TYPE: COMMITTEE HEARING

LENGTH: 23634 words

COMMITTEE: HOUSE FINANCIAL SERVICES COMMITTEE

HEADLINE: U.S. REPRESENTATIVE MICHAEL OXLEY (R-OH) HOLDS HEARING ON MONETARY POLICY

SPEAKER:
U.S. REPRESENTATIVE MICHAEL OXLEY (R-OH), CHAIRMAN

LOCATION: WASHINGTON, D.C.

WITNESSES:

ALAN GREENSPAN, CHAIRMAN OF THE FEDERAL RESERVE

BODY:

 
HOUSE COMMITTEE ON FINANCIAL SERVICES HOLDS A HEARING TO RECEIVE
CHAIRMAN GREENSPAN'S SEMI-ANNUAL REPORT ON MONETARY POLICY
 
(TRANSCRIPTS BEGIN AT START OF THE QUESTION AND ANSWER PERIOD)
 
FEBRUARY 27, 2002

SPEAKERS:
U.S. REPRESENTATIVE MICHAEL OXLEY (R-OH)
CHAIRMAN
U.S. REPRESENTATIVE JIM LEACH (R-IA)
U.S. REPRESENTATIVE MARGE ROUKEMA (R-NJ)
U.S. REPRESENTATIVE DOUG BEREUTER (R-NE)
U.S. REPRESENTATIVE RICHARD BAKER (R-LA)
U.S. REPRESENTATIVE SPENCER BACHUS (R-AL)
U.S. REPRESENTATIVE MICHAEL CASTLE (R-DE)
U.S. REPRESENTATIVE PETER KING (R-NY)
U.S. REPRESENTATIVE ED ROYCE (R-CA)
U.S. REPRESENTATIVE FRANK LUCAS (R-OK)
U.S. REPRESENTATIVE BOB NEY (R-OH)
U.S. REPRESENTATIVE BOB BARR (R-GA)
U.S. REPRESENTATIVE SUE KELLY (R-NY)
U.S. REPRESENTATIVE RON PAUL (R-TX)
U.S. REPRESENTATIVE PAUL GILLMOR (R-OH)
U.S. REPRESENTATIVE CHRISTOPHER COX (R-CA)
U.S. REPRESENTATIVE DAVE WELDON (R-FL)
U.S. REPRESENTATIVE JIM RYUN (R-KS)
U.S. REPRESENTATIVE BOB RILEY (R-AL)
U.S. REPRESENTATIVE STEVEN LATOURETTE (R-OH)
U.S. REPRESENTATIVE DONALD MANZULLO (R-IL)
U.S. REPRESENTATIVE WALTER B. JONES JR. (R-NC)
U.S. REPRESENTATIVE DOUG OSE (R-CA)
U.S. REPRESENTATIVE JUDY BIGGERT (R-IL)
U.S. REPRESENTATIVE MARK GREEN (R-WI)
U.S. REPRESENTATIVE PATRICK TOOMEY (R-PA)
U.S. REPRESENTATIVE CHRISTOPHER SHAYS (R-CT)
U.S. REPRESENTATIVE JOHN SHADEGG (R-AZ)
U.S. REPRESENTATIVE VITO FOSSELLA (R-NY)
U.S. REPRESENTATIVE GARY MILLER (R-CA)
U.S. REPRESENTATIVE ERIC CANTOR (R-VA)
U.S. REPRESENTATIVE FELIX GRUCCI JR. (R-NY)
U.S. REPRESENTATIVE MELISSA HART (R-PA)
U.S. REPRESENTATIVE SHELLEY MOORE CAPITO (R-WV)
U.S. REPRESENTATIVE MIKE FERGUSON (R-NJ)
U.S. REPRESENTATIVE MIKE ROGERS (R-MI)
U.S. REPRESENTATIVE PAT TIBERI (R-OH)
 
