after it had received a final grounding order from
the Federal Aviation Administration (FAA) for numerous safety violations and for allegedly
falsifying aircraft identification numbers to avoid mandatory maintenance. The Committee has
reviewed dated invoices from N C A which show that it received four weeks of payments for services
it did not perform. Additionally, ITS personnel said they were ordered by their supervisors to make
the payments despite the knowledge that the invoices were incorrect.
Federal R e s e r v e Overcharging the U.S. Treasury
The F R B B has been improperly charging the U.S. Treasury 67 percent more than it charges
private sector companies for transporting canceled Treasury checks, costing taxpayers millions of
dollars. The Committee has discovered that this discrepancy between the rate the Fed charges the
Treasury and what it charges private companies, was not known to Treasury officials.
Insufficient Controls. W a s t e and Deception
The ITS engaged in budget dumping by making lump-sum payments to contractors toward
the end o f the year for future services. (This practice allows the ITS to falsely justify its funding in
subsequent budgets.) In one case $700,000 was paid to a private company that failed before it
performed approximately $420,000 in services. FRBB officials made no attempt to recoup this loss
from the company during bankruptcy proceedings.
The Committee staff found that there were insufficient controls to account for approximately
6.5 million gallons o f fuel provided annually by ITS at no charge to its contracted private aircraft
companies. ITS personnel said the Federal Reserve could not account for at least 200 gallons o f jet
fuel per carrier per week. The FRBB furnished the Committee with a letter from a private vendor
to an FRBB officer thanking the FRBB for agreeing to supply ITS fuel for a private non-contracted
use. The date o n the letter supported the Fed's contention that there was no prior plan to furnish ITS
fuel for the unauthorized use; that it was just a "spur of the moment" decision when the network
started. The Committee obtained a duplicate letter written to the FRBB by the private vendor with
a date two weeks earlier, a letter the FRBB had failed to send when all such communications were
requested by the Committee staff.
The Federal Reserve paid nearly $400,000 in 1993 to a private consulting firm, Arthur D.
Little, Inc., to study ITS operations and provide recommendations. The consulting firm produced
a short report and computer software. According to FRBB officers and ITS staff who operate the
ITS, the report and recommendations were said to be of little or no use in the operation of the ITS
and the software was useless because it was incompatible with FRBB software.

Conclusion
When the Committee brought this egregious waste to the attention of the FRBB, their




2

127
response was, "it's a difference in opinion about management decisions," and little effort has been
made to correct these problems. While the Fed may dismiss millions of dollars as "peanuts,"
American taxpayers may not.




3

128
1.) Interdistrict Transportation System
C l e a r i n g paper checks: The Federal Reserve's Interdistrict Transportation System (ITS)
office at the Federal Reserve Bank of Boston contracts a fleet of 47 airplanes and auxiliary ground
services that transport an average of $10 billion in canceled paper checks across the country each
night, Monday through Thursday. The ITS handles checks cleared between Federal Reserve Banks,
both those initially cleared and those that have been returned for insufficient funds. ITS planes make
approximately 200 flights nightly, Monday through Thursday, with some additional weekend flights.
The ITS also contracts with freight forwarders which are companies that transport checks for ITS
on Tuesday through Friday mornings using commercial airlines. The freight forwarders transport the
checks via private air freight carriers. In 1994, the Federal Reserve spent $35 million on its ITS
operations.
Since 1991, Santa Express, a private company, has had only one customer, the Federal
Reserve. At its headquarters in Duxbury, Massachusetts, Santa Express operates the ITS central
control facility which monitors and directs the transportation o f checks each night. Santa Express
also provides for the loading and unloading of ITS contracted aircraft at airports in the network that
are called "hub cities." The contracted air carriers provide their own loading and unloading services
at other airports.
Interdistrict Transportation System (ITS) H u b Cities and Airports
{There are 43 spoke cities)

HUB CITY

AIRPORT

New York
Cleveland
Atlanta
Chicago
Dallas

Teterboro (in New Jersey)
Burke-Lakefront
Hartsfield
Midway
Love

E x a m p l e : To illustrate ITS operations, consider a check paid by a N e w York City resident
for a purchase in Los Angeles, California. The check is deposited in a Los Angeles bank which may
clear it by sending it to the Los Angeles branch o f the San Francisco Federal Reserve. The Los
Angeles branch sends the check via ITS aircraft to the Federal Reserve Bank o f N e w York which
sends it to the N e w York City bank on which it is drawn. If there are insufficient funds, the check
must be sent back across the country. Any delay in processing the checks results in float. Float
arises because the money designated on a check is simultaneously recorded in two different accounts:
the m o n e y is credited to the account where the check is deposited even though the funds have not
yet been deducted from the account at the bank where the check is drawn.

Federal Reserve Officials Supervising ITS: The immediate supervisors are officers of the




4

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FRBB. The First Vice President o f the FRBB responsible for ITS operations is Paul M. Connolly.
The vice presidents in charge o f ITS operations were Robert LaRocca (1983 through late 1993, after
which he was promoted to senior vice president) and Richard Burns (1993 to present). FRBB Vice
President and Associate General Counsel John Kimball also was responsible for overseeing ITS.
Mr. Kimball met with Committee staff while they examined ITS documents at the Board of
Governors in Washington, D.C. and actively participated in the June 26, 1995 interviews at the
FRBB.
At least several employees o f the Board of Governors involved with the operation o f the
Federal Reserve's payment system including ITS operations, are knowledgeable about Congressman
Gonzalez's investigation. Several o f these individuals spoke with Committee staff about the
investigation. Jack Walton, Manager o f Check Payments at the Board o f Governors, was present at
the June 26, 1995 Committee staff interviews at the FRBB. At that time he indicated he was
investigating matters connected to the Committee investigation. He said he had recently been to the
Santa Express Duxbury, Massachusetts headquarters which operates the nightly central control
functions for the ITS. He acknowledged that he had the opportunity to examine the notes for ITS
operations available at that location. He also said he had visited one or more o f the contracted
carriers' headquarters. Additionally, almost all of the Committee s t a f f s written inquiries about ITS
operations and replies from the FRBB were sent to Donald J. Winn, assistant to the Board of
Governors and Congressional liaison who directly serves Chairman Alan Greenspan. There are a
number o f other officials at the Board of Governors in the Division o f Reserve Bank Operations and
Payment Systems who have supervisory roles over the Fed's check clearing operations.
C o m p l a i n t s o f Intimidation: Fed staff who sent numerous signed statements about ITS
management in response to the Committee's inquiries, with copies to the FRBB Executive Vice
President and General Counsel William N. McDonough, complained that they were intimidated for
what they believe to be truthful replies.
On August 3 0 , 1 9 9 5 , Thomas McFarland, an ITS supervisor, wrote to the Committee about
a meeting he had with FRBB Vice President Richard Bums, the officer directly in charge o f the ITS
office. Mr. McFarland stated that at that meeting Vice President B u m s spoke to him in a "hostile
tone" in an attempt to influence Mr. McFarland's written replies to the Committee. 1 Charles Fazio,

1
Thomas McFarland described his meeting with FRBB Vice President Richard Bums: "I asked Rich if the
attached draft reflected the opinions of Bob LaRocca to which he angrily responded, 'Yes.' Rich then repeated his
warning to me that I should not let my personal feelings toward Bob LaRocca affect how I answered...He further stated
that the positions as expressed in the draft text represented the * Bank's position,' and that I should carefully consider the
* Bank's position' before I prepared my answers. I then asked Rich if it was his intent to influence my response. Rich
answered in a controlled but hostile tone, 'Yes it is. I consider it part of my job to influence your opinion. I would be
remiss in my duties if I did not point out the position that the Bank has taken, and expect that you will give full
consideration to that position before you answer.' I think it is important that the Committee understands that each ITS
staff member who responds to the Committee's questions with answers that differ from those in the official FRBB
responses, answers at his own peril, as the FRBB is an institution that does not tolerate aox dissent The ITS staff
believes that once the Committee's investigation is concluded, and the Committee has reported its findings and made its
recommendations, that each ITS staff member who responds to the Committee with answers that differ from the 'Bank's




5

130
also an ITS employee, wrote to the Committee that he was also called into FRBB Vice President
Richard Burns' office during the same week and handed a packet of material that Mr. Fazio
understood to be the "Bank's position" that he should use in his reply to the Committee. 2 Dave
MacDonald, another ITS employee, also wrote that he was very troubled by possible repercussions
from replies to the Committee that he considered truthful. He said "that by honestly and accurately
answering your Committee inquiries I will be forced to contradict the positions taken by the Senior
Management o f the FRBB." 3
F o l l o w i n g these complaints o f intimidation sent to the Committee via his office, FRBB
E x e c u t i v e V i c e President and General Counsel William N. McDonough notified the Committee
on September 14,1995 that he "had instituted an investigation of these allegations" and he said, "I
take very seriously the allegations o f intimidation and possible retaliation against staff for taking
positions contrary to those taken by management." 4
F R B B Vice President Richard Burns, the F R B B officer supervising ITS, sent
criticisms of his staff to the Committee after they began directly answering C o m m i t t ^ staff
inquiries: The ITS staff had replied to the Committee about a payment of over $550,000 by ITS to
a private vendor for upgrading to another airplane. (This upgrade is discussed in Part 6E.) The ITS

responses will find, to varying degrees, their careers adversely affected and be subjected to some form of retribution. The
punishment may not be immediate, but I have no doubt it will be exacted." (August 30,1995 letter to Committee staff,
pp. 1-2.)

2
Charles Fazio informed the Committee about his meeting with FRBB Vice President Richard Bums: "I
surmised that anything 1 said which didnt support the 'Bank's position would be interpreted as having an axe to grind
with Mr. LaRocca. Mr. Bums then told me that he wanted to know if anyone other than an [FRBB] officer had anything
to do with influencing my responses. I took this to mean that sharing information with other ITS staff was off-limits."
(August 29, 1995 letter to the Committee staff, p.l.)

3
Dave MacDonald stated: "I feel very uncomfortable about this situation because my answers may differ from
FRBB Senior managemenfs...Now I find myself in a position that by honestly and accurately answering your
Committee's inquiries I will be forced to contradict the positions taken by the Senior Management of the FRBB and by
doing so leave myself open to the possibility of retaliation by management." (August 31, 1995, p.l.)

4
Mr. McDonough said: "One element of the staff responses which I take very seriously is the allegations of
intimidation and possible retaliation against staff for taking positions contrary to those taken by management As the
General Counsel of the Bank as well as the Senior Personnel Officer, it is my responsibility to insure that intimidation
and coercion do not take place. The Bank has an explicit policy against intimidation and coercion (copy attached) which
is strictly enforced. In accordance with that policy, I have instituted an investigation of these allegations and want you
to know that the Bank takes these matters very seriously and does not condone or permit any violations of Bank policy,
particularly those relating to management/staff relationships. I will keep you posted on the results of our investigation."
(Letter to Committee staff, September 14, 1995, p. 1.)




6

131
staffers had extensive experience with ITS operations and some had participated in monitoring and
checking on the aircraft in question while FRBB Vice President Richard B u m s had only been in
charge o f ITS for 18 months. Vice President Richard Burns wrote to the Committee about his
problems with his staff :5
O n the need to influence staff's replies to the Committee: "I believe I talked to
Chuck Fazio first, and because I was cognizant of being careful N O T to come across
as intimidating, I fumbled over how to state that I did in fact want to influence their
opinions to the extent that additional information should broaden the basis for an
opinion."
O n refuting staff's comments that they were shown "bank*s position": "To the
best of my recollection, I never indicated or implied to any staff member that the
enclosed documents represented the Bank's position and that it was important that all
ITS employees support the Bank's position."
Permission f o r staff to say FRBB Vice President R i c h a r d Burns influenced
them: "With each staff member thereafter, [after Charles Fazio] I just stated that they
should feel free to state in their response that I had influenced them, because I felt it
my ongoing responsibility to influence their opinions with information."
O n the staff's attitude: "In various situations over my eighteen months in ITS I have
had to filter out sarcasm and banter to get to an understanding o f base facts, so I also
felt it important to ask staff up front and very pointedly to try to form their opinions
dispassionately."
O n the s t a f f s view: "With respect to the [ITS] staff opinions about each of the
specific questions posed by [Committee staff], I believe them to be somewhat
narrowly focused upon the concrete and measurable facets o f aircraft comparison;
quite frankly, as one might expect. As in many organizations, often the
responsibilities we place upon staff and the authority they are given are structured in
a manner that emphasizes quantification of expected results as the preeminent basis
for recommendations."
Aversion to full public accountability for ITS operations: The Committee inquiry into
the Federal Reserve's payment system entered an area which one Federal Reserve official thought
should not receive close public scrutiny. On April 2 6 , 1 9 9 4 Senior Vice President of Check Services
o f the Federal Reserve Bank o f Philadelphia, Blake Prichard, told a conference o f the First Vice
Presidents of the Federal Reserve Banks "...the ITS operates under more public scrutiny than is fair

5
Memorandum from "Rich Bums" to "Bill McDonough," September 14, 1995, pp. 2 and 3, sent to the
Committee under a cover letter from FRBB Executive Vice President and General Counsel William N. McDonough.




7

132
or reasonable. This scrutiny is primarily from US CHECK, the only surviving private overnight
check air courier of any significance. Concerns over our management of ITS have to date stymied
any consideration of pricing options that might legitimately promote expanded use of ITS by large
volume check shippers..."6
H i d i n g behind the aegis of the Federal Reserve Banks' quasi-public corporate
structure; The Federal Reserve often resorts to special protection from normal oversight given
to government agencies by citing the quasi-public corporate organization o f its 12 Federal
Reserve Banks that do not use Congressionally authorized funds. Vice President Prichard o f the
Philadelphia Federal Reserve Bank told the conference of First Vice Presidents, "The ITS is at
long last recognized for what it really is — a private transportation utility run for the exclusive use
o f important overnight deliveries between Federal Reserve offices." 7
However, the fact that the 12 Federal Reserve Banks are organized as quasi-public
corporations does not spare the taxpayers from paying for Federal Reserve expenses. All funds
received by the Federal Reserve that are not used for expenses or added to its surplus are returned
to the U.S. Treasury and reduce the federal government's deficit. In addition, ITS is clearly part o f
the central bank of the United States and it is involved in interstate commerce. The FRBB and the
ITS o f f i c e at the FRBB are subject to supervision from the Board of Governors which is the Federal
Reserve's ruling body and is an independent entity in the executive branch of the federal
government. 8

6
April 26,1994 speech to die Conference of First Vice Presidents of the Federal Reserve System, "ITS COST
ALLOCATION PRESENTATION,": p. 2.
7
Bold emphasis added, April 26,1994 speech to the Conference of First Vice Presidents of the Federal Reserve
System, "ITS COST ALLOCATION PRESENTATION," p. 1.

* The legal standing of the ITS was specifically noted in a 1984 Federal court case: "There can be no doubt that
the Federal Reserve Bank of Chicago is an 'authority1 of the government of the United States. As a member of the
Federal Reserve System, it performs important governmental functions and exercises powers entrusted to it by the United
States government...It is unquestionable that a court may review the action of either the Federal Reserve Board or its
designated Banks in connection with the national check transportation system. (Flight International Group, Inc., Plaintiff,
v. Federal Reserve Bank of Chicago, Defendant, Civil Action C83-2696A, February 24,1984, Order by Judge Marvin
H. Shoob, United States District Court, Northern District of Georgia, pp. 7 and 9.)




8

133
2.) Possible Violation of the Monetary Control Act of 1980
T h e issues involved in the violation of the Monetary Control Act of 1980 (MCA): The
M C A requires the Federal Reserve to match its costs and revenues over the long run with regard to
priced services. 9 The M C A also specifically requires pricing o f the Federal Reserve's check clearing
services. 10 The purpose o f this provision o f the MCA is to require the Federal Reserve to price its
services without any subsidy s o that private firms can compete in the market to supply these
services. 11
The Federal Reserve takes several contradictory positions with regard to its obligation under
the MCA. First, the Federal Reserve states that it does not need to match its costs and revenues in
each of its operations that have priced services. It can bundle these operations into larger groups and
match the costs and revenues of the entire bundle of priced services. According to this contention,
even if the ITS costs were greater than revenues it would not violate the M C A as long as the costs
and revenues for a large group o f priced services is nearly equal in that period. This statement is
contrary to the orders given to the ITS personnel to produce 100 percent cost/revenue matching.
T h e Fed's argument against ITS cost/revenue matching: The Federal Reserve argues that
it does not have to match costs and revenues for ITS services because the law permits it to group all
payments and revenues into larger groups for the purpose of revenue matching. This bundling could

9
"(3) Over the long run, fees shall be established on the basis of all direct and indirect costs actually incurred
in providing the Federal Reserve services priced, including interest on hems credited prior to actual collection, overhead,
and an allocation of imputed costs which takes into account the taxes that would have been paid and die return on capital
that would have been provided had the services been furnished by a private business firm, except that the pricing
principles shall give due regard to competitive factors and the provision of an adequate level of such services
nationwide." (Depository Institutions Deregulation and Monetary Control Act of 1980, Title 1, Monetary Control Act
of 1980, Section 11 A.)

10
"Sec. 11A (a) Not later than the first day of the sixth month after the date of enactment of the Monetary
Control Act of 1980, die Board shall publish for public comment a set of pricing principles in accordance with this
section and a proposed schedule of fees based upon those principles for Federal Reserve Bank services to depository
institutions, and not later than the first day of the eighteenth month after the date of enactment of the Monetary Control
Act of 1980, the Board shall begin to put into effect a schedule of fees for such services which is based on those
principles.

"(b) The services which shall be covered by the schedule of fees under subsection (a) are"(2) check clearing and collection services;" Qd )
11
Prior to 1980 check clearing services were provided at no cost to banks that were members of the Federal
Reserve System.




9

134
include sorting and other check clearing services. 12 On March 23, 1995 the Federal Reserve replied
to the Committee staff question of whether there had been any attempt to use fees for the electronic
check presentations system to cross-subsidize paper check collection services. The Fed said that
"Both electronic check products and paper check products are within the same check service
category. There is no requirement that the Reserve Banks recover costs by product."13
The Federal Reserve's argument undermines the basis for charging competitive prices for
ITS services and is disputed by the Federal Trade Commission. This bundling of different priced
services for the purpose of cost/revenue matching would make it difficult to determine if charges for
ITS priced services are based on costs. In 1991 the Federal Reserve was told that its bundling
argument needed to be reexamined by the Federal Trade Commission's staff.
The staff of the Bureau of Economics of the Federal Trade Commission informed the Board
of Governors o f the Federal Reserve System on March 19,1991 that the Fed's argument for bundling
neglected that private sector suppliers do compete with specific priced services. The Federal Reserve
System ( F R S ) "seems to conclude that because the FRS integrates sorting, transportation, and
presentment activities into a single service offering, private couriers do not compete with the FRS.
The FRS may wish to reexamine this interpretation. A vertically integrated supplier [such as the
F R S ] d o e s c o m p e t e with firms that supply one stage of the vertical process whenever singlestage suppliers can be linked with suppliers at other stages to provide a close substitute for the
integrated service." 1 4

12
Federal Reserve response of May 26, 1995:"As noted in Chairman Greenspan's April 28 response to
Congressman Gonzalez, the Monetary Control Act (MCA) requires that, over the long run, fees for Federal Reserve
services be based on all direct and indirect costs incurred in providing the services, including a private sector adjustment
factor (PSAF). The Board's pricing principles reiterate this requirement and indicate that the Board intends that fees be
set so that revenues for major service categories match costs. ITS costs associated with the Federal Reserve's check
collection service are a component of total check collection costs that are recovered through the fees charged for the
Reserve Banks' commercial check services. The Board of Governors reviews and approves all Federal Reserve fees and
the PSAF annually at an open meeting." (P. 17.)

13
Federal Reserve Board staff response to Congressman Henry B. Gonzalez's March 9,1995 questions, under
a cover letter from Chairman Alan Greenspan to Congressman Gonzalez, March 23,1995, p. 9.
14
"Comment of the Staff of the Bureau of Economics of the Federal Trade Commission Before the Board of
Governors of the Federal Reserve System, March 19,1991, pp. 14-15) "Our examination of the FRS's (Federal Reserve
System's) request for comments and interviews with private couriers and banks, GAO reports, and publicly available
market information suggest that private air courier services do compete with ITS. The FRS seems to conclude that
because the FRS integrates sorting, transportation, and presentment activities into a single service offering, private
couriers do not compete with the FRS. The FRS may wish to reexamine this interpretation. A vertically integrated
supplier [such as the FRS] does compete with firms that supply one stage of the vertical process whenever single-stage
suppliers can be linked with suppliers at other stages to provide a close substitute for the integrated service. Our current
understanding is that customers, in fact, have such alternatives."




10

135
These statements on bundling from the Federal Reserve, however, are not consistent with
instructions to the ITS personnel. ITS staff members said that it was their understanding "that it was
over the long run, three to five years, that ITS was required to match annual costs and annual
revenues." 15 They said their impression that there was such a target at ITS was "based on
conversations with the ITS Officer and reinforced through memoranda from Senior Officers of the
F R B B and other internal written documentation." That changed when the Committee staff
investigation started, according to ITS staffers Hunt and McFarland: "Recently, (since this
Committee's investigation) we have been told by FRBB officers, Board staff and FRBB auditors that
it is not necessary that the ITS network ever match annual costs with annual revenues." 16
There is abundant evidence that the Federal Reserve did in fact have a target o f 100 percent
revenue matching for ITS operations. ITS issued monthly internal memoranda reporting the
cost/revenue matching of the ITS. The memoranda were sent to FRBB First Vice President Paul M.
Connolly from the officer (Vice President Robert LaRocca or then Vice President Richard Burns)
directly in charge of ITS. The memoranda contend that ITS matched their costs at yearly averages
from 87 percent to 99 percent with an average of 93 percent for the four years 1991 to 1995. In
addition, the Federal Reserve stated: 17
"...the calculated long-term average cost recovery for the ITS c o m p o n e n t of the
commercial check service has been approximately 100 percent..."
In answer to Committee staff questions, FRBB Senior Vice President Robert LaRocca and FRBB
Vice President Richard Bums claimed that ITS had matched costs and revenues and that the target
has been 100 percent cost/revenue matching: 11

15
"Responses to the Congressional Committee Inquiry of November 7, 1995, to FRBB Executive Vice
President and General Counsel William N. McDonoughfromThomas Hunt and Thomas McFarland, November 8,1995,
p.l.
16
"Responses to the Congressional Committee Inquiry of November 7, 1995, to FRBB Executive Vice
President and General Counsel William N. McDonoughfromThomas Hunt and Thomas McFarland, November 8,1995,
p. 1: "Response: Up until early 1995 it was Thom Hunfs understanding that ITS was required to match annual costs with
annual revenues. Up until late in die year 1991 it was Tom McFarland's understanding that the ITS network match its
annual costs with its annual revenues. Both of these opinions were based on conversations with the ITS Officer and
reinforced through memoranda from Senior Officers of the FRBB and other internal written documentation. ...Recently,
(since this Committee's investigation) we have been told by FRBB officers, Board staff and FRBB auditors that it is not
necessary that the ITS network ever match annual costs with annual revenues."

17

Bold emphasis added, Federal Reserve response, May 26,1995, p. 19.

11

Tape of Committee staff interview at the FRBB, March 24,1995. (The FRBB and the Committee staff both
agreed to tape the interviews and the FRBB supplied transcripts to the Committee made from their tape.)




11

136
Committee staff: "Do you attempt to match costs and revenues for your operations?"
F R B B Senior Vice President Robert LaRocca: "Actually over the years we actually
have cost/revenue matched ITS. One of the problems with the way the language is
read, you know, our goal is to come in at 100 percent. You know, they don't want
you to come in at 105 or 106... But overall we came very close to 100 percent, plus
or minus, a little bit, for years. Always. I don't know the last year or two because
I haven't been involved, but-"
F R B B Vice President Richard Burns: "...to and including [19]94"
F R B B Senior Vice President Robert LaRocca: "To and including [19]94, Yeah."
However, the cost/revenue recovery data are apparently distorted because the revenue data
includes ITS overcharges for U.S. Treasury checks which are discussed in Part 5. If these
overcharges are removed, ITS apparently covers only about 75 percent of its costs. This suggests
that ITS' services to private users are significantly underpriced, contrary to the requirements o f the
MCA.

ITS Cost/Revenue Matching
According to Monthly Internal Federal Reserve Reports
Date of reDort

1-10-92
1-15-93
1-13-94
1-06-95




Month covered bv
report

December
December
December
December

1991
1992
1993
1994

Rf«v?ry rate for
month.
percentage
89
99
98
86
Average percentage

12

Recoverv rate
Ywr tnding in dtttenataJ
month
Derpntavi
87
96
96
93
93

137
3.) Improper Contracting Practices
A/1 T h e F e d e r a l Reserve awards contracts without competitive bidding
Santa Express is a private company that provides loading and unloading services at the five
hub cities for ITS and operates the ITS central control facility at Duxbury, Massachusetts, which
coordinates and manages the nightly ITS operations. Santa Express has been awarded all of its
contracts w i t h I T S for these operations without competitive b i d d i n g since 1987. The Federal
Reserve argues that these non-competitive awards were justified by claiming that Santa Express is
a "sole source" for the services it provides to the Federal Reserve, its only customer. There is no
evidence to support the claims of the Federal Reserve, and it is likely that other offerors could be
found. In fact, these operations previously were obtained through competitive bids.
The current ITS contract with Santa Express, which expires in 1996, continues to include
both hub-ground operations and the central control facility. The annual payment to Santa Express
under this contract is $1,976 million. 19 In addition, the Federal Reserve has paid Santa Express a
total o f $ 1 , 4 9 7 , 1 0 0 from 1989 to 1994 for additional freight handling services.
Competitive bidding in the past: The historical record o f both the central control function
and the hub-ground operations of ITS shows that these two operations were awarded to private
vendors by ITS on the basis of competitive bidding until 1987 and 1990, respectively, when they
were separated. 2 0

19
Approximately 85 percent of the cost to ITS for Santa Express' services are attributable to the hub-ground
operations and 15 percent for the central dispatch function. The breakdown is as follows: weekday central dispatch
fiinction, $210,421.20; weekday hub-ground, $1,253,560.95; and weekend hub-ground and central dispatch function
$512,017.85 for a total of $1,976,000. By applying the same percentage of cost distribution for the weekend work as is
shown between the weekday hub-ground and central dispatch functions, an estimate of approximately $85,946.69 of the
weekend costs can be attributed to the central dispatch function. $426,071.16 is attributed to weekend hub-ground
operations. The overall weekday and weekend breakdown is $296,367.89 for the central dispatch function and
$1,679,632.11 for the hub-ground Since this is an extremely labor intensive operation, the rise in unit labor costs is
used to adjust this number to mid 1994 prices. Unit labor costs rose by 9.95 percent in that period. If that percentage
is added to the $1.2 million paid to Corporate Air in 1987 for hub-ground operations, the mid-1994 cost of these
services would be $ 1.32 million. The present $ 1.697 million annual payment is $360,000 per year higher or $ 1.44 million
higher for a four year contract

20
The hub-ground operations had been provided by Corporate Courier which was part of the then Connector
Zone contractor, Corporate Air, Inc. (The Connector Zone contractor provides air services between the five hub cities
and the west coast) These hub-ground operations were supervised by Jack Davis. Corporate Air and Corporate Courier
were informed in 1986 that the hub-ground operations would be separated beginning with the 1987 Connector Zone
contracts. The compensation to Corporate Courier for the last year ending in mid-1987 for the the hub-ground
operations was approximately $12 million and the central control facility cost Corporate Air approximately $125,000,
according to information received by the Committee. Barry Lutin was the chief operating officer at Corporate Air Inc.
Mr. Lutin's company had been a large contracted carrier with the ITS. In 1990. Mr. Lutin had asked the ITS for some




13

138
Federal Reserve Payments to Santa Express for
Payments Not Covered by Contract
1989 - 1994
Year
1989
1990
1991
1992
1993
1994

Amount
$335,000
300,000
363,000
384,000
104,000
11,100

Total

$1,497,100

Personnel Employed at Santa Express
Location
Central Control, Duxbury, Massachusetts
New York
Cleveland
Atlanta
Chicago
Dallas
Total

Full-time
6
7
4
4
6
3
30

Part-time
2
1
1
1
1
0
6

Source: April 28, 1995 reply from the FRBB

additional funds to cover losses Corporate Air Inc. was incurring in maintaining some of its aircraft in the Blue Zone
contract. The ITS gave Corporate Air, Inc. some additional funds and then held new bidding for the contract
In 1987 Flight International was awarded the Connector Zone contract through competitive bidding and
Corporate Courier Inc. was awarded die hub-ground operation without competitive bidding. Jack Davis had purchased
the hub-ground operations from Corporate Air Inc. and formed his own company, Santa Express. In mid-1987 ITS
negotiated a separate one-year contract with Santa Express without competitive bidding. In 1990 ITS purchased
computer hardware and developed software to use in the operation of the central control function. ITS negotiated a
three-year contract with Santa Express giving them a contract for both the central control facility and die hub-ground
operations.
Following 1987, Santa Express received three one-year contracts for hub-ground operations without competitive
bidding. In 1990 Santa Express received a three-year contract for ITS hub-ground operations without competitive
bidding.. On June 14,1990 FRBB Vice President Robert LaRocca wrote to FRBB First Vice President Paul M. Connolly
that "the negotiation of a three-year contract with SANTA EXPRESS for the weekday/weekend dispatch function and
hub-ground operation, has been endorsed by John Kimball [ FRBB Vice President and Associate General Counsel]..."
On January 23, 1991 Santa Express was awarded again the ITS central control facility contract without competitive
bidding.




14

139
B.) Extension of three ITS contracts without competitive bidding:
The FRBB officers supervising ITS in 1995 authorized one-year extensions (with an option
for ITS to extend them another six months) of the contracts to three vendors. This action was taken
with no competitive bidding. The FRBB reported this extension in a response to Committee staff
o n July 2 0 , 1 9 9 5 . They said that "As a result of the negotiations, the contracts were extended for
twelve months with an option to extend for a m a x i m u m o f an additional six months" and that
the payments to the vendors would increase in a " range from 5 to 11 percent..."21
C . l Allegations of non-competitive bidding for a contract
The Federal Reserve informed the Committee that a competitive procurement process is
followed in the award o f freight forwarding contracts, such as the one awarded to Sky Courier. They
said that "The Boston Reserve Bank selects its primary air freight forwarding providers through a
competitive procurement process."22
Despite this assurance the FRBB could not, in one case, find a document that is normally sent
out in such a process, a Request for Proposals (RFP). In its June 2 0 , 1 9 9 5 reply, the Federal Reserve
said they had been unable to locate the RFP for the 1991 ITS award of a freight handling contract
to Sky Courier. 23

21
The July 20, 1995 Federal Reserve response to the Committee staff July 6, 1995, inquiry stated (p. 1 and
2): "Federal Reserve Bank of Boston (FRBB) management negotiated extensions to the ITS Connector Zone contracts
that were due to expire May 1995 with all three current vendors. As a result of the negotiations, the contracts were
extended for twelve months with an option to extend for a maximum of an additional six months....FRBB management
extended the existing contracts to allow the Federal Reserve to experiment with cost-saving modifications to the ITS
network, which, if successful, would be incorporated into an RFP for competitive procurement for connector zone
services to commence during 1996...FRBB management has indicated that all three Connector Zone contract extensions
included payment increases based principally upon cost increases over the past four years. The increases, which range
from 5 to 11 percent, were negotiated by FRBB separately with each vendor, and include the cost of complying with a
1994 manufacturer-issued service bulletin requiring the periodic replacement of engine turbine blades, among other
factors. At the same time, FRBB included provisions in the contract with RTS to eliminate the services of one Lear 35,
used for the West Coast routes. As a result, the annualized cost of the RTS contract, rather than increasing by 11 percent,
would be reduced by 4.6 percent following implementation of that change.
"During December 1994, Richard Bums, Vice President, reached verbal agreements with the current connector
zone earners to extend the contracts beyond May 1995. The connector zone carriers and Mr. Bums finalized terms for
the contract extensions during May. John Kimball, Vice President and Associate General Counsel, reviewed die contract
extensions for legal sufficiency and consistency with Bank procurement problems. Paul Connolly, First Vice President,
then reviewed and approved the contract extensions."

22

Reply to Committee staff inquiry, April 28, 1995, P. 4.

23
"The FRBB has not been able to locate in its files an RFP for the Sky Courier contract. A copy of the
contract itself, however, is enclosed for your information." (P. 3.)




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During a June 26, 1995 interview with Committee staff at the FRBB, Senior Vice President
Robert LaRocca was asked if Sky Courier was awarded a contract without competitive bidding. He
said: "They did not receive it without competitive bidding. I can't recall whether there was a
formal RFP.... We went around and got rates from people and Sky was just the most competitive."24
The ITS staff who direct operations at the ITS did not have such memory lapses. They
claimed that a bogus bid was sent to the Committee by the FRBB officers supervising ITS in order
to make it appear that competitive bidding occurred. They stated: "We are quite certain that this
procurement was not a competitive procurement... Furthermore, we believe that the bid that was
submitted by SANTA Express [a copy of which was sent to the Committee] was requested by Bob
LaRocca for the Tiles' and only for the ITS Tiles.' Requesting that SANTA submit a bid for this
air freight forwarding w o r k w a s a deception, as it was well known within the ITS Office that
S A N T A could not effectively compete for air freight forwarding work due to business constraints
that had to be borne by S A N T A as a cession to receiving a no-bid FRBB contract."25
The ITS staffers state that "at least a half dozen letters with accompanying brochures for air
freight forwarding companies asking for an opportunity to meet with Bob LaRocca " were received
at ITS. The staff contend that "These companies were always rebuffed." 26

24
Bold emphasis added, transcript supplied by the FRBB of the June 26,1995 interview of FRBB personnel
by Committee staff, tape 4, p.21.
25
The ITS staff further stated that the Committee had been sent a bogus proposal for the Sky Courier contract
to make it appear there had been competitive bidding and that other factors entered into the contract award.
(Memorandum to FRBB Executive Vice President and General Counsel William N. McDonough, "Responses to the
Congressional Committee Inquiry of October 3,1995," October 11,1995, p. 6) "We are of the opinion that this contract
was given to Sky Courier because of the common backgrounds shared by Bob LaRocca and the Sky Courier sales
representative. Furthermore, we believe that the bid that was submitted by SANTA Express was requested by Bob
LaRocca for the 'Files', and only for the ITS 'Files.'"
26
"Response to October 6,1995 memos of Bob LaRocca and Rich Burns," to Committee Staff from Charles
Fazio, Dave MacDonald, Thomas McFarland, and Mike Reveliotty, November 13,1995, p. 2: "Shortly thereafter, despite
the fact that there were at least a half dozen other airfreightforwarding companies that were seeking to bid on ITS work,
a contract for the ITS weekday air freight forwarding was negotiated between Bob LaRocca and the Sky Courier
salesman."