U.S. REPRESENTATIVE JOHN LAFALCE (D-NY)
RANKING MEMBER
U.S. REPRESENTATIVE BARNEY FRANK (D-MA)
U.S. REPRESENTATIVE PAUL KANJORSKI (D-PA)
U.S. REPRESENTATIVE MAXINE WATERS (D-CA)
U.S. REPRESENTATIVE CAROLYN B. MALONEY (D-NY)
U.S. REPRESENTATIVE LUIS GUTIERREZ (R-IL)
U.S. REPRESENTATIVE NYDIA VELAZQUEZ (D-NY)
U.S. REPRESENTATIVE MELVIN WATT (D-NC)
U.S. REPRESENTATIVE GARY ACKERMAN (D-NY)
U.S. REPRESENTATIVE KEN BENTSEN (D-TX)
U.S. REPRESENTATIVE JIM MALONEY (D-CT)
U.S. REPRESENTATIVE DARLENE HOOLEY (D-OR)
U.S. REPRESENTATIVE JULIA CARSON (D-IN)
U.S. REPRESENTATIVE BRAD SHERMAN (D-CA)
U.S. REPRESENTATIVE MAX SANDLIN (D-TX)
U.S. REPRESENTATIVE GREGORY MEEKS (D-NY)
U.S. REPRESENTATIVE BARBARA LEE (D-CA)
U.S. REPRESENTATIVE FRANK MASCARA (D-PA)
U.S. REPRESENTATIVE JAY INSLEE (D-WA)
U.S. REPRESENTATIVE JAN SCHAKOWSKY (D-IL)
U.S. REPRESENTATIVE DENNIS MOORE (D-KS)
U.S. REPRESENTATIVE CHARLIE GONZALEZ (D-TX)
U.S. REPRESENTATIVE STEPHANIE TUBBS JONES (D-OH)
U.S. REPRESENTATIVE MICHAEL E. CAPUANO (D-MA)
U.S. REPRESENTATIVE HAROLD FORD (D-TN)
U.S. REPRESENTATIVE RUBEN HINOJOSA (D-TX)
U.S. REPRESENTATIVE KEN LUCAS (D-KY)
U.S. REPRESENTATIVE RONNIE SHOWS (D-MS)
U.S. REPRESENTATIVE JOSEPH CROWLEY (D-NY)
U.S. REPRESENTATIVE WILLIAM CLAY JR. (D-MO)
U.S. REPRESENTATIVE STEVE ISRAEL (D-NY)
U.S. REPRESENTATIVE MICHAEL ROSS (D-AR)
 
U.S. REPRESENTATIVE BERNARD SANDERS (I-VT)
 


*


(JOINED AT THE START OF THE Q&A)

OXLEY: In light of recent market movements in the wake of Enron, it has been suggested by some that ultimately the market does a far better job of deterring abuses than does government. What are your thoughts in that regard, and what would be some suggestions that you would give this committee as we work our way through some of these difficult issues?

GREENSPAN: I think Enron, as I indicated to the Senate Budget Committee the other day, is not a significantly negative event to the economy, and in fact, in the long run, its emergence may alter the way we govern corporations. That the long history of corporate governance will continue to be a very substantial and positive force for economic growth and productivity.

I do believe that something fundamentally different has happened in this most recent period, and I think it's important for us to go back and look at the causes of it. I would say particularly what has changed in the way I recall corporate governance, stock prices, stock markets, security analysis, years ago is that in earlier years, there was not any really significant emphasis of the type we see today on short-term corporate earnings.

Indeed, dividends were exceptionally high. The yield on dividends before 1950 for several years was 6 percent. It's now little more than 1 percent, and if most of what you get from a corporation is cash, you don't worry about how it was calculated. You just take the money, and that's it.

But one of the significant changes that occurred with the propensity to buy back stock, which only occurred in the 19 -- early 80s -- with rules which somehow delimited the concerns that stock buy backs would be perceived as price manipulation. That very act caused a very major shift from cash dividends to purchase, stock purchase. Two other events were very important in that context to create the environment which ultimately led to the Enron debacle.

One was the unfortunate reversal of the FASB ruling in the early 1990s about stock option accounting. We estimate that over the past, or say the period 1995-2000, almost three full percentage points of the annual average gained in earnings resulted from the fact that stock options rather than cash was used as compensation amongst our major corporations.

This undoubtedly had an effect of accelerating the earnings outlook, which in turn had been very significantly propelled upward by the structural change in productivity. And so what occurred as a consequence of all of these forces was an endeavor to try to gain the accounting system in manner to create the perception of short term earnings growth which would be confused with long-term earnings growth.

If long-term earnings growth were properly evaluated over this period, I don't think we would have had many of the type of problems that we've had. But there's been a significant endeavor to make the data look as though something fundamentally different is going on in corporate America, and that has been unfortunate. Much of that has already been reversed by the market.

There is now a very significant shift towards corporations endeavoring to be far more transparent on what they are doing. The markets are clearly creating price earnings premiums for corporations which are perceived to be without skin, so to speak. And so a goodly (ph) part of what needs to be done to restore corporate governance to where it was in earlier years -- and I must say back then it did a pretty good job -- in the vast majority of corporate governance in today's markets, even with the Enron debacle, is of superior nature, and, indeed, far superior than any other place in the world.

GREENSPAN: But we do need to fix what is wrong with our system. And I would suggest that a proper diagnosis is clearly the first step in determining what should be done.

OXLEY: Thank you.

Mr. Chairman, my time has expired, let me now yield to the gentleman from New York, the ranking member, Mr. LaFalce.

LAFALCE: Thank you very much, Mr. Chairman. I disagree with you fundamentally, and also with Dr. Greenspan in some of his introductory comments.