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4.) "Gifts" to Nonperforming Contractors
A/1 $1.5 Million for a missing backup aircraft
The FRBB negotiated two agreements not covered in the original contract awards to pay a
private vendor for an airplane that the Committee investigation found was missing much o f the time.
The private vendor was Executive Jet Management, Inc. (EJ), also known by the name o f an
affiliated corporate entity, RTS Capital Services, Inc. (RTS). 27 The total payments from 1991 to
1994 for this missing aircraft was Si.543 million. The agreements called for a warm standby spare
aircraft to be stationed at Teterboro Airport. The phrase "warm standby" is a term widely understood
in the aircraft industry to designate a plane ready to fly with a crew.
Fed staff stated that the officials o f RTS were "well aware of the requirements within the RFP
to provide backup Lear jet aircraft to cover for any scheduled or unscheduled maintenance events."28
Payments for the warm standby aircraft continued even though the ITS personnel told the
Committee that they knew at that time that RTS had not been providing a warm standby backup as
specified in a April 2 3 , 1 9 9 1 letter of agreement. Nevertheless, RTS evidently wanted more money,
which w a s provided by a 1992 contract amendment: "FRBB agrees to pay ITS the annual amount
of $208,236, plus F.E.T. which, when combined with item No. 2 of the April 2 3 , 1 9 9 1 amendment,
will cover the full fixed costs of the eighth Lear 35A." The letter stated that "RTS agrees to continue
to maintain a 'warm standby1 Lear 35A to accommodate ITS network needs..."
The dates and amounts of payments by ITS for the warm standby plane authorized by the two
contract amendments are listed in a table on page 21. Since the original arrangement w a s made
to provide extra money to one vendor before competitive bidding for the contract ended, the
Federal R e s e r v e officials clearly circumvented the bidding process.
Falsifying a contractual agreement, the change in routes deception: The reason given
for doubling the payment - an increase o f over $624,000- for the spare plane in the April 2 3 , 1 9 9 5
contract amendment was stated to be "in consideration of the network changing from seven

27
RTS Capital Services Inc. was a subsidiary of Executive Jet Aviation, created to conduct business with ITS.
RTS Courier was a wholly-owned subsidiary of RTS Capital Services.
2S
Memorandum to FRBB Executive Vice President and General Counsel William N. McDonough, entitled;
"Responses to [staff] Inquiries of September 5, 1995," from Thomas McFarland, September 21, 1995, p. 3: "...Both
Jim Christiansen [president of RTS] and A1 Pod [vice president of RTS] offered assurances that RTS management was
well aware of the requirements within the RFP to provide backup Lear jet aircraft to cover for any scheduled or
unscheduled maintenance events. A1 Pod said that RTS had, in fact, already been in contact with a number of air cargo
charter companies that were receptive to chartering Lear jets to RTS on an on-call basis."




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routes to eight. The number of flight hours will not change." 2 9
However, according to statements by ITS staff and documents the Committee received, there
was no change in the number of aircraft routes between the time the contract was awarded to RTS
in 1991 after supposedly competitive bidding and the two letters o f agreement in 1991 and 1992.
There was also no change in any of the routes flown by RTS after the letters of agreement.
The
absence o f any change in routes is verified by four ITS staff (Thomas McFarland, Mike Reveliotty,
Dave MacDonald, and Charles Fazio) who monitor and plan ITS routes. They all signed a written
statement specifying that:"the only reason for this contract amendment was to give more money
to RTS." 3 0
T h e missing w a r m standby aircraft at Teterhoro: The RTS (also called "EJ") warm
standby jet required in the agreement was missing from Teterboro Airport nearly all the time in 1992
before the Fed authorized a doubling of annual payments for this aircraft, from more than $624,000
to $1,248 million (plus tax).
Entries noting the missing spare are described in the "operational notes" at the Santa Express
headquarters in Duxbury, Massachusetts. ITS awarded Santa Express, whose only customer is the
Federal Reserve, a series of contracts that included the operation o f the central control facility that
monitors and directs nightly ITS operations, as described in Part 3A. 31

29
Bold emphasis added, letter from then FRBB Vice President Robert LaRocca to Albert Pod, Vice President,
Executive Jet Management, Inc., June 10, 1992.
30
Memorandum to FRBB Executive Vice President and General Counsel William N. McDonough, entitled;
"Responses to Committee's inquiry of September 5, 1995," from Thomas McFarland, Mike Reveliotty, Dave
MacDonald, and Charles Fazio, Sept 21,1995, p. 1): Committee staff question 2: "Please have [staff]...state whether
they believe there was an increase from 7 to S routes in the RTS contracted service after the initial contract was awarded
to RTS and the June 10,1992 agreement which stated that the FRBB agrees to pay RTS the annual amount of $208,236,
plus F.E.T. which, when combined with No. 2 of the April 23,1991 amendment will cover the full fixed costs of the
eighth Lear 35 A. This is done in consideration of the network changing from seven routes to eight.' If the underlined
statement is incorrect, explain, to the best of your knowledge, why ITS entered into an agreement to award RTS an
additional annual amount of $208,236 for a "warm standby Lear.'"
"Responses [of ITS staff]: There was never any change in the number of routes flown by RTS from the
commencement of the contract through the June 10,1992 contract amendment We believe that the reasons stated in this
contract amendment for the increased payments to RTS are Dot valid, and that the only reason for this contract
amendment was to give more money to RTS."
The FRBB officers supervising ITS argued that the eighth route was similar to that of a previous contracted
carrier flying these routes, Flight International. This reply was irrelevant and misleading because there was no change
in the number of routes since the 1991 ITS contract award to EJ which did not provide for eight routes or payment for
a plane in maintenance.

31
The ITS has also called the central control facility the "chief dispatching operations" (November 2,1989
memorandum from FRBB Vice President Robert LaRocca, with subject: "Recommendations for ITS Chief Dispatch
[and] Management Information System (MIS)," p. 1) and the "Central Dispatch Function (CDF)".




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A misleading survey on the missing spare from the Board of Governors: After the Board
o f Governors sent a misleading reply to the Committee that the spare plane had been at Teterboro
72 percent o f the time between 1992 and 1994, Committee staff requested a more accurate report.
The incidence of the failures of the spare to appear at Teterboro Airport during the first half of 1992
w h e n the Federal Reserve doubled the payments for the spare was especially significant. The
Federal Reserve replied that "Data for months prior to N o v e m b e r 1992 were incomplete and,
t h e r e f o r e , w e r e not included in the sample." 32
T h e 72 percent survey statistic from the Board of Governors was misleading according
to the ITS' operational notes of its central control facility operated by Santa Express. (The entries
in the operational notes are included in the table on page 22. 33 )
The ITS staff recorded information from the ITS' operational notes on the availability of the
warm standby spare for 1992 through September 1995. They could find only one entry, April 16/17,
1992 before May 7/8, 1992 in which a spare was recorded as being at Teterboro Airport. From
January 1992 to September 1995 the spare was recorded as present 58.1 percent of the time. The ITS
staff were unable to ascertain from the records the status of the spare 2.8 percent of the time.
Federal Reserve officials defend the payment for the missing plane bv arguing that a
p l a n e in maintenance could be considered the " w a r m standby Lear 35 iet to be based at
Teterboro Airport during the week:" Federal Reserve officials argued that even if the spare plane
were not at Teterboro at the beginning of the evening, even if Santa Express' central control facility
recorded, "EJ no spare," the spare was present. In fact, they argued that it was always present.
During the June 26, 1995 Committee staff interviews at the FRBB, Vice President Richard Bums,
w h o w a s directly in charge of ITS, stated: "The spare was always in the network." 34
FRBB Senior Vice President LaRocca explained during the June 24, 1995 Committee staff

32
Responses under Donald Winn's (Assistant to the Board of Governors) cover letter to Committee staff, June
20,1995, p. 2: Committee staff: "Please supply the documentation and the methodology for obtaining a 72 percent on
station calculation for the warm standby Lear 35A called for in the RTS contract, as specified in the addendum to Don
Winn's June 7, 1995 reply. Was the warm standby always a Lear 35A as called for in the agreement with the FRBB?
If not, please elaborate giving exact dates."

Federal Reserve Response: "...For selected months Board staff noted whether or not a backup airplane was identified
on both RTS's and ITS' logs as available at the beginning of each night... The months selected began with November
1992, included January, July, and November for the years 1993 and 1994, and January through May 1995. Data for
months prior to November 1992 were incomplete and, therefore, were not included in the sample.
33
On a few dates the ITS' operational notes contained uncertain information about the EJ spare. This problem
occurred before and after November 1992.
34
Bold emphasis added, transcript supplied by the FRBB of the June 26, 1995 interview of FRBB personnel
by Committee staff, tape 2, p.5.




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interviews at the FRBB that a plane in maintenance could be the spare aircraft: "The difference was
with RTS [also known as EJ] if they wanted to use that plane in maintenance, the eighth
plane[,] leave it in maintenance all [the] time [,] that was fine as long as they do their 95% [a
measure o f on-time performance]" 35
Thus, the Federal Reserve officials were contending that a plane incapable of flying and
housed in a maintenance facility could be considered the "Warm standby Lear 35 to be based at
T e t e r b o r o Airport during the week" as specified in the contract they authorized.
F R B B Senior Vice President LaRocca stated that a "warm standby" meant a plane and pilot
crew without any stipulation as to where such a crew and aircraft would be stationed. This statement
contradicts his explanation since a plane in maintenance does not have a crew. 36
F R B B officer admits that doubling the payment to R T S w a s made to help the vendor
financially: In his October 6 , 1 9 9 5 response, FRBB Senior Vice President LaRocca admitted it was
his decision to double the payment to RTS in the contract agreement amendment of June 10, 1992
because the company was incurring chartering costs: "A review of the first year of 50/50 cost sharing
showed that RTS had lost more than $300 thousand between the excess chartering costs and the
unbudgeted cost for the eighth Lear 35...I made the decision that it was in the best interest of the ITS
to fund the other half of the eighth Lear 35 for the remaining term o f the contract."37

35
Bold emphasis added, transcript supplied by the FRBB of the June 26,1995 interview of FRBB personnel
by Committee staff, tape 2, p. 14.
36
FRBB Senior Vice President Robert LaRocca memorandum to FRBB Executive Vice President and General
Counsel William N. McDonough, October 6,1995, "Responses to [Committee staff] Fax of September 5, 1995,": "As
I have stated 'warm standby* meant a plane and pilot crew. If it were literally true that every night a Lear 35 had to be
sitting at Teterboro Airport the cost to RTS would have been prohibitive. In other words, they never could have agreed
to that arrangement, because they would have had to charter every time they had a mechanical problem or maintenance
need." (p. 1.)

37
FRBB Senior Vice President Robert LaRocca memorandum to FRBB Executive Vice President and General
Counsel William N. McDonough, October 6,1995, "Responses to [Committee staff] Fax of September 5, 1995," p. 2.




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$1,543 M i l l i o n from ITS for " W a r m Standby Spare Plane" to be Furnished by Executive
J e t Management, Inc. or its Affiliated C o m p a n y , RTS Courier
Contract
Date

D a t e o f Invoice/Date of Payment

Invoice not dated/general ledger date o f payment,
5-31-1991
Invoice not dated nor specifically described/
general ledger date o f payment, 11-22-1991
labeled as "standby aircraft"
6-10-92/6-12-92
10-16-92/11-6-92
10-16-92/10/22/92
10-13-93/10-22-93
10-13-93/10-22-93
11-1-94/11-4-94
11-1-94/11-10-94

Amount
(including
tax)
$136,154.24

Per April 23, 1991
memo
Per April 2 3 , 1 9 9 1
memo

221,250.75

Per April 2 3 , 1 9 9 1
memo
Per April 2 3 , 1 9 9 1
memo
Per April 2 3 , 1 9 9 1
memo
As per June 1 0 , 1 9 9 2
A s per June 10, 1992
As per June 1 0 , 1 9 9 2
FET for 11-1-94
payment

TOTAL

221,250.75
221,250.75
221,250.75
221,250.75
221,250.75
74,736.76
4,671.04
1*543,066.54

R T S Spare Occurrences Recorded by ITS Staff in October 1995*
Date

Number
of days

1992
1993
1994
1995
Total

200
200
199
150
749

Spare

66
123
147
100
436

N o spare

No
record

116
76
50
50
292

18
1
2
0
21

Percent
spare
33
61.5
73.9
66.7
58.1

Percent
no spare
58
38
25.1
33.3
39.1

Percent
no
record
9
0.5
1
0
2.8

•ITS staff who recorded this information in October 1995 may not have had complete access to 1992 Santa Express
records that Committee staff viewed on March 24,1995. The 1992 record is included in the table and indicates more
"no spare" entries than in this table. Two examples are: (1.) The record was based on an entry for March 12, 1992
classified as "no record." The entry in the Santa log for that date was "EJ. NO SPARE ... EJ. 671-3 MECH. IN
DENV (LEFT ENGINE WOULD NOT START)" (2.) The record was based on an entry for June 2, 1994 classified
as spare at Teterhoro Airport The June 2, 1992 log stated "EJ has a spare but cannot fly through T-storm due to
Radar problem."




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Dates During 1992 that "No Spare" Was Recorded by
ITS at the Central Control Facility
Month
January

February

March

April
May

June
July
August
September

October
November
December

Dates
4-5, 7, 8, 13, 15, 16 ("EJ 176-1 BROKE IN NEWY, A/C DOWN ALL NIGHT.
THEY STILL HAVE THE LR-23 CHARTER FLYING OUT OF RICH."), 212 2 , 2 3 , 2 7 , 2 8 , 2 9 ("EJ CHARTER CASI'S CHIC BASED MU2 WAS FIXED
IN TIME TO FLY 474-1. EJ LEAR WAS FIXED IN TIME TO FLY 474-1
AND CASI WENT BACK TO CHIC EMPTY")
3 , 4 , 1 0 , 1 1 , 1 2 , 1 3 , 1 8 ("E.J. 474 Broke - Chartered L.R. 24 from, A.F.S. Tail #
157 AG ... EJ chartered 2nd .L.R.24 from Fit. Ops. To Assist on 474-4 due to
wt./Bulk. Tail #57 F.L."), 19,20,24,25, 26
2, 3 , 4 , 5 , 9 , 1 2 ("E.J. NO SPARE ... E.J. 671-3 MECH. IN DENV (LEFT
ENGINE WOULD NOT START)"), 1 7 , 1 8 , 1 9 , 30 ("E.J. Chartered a Lear 24
from American Air..."), 31
2, 6, 7, 8, 9, 1 3 , 1 4 , 2 0 , 2 1 , 2 2 , 2 3 , 2 7 , 2 8 , 29, 30,
4, 5, 6, 12 ("NO SPARE AFTER 2400), 13, 14, 26 (" E.J. HAD A SPARE UP
UNTIL 0030"), 28 ("E.J. HAS A SPARE UP UNTIL 474.4 departs TEB. Spare
crew is based in MINN & flying back on 474.")
2 ("E.J. HAS A SPARE BUT CANNOT FLY THROUGH T-STORM DUE TO
RADAR PROBLEM."),3 ("EJs Spare broke"), 16, 25
8 , 1 4 ("WERE GOING TO USE THEIR SPARE BUT IT BROKE AS
WELL."), 1 5 , 1 6 , 2 1 , 2 2 , 29
3 , 4 , 6, 10, 11, 12,13, 17,18, 19,20,24, 25, 27, 31
[Entry on September 1, "E.J. had a spare!!!"] 8 , 1 0 , 1 4 {"E.J. No Spare... approx
for 2 weeks (maint)...E.J. FLT 643-1 Broke in SALT HAD N A T s COURIER
DELIVER THE SALT & LOSA 2ND DISPATCH TO THE DENV FED TO
BE PUT ON 671-3 TUESDAY....E.J. couldn't get a charter to cover 643-3,
therefore, HAD BANK AIR FLT 373 once it got to CLEV, turn AND GO
BACK TO CHIC TO PICK-UP YELLOW THAT WAS TO BE PUT ON 6433,...E.J. USED THEIR 323 A/C TO DEADHEAD TO ATLA TO PICK UP
ROUTE 643-4"}, 16, 17,21, 2 2 , 2 3 , 2 4 , 2 8 , 2 9 , 30
8,14,21
3 ("E.J. Spare in TEB down due to ... problem."), 9 , 1 0 , 1 2 , 1 5 , 1 6
1, 7, 8, 9, 10, 14,15 ("E.J. HAD A SPARE UNTIL 0300, THEN SWAPPED
W/ 474 A/C due to mechanical."), 17 ("E.J. HAD A SPARE AT 0200 (IN
TEB)"\ 21, 28

When the warm standby spare was regularly on station: When Federal Reserve Vice
President Richard Bums was promoted and became the officer directly in charge of ITS in late 1993,
he directed EJ to provide a warm standby Lear. This effort included chartering aircraft to serve as
a standby spare when an EJ Lear 35A was undergoing a 12,000- hour required maintenance service.
He explained his actions by saying that the contract amendment requiring a warm standby spare only




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applied to periods when a plane was in long-term maintenance. 31 RTS (which is affiliated with
Executive Jet) had the next to lowest performance record for all o f 1992.This on-time performance
record w a s reported in official ITS records circulated to the FRBB officers supervising ITS.
1992 Carrier Performance Rates (percentage on time) at ITS Inspections
Carrier

AH of 1992

RTS Courier, Inc (Connector A/B)
CASI (Connector D)
Epps Aviation (Blue Zone)
Top Flight (Red)
Bankair (Yellow)
Bankair (Connector C)
CASI (Green)
CASI (Brown)
ACT (Hele, Seat & Port)

96.4
98.5
96.6
96.7
97.7
98.2
98.3
97.5
96.1

T h e meaning of a Federal Reserve contract is reserved for those p r i w to its "intent and
interpretation:" In response to a Committee inquiry, the Fed sent a November 1, 1995 cover letter
from William N. McDonough, Executive Vice President and General Counsel o f the FRBB which
contained a statement from FRBB Vice President and Associate General Counsel, John Kimball.
Associate General Counsel Kimball presented a reason for the failure to satisfy the contract
amendment that specified a"warm standby Lear 35 jet to be based at Teterboro Airport during the
week." Associate General Counsel Kimball claimed that "the only persons with any knowledge
of the intent and interpretation of the amendment" could interpret what it means. He added more
reasons for the authorization of S1.543 million for a spare aircraft that was not regularly at Teterboro
Airport and was almost never there during the first half o f 1992 when the F R B B doubled the
payment for it. According to this officer o f the FRBB, reasons that no spare was available at
Teterboro Airport are: a "lack of need for a backup" and, opening the list o f reasons to many

31
According to the June 20, 1995 reply from the Federal Reserve, the chartered planes: "were Aircraft
Corporation LA 1124's, jets comparable in speed and capacity to a Lear 235A. The dates of the Charters were: January
24, 1994 to February 22, 1994; February 22, 1994 to March 29, 1994; and April 27,1994 to June 13, 1994." (p. 3).
In his October 6, 1995 reply, FRBB Vice President Richard Burns said:"Tom [Thomas McFarland] conveyed
to me the impression that I had better do something, because the contract called for a spare aircraft, while not having the
spare available on any night might be OK, not having one available for such an extended period [for long term
maintenance] could really jeopardize the network... I advised A1 Pod [at RTS] that my reading of the contract was that
we should have access to a spare aircraft, and that if one other of their aircraft was going to be continuously out of
service for such a long period, then I thought it incumbent upon RTS to make alternative arrangements to meet this
responsibility..." (Bold emphasis added, FRBB Vice President Richard Burns memorandum to FRBB Executive Vice
President and General Counsel William N. McDonough, October 6, 1995, "Response to [Committee staff] 9/5/95
Inquiry," p. 1.)




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possibilities, "etc.":39 At a minimum, there is confusion within the Fed regarding the contractor's
obligation to provide spare aircraft.
B.l $ 4 2 5 . 0 0 0 for a missing backup aircraft
In 1990, ITS awarded a contract for its Blue Zone to Corporate Air, Inc. for $2,056,000.
Subsequently, Corporate Air, Inc. determined it was unable to perform the requirements of the
contract at the bid price. Corporate Air, Inc. requested an additional $100,000 per year to maintain
its Blue Zone operations. ITS responded by giving Corporate Air, Inc. additional funds in order to
allow ITS to solicit additional contracts. 40
In subsequent bidding for the ITS contract award, the previous Blue Zone carrier, Epps
Aviation, won the ITS contract at an annual cost of $2,650,000. This payment was more than
Corporate Air, Inc.'s contract including the additional payments, according to information received
by the Committee. The m o n t h after the award to Epps Aviation, ITS gave Epps an additional
lump-sum payment of $400,000 plus $25,000 for tax for a backup a i r c r a f t This contract award
was similar to an award given to Epps in a previous contract before Corporate Air, Inc. was awarded
the contract for this zone. That award for a backup aircraft was never conveyed to Corporate Air,
Inc. On December 23, 1988 the ITS awarded Epps an additional lump-sum payment of $223,000
to upgrade that backup aircraft (from an MU-2J to a MU-2B-60).
T h e p h a n t o m spare: Information received by the Committee indicates that the backup
aircraft for which ITS paid $425,000 in 1991 was not regularly at Teterboro Airport except for
approximately two months during the winter months of 1994. 41 A September 22, 1993 ITS on-

39
Memorandum to William N. McDonough, Executive Vice President and General Counsel of the FRBB to
FRBB Vice President and Associate General Counsel John Kimball, October 24, 1995 under cover letter of November
1, 1995:"' [from Committee staff question] 1.... explain whether an aircraft in maintenance and not performing as a
backup aircraft, under contract requiring a 'warm standby spare' aircraft, would be of any benefit to ITS if weather or
mechanical problems occurred, Specifically explain how this situation is related to the repeatedly stated goal of FRBB
to minimize float'"
"[response] The interpretations of the April 23,1991 amendment to the RTS contract that has been expressed by ITS
and RTS management is a reasonable and valid interpretation of this amendment by the only persons with any knowledge
of the intent and interpretation of the amendment The amendment benefited ITS in providing a backup plane even if
the backup plane was not used on occasion for any of a variety of reasons, such as lack of need for the backup,
maintenance of the backup, need for the backup in places not readily accessible to the backup, prior use of the backup
as replacement for other RTS planes on ITS routes, etc."

40
ITS paid Corporate Air $3,538.46 per weekfromthe end of March 1991 to mid- January 1992, according
to information supplied to the Committee.
41
The spare was present much of the time or a plane was chartered for the months beginning August in 1995
until October 1995. This was a period in which the Committee staff inquiry began to receive replies from ITS staff who
direct operations at the ITS via the office of FRBB Executive Vice President and General Counsel William N.
McDonough about ITS operations. The statements made by the FRBB officers supervising ITS about a plane in




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site staff report stated: "Epps Aviation was short two aircraft, and the other was the phantom spare
that no o n e has seen in Teterboro in '93."
W h e n asked about the missing spare, FRBB Senior Vice President LaRocca said: "Could
have been in maintenance if it wasn't there. It was working for ITS whether it was in maintenance
or whether it was in Teterboro."42
C i r c u m v e n t i n g the Bidding Process: The bidding system was circumvented with these
lump-sum payments awarded after bidding was closed. Corporate Air Inc. was not treated on a level
playing field with other carriers.
Normally, the ITS requests bids. On February 1,1991, Vice President and Associate General
Counsel o f the FRBB, John Kimball, asked a private law firm to review a report that contained the
recommendations of the winning bidders for the ITS zones (geographical areas defined by ITS for
contracted air service). The report outlines the procedures followed in the bidding process: "Requests
for Proposals (RFP's) were mailed to more than fifty companies in late August o f which nine
responded by the November 2 , 1 9 9 1 deadline. N o late proposals were received. The site inspection
team consisted o f Bob LaRocca, Vice President, ITS Office, and Tom McFarland, Operation Section
Head, ITS Office. ...The lowest four proposals in each zone were analyzed in detail to determine
c o m p l i a n c e with the requirements o f the RFP. Visits were made to the finalists for each zone to
determine their understanding of the RFP's requirements."
Thus, the farce of soliciting proposals with full and detailed information for ITS contract
awards w a s outwardly impressive. The additional payments described previously circumvented the
bidding process and provided some bidders with more information than others.

maintenance being a spare and other questionable statements about the spare were refuted by these staff members.
Someone may have notified the vendor that a spare should be supplied during this period.
42

Transcript supplied by the FRBB of the June 26,1995 interview of FRBB personnel by Committee staff, tape

l.P- 14-




25

150
R e c o m m e n d a t i o n s of ITS for Award of Contracts to Air Carriers
for the F o u r Connector Zones, February 1 , 1 9 9 1
Zone A*
Lowest Proposers:

Zone B**
Lowest Proposers:

Combination
Lowest Proposers:

Annual dollar payment
3,247,375
4,168,394
4,564,469
4,836,774

1. Janair, Inc.***
2. RTS Courier
3. Corporate Air, Inc.
4. Flight International, Inc.
1.
2.
3.
4.

Janair, Inc.***
Corporate Aviation Services, Inc.
RTS Courier
Corporate Air, Inc.

2,265,958
2,768,767
2,811,408
2,915,954

1.
2.
3.
4.

Janair, Inc.***
RTS Courier
Corporate Air, Inc.
Epps Air Services, Inc.

5,513,333
6,783,352
7,145,008
8,138,090

A+B Combination
Recommendation: RTS
•The largest of the four connector zones, this zone requires four satellite jets based in New York (Teterboro),
Richmond, Minneapolis and Los Angeles. ** A three-jet zone with two jets based in Miami and one in Salt Lake
City. *** Janair subsequently withdrew their proposal. Source:"ITS CONNECTOR ZONE RECOMMENDATIONS
FOR THE MAY 1991 TO MAY 1995 CONTRACT PERIOD," February 1,1991)
C ^ P a y m e n t s f o r services of grounded aircraft
C o n t r a c t a w a r d to North Coast Aviation (NCA1 in 1990: Requests for proposals were
sent by ITS to over 100 companies in late August and ten responded by November 1, 1989. FRBB
V i c e President and Associate General Counsel John Kimball sent copies of the recommendations
to an outside law firm contracted by the Federal Reserve. North Coast Aviation, Inc. was described
as having submitted the third highest bid and was recommended for the contract award for the Red
Zone. The t w o lowest bidders were eliminated because of other factors. The memorandum
contained praise for the track record of NCA as an ITS operator but it also included guarded
comments about its financial statement 43 The recommendation indicated that even if the two lowest
bidders made certain changes in their equipment past experience with ITS was given more
importance. 44 Thus, the FRBB officers supervising ITS stated they placed substantial weight on a

43
Undated, attached to a January 29, 1990 cover note sent to the Committee: "ITS Color Zone
Recommendations for the May 1990 to May 1994 Contract Period" p. 4) "NCA is a small company based at Hopkins
Airport in Cleveland... NCA performed the ITS RED zone from March 1984, to December 1986 under the name,
Sundorph," and did an excellent job... Although the [balance sheet] statement is not strong, it is much stronger than it
was in 1985 and 1986 when the company was book insolvent."

44
Undated, attached to a January 29,1990 cover note, "ITS Color Zone Recommendations for the May 1990
to May 1994 Contract Period." p. 6: "The RFP clearly states that price may be outweighed by other factors described
in the RFP in the sole judgement of FRBB. One of those factors is past experience on a contract for a Federal Reserve




26

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vendor's past experience with ITS in deciding contract awards.
Grounding of North Coast Aviation hv the F A A : On July 17, 1990 the Federal Aviation
Administration (FAA) revoked the FAA Part 135 certificate o f North Coast Aviation, Inc. ( N C A )
for alleged safety violations including "knowingly and intentionally" falsifying aircraft
identification numbers to avoid mandatory maintenance. The FAA Part 135 Air Carrier
Operating Certificate is required by the ITS for their contracted private air carriers. This FAA order
w a s sent to the Federal Reserve and stamped "received."
The charges that NCA officials fraudulently entered identification numbers should have
raised concerns about the company.
The FRBB officers supervising ITS authorized double payments for services contracted to
N C A when N C A was grounded. On each route both N C A and a substitute air carrier were paid.
After the final revocation order, ITS paid N C A for services clearly not rendered.
S p u r i o u s invoices: Four invoices were paid by ITS for four weeks' service by N C A
following this final revocation order when no service could have been performed. It is clear from
the dates o f alleged N C A services after September 24, 1990 on these invoices that no service was
provided by N C A on these dates. It was certainly improper to pay for these invoices and ITS
personnel knew this. 45
I T S p a y m e n t s to NCA "could be an exception to our procurement guidelines": On
August 6 , 1 9 9 0 FRBB Senior Vice President LaRocca informed officials at the Federal Reserve of
the dire financial condition of NCA and suggested negotiating charters with substitute carriers even
though that would be "an exception to our procurement guidelines." FRBB Vice President LaRocca
in effect was suggesting double payments for the services provided even though "It may not be
realistic to assume w e can get our money back..."46

Bank."
43
Memorandum from Dave MacDonald to Banking Committee staff via the office of FRBB Executive Vice
President and General Counsel William N. McDonough, "Response to [Committee staffs] September 5th inquiry,"
September 22, 1995, p. 1.
46
Memorandum from Bob LaRocca to Bill Stone, Fred Herr, Ollie Ireland, Gayle Brett with copies to R.
Eisenmenger, P. Connolly, and J. Kimball, August 6, 1990, pp 1 and 2: "As we discussed, NCA is in a financial bind
because of the chartering cost it has incurred to keep the zone operating. I have paid S20 thousand to TAS, Inc., die
former Red Zone carrier, for its costs to operate several routes for NCA. In addition, I expect to pay approximately $20
thousand to keep the zone operating through this week. We reserve the option of offsetting this S40 thousand against
our weekly payment (approximately $18 thousand) to NCA. NCA has already incurred substantial financial harm
because of their effort to keep the Red Zone operating. It may not be realistic to assume we can get our money back,
particularly in the near term."




27

152
On September 6, 1990 LaRocca informed NCA that ITS had paid $87,331.45 in chartering
costs during the period in which N C A had its Part 135 Certificate suspended. He informed NCA that
these funds would be deducted from NCA's weekly payments from ITS at the rate of $900 a week
for 9 6 weeks and a final payment of $931.35. The Federal Reserve informed the Committee that the
total cost for twelve substitute carriers for NCA was $155,645, as shown in the following table.

Payments to Substitute Carriers Following the Initial FAA July 17,1990
Grounding Order While ITS Continued Payments to NCA
Ace Air Cargo, Inc., Cleveland, OH
Baron Enterprises, Marion, OH
Beaver Aviation Service, Beaver Falls, PA
Castle Aviation, Inc., Ravanna, OH
Contemporary Aviation, Washington, WV
Gordon Air, North Canton, OH
Prior Aviation Service, Buffalo, N Y
Rohrer Aviation Service, Wodsworth, OH
TAS Aviation o f Defiance, Defiance, OH
Tiffin Aire, Inc., Tiffin, Oh
Sunbird Air Services, Springfield, OH
Wings, Inc., Mercer, OH

$10,783.00
17,139.00
7,142.00
6,446.00
1,113.00
1,321.00
8,226.00
10,462.00
56,617.00
10,084.00
16,883.00
9,429.00

Total
$155,645.00
Source: Federal Reserve response to the Committee staff, May 26, 1995, p. 22 and the correction
for TAS Aviation of Defiance, Ohio from $76,646 to $56,617 in the response of July 26, 1995.

"NCA is attempting to merge with another company, but chances of a deal are slim at this time. If a doomsday scenario
unfolds, i.e. NCA loses, our options are; A) negotiate four-month contracts with various carriers to keep the zone
operating, and issue an RFP; and B) negotiate contracts that run to May 1994 with several known carriers. Option B
provides the greatest security and the lowest cost; however, it could be an exception to our procurement guidelines.
Option A would cost us about $200 thousand extra in 1990, but only about an incremental $25 thousand a year thereafter.
Option B would cost us about $50 thousand extra in 1990 and a nominal sum thereafter."
"I will keep you informed and will seek your counsel before any decisions are made. Thanks for your continued
support."




28

153
Payments By I T S to North Coast Aviation, Inc.
After N C A W a s Grounded by the FAA
Date of
invoice

Date of
Payment

N u m b e r of N C A
invoice

9/24/90
10/12/90
10/19/90
10/28/90

9/4/90
10/1/90
10/1/90
10/1/90

11299
11317
11311
11318

Dates of service as they
appear on the North
Coast Aviation invoices
sent to the F R B B
"9/24 thru 9/28/90"
"10/1 thru 10/5/90"
"10/8 thru 10/12/90"
"10/15 thru 10/19/90"
Total

Amount

$16,536.73
16,536.73
16,536.73
16,536.73
66,146.92

I U Failure to pursue repayment
The F R B B officers supervising ITS authorized a $700,000 lump-sum payment to TLC Air,
Inc. on September 20, 1988 "for the weekday ITS Connector Zone C relating to the rerouting and
upgrading o f Route 535 to a Lear 35 aircraft'147 TLC went bankrupt about one year later, with one
year and eight months remaining on the contract Officials w h o manage the ITS decided not to
pursue collection of any part of the remaining payment due to ITS.

47

Letter from ITS Vice President Robert K. LaRocca, FRBB, to Roger Tannery, President, TLC Air, Inc.




29

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5.) Federal Reserve Overcharging the U.S. Treasury
In response to Committee staff inquiries, the Federal Reserve conducted a survey in August
1995 to determine the cost per pound o f transporting government and other checks by ITS. The
average fee charged by the ITS to the U.S. Treasury was found to be S4.964 per pound for the first
quarter o f 1995. 48 The average fee ITS charged other customers for transporting their canceled
checks is $2,957 per pound.
The ITS staff reported that the average cost of "moving a pound o f work via ITS is
approximately $3.23." The approximate charge for commercial checks is $3.10 per pound. The
nearly $5 per pound charged the U.S. Treasury is a significant overcharge. 49
Substantial savings to the taxpayers bv shipping canceled U.S. Treasure checks outside
o f I T S : Canceled U.S. Treasury checks returned to the Federal Reserve are transported to a
processing office in each Federal Reserve District. The U.S. Treasury requires that a certain
percentage o f Treasury checks be processed within four days unless the Treasury is notified of a
delay. Thus, these checks do not have the same time sensitivity as other checks. Private sector
checks incur float because of double entry o f the check balance in the checking accounts of both the
payor and the payee. If there is a delay in clearing these checks the float increases. N o such float
problem arises with canceled U.S. Treasury checks because the Treasury operates according to
authorized budget appropriations and does not increase its expenditures because o f float.
Since they are not time sensitive, canceled U.S. Treasury checks could be transported outside
ITS for substantially less than the nearly $5 per pound being charged by ITS. Using air freight
forwarders or ground transportation, the cost to the U.S. Treasury and the U.S. taxpayers could be
reduced to between $0.25 and $1 per pound. The staff of the ITS verified this estimate. 50

48
A note in the Federal Reserve response of August 16,1995 indicates that because there are only 210 checks
per pound rather than the 325 per pound calculation the ITS normally uses, the cost of U.S. Treasury checks may be
slightly less, $4,867 per pound.
49
"Responses to Question #5 of Congressional Committee Inquiry of September 5, 1995," memorandum to
FRBB Executive Vice President and General Counsel William N. McDonough, from Thomas McFarland and Thomas
Hunt, September 20, 1995, p. 4.
30
Memorandum to FRBB Executive Vice President and General Counsel William N. McDonough, entitled;
"Responses to Committee's inquiry of September 5, 1995," from Thomas McFarland, Mike Reveliotty, Dave
MacDonald, and Charles Fazio, September 21, 1995, p. 1: "Response: To insure that Treasury checks would continue
to move in a timely manner if they were moved outside ITS would require that each Federal Reserve District evaluate
the various transport means available within their district to decide which transportation options would be most cost
efficient There are a number of transport means that would be comparable to the service provided by ITS and some that
would be somewhat slower. We believe that while most districts would opt for one day service it is certain that every




30

155
Misleading and inaccurate replies about the costs charged by ITS to deliver canceled
U.S. Treasury checks: The Federal Reserve claimed that "non-checks," a component of ITS freight
which includes Treasury checks, were not allocated a full share o f the costs in the past, "resulting
in a slightly higher allocation to the commercial check service." 51 The opposite is true.
Transportation of canceled Treasury checks bears a much higher cost per pound than transportation
o f other checks.
The survey the Federal Reserve conducted showed the nearly $5 per pound charge for U.S.
Treasury checks in the first part of 1995, is 67 percent more than the ITS charged for transporting
other canceled checks.

district would find a cost effective means of transportation that would easily stay within the Treasury mandated four-day
turn around time. The cost of these various means of transportation would range from twenty-five cents per pound to
one dollar per pound depending on the weight shipped and the distance from the sending Federal Reserve Office (FRO)
to the receiving/processing FRO."
51
The Federal Reserve said: "The Boston Reserve Bank believes that non-check shipments were not allocated
a full share of the costs in the past, resulting in a slightly higher allocation to the commercial check service." (p. 8.)