First of all, I think we've shown that we cannot rely on the unfettered magic of the marketplace alone, that, with respect to publicly traded companies, there must be significant regulation, that the SROs, the self-regulatory organizations, have not worked. They've not worked with respect to the securities analysts, they've not worked with respect to the accounting firms.

We need a significantly enhanced role for the Securities Exchange Commission. We need to appropriate monies for pay parity. We need to significantly enhance their resources to do the job, because so many Americans today do have almost all of their wealth in the markets. They have defined contribution plans today, rather than defined benefit plans today.

They're not putting their money in banks, where you, Chairman Greenspan, have your examiners there on a daily basis, where the state bank examiners are there on a daily basis. They're in the markets, and we need to protect them.

I disagree with you when you say that Enron is not a significant event. I think Enron is a most significant event. I think we can, you know, make lemonade out of lemons, to be sure, but we can never deal with the fact that $4-$5 trillion of American money has been lost in the markets, now a great amount due to the excesses, to the bubble, to the speculation, but a significant amount due to earnings manipulation.

Now, where I do agree with you strongly is with respect to stock options. So much of what took place was done by corporate officers and audit committees of board of directors, all with stock options, that were interested in one thing and one thing only, and that was enhancing market capitalization so that they could have a good return on those stock options. And we must deal with all those.

Now, who's we? We is government. The marketplace will be more vigilant now for a month or two, maybe a year or so, but nothing can substitute for a strong regulatory environment for our publicly traded companies. And that's what we must achieve. And if anybody thinks that we can achieve the end result of protection of American investors without that, they are deluded.

Now, having said that, would you...

GREENSPAN: Could I respond?

(LAUGHTER)

LAFALCE: Sure.

GREENSPAN: You are quite correct, I might add, in saying that we need more resources for the Securities and Exchange Commission, especially on the pay parity issue, which I think is long overdue.

I did not say, nor do I believe, that there are not adjustments that are required and indeed ought to be made. And I would start off with the way we account for stock options. I would account for a number of other issues as to the way we have corporate governance, because significant things have happened in the recent decades which require adjustment.

I want to emphasize, however, that the overall level of corporate governance has served us well over recent decades, including the current period, by the vast majority of corporations who see their -- the management sees their self-interest as coincident with those of shareholders.

I don't want to get into the economics of this, but if we could make that tie locked in some manner or another, we will maximize the allocation of capital in this economy.

There has been a severance, in my judgment, of the interests of the chief executive officer in many corporations from those of the shareholders, and that should be pulled together. Stock options help, but not if they are functioning in the manner which they currently are.

LAFALCE: Dr. Greenspan, if I could just get in one question. Could you comment on the conduct of United States monetary policy within the global context, given the fact that there is now one monetary policy maker in Europe; that they are achieving integration while at the same time expanding; that Japan has been in the doldrums for a decade or so, and the interplay that goes on in your decision- making between the domestic and the global economy?

GREENSPAN: Well, Congressman, as you well-know, our mandate is to maximize long-term sustainable economic growth in the United States. I mean, we consider foreign conditions only to the extent statutorily as they impact on us. And, obviously, as they increasingly do so, we become far more interested in what's going on in the world and respond to it.

And indeed, we have. In other words, considerable part of our analysis of what's been going on in the American economy in recent years has had a very high level of international interrelationship and fallout, in certain respects.

So we do evaluate the European economy, the Japanese economy, East Asia, Latin America, in a fairly extensive level to make certain that our policy, which is implemented here and focused on the American system, is not going to be deflected by events that we perceive occurring abroad.

OXLEY: The gentleman's time has expired.

The chair is now pleased to recognize the gentleman from New York, Mr. King.

KING: Thank you, Mr. Chairman.

Good morning, Mr. Greenspan. It's always a pleasure to have you here.

Let me say at the outset, as a New Yorker and as an American, commend you for the critical role that you and the Fed played in providing the liquidity that was so important after September 11. It's very reassuring, and I want to thank you for that.

I'm going to focus my questions on the question of interest rates. And this in a way is a follow-up to what Mr. LaFalce was talking about with the Japanese economy being in the doldrums. If would ask you if you could just make some comments on how low interest rates can go before the cutting of the interest rates loses its impact. Japan is at low interest rates now for a number of years, and it appears that it's had no impact as far as rebuilding the economy. If you could tell us how close you think you are -- we are to that level, where perhaps they can't go any lower.

And secondly, in that regard, even though the rates have gone down -- the discount rate has gone down, the long-term rates have not gone down. How essential do you believe the reduction of long-term rates are to the long-term growth of the economy?

GREENSPAN: Well, Congressman, I would not view the Japanese experience as a general experience with respect to how low interest rates could or could not go.

The problem with Japan, as I've indicated on many occasions, is that they have only one major form of financial intermediation