31

156
6.) Waste, Deception, and Insufficient Controls
A.l Fed misleads Committee about fuel provided for non-ITS uses
Although ITS provides fuel for its contracted carriers (at no charge), it attempts to control
the use o f its fuel so that none is provided for non-contracted uses. In violation o f these controls,
ITS provided its fuel to Top Flight Air Service which began to operate a new check transportation
network that was not part o f ITS. The new network serviced three major banks in Florida and
immediately took business away from the carrier that previously provided that service. FRBB
officers informed the Committee that they had not participated in any prior planning to provide fuel.
Even though Top Flight later paid for the fuel, the use of ITS fuel saved Top Flight
approximately $1 per gallon because of the discounts ITS receives from bulk purchases. Top Flight,
operating as a non-ITS carrier, received fuel from the Federal Reserve for three weeks in December
1992. Top Flight received 18,203 gallons o f fuel at the reduced ITS cost.
After Top Flight started its service, the former provider complained about the fuel subsidy.
ITS stopped supplying Top Flight fuel and one week after the Federal Reserve stopped supplying
ITS fuel, the Top Flight network with the three banks terminated. FRBB Senior Vice President
LaRocca denied the phone call from the former provider was related to the termination o f the fuel
arrangement.
Fed officials call violation of rules "de minimis" and "peanuts:" At the March 24, 1995
Committee staff interviews at the FRBB Vice President Richard Burns characterized the amount of
fuel given to Top Flight as: "a de minimis amount of fuel." FRBB Senior Vice President LaRocca
said: "The amount of fuel, you know, that we're talking about in the grand scheme o f things,
peanuts." The attitude apparent from these remarks is that disregarding ITS regulations about fuel
was not important because the cost was not large compared to the total expenditures o f ITS. The
arrangement is probably not regarded as de minimis for private entrepreneurs who compete for these
services.
The provision of ITS fuel to Top Flight was a case in which the FRBB officers in effect
authorized the use of taxpayer resources to establish and assist a private company that would
compete with ITS' main competitor, US Check. The ITS staff who direct operations at the ITS said
this was the intent of the FRBB's assistance to Top Flight.52

52
Memorandum to FRBB Executive Vice President and General Counsel William N. McDonough, "Responses
to the Congressional Committee Inquiry of October 3, 1995," October 11, 1995, p. 5: Committee staff: "What was the
intent of the FRBB assisting Top Flight, Inc. in launching its transportation network given the fact that ITS was in effect
creating its own competition?"




32

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T h e Fed's pretense of a last-minute decision and their denial that credit problems were
involved: The Federal Reserve treated the provision of ITS fuel for non-ITS uses only as a lastminute decision because Top Flight was too busy to make these arrangements. Under a cover letter
from Federal Reserve Chairman Alan Greenspan to Congressman Gonzalez, the Federal Reserve
noted the last-minute nature o f the agreement to provide fuel:
"Upon start up, Top Flight was unable to complete its arrangements at some
locations for fuel requirements."53
The same claim of a last-minute plan to supply fuel for non-ITS uses was stated at a March
24, 1995 interview held at the FRBB. 5 4 FRBB Senior Vice President LaRocca continued to deny
that Top Flight had credit problems that caused it to ask for ITS fuel. Senior Vice President LaRocca
also said that there was no risk of failure to repay ITS for the fuel since Top Flight was flying the
Red Zone under an ITS contract and the money could be deducted from the ITS payments to Top
Flight. These statements sidestepped the issue of why the Federal Reserve authorized the
provision of ITS fuel for non-ITS purposes. 53 Top Flight had great difficulty with future fuel

Charles Fazio, Dave MacDonald, Thomas McFarland, and Mike Reveliotty: "The primary competitor of ITS was, and
is, US Check. It was expected that this new check transportation network would take volume, that was critical to the
economic viability of U.S. Check's Florida operations, off of U.S. Check's system and redirect some of that volume, via
the new Top Flight check transportation network, to the ITS network."

53

Bold emphasis added, material under cover letter from Chairman Greenspan, March 23, 1995, p. 5.

54

Committee staff: "Here [referring to 12/9/92 letter from Top Flight], December 9, 1992 he [Jim Jackson,
president of Top Flight] wrote a letter to you saying [reading part of letter] ...He said he needed —"
FRBB Senior Vice President LaRocca: "Thafs in December of 92"
Committee staff: "Right And he needed fuel. Why did he need fuel? Was it because he didnt have credit to buy it at
the airport?"
FRBB Senior Vice President LaRocca: "No, let me explain that one to you. He was already at that point in time he had
probably been doing business with us in the Red Zone Tm going to say ball park about a year. Maybe longer. Maybe
he started in the Fall of 91. He was approached. And again I dont know exactly how it all happened. There were three
banks in Florida that he did a lot of business for. He used to fly checks for what's called the Florida Clearing House.
He pushed checks all over Florida for them and apparently did a fine job of it... Jackson spent months working on
designing and planning a new commercial check network..."
55
FRBB Senior Vice President Robert LaRocca was asked again about the fuel arrangement (tape of Committee
staff interview at the FRBB, March 24, 1995):Committee staff: "Why couldn't he get fuel at the airport?"
FRBB Senior Vice President LaRocca: "Well he didnt have his arrangements in place yet With him, with all the work
he was doing, the banks wanted to kick it off at this time. He probably would have to go to these places and sit down
and talk to an FBO, negotiate an arrangement, OK?"
Committee staff: " ...He didn't have the credit to buy the gas?"
FRBB Senior Vice President LaRocca: "I dont know that Because he eventually got it He eventually got his own fuel

33

24-529

0 - 9 6 - 6




158
arrangements and its credit problems were known by some ITS personnel.
According to the March 30, 1995 material sent from the Federal Reserve, Jim A. Jackson,
then president o f Top Flight, wrote a letter dated December 9,1992, expressing appreciation for the
provision o f ITS fuel and for the right to "tie in" with ITS routes in delivering canceled checks in the
new T o p Flight network: 56
"I w o u l d like to thank you for your willingness to help Top Flight get our new
program started. The areas in the beginning we will need lift to are: Buffalo, Utica
and Boston out of Teterboro, Helena, N e w Orleans, Birmingham, and Nashville out
o f Atlanta. Phase II, approximately in late January, we will need lift out of Midway."
"The present locations that we would require fuel at Miami (450 gal.) Jacksonville
( 1 1 5 0 gal.) Charlotte (570 gal.) and Atlanta (1800 gal.) per night. Allowing Top
Flight to fuel and deduct the costs from our existing weekly wire will greatly enhance
the success of this program."

Contrary to the statements of FRBB Senior Vice President LaRocca there is no mention in this letter
about a temporary or three week arrangement. Instead, Top Flight informed the Federal Reserve
about a longer arrangement. Top Flight President Jackson writes, "Phase II, approximately in late
January, w e will need lift out of Midway."
The December 9 , 1 9 9 2 letter from Jim A. Jackson to FRBB Vice President LaRocca w a s a
d u p l i c a t e o f a N o v e m b e r 2 4 , 1 9 9 5 letter. 5 7 Only the letter of December 9 , 1 9 9 2 was sent to the
Committee by the Federal Reserve. The later letter changed the timing of the agreement to provide
ITS fuel for non-ITS use to reflect their "last-minute" request story.
T w o ITS staffers specifically state that FRBB Senior Vice President LaRocca requested a
second letter from Jim Jackson to hide the fact o f prior planning to provide Top Flight with ITS
fuel. 58

deal. So I would say that would was a - mitigate against what you are saying. I mean he must of been able to get the
gas. He was able to do it after. It just took him a couple of weeks..."
56
December 9,1992 letter to FRBB Senior Vice President Robert LaRocca from Jim A. Jackson, president
of Top Flight Air Service, Inc.
57
The second letter was a duplicate except for the addition of tail numbers and some handwritten notes
repeating the fuel requests.
58
Thomas McFarland and Mike Reveliotty, letter to Committee staff, November 30, 1995, pp. 1-2. "In fact,
the letter dated December 9, 1992 was sent by fax to ITS per the request of Bob LaRocca to replicate the earlier letter
dated November 24,1992. Bob requested that this duplicate letter with a new date be sent so that the Top Flight request
for fuel assistance would appear to have been made proximate to the Top Flight network startup date of December 10,




34

159
B.} Inadequate controls to monitor fuel use
FRBB Vice President Richard Burns responded to a Committee staff inquiry in August 1995
that "ITS utilizes approximately 6.5 million gallons of fuel per year, or the equivalent of 125,000
gallons per week." 59 Fuel is provided at no charge to contracted ITS carriers to be used only in
transporting ITS freight (primarily canceled checks).
FRBB Senior Vice President LaRocca stated at the March 24, 1995 Committee staff
interviews that this provision o f free fuel meant that contracted carriers would not have to assume
the risk of fuel price changes when they bid on the contracts.
The Committee staff investigation found that there were insufficient accounting controls of
uses o f ITS fuel for unauthorized purposes. ITS contracts specifically state that contracted air
carriers may only use fuel obtained from the Federal Reserve for service specified and not for
"repositioning aircraft, maintenance, air crew training, or any other purpose other than providing
the service hereunder." Committee staff received information that many carriers routinely use fuel
for repositioning their planes and for ferrying them to their maintenance bases. Also ITS fuel cannot
be used by contracted carriers for unauthorized uses, such as carrying freight for private clients.
The FRBB officers supervising ITS and ITS personnel who direct operations at the ITS
admitted that there are insufficient accounting controls over the use of ITS fuel provided contracted
carriers.60

1992. In fact, to meet this request the entire letter had to be retyped. We believe this second letter clearly shows that
Bob LaRocca was well aware of the possible implications of providing fuel for non-ITS purposes to a private carrier in
direct competition with another private carrier, US Check."

59
Memorandum from Rich Bums to William McDonough, August 23, 1995 sent to the Committee. This fuel
is purchased at a discount price of approximately $.80 compared to the approximately SI .80 price paid for jet fuel by
air carriers which do not have quantity discounts.
60
Memorandum on "Response to [Committee staff] 8/4/95 inquiry." pp. 1 and 2: "While we review the fuel
usage on each route for reasonableness, we do not actually reconcile fuel usage on a route basis because the usage can
vary on any given night due to weather, air traffic, weight carried, and reroutings or changes dictated by network needs."
"A fourth carrier, whose maintenance base is located in Atlanta, has a stated procedure to refuel on its own account,
generally in Teterboro, the planes that are scheduled into Atlanta for maintenance. That carrier concedes that it has not
monitored closely the adherence to the stated procedure, and that if and when not followed, the aircraft would be utilizing
ITS fuel (220-270 gallons) to ferry planes to Atlanta. That carrier states that, on average, however, it ferries a plane to
Atlanta every other week. In all cases, however, it used its own fuel to ferry planes back into ITS service, and in some
instances, actually supplies more fuel than would be consumed on the return trip itself...."

"As noted above, one carrier regularly utilizes ITS fuel for repositioning and ferrying ITS aircraft to its base in
Cincinnati, and reimburses ITS for that fuel. Another carrier has undoubtedly used ITS fuel on some occasions to ferry
to Atlanta, but has not been required to make reimbursement To some extent we believe also that carriers utilize ITS
fuel to reposition or ferry aircraft when mechanical problems arise while in the performance of their ITS routes. We do




35

160
The Committee staff requested some documentation to verify that vendors were buying their
own gas when not on ITS routes. This request was not fulfilled. Documentation for the purchase
of fuel for unauthorized usage such as ferrying planes to maintenance bases and repositioning planes
should be required and available.
Personnel at the ITS stated that "The margin of error could be up to 200 gallons per carrier
per week" for non-ITS uses.61 They stated that some ITS fuel "is and has been used for repositioning
and for ferrying their aircraft to maintenance bases."
F R B B Executive Vice President and General Counsel William N. McDonough wrote to the
Committee (letter dated August 24,1995) that new procedures would be instituted.62
"In the near future, we plan to use some combination o f additional audit procedures,
communications with carriers and clarification of contractual requirements regarding
ITS fuel usage so as to improve the effectiveness of our controls."

The Zone of Operations and the Principal Maintenance Base for ITS
Contracted Carriers
Carrier
RTS Courier, Inc
Epps Air Service,
Inc.
Lindsay Aviation

Bankair
Corporate Aviation
Services, Inc.

Zone of Operations
Connector between hubs
Blue Zone: Northeast from Virginia to Maine
Red Zone: Ohio; Kentucky; West Virginia; western
parts of New York and Pennsylvania; and Michigan
except upper peninsula
Yellow Zone: southeast from Tennessee and southern
Louisiana to the Atlantic Ocean
Green/Brown Zones: north central states from Lake
Michigan west through Montana, Wyoming,
Colorado, and northern N e w Mexico

Maintenance
Base
Cincinnati, OH
Atlanta, GA
Cheektowaga,
NY
West Columbia,
S.C.
Tulsa, OK

not believe that the overall level of such usage is substantive."
61
Memorandum from Mike Reveliotty, Thomas McFarland and Dave MacDonald to Bill McDonough, August
11, 1995, sent to the Committee.
62

Letter to Committee staff, August 24,1995, p. 1.




36

161
C.l B u d g e t d u m p i n g
The Federal Reserve authorized $8,345,758.28 in large lump-sum payments to private
vendors between 1987 and 1994 that were not in the original contracts. S o m e were paid for future
services. Many of these lump-sum payments were made to exhaust the budget allocated to ITS,
which really amounts to the practice of budget dumping. Some I T S contracted vendors
reportedly p h o n e d the ITS office near the end of the year to ask if any m o n e y w a s left in the
budget that they might have for "upgrades" etc. Eighty-four percent o f these payments occurred
in the last six months and 73 percent in the last three months o f the year.
F R B B Senior Vice President LaRocca clearly ducked this budget dumping allegation by
dismissing a "$300,000 or $400,000 underrun" near the end of the year as a "fairly small amount
o f money" that is available for lump-sum payments. 64 Additional information on budget dumping
at ITS was obtained from the Federal Reserve's reply to the request to list all the years since 1986
that ITS spent less than its allocated budget and money was redistributed to the 12 districts following
a Committee staff request. In only one year, since 1987 were any funds left from the ITS budget. 65
T h e taxpayers must pav: The Federal Reserve has an obligation to lower its budget for any
savings it achieves in providing services such as check clearing. The Monetary Control Act of 1980
requires any savings to be paid to the U.S. Treasury, clearly establishing that taxpayers pay the costs
for any excessive
expenditures

64
Transcript supplied by the FRBB of the June 26,1995 interview of FRBB personnel by Committee staff, tape
3, p. 34-35: "No, we would discuss any changes like this we were going to make with the Subcommittee on the Payments
Mechanism and... just say, look this is where we stand on the budget if it were late in the year: ...we're looking at this
amount of $300,000 or $400,000 underrun. Now I can give you guys back the money or we have this change to make.
Now we can make this change by a weekly increase to the guys to the carriers but we can save some dough if you want
me to do it lump sum and it's pretty much your call. Things like that And most everybody at the time of the year when
you talk about $300,000 or $400,000 giving it back to 12 districts it's a fairly small amount of money to each individual
district to get back...."

65
Response from the Board of Governors, July 17,1995, p. 4: Federal Reserve: "FRBB management has
indicated that 1987 was the only year since 1986 in which ITS underran its budget such that the charges distributed to
the Reserve Banks were reduced. In 1987, ITS expenses were $27,018,000~$608,000 less than the budgeted costs of
$27,625,000. ..."
66
Depository Institutions Deregulation and Monetary Control Act of 1980, Title 1, Section 226, Pricing of
Services:" (d) The Board [of Governors of the Federal Reserve System] shall require reductions in the operating budgets
of the Federal Reserve Banks commensurate with any actual or projected decline in the volume of services to be provided
by such banks. The amount of the savings so realized shall be paid into the United States Treasury."




37

162
D/l P a y m e n t of $584.375 deemed a "wasteful" expenditure
On October 27, 1993 ITS made a lump-sum payment o f $584,375 ($550,000 plus $34,375
tax) to Epps Air Service, Inc. to upgrade from an MU-2L to a Citation aircraft to fly a route to
Baltimore. In their May 26,1995 response, the Federal Reserve provided the Committee with the
following reasons for this expenditure:
Reason: To improve the speed and capacity on route 101 (Baltimore-TeterboroBuffalo-Cleveland-Teterboro-Baltimore), the MU-2L was upgraded to a Citation.
In addition, ITS management believed that one or two planes with greater speed and
capacity than the turboprop would be required if ITS were to undertake a major
redesign of the network, which was being considered. The cost o f the Citation was
$600,000." 6 7
Using the approximately 199 flying days per year in the ITS operations, this upgrade costs over
$1,000 extra per day.
After the Committee staff began investigating lump-sum expenditures not covered in the
initial contracts, the FRBB officers supervising ITS said the expenditure was made to reduce the
noise level at Teterboro Airport since the Citation was less noisy than the other planes in use. The
new aircraft was less noisy than the MU-2L it replaced. However, since the upgrade only accounted
for two o f the 13 daily takeoffs from Teterboro Airport where noise problems were reported, the
reduction in noise level was small. 68
The staff at ITS reported to the FRBB officers supervising ITS that this Citation aircraft
would use more fuel and was viewed by the pilots as a waste o f money: "[Pilot at Epps] is still
complaining about the Citation he is flying. He says that with the more expensive Citation you
need t w o pilots, it uses more fuel (I calculate 30-35 percent more fuel)..." 69
ITS staff member Thomas McFarland said the Citation upgrade had no benefits other than
a slight n o i s e reduction and "was certainly made to help exhaust the budget." He added: "I

67
The payment was made October 29,1993. Responses to the Committee from the Board of Governors, May
26, 1995, p. 14.
68
The Federal Reserve argued that this upgrade was needed for flexibility in developing a new network. The
argument about flexibility has several major problems. First, this experiment could have been conducted for a short
period by chartering the aircraft Second, the Citation has not been manufactured for a number of years and does not
appear to be a candidate for developing the ITS fleet of contracted planes. Third, an expert in this field of transporting
canceled checks said that this was clearly the wrong type of aircraft to haul paper checks. It is likely that the primary
rationale for this $584,375 lump-sum expenditure made on October 29, 1993 was related to budget dumping.

69

Bold emphasis added, on-site inspection report, April 28, 1995.




38

163
believe this u p g r a d e was a complete waste of money." 70
Five I T S staff are unanimous in declaring the $584.375 expenditure to be "wasteful"
o r not n e e d e d : Charles Fazio, Thomas Hunt, Dave MacDonald, Thomas McFarland, and Mike
Reveliotty, all ITS staffers, were unanimous in finding this lump-sum expenditure "wasteful" or not
needed. The taxpayers bought a private company and airplane that was of little or no benefit to the
Federal Reserve.
$387.000 f o r a useless report and comnuter software
The Federal Reserve authorized the payment of $387,000 in 1993 to Arthur D. Little, Inc.
for a study that resulted in a report and computer disks that were never used. The report is 104
pages and appears to be produced for a slide presentation. In response to Committee staff questions,
F R B B Senior Vice President Robert LaRocca recalled one idea in the report about using freight
forwarding that was already being discussed at ITS. He added: "But other than that I would have to
sit down and re-read the report to see what was in there ... "7I

70
Bold emphasis added, memorandum relating to "Responses to Congressional Committee's Inquiry of August
22.1995" to Bill McDonough from Thomas McFarland, sent to the Committee, August 30,1995, p. 2.

71
Transcript supplied by the FRBB of the June 26,1995 interview of FRBB personnel by Committee staff, tape
4, p. 16: Committee staff: "This report appears to be made for a slide presentation because it is in large print with
abundant gaps of blank space and with a number of pages containing only a two-word heading. Would you agree with
the staff estimate ... that the prose portion of this report could be reset on less than 20 pages of normal 12 point print,
[because] ifs mostly blank?"
FRBB Vice President and Associate General Counsel John Kimball: "I dont think they get paid by the word."
[...]
FRBB Senior Vice President LaRocca: "...they did an analysis... to see if there were ways that you could keep the same
service level and spend less money or if you wanted to improve service could you do it without spending money or
whatever and they could not find any ways and I think they drew that conclusion. One of the things that they came up
with which was an idea that we were kicking around at the time was to try to come up with ways which we might be able
to reduce the cost of the network without hammering us on the side of collecting checks effectively.... [Example is
presented of using freight forwarding] But other than that I would have to sit down and re-read the report to see what
was in there ... "
Committee staff: "What use was made of those diskettes [from Arthur D. Little] and what was on them and how did you
change your operation as a consequence?
FRBB Senior Vice President LaRocca: "We didnt change our operation as consequence of the new schedule. Diskettes
were a routing structure — I'm not even really sure what was on them, routing structure or the programs for doing routes
— stuff like that -- which frankly we didnt find useful."




39

164
L u m p - s u m Payments Made by ITS to Contracted Carriers, 1987-1994

Carrier

Bankair, Inc
Epps Aviation
Epps Aviation
CASI, Inc
TAS
Epps Aviation
CASI, Inc.
Epps Aviation
CASI, Inc.
TLC Air, Inc.
Epps Aviation
CASI, Inc.
Bankair, Inc
Bankair
CASI, Inc.
CASI, Inc.
CASI, Inc.
RTS Courier
RTS Courier
RTS Courier
RTS Courier
CASI, Inc.
Bankair
Bankair
Epps Aviation
CASI, Inc.
RTS Courier
RTS Courier
RTS Courier
RTS Courier
RTS Courier
Bankair
Epps Aviation
CASI, Inc.
Total dollar
amount of lumpsum payments is
$8^45,758.28




Date

11/17/87
11/17/87
12/1/87
12/1/87
1/21/88
4/5/88
8/2/88
8/2/88
8/16/88
9/27/88
12/23/88
3/21/89
7/11/89
8/1/89
10/6/89
9/21/90
9/29/89
5/31/91
11/22/91
10/30/92
10/22/93
11/22/91
9/20/91
12/27/91
2/29/92
4/17/92
6/12/92
11/6/92
10/22/93
11/4/94
11/20/92
11/20/92
10/29/93
11/19/93
TOTALS
Percentage of
total in each time
period:

Dollar
amount when
in the first
half of the
year

Dollar amount
when in the
second half of
the year

Dollar amount
when in the
final quarter of
the year

$517,808.33
372,585.98
295,381.64
67,200.00

$517,808.33
372,685.98
295,381.64
67,200.00

52,453.38
312,900.00
83,300.00
735,000.00
234,150.00

735,000.00
234,150.00

82,500.00
341,250.00
315,000.00
184,800.00
130,788.96

315,000.00
184,800.00
130,788.96

221,250.75
221,250.75
221,250.75
101,092.63
210,375.00
318,750.00

221,250.75
221,250.75
221,250.75
101,092.63
210,375.00
318,750.00

221,250.75
221,250.75
74,736.76
637,500.00
159,375.00
584,375.00
79,687JO
6,997,263.93
84 percent

221,250.75
221,250.75
74,736.76
637,500.00
159,375.00
584,375.00
79,687.50
6,124,960.55
73 percent

$55,250.00
393,750.00

52,500.00

136,993.60

425,000.00
63,750.00
221,250.75

1,348,494.35
16 percent

40

165
Conclusion
This report describes numerous cases of waste and abuse involving pervasive
mismanagement in the operation of the Federal Reserve's fleet of contracted aircraft and auxiliary
ground services of the Interdistrict Transportation System. The Federal Reserve provided insufficient
justification for awarding a number of ITS contracts without competitive bidding. In some cases,
the bidding process was circumvented altogether when Federal Reserve officials arranged for
payments to be made to proposers before the contracts were awarded in a supposedly competitive
procurement process.
The report also describes the failure of the ITS to match their revenues to their costs by a
substantial margin. The Monetary Control Act of 1980 requires cost/revenue matching over the longrun for priced services. The Federal Reserve may have violated the Monetary Control Act with
subsidized prices for ITS services that may have undermined actual and potential competition.
There was no evidence of meaningful, consistent internal controls by the FRBB at ITS. The
lack of internal controls at the FRBB indicates that this practice is unlikely to be confined to the ITS.
The result is a powerful government bureaucracy that inhibits private competition and is able to
continue wasteful and abusive management practices with little to fear from the private sector. The
remedies must come from the Congress which has the power to stop these practices and is obligated
to provide effective oversight.




41

166

product(GDP)
Is such a crazy
mismeasure of
the economy
that it
portrays
disaster as
gain. A new
economic
barometer
might
transform
our society.
BY CLIFFORD COBB,
TED HALSTEAD, AND
JONATHAN ROWE




167

IF THE
GDP IS UP,
WHY IS
AMERICA DOWN?
by CLIFFORD COBB, TED HALSTEAD, AND JONATHAN ROWE

Why we need new measures
why we do not have them,
the social

of

progress,

and how they would

and political

change

landscape

of the.elections last year political commentators were perplexed by a
stubborn fact. The economy was performing splendidly, at least according to the standard measurements. Productivity and employment were
up; inflation was under control. The World Economic Forum, in Switzerland, declared that the United States had regained its position as the
most competitive economy on earth, after years of Japanese dominance.




Illustrations

by S e y m o u r

Chwast

IICTIIKKn

19 9.1

168
The Ointon Administration waited expectantly, but the
applause never came. Voters didnt feel better, even though
economists said they should. The economy as economists
define it was booming, but the individuals who compose it—
or a great many of them, at least—were not President Bill
Ointon actually sent his economic advisers on the road to
persuade Americans that their experience was wrong and the
indicators were right.
This strange gap between what economists choose to
measure and what Americans experience became the official conundrum of the campaign season, "PARADOX OF '94:
GLOOMY VOTERS IN GOOD TIMES," The New York Times
proclaimed on its front page, "BOOM FOR WHOM?" read the
cover of Time magazine. Yet reporters never quite got to
the basic question—namely, whether the official indicators
are simply wrong, and are leading the nation in the wrong
direction.
The problem goes much deeper than the "two-tiered"
economy—prosperity at the top, decline in the middle and at
the bottom—that received so much attention. It concerns the
very definition of prosperity itself. In the apt language of the
nineteenth-century writer John Ruskin, an economy produces "illth" as well as wealth: yet the conventional measures of well-being lump the two together. Could it be that
even the upper tier was—and still is—rising on the deck of a
ship that is sinking slowly into a sea of illth. and that the nation's indicators of economic progress provide barely a clue
to that fact?
Ample attention was paid to the symptoms: People were
working longer hours for less pay. The middle class was
slipping while the rich were forging ahead. Commutes
were more harried. Crime, congestion, and media violence
were increasing. More families were falling apart. A Business W<?dk/Harris poll in March imparted the not surprising
news that more than 70 percent of the public was gloomy
about the future.
Sounding much like the guidance department of a progressive New York grammar school, the Clinton Administration said that Americans were simply sutfering the anxieties of adjustment to a wondrous new economy. Speaking
in similar terms. Alan Greenspan, the chairman of the Federal Reserve Board, told a business gathering in San Francisco
this past February that "there seemingly inexplicably remains an extraordinarily deep-rooted foreboding about the
[economic] outlook" among the populace.
Those silly people. But could it be that the nation's economic experts live in a statistical Potemkin village that hides
the economy Americans are actually experiencing? Isn't it
time to ask some basic questions about the gauges that inform expert opinion, and the premises on which those
gauges are based?
Economic indicators are the main feedback loop to national policy. They define the economic problems that the
political arena seeks to address. If the nation's indicators of
TIIE \ r I. t \ T I 0 MONTHLY




economic progress are obsolete, then they consign us to continually resorting to policies that cannot succeed because
they aren't addressing the right problems.
Today the two political parties differ somewhat in regard
to means, but neither disputes that the .ultimate goal of national policy is to make the big gauge—the gross domestic
product—climb steadily upward. Neither questions that a
rising GDP will wash away the nation's* ills: if Americans
feel unsettled despite a rising GDP, then clearly even more
growth is needed.
This was clear in the months after the election, as the media continued to report economy up, people down stories
that never quite managed to get to the crucial question: What
is "up." anyway? In July, Business Week ran a cover story
called "The Wage Squeeze" that got much closer than mosL
The article showed remarkable skepticism regarding the
conventional wisdom. But the magazine's editorial writers
retreated quickly. Why aren't workers doing better even as
corporate profits and "the economy" are up? "America just
may not be growing fast enough." they said.
Furthermore, the GDP and its various proxies—rates of
growth, expansion, recovery—have become the very language of the nation's economic reportage and debate. We literally cannot think about economics without them. Yet these
terms have increasingly become a barricade of abstraction
that separates us from economic reality. They tell us next to
nothing about what is actually going on.
The GDP is simply a gross measure of market activity, of
money changing hands. It makes no distinction whatsoever
between the desirable and the undesirable, or costs and gain.
On top of that, it looks only at the portion of reality that economists choose to acknowledge—the part involved in monetary transactions. The cniciai economic functions performed
in the household and volunteer sectors go entirely unreckoned. As a result the GDP not only masks the breakdown of
the social structure and the natural habitat upon which the
economy—and.life itself—ultimately depend: worse, it actually portrays such breakdown as economic gain.
Yet our politicians, media, and economic commentators
dutifully continue to trumpet the GDP figures as information
of great portent. There have been questions regarding the accuracy of the numbers that compose the GDP. and some occasional tinkering at the edges. But there has been barely a
stirring of curiosity regarding the premise that underlies its
gross statistical summation. Whether from sincere conviction or from entrenched professional and financial interests,
politicians, economists, and the rest have not been eager to
see it changed.
There is an urgent need for new indicators of progress,
geared to the economy that actually exists. We are members
of Redefining Progress, a new organization whose purpose is
to stimulate broad public debate over the nature of economic progress and the best means of attaining it. Accordingly,
we have developed a new indicator ourselves, to show both

169
that it can be done and what such an indicator would look
like. This new scorecord invites a thorough rethinking of economic policy and its underlying premises. It suggests strongly that it is not the voters who are out of touch with reality.

A BRIEF HISTORY
OF ECONOMIC
(MIS)MEASUREMENT

T

HE GDP has been the touchstone of economic policy
for so long that most Americans probably regard it as
a kind of universal standard. (In 1991 the government'
switched from the old GNP to the GDP, for reasons we will
discuss later. ) Actually the GDP is just an artifact of history,
a relic of another era. It grew out of the challenges of the
Depression and the Second World War, when the nation
faced economic realities very different from today's. Through
history economic measurement has grown out of the beliefs
and circumstances of the era. As Western economies went
from agriculture to manufacturing to finance and services,
modes of measurement generally evolved accordingly. But
during this century, and especially since the war, the evolutionary process has slowed to a crawl. The market economy
has continued to change radically. In particular it has penetrated deeper and deeper into the realms of family, community, and natural habitat that once seemed beyond its reach.
But even as this change has accelerated, the way we measure
economic health and progress has been frozen in place.
The first estimates of national accounts in the Western
world were the work of one Thomas Petty, in England in
1665. Petty's scope was fairly broad; he was trying to ascertain the taxable capacity of the nation. In France, however, a
narrower focus emerged. The prevailing economic theory
was that of the Physiocrats, who maintained that agriculture
was the true source of a nation's wealth. Not surprisingly,
their economic measurement focused on agricultural production. There was a great diversity of viewpoint, however,
even in France. In England, a more industrial country, Adam
Smith articulated a broader theory of national wealth that included the whole swath of manufactures as well.
But one of many important points overlooked by his ardent followers is that Smith excluded what we today call the
entertainment and service economies, including government
and lawyers. Such functions might be useful or not. he said.
But all are ultimately "unproductive of any value." because
they don't give rise to a tangible product. That view was certainly debatable. But Smith was asking a crucial question—
one that has pretty much disappeared from economic
thought. Is there a difference between mere monetary transactions and a genuine addition to a nation's well-being?
By the end of the nineteenth century England's economic
center of gravity had shifted significantly from manufacturing to trade and finance. In this new economy Smith's views
on national wealth began to pinch. Alfred Marshall, who ar4




ticulated what is now called neoclassical economics, declared that utility, rather than tangibility, was the true standard of production and wealth. Lawyers' fees, commissions,
all the paper shuffling of an abstracted commercial economy, were essentially no different from sacks of potatoes or
carloads of iron. The economic significance of a thing lay
not in its nature but simply in its market price.
This yoking of national accounting to the lowest common denominator of price was to have large implications.
It meant that every item of commerce was assumed to add
to the national well-being merely by the fact—and to the
extent—that it was produced and bought. At the same time,
it meant that only transactions involving money could
count in the national reckoning. This left out two large
realms: the functions of family and community on the one
hand, and the natural habitat on the other. Both are crucial
to economic well-being. But because the services they perform are outside the price system, they have been invisible
in our national accounting.
Long ago this omission was understandable. In Adam
Smith's day the portion of life called "the market" occupied
a very small part of physical and social space. The habitat
seemed to have an infinite supply of resources, and an infinite capacity to absorb such wastes as the industry of the day
might dump. The social structure seemed so firmly anchored
in history that there was little thought that a growing market
could set it adrift.
During this century, however, those assumptions have
become increasingly untenable. It is not accidental that
both the habitat and the social structure have suffered severe erosion in recent decades; these are precisely the
realms that eighteenth- and nineteenth-century assumptions precluded from the reckoning of national well-being—in capitalist and socialist economies alike. This erosion has been mainly invisible in terms of economic policy
because our index of progress ignores it; as a result, the nation's policies have made it worse.
To understand how the national accounts became trapped
in the assumptions of a bygone era. it is useful to study
the era in which the current form of economic accounting
was wrought.
In 1931 a group of government and private experts were
summoned to a congressional hearing to answer basic
questions about the economy. It turned out they couldn't:
the most recent data were for 1929. and they were rudimentary at that. In 1932. the last year of the Hoover Administration. the Senate asked the Commerce Department
to prepare comprehensive estimates of the national income.
Soon alter, the department set a young economist by the
name of Simon Kuznets to the task of developing a uniform set of national accounts. These became the prototype
for what we now call the GDP.
As the thirties wore on. a new kind of economic-policy
thinking started to take hold among some New Dealers. In
II <: T O II K N 19 4 -1

170
their view the role of the federal government was not to
coordinate industry or to prevent industrial concentrations,
as the New Deal had initially done. Rather, the government
should serve as a kind of financial carburetor to keep a rich
mixture of spending power going into the engine, through
deficits if necessary.
This theory is generally attributed to John Maynard
Keynes, of course, but numerous New Dealers had earlier
approximated it in an instinctive and practical way. Since
Keynesian management worked through flows of money
rather than through bureaucratized programs, the new national accounts were essential to it. The Nobel Prize-winner
Robert Solow, of MIT, has called Kuznets's work the "anatomy" for Keynes's "physiology."
The two formally came together during the Second World
War, and in the process the GNP became the primary scorecard for the nation's economic policy. The degree to which
the GNP evolved as a war-planning tool is hard to exaggerate.
Keynes himself played a central role in Britain's Treasury during both world wars. At the start of the second he co-authored




a famous paper called T h e National Income and Expenditure
of the United Kingdom, and How to Pay for the War," which
provided much conceptual groundwork for the GDP of today.
In the United States the Manhattan Project got much more
glory. But as a technical achievement the development of the
GNP accounts was no less important. The accounts enabled
the nation to locate unused capacity, and to exceed by far the
production levels that conventional opinion thought possible. To their great surprise, American investigators learned
after the war that Hitler had set much lower production targets, partly for lack of sophisticated national accounts.
Having helped win the war. the Keynesians were giddy
with confidence. The specter of the Depression still haunted
the United States: but these economists thought they had
found the keys to the economic kingdom. With proper fiscal
management and detailed knowledge of the GNP, they could
master the dreaded "business cycle" and ensure prosperity indefinitely. When John Kenneth Galbraith joined the staff of
Fortune magazine, his first project was to prepare a blueprint
for America's transition to a postwar economy. The article

171
was based on projections from the GNP accounts. "One good
reason for expecting prosperity after the war is the fact that we
can lay down its specifications," the article said. "For this we
can thank a little-observed but spectacular improvement in the
statistical measures of the current output of the (J.S. plant."
The Employment Act of 1946 turned the GNP and the theory it embodied into official policy. It established a Council
of Economic Advisers as "the high priests of economic management," as Allan J. Lichtman. a professor of history at the
American University, has recently put it, and the GNP as

But the biggest change was in who Mthe people" now
were. Because the Keynesian approach saw consumption as
the drive train of prosperity, Washington collectively looked
at the public in those terms as well. They were no longer primarily fanners, workers, business people—that is. producers.
Rather, they were consumers. whose spending was a solemn
national duty for the purpose of warding off the return of the
dreaded Depression. Our young men had marched off to
war; now Americans were marching off to the malls that
eventually covered the land.

their catecnism. The production frenzy that had pulled the
nation out of the Depression and through the war was now
the model for the peace as well.
These developments set the course for economic policy
and reportage for the next fifty years. The ironies have been
many. If it is odd that liberal Democrats would turn the principles of a war economy into the permanent template for
government, it is no less so that Republicans would latch fervently onto a measure of well-being that was basically a tool
of central government planning.
There have been a number of consequences that few saw
clearly at the time. One was that economists became the ultimate authorities on American public policy. Before the
war. economists were rarely quoted in news stories except in
some official capacity. Now their opinions were sought and
cited as canonical truth. Moreover, as the party that nurtured
these economists, the Democrats became adherents of technocratic top-down management that purported to act for the
people, even if in ways beyond their ken.

In this atmosphere the GNP. the measure and means of
policy, rapidly became an end of policy in itself. The nation's social cohesion and natural habitat, which the GNP
excluded, were taken for granted. Each week the host of
General Electric Theater. Ronald Reagan, declared to the
nation that "progress is our most important product." Products were progress, and therefore the GNP was progress too.




THE
HOW

I

GDP

DOWN

TODAY:

BECOMES I P

F the chief of your local police department were to announce today that "activity" on the city streets had increased by 15 percent, people would not be impressed, reporters least of all. They would demand specifics. Exactly what
increased? Tree planting or burglaries? Volunteensm or muggings? Car wrecks or neighborly acts of kindness?
The mere quantity of activity, taken alone, says virtually
nothing about whether life on the streets is getting better or

172
worse. The economy is the same way. "Less" or "more"
means very little unless you know of what. Yet somehow the
GDP manages to induce a kind of collective stupor in which
such basic questions rarely get asked.
By itself the GDP tells very little. Simply a measure of total output (the dollar value of finished goods and services), it
assumes that everything produced is by definition "goods."
It does not distinguish between costs and benefits, between
productive and destructive activities, or between sustainable
and unsustainable ones. The nation's central measure of

well-being works like a calculating machine that adds but
cannot subtract. It treats everything that happens in the market as a gain for humanity, while ignoring everything that
happens outside the realm of monetized exchange, regardless of the importance to well-being.
By the curious standard of the GDP. the nation s economic hero is a terminal cancer patient who is going through a
costly divorce. The happiest event is an earthquake or a hurricane. The most desirable habitat is a multibillion-dollar Superfund site. All these add to the GDP. because they cause
money to change hands. It is as if a business kept a balance
sheet by merely adding up all "transactions." without distinguishing between income and expenses, or between assets
and liabilities.
The perversity of the GDP affects virtually all parts of society. In 1993 William J. Bennett, who had been the Secretary
of Education in the Reagan Administration, produced a study
of social decline. He called it •"The Index of Leading Cultural Indicators.-' a deliberate counterpoint to the Commerce




Department's similarly named regular economic report. His
objective was to detail the social erosion that has continued
even as the nation's economic indicators have gone up.
The strange fact that jumps out from Bennett's grim inventory of crime, divorce, mass-media addiction, and the rest is
that much of it actually adds to the GDP. Growth can be social decline by another name. Divorce; for example, adds a
small fortune in lawyers' bills, the need for second households, transportation and coQnseling for kids, and so on. Divorce lawyers alone take in probably several billion dollars a

year, and possibly a good deal more. Divorce also provides a
major boost for the real-estate industry. "Unfortunately, divorce is a big part of our business. It means one [home] to
sell and sometimes two to buy." a realtor in suburban Chicago told the Chicago Tribune. Similarly, crime has given rise
to a burgeoning crime-prevention and security industry with
revenues of more than S65 billion a year. The car-locking device called The Club adds some S100 million a year to the
GDP ail by itself, without counting knock-offs. Even a gruesome event like the Oklahoma City bombing becomes an
economic uptick by the strange reckonings of the GDP. ".Analysts expect the share prices [of firms making anti-crime
equipment] to gain during the next several months." The Wall
Street Journal reported a short time after the bombing, "as
safety concerns translate into more contracts."
Bennett cited the chilling statistics that teenagers spend
on average some three hours a day watching television, and
about rive minutes a day alone with their fathers. Yet when
kids are talking with their parents, they aren't adding to the

173
GDP. In contrast, MTV helps turn them into ardent. GDPenhancing consumers. Even those unwed teenage mothers
are bringing new little consumers into the world (where they
will quickly join the "kiddie market" and after that the "teen
market," which together influence more than $200 billion in
GDP). So while social conservatives like Bennett are rightly
deploring the nation's social decline, their free-marketeer
counterparts are looking at the same phenomena through the
lens of the GDP and breaking out the champagne.
Something similar happens with the natural habitat The
more the nation depletes its natural resources, the more the
GDP increases. This violates basic accounting principles, in
that it portrays the depletion of capital as current income. No
businessperson would make such a fundamental error. When
a small oil company drains an oil well in Texas, it gets a generous depletion allowance on its taxes, in recognition of the
loss. Yet that very same drainage shows up as a gain to the
nation in the GDP. When the United States fishes its cod




populations down to remnants, this appears on the national
books as an economic boom—until the fisheries collapse. As
the former World Bank economist Herman Daly puts it. the
current national-accounting system treats the earth as a business in liquidation.
Add pollution to the balance sheet and we appear to be doing even better. In fact, pollution shows up twice as a gain:
once when the chemical factory, say, produces it as a by-product, and again when the nation spends billions of dollars to
clean up the toxic Superfund site that results. Furthermore, the
extra costs that come as a consequence of that environmental
depletion and degradation—such as medical tills arising from
dirty air—also show up as growth in the GDP.
This kind of accounting feeds the nodon that conserving resources and protecting the natural habitat must come at the
expense of the economy, because the result can be a lower
GDP. That is a lot like saying that a reserve for capital depreciation must come at the expense of the business. On the con-

174
trary, a capital reserve is essential to ensure the future of the
business. To ignore that is to confuse mere borrowing from
the future with actual profit. Resource conservation works the
same way, but the perverse accounting of the GDP hides this
basic fact.
No less important is the way the GDP ignores the contribution of the social realm—that is, the economic role of
households and communities. This is where much of the nation's most important work gets done, from caring for children and older people to volunteer work in its many forms. It
is the nation's social glue. Yet because no money changes
hands in this realm, it is invisible to conventional economics. The GDP doesn't count it at all—which means that the
more our families and communities decline and a monetized
service sector takes their place, the more the GDP goes up
and the economic pundits cheer.
Parenting becomes child care, visits on the porch become
psychiatry and VCRs, the watchful eyes of neighbors become alarm systems and police officers, the kitchen table becomes McDonald's—up and down the line, the things people used to do for and with one another turn into things they
have to buy. Day care adds more than $4 billion to the GDP;
VCRs and kindred entertainment gear add almost $60 billion. Politicians generally see this decay through a wellworn ideological lens: conservatives root for the market, liberals for the government. But in fact these two "sectors" are,
in this respect at least, merely different sides of the same
coin: both government and the private market grow by cannibalizing the family and community realms that ultimately
nurture and sustain us.
These are just the more obvious problems. There are others, no less severe. The GDP totally ignores the distribution
of income, for example, so that enormous gains at the top—
as were made during the 1980s—appear as new bounty tor
all. It makes no distinction between the person in the secure
high-tech job and the "downsized" white-collar worker who
has to work two jobs at lower pay. The GDP treats leisure
time and time with family the way it treats air and water as
having no value at all. When the need for a second job cuts
the time available tor family or community, the GDP records
this loss as an economic gain.
Then there's the question of addictive consumption. Freemarket fundamentalists are inclined to attack critics of the
GDP as "elitists." People buy things because they want
them, they say. and who knows better than the people themselves what adds to well-being ? It makes a good one-liner.
But is the truth really so simple? Some 40 percent of the nation's drinking exceeds the level of "moderation." defined as
two drinks a day. Credit-card abuse has become so pervasive that local chapters of Debtors Anonymous hold fortyfive meetings a week in the San Francisco Bay area alone.
Close to 50 percent of Americans consider themselves overweight. When one considers the 532 billion diet industry, the
GDP becomes truly bizarre. It counts the food that people
T II K t r i - W T I l

M u \ T II 1 1




wish they didn't eat. and then the billions they spend to lose
the added pounds that result. The coronary-bypass patient
becomes almost a metaphor for the nation's measure of
progress: shovel in the fat. pay the consequences, add the
two together, and the economy grows some more.
So, too, the O. J. Simpson trial. When The Wall Street Journal added up the Simpson legal team ($20,000 a day), network-news expenses. O. J. statuettes, and therest,it got a total
of about $200 million in new GDP. for which politicians will
be taking credit in 1996. "GDP OF O. J. TRIAL OUTRUNS THE
TOTAL OF, SAY, GRENADA," the Journal's headline writer
' proclaimed. One begins to understand why politicians prefer
to talk about growth rather than what it actually consists of,
and why Prozac alone adds more than SI.2 billion to the GDP,
as people try to feel a little better amid all this progress.
THE
OF

POLITICS

PERMANENCE

S

IMON Kuznets had deep reservations about the national accounts he helped to create. In his very first
report to Congress, in 1934. he tried to warn the nation of the limitations of the new system. "The welfare of a
nation." the report concluded, can "scarcely be inferred from
a measurement of national income as defined above."
But the GNP proceeded to acquire totemic stature, and
Kuznets's concerns grew deeper. He rejected the a priori
conceptual schemes that govern most economic thought. As
an economy grows, he said, the concept of what it includes
must grow as well. Economists must seek to measure more
and different things. By 1962 Kuznets was writing in The
New Republic that the national accounting needed to be fundamentally rethought: "Distinctions must be kept in mind
between quantity and quality of growth, between its costs
and return, and between the short and the long run." he
wrote. "Goals for 'more* growth should specify more growth
of what and for what" (emphasis added}.
To most of us. that would seem to be only common sense.
If the government is going to promote something, surely the
voters should know what that something is. But in the view of
most economists. Kuznets was proposing a pipe bomb in the
basement. Once you start asking "what" as well as "how
much"—that is. about quality instead of just quantity—the
premise of the national accounts as an indicator of progress
begins to disintegrate, and along with it much of the conventional economic reasoning on which those accounts are based.
Unsurprisingly, the profession did not seize eagerly upon
Kuznets's views. Though he won a Nobel Prize in 1971.
many economists dismissed him as a kind of glorified statistician. Most are aware of at least some of the basic shortcomings of the GDP. But rather than face those shortcomings
squarely, they have either shrugged their shoulders or sought
to minimize the implications for their underlying models. In
his ubiquitous economics text Paul Samuelson and his co-au-

i)

175
thor William Nordhaus devote a few pages to possible revisions to the GDP to reflect environmental and other concerns.
But this is more in the spirit of a technical adjustment than a
questioning of the underlying premise.
The effects of the GDP fixation can be seen perhaps most
vividly in what are called "developing nations" (a term that
is itself defined mainly in terms of GDP)—specifically in the
policies of the World Bank, which is a kind of development
czar for the nations of the South. Decades ago Kuznets tried
to point out the absurdity of using such a measure to assess
the economies of less-developed nations, where much production takes place in the household economy and is therefore beyond the ken of the GNP. A development strategy
based on raising the GNP might undermine this household
economy and therefore diminish the well-being of the nation's people, while devastating the habitat to boot.
In 1989 Barber Conable, then the president of the World
Bank, acknowledged the problem with respect to environmental issues. "Current calculations ignore the degradation
of the natural-resource base and view the sales of nonrenewable resources entirely as income." he wrote. "A better way
must be found." Yet on the floors beneath him the bank's
economists continued churning out loan strategies aimed at

the country's real, sustainable growth rate was only about
half the official rate. And that wasn't counting the broader
spectrum of environmental and social costs, which would
have brought the growth rate down even more.
Here was another warning for those disposed to heed it. Yet
the international development establishment did nothing of
the son. In fact what is being measured has grown more partisan than ever. Specifically, in 1991 the GNP was turned into
the GDP—a quiet change that had very large implications.
Under the old measure, the gross national product, the
earnings of a multinational firm were attributed to the country where the firm was owned—and where the profits would
eventually return. Under the gross domestic product, however, the profits are attributed to the country where the factory
or mine is located, even though they won't stay there. This
accounting shift has turned many struggling nations into statistical boomtowns, while aiding the push for a global economy. Conveniently, it has hidden a basic fact: the nations of
the North are walking off with the South's resources, and
calling it a gain for the South.
The more basic defects of the GDP have not gone unnoticed among the nations of the world. In France a parliamentary report has called for new indicators of progress: the

he perversity of the GDP affects
/ w ^ ^ f ^ u ^ ^ ^ V l / f - ' l
I
/

H

virtually all parts of society. In 1 9 9 3 ,

I

f ° r example, William J. Bennett, w h o

^ ^ ^ m k / J m had been the Secretary of Education in
the Reagan Administration, produced a study of social decline. He called
it "The Index of Leading Cultural Indicators." The strange fact that
jumps out from Bennett's grim inventory of crime, divorce, mass-media
addiction, and the rest is that much of it actually adds to the GDP.
boosting GDP. One recent World Bank publication reaffirmed it as the "main criterion for classifying economies.'"
And a wrongheaded one. In a groundbreaking study of Indonesia in 1989. the World Resources Institute, of Washington. D.C.. explored the implications for natural resources.
Since the 1970s Indonesia had been a success story for the
conventional development school, achieving an exceptional
growth rate of seven percent a year. But such an amphetamine pace cannot be sustained forever. Indonesia is selling
off precious nonrenewable mineral weaith. Clear-cutting its
forests and exhausting its topsoil wuh intensive farming, it is
in effect robbing the future to finance the current boom. After adding in these and other factors, the institute found that

11
1




Treasury of Australia has done so as well. Both the UN and
the European Parliament have taken up the issue, and there
are npples even at the World Bank.
But in the United States change will not come easily. The
quarterly release of the GDP figures has become a Wall
Street ntual and metronome for the national media, setting
the tempo and story line for economic reportage. For the media in particular, the GDP serves deep institutional cravings,
combining the appearance of empirical certitude and expert
authority with a ready-made story line. It also serves the industries that thrive on the kind of policies it reinforces: those
inclined to deplete and pollute are especially pleased with
an accounting system that portrays these acts as economic
IICTIIRKH I 1 1 .1

176
progress. This came to light clcarly last year when the Clinton Administration proposed, sensibly, that resource depletion be subtracted from GDP (albeit only in a footnote) instead of added to it.
The idea had been kicking around the Commerce Department for years, and the Administration's actual proposal was
modest in the extreme. Still, at a House Appropriations
Committee hearing in April of 1994 two representatives
from coal states pounced on the department staff. After a series of jabberwocky exchanges that illustrated why members
of Congress usually leave technical issues to their staffs.
Congressman Alan Mollohan. of West Virginia, finally got to
the heart of the matter. If the national accounts were to
include the depletion of coal reserves and the effects of air
pollution (which would be added eventually), he said, "somebody is going to s a y . . . that the coal industry isn't contributing anything to the country." Better to keep depletion and
pollution hidden under the accounting rug called "growth."
The committee demanded an expensive outside review, effectively delaying the project. In the Republican Congress
its fate is by no means assured.
A

GENUINE

PROGRESS

INDICATOR

E

CONOMISTS have couched their resistance to new
indicators mainly in philosophical terms. A measure
of national progress must be scientific and value-free,
they say. Any attempt to assess how the economy actually
affects people would involve too many assumptions and imputations, too many value judgments regarding what to include. Better to stay on the supposed terra firma of the GDP.
which for all its faults has acquired an aura of hardheaded
empirical science.
Aura notwithstanding, the current GDP is far from valuefree. To leave social and environmental costs out of the economic reckoning does not avoid value judgments. On the
contrary, it makes the enormous value judgment that such
things as family breakdown and crime, the destruction of
farmland and entire species, underemployment and the loss
of free time, count for nothing in the economic balance. The
fact is. the GDP already does put an arbitrary vaiue on such
factors—a big zero.
Conventional economic thinking follows a simple premise
in this regard: As' Paul Samuelson puts it in his textbook,
"economics focuses on concepts that can actually be measured." If something is hard to count, in other words, then it
doesn't count. Of course, there will never be a way to assign
an exact dollar value to our family and community life, our
oceans and open spaces. This doesn't mean they don't have
value. It means only that we don't have a way to register
their value in a form comparable to market pnees. Given
that, the challenge is simply to start to develop values that
are more reasonable than zero: it is to stop ignoring totally.

run V T I. I > f I ('. MIINTIIL)




that which is crucial to the nation's economic and social
health. An approximation of social and habitat costs would
be less distorting and perverse than the GDP is now; a conservative estimate of. say, the costs of family breakdown and
crime would produce a more accurate picture of economic
progress than does ignoring such costs entirely.
We have a rough sketch of such a picture. On a limited
budget, using data that the federal government and other institutions already collect, we have developed estimates for
the kinds of factors that the economic establishment ignores.
The result is a new index that gets much closer—not all the
way, but closer—to the. economy that people experience. We
call it the "genuine progress indicator" (GPI), and it provides
substance to the gap between the economy limned by the
commentators and the one that has brought increasing apprehension and pain to so many others. It also begins to suggest
the kinds of measurements that the federal government, with
its enormous statistical resources, could construct.
The GPI includes more than twenty aspects of our economic lives which the GDP ignores. We based this list on
available data and on common sense. A family does not
count every dollar spent as a step forward. Rather, it tries to
son out the different kinds of expenditures—and that's basically what we did with the national accounts. We started
with the same consumption data that the GDP is based on.
but revised them in a number of ways. We adjusted for some
factors (such as income distribution), added certain others
(such as the vaiue of housework and community work), and
subtracted yet others (such as pollution costs and the like).
The result is a balance sheet for the nation that starts to distinguish between the costs and benefits of "growth."
Here are some of the factors we included:
The household and volunteer economy. Much of the nation's most important work—and the work that affects our
well-being most directly—gets done in family and community settings. Taking care of children and the elderly, cleaning and repairing, contributing to neighborhood groups—all
of these are totally ignored in the GDP when no money
changes hands. To overcome this problem, we included,
among other things, the value of household work figured at
the approximate rate a family would have to pay someone
else to do it.
Crime. The GDP counts as progress the money people
spend deterring crime and repairing the damage it causes.
However, most people would probably count those costs as
necessary defenses against social decline, and that's how the
GPI counts them too. We included hospital bills and property losses arising from crime and the locks and electronic devices that people buy to prevent it.
Other defensive expenditures. Crime-related costs are
just one kind of expenditure that seeks to repair past or present damage, us opposed to making people better off. We also
incorporated the money spent on repairs after auto accidents
and what households pay tor water filters, air-purification
11

177
equipment, and the like to defend against the degradation of
their physical environment.
The distribution of income. A rising tide of GDP doesn't
necessarily lift all boats—not if the growth of income is
mainly at the top. It was in the 1980s: the top one percent of
households enjoyed a growth in income of more than 60 percent. while the bottom 40 percent of households saw their incomes drop. To take account of this uneven tide, we adjusted the GPI for the extent to which the whole population
actually shared in any increase.
Resource depletion and degradation of the habitat. As
the nation uses up oil and other minerals, this should appear
as a cost on the national accounts, just as it does on the books'
of a private business: yet the GDP treats it as a gain. We reversed that in the GPI. Similarly, the pollution of our air and
water represents the using up of nature's capacity to absorb
humanity's waste. Therefore we included, among other
things, the damage to human health, agriculture, and buildings from air and water pollution, along with such recreational losses as beaches fouled by sewage or medical debris.
Loss of leisure. If people have to work two jobs or longer
hours just to stay even, then they aren't really staying even.
They are falling behind, losing time to spend with their families, to further their education, or whatever. The GDP assumes that such time is worth nothing. We included it at an
average wage rate.
To include such factors is to begin to construct a picture of
the economy that most Americans experience. It clarities
greatly the "paradox" that permeated the reportage during
last year 's congressional campaigns. The GDP would tell us
that life has gotten progressively better since the early
1950s—that young adults today are entering a better economic world than their parents did. GDP per American has
more than doubled over that time. The GPI shows a very different picture: an upward curve from the early fifties until
about 1970. but a gradual decline of roughly 45 percent
since then. This strongly suggests that the costs of increased
economic activity—at least the kind we are locked into now
—have begun to outweigh the benefits, resulting in growth
that is actually uneconomic.
Specifically, the GPI reveals that much of what we now
call growth or GDP is really just one of three things in disguise: fixing blunders and social decay from the past, borrowing resources from the future, or shifting functions from
the traditional realm of household and community to the
realm of the monetized economy.
Many readers might think of additions to the list of factors
that the GPI ought to include—thus corroborating both the
underlying concept and the conservative nature of our calculations. We left out. for example, the phenomenon of addictive consumption, which is spending that consumers themselves say they wish they didn't do. We also left out the
destruction of species, since there is not a satisfactory way to
reckon such loss in economic terms.

12




The GPI has been several years in the making, and we will
continue to refine it. But already it appears to have touched a
nerve in the economics profession and beyond. More than
400 economists and a growing number of opinion leaden, including Robert Eisner, the former president of the American
Economic Association, and Alvin Toffler. Newt Gingrich's
favorite futurist, have endorsed it as an, important step toward
the new kinds of indicators that are urgently needed. Research institutes in Germany and the United Kingdom have
sought to replicate it for their countries. Economic measurement is due for a radical change, and we hope that the GPI
will speed up the process. But measurement! is a means, not
an end. The more important question is how an honest set of
economic books would change the nation's economic debate
and force our leaders out of their Potemkin vilJage.
FROM
TO

S C O RE C A R D S
POLICIES

I

MAGINE Peter Jennings on the network news tonight
reciting the latest Commerce Department figures with
his polished gravity. Instead of the GDP, however, he is
reporting something more like the GPI. The nation's output
increased, he says, but parents worked longer hours and so
had less time with their kids. Consumer spending was "up
sharply," but much of the difference went for increased medical costs and repairing the rubble left by hurricanes and
floods. Utility receipts were up, but resources declined,
meaning that part of today's prosperity was taken from our
grandchildren. And so on down the line.
Reports of that kind would have a radical effect. They
would break through the hermetic economy portrayed by
economists and Wall Street analysts which dominates the
news today—the abstractions that serve as a conceptual phalanx against reality. Suddenly reporters and politicians alike
would have to confront the economy that people actually experience. There would be some genuine accountability in
Washington, a better sense of cause and effect between what
Congress does and what happens in our lives. New indicators would blast away the obfuscatory polemics of growth—
and the devious politics that goes along with it. Politicians
could no longer get away with glib assurances that the nation
can grow its way out of family breakdown and environmental decay, inequity and debt, when in many cases the nation
has been growing its way into them.
Such assurances have become a kind of political perpetualmotion machine. Newt Gingrich rhapsodizes about the entertainment economy and the 500 cable channels it will bring to
the American living room. (When Gingrich and like-minded
politicians extol "growth." entertainment is one of the things
they are talking about: since 1991 it grew twice as fast as consumer spending generally.) But when these channels flood the
family living room with sex and violence, and kids spend
more time watching TV than they do with their parents or

178
their homework, he blames "McGovemik liberals" for the
breakdown in traditional family values. At the same time, he's
only too happy to count the new tax revenues that arise from
.hat family breakdown toward balancing the federal budget.
Honest accounting would blow the whistle on these political games. It would also bring a new clarity and rigor to any
number of policy debates—those over trade agreements being a prime example. In the recent past these debates have
been framed largely in terms of the GDP. The General
Agreement on Tariffs and Trade means "percentage points
. . . of U.S. GDP growth." exclaimed Bill Frcnzei, a former
congressman from Minnesota and a congressional representative to GATT negotiations. "It means trillions of dollars in
increased world trade." This kind of talk was typical. In" fact
the increase means very little—only that more things will
pass back and forth between nations. Will families and communities suffer continuing disruption? Will the increased
traffic back and forth simply burn up more energy, the price
of which is kept artificially low by tax subsidies and the
like? Will America lose a measure of control over decisions
that affect the lives of its own citizens?
There were efforts to raise such issues in the trade debates. But the polemical playing field was tilted sharply

replace traditional Main Streets, the matrix of community activity is significantly undermined as well. Similarly, when
mass media replace the storytelling of parents and grandparents. the GDP goes up while the role of families declines.
If factory jobs migrate to low-wage nations, it means
cheaper products and more efficiency. But it also means severe family disruption, and the decline of die informal safety net of churches and union halls that once flourished in factory towns and helped families in need. The government
obscures the impact of such policies by in effect-keeping two
sets of books—a visible one for the market and an invisible
one for everything else. New indicators would bring the two
together, and better policy just might result
The effect would perhaps be especially direct on tax policy. The current tax system is deeply perverse, but not for the
reasons that economists generally cite. Purveyors of conventional wisdom say that the tax system retards growth, by
which they mean GDP. But this makes no distinction at all
between muscle and bloat. They want capital-gains tax
breaks, but for what? Pop art? Overseas investment funds ?
They urge taxes on consumption. But what kinds do they
mean? Work shoes as well as Guccis? Recycled paper along
with that made from ancient forests?

j he more basic defects of the GDP have
not gone unnoticed in other nations.
In France a parliamentary report has
called for new indicators of progress;
the Treasury of Australia has done so as well. But in the United States
change will not come easily. The quarterly release of the GDP figures
has become a Wall Street ritual. It sets the tempo and story line for
economic reportage. The GDP serves deep institutional cravings.
against them by the GDP. The result was a perpetuation of
free-trade dogma that is based on the economy of 200 years
ago. Better accounting would not in itself dictate a different
conclusion. But at least it would level the field, and include
many factors that now get left out. It would, for example, reflect some of the numerous benefits of local production that
don't show up in the GDP—social stability, job security, energy savings, and the like. Free-trade dogma dismisses such
thoughts as primitive and benighted.
Better indicators would also strengthen the role of famiiv
and community values in our poiicv debates. Rareiv does anyone point out how the market itself can undermine family values in the name of growth. When regional shopping centers




Meanwhile, the left argues tor "progressive" taxes based
entirely on income, as if income and the activities that produce it were inherently worthy of censure, regardless of
what those activities are. Better accounting would define the
issue along an entirely different spectrum.
For example, the current system taxes heavily that which
should be encouraged—enterprise and human labor. Meanwhile. it taxes lightly or even subsidizes the use of the natural resources that humanity needs to husband and conserve.
Employers pay a heavy tine, in the form of Social Security
taxes, workers' compensation, and the rest, when they hire
somebody. But they get big write-offs when they help to
drain the world's natural resources. New accountine would

179
expose this perversity, and point toward a new tax system
that defied the stereotyped categories of left and right.
To put it simply, the nation would cut—or if possible eliminate—(axes on work and enterprise and replace them with
increased taxes on the use of natural resources. Such a system
would diminish the need for environmental regulation, by
building a semblance of environmental accounting right into
the price system. Prices would include environmental and social costs. This approach would also be a spur to enterprise
and employment. With reduced income taxes, the entire
economy would become a land of enterprise zone, and the
nation's entrepreneurial energies would be deployed much
more toward solving environmental and social problems than
toward creating them. Moreover, by doing away with the corporate income tax, we could get rid of the whole loophole
culture that corrupts the nation's politics and is a primary
source of corporate subsidy and waste.
Closely related is the issue of cost-benefit analysis, which
was one of the hot topics in Washington this year. Republicans argue, sensibly, that environmental and other regulations should bring benefits commensurate with the costs involved. But that just begs the crucial question: What goes
into the accounting? If the GDP defines the framework, then
cost-benefit analysis becomes a made-in-heaven deal for
polluters and those who cause social disruption. If nothing
counts other than what is conventionally counted, then tangible increases in production will win out over the less easily quantified—but no less real—harm to the natural and social spheres. To broaden the reckoning, however, could
produce results quite the opposite of what the current advocates of cost-benefit analysis intend.
THE
OF

NEW POLITICS
PROGRESS

I

T has become almost obligatory in a context such as this
to invoke the concept of a "paradigm shift." to use
Thomas Kuhn's much-cited formulation, laid out in The
Structure of Scientific Revolution. But there is a side to this
that is generally overlooked—namely, the central role of
generational divides. Kuhn quotes the physicist Max Planck:
"A new scientific truth does not triumph by convincing its
opponents and making them see the light, but rather because
its opponents eventually die."
One would wish for a more ceremonious process. But no
field has grown more tightly shut than economics, whose basic orthodoxies have persisted for at least a hundred years.
Unless history stops cold, these, too. will eventually yield, and
the time is now propitious. The generation that developed the
GDP. and for which the GDP distilled an entire world view, is
now mainly retired. The students and disciples of that generation are well into their middle years, rumbling along on mental capital from long ago. For the generation that is replacing
them, the defining traumas were not the Depression and the
14




Second World War but rather the material glut and environmental and social disintegration of which many in the old
guard served as unwitting boosters and engineers.
To be sure, the old order does no* lack acolytes. But for a
growing number of economists, the conceptual tools and
measurements of the neoclassical model—Keynesian twists
included—are no longer adequate. These economists are demanding that their profession start to take account of the
larger economy in which the market is grounded—the natural and social spheres, which they have in the past dismissed
as the netherworlds of externality. In a survey in the 1980s of
economists at fifty major universities two-thirds acknowledged a sense of "lost moorings" in the profession.
In recent decades this kind of critique has been associated
mainly with the ecological camp. Herman Daly, Hazel Henderson. Kenneth Boulding, and other writers have pointed out
that in a world of finite physical resources the possibility of
endless material expansion is not something we should count
on. What is new today is that a similar argument is coming
from certain quarters on the right: specifically that the pursuit
of GDP has been undermining traditional values and social
cohesion, much as it has been destroying the natural habitat.
Americans are conditioned to see ecology and social conservatism as occupying opposite ends of the political spectrum. But that is largely an optical illusion, reinforced by an
antiquated national accounting system. The fact is that adherents at both ends deplore the way the pursuit of GDP can
undermine the realm of their concern. Much as this pursuit
turns ancient forests into lumber and beaches into sewers, so
it turns families into nodes of consumption and the living
room into a marketing free-fire zone. Both camps speak
from the standpoint of values against the moral relativism
and opportunism of the market. "If you read the New Testament or the Pope's encyclical, it's no cheers for socialism
and one and a half or two for capitalism." William Bennett,
who was Reagan's Secretary of Education, observes. "Socialism treats people as a cog in the machine of the state;
capitalism tends to treat people as commodities."
This strain of conservatism, partly rooted in traditional
Christian teachings, was largely dormant during the Cold
War. when the greater enemy communism predominated.
But with the fall of the Soviet bloc it has reawakened, and
the result has been a widening gap on the right between social conservatives and libertarian tree-marketeers. This gap
was easily overlooked in the Republican triumph last November. but it may well become as important as the one between the Republicans and the Democrats they replaced.
It can be seen, for example, in the diverging views of that
archetypal Republican era. the Reagan eighties. Martin Anderson. who was Reagan's domestic-policy adviser, gave the
rapturous libertarian view in his book Revolution (1988). "It
was the greatest economic expansion in history." Anderson
wrote. "Wealth poured from the factories of the United
States, and Americans got richer and richer."

180
But does richer mean better—even assuming that all
Americans shared in this bounty, which they didn't? For libertarians. as for many Keynesian liberals, the question isn't
relevant. For social conservatives, however, it is the question. Bennett does not disparage the economic achievements
of the Reagan yean. Nor does he dispute that more family
income can mean better schooling, medical care, and the
like. But recently he has been calling attention to the social
decay that has continued despite (and often in the name of)
economic growth. "Would you rather have kids raised by
rich people with lousy values, or by good people who just
don't have much money?" he asks. "A lot of us would say
we want the values right."
What the right calls "family values" is one arena in which
the latent conflict between market and nonmarket values
is coming out into the open. In a long article in The Washington Post last November, Edward Luttwak. of the Center for
Strategic and International Studies, a conservative think tank
in Washington. D.C., pointed out that much family disruption
today arises from the "creative destruction" of the market that
free-market economists adore. The failure to acknowledge
this, Luttwak wrote, is "the blatant contradiction at the very
core of what has become mainstream Republican ideology."
In an interview Luttwak argued that people need stability
more than they need much of the new stuff that makes the
GDP go up. Yet economists talk about stability "in entirely
negative terms." he said. Conservation becomes a dirty
word. One would think that conservatives would be the lirst
to point this out; stability, after all. is what families and communities are for. But the political right is muzzled on these
issues, Luttwak said, by the economic interests of its major
funders. "Any conservative who wishes to conserve will not
be funded."
This split has a distinct similarity to the tension that arose in
the Democratic Party in the seventies between environmentalists and the growth-boosting Keynesian mainstream. It could
betoken the beginning of a new politics in which the popular
currents represented by social conservatives and environmentalists increasingly find common cause. Some writers have
made the connection already. For example. Fred Charles Ikle,
who was an undersecretary of defense in the Reagan Administration. wrote an article for the National Review in which he
criticized the "growth Utopians'' of the right. "Citizens who
fear for our vanishing patrimony in nature." Ikle wrote, "drink
from a wellspring of emotions that nourishes the most enduring conservative convictions.'' (He also tweaked the magazine's right-wing readers by pointing out that economic
growth almost invariably leads to bigger government.)
Just a few years ago a confluence of the environmental
and social-conservative impulses would have seemed unlikely. But the political seas are changing rapidly. The coalition that came together to oppose NAFTA and GATT—environmentalists and anti-corporate populists like Ralph Nader
on the one hand, and social conservatives like Pat Buchanan
TiiK a t h n t i i : MONTHLY




on the other—seemed an oddity to most pundits. But something similar happened when the Walt Disney Company proposed a new theme park near the Civil War battlefield in
Manassas, Virginia. Buchanan and numerous other traditionminded conservatives joined environmentalists in blasting
the proposal. In his syndicated newspaper column Buchanan
demanded. "Conservatives who worship at the altar of an
endlessly rising GNP should tell us: What is it they any
longer wish to conserve?"
The two camps have converged in opposing the socalled "takings" bills, which would require the taxpayers
, to compensate property owners for restrictions on the use
of their property. The Reverend Donald E. Wildemon. the
president of the American Family Association, in Tupelo,
Mississippi, has called such a proposal in his state the
"porn owners'^relief measure," because it could restrict the
ability o f local governments to control such things as topless bars. Environmentalists of course worry about the implications for the protection of wetlands, open space, and
the like. The two camps agree that "growth" is not an end
in itself but must serve larger values that are not economic
in the usual sense.
We may be witnessing the opening battles in a new kind
of politics that will raise basic questions about growth—
questions that defy the conventional left-right divide. Where
the old politics was largely concerned with the role of government—with the relation between public and private sectors—the emerging one will be more concerned with such
issues as central versus local, market culture versus family
and community culture, material accretion versus quality
and values. The new politics will not be anti-growth, because to be categorically against growth is as nonsensical as
to be categorically for it. Rather, it will begin with Luttwak's
sane observation that when your goal is simply to increase
GDP. then "what you increase isn't necessarily good." It will
insist that growth—and economics generally—must be a
means to an end. and not an end in itself.
This is not to suggest that such a new alliance is around
the corner. But although the differences between the socialconservative and environmentalist camps are still large, they
are probably etched more sharply among leaders in Washington than in the nation as a whole. These groups are converging on one crucial issue—namely, the ends of economic
life. In their different ways they are expressing the feeling,
widespread among the public, that the pronouncements from
economic experts are fundamentally out of sync with the experience of their own lives: that economics must be about
more than just the production and consumption of stuff: and
that we need larger goals and better ways to measure our
achievements as a nation.
Of course, this instinct could play out in many ways. But
at least one thing is clear: boosting the GDP is no longer a
sufficient aim for a great nation, nor one that America can
continue to endure.




181

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PUBLISHED AS THE COYHR STORY

OF THE OCTOBER, 1995. ISSUE OF

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About

the

authors:

Clifford Cobb, a policy analyst, is
the author of Responsive Schools,
Renewed Communities (1992).
Cobb is the research director of
Redefining Progress, a nonprofit
public-policy organization in San
Francisco.
Ted Halstead is the founder and
executive director of Redefining
Progress.
Jonathan Rowe has been an editor
at The Washington Monthly and a
staff writer for The Christian
Science Monitor. He is a co-author,
with Edgar Cahn, of Time Dollars
(1991). He is the program director
of Redefining Progress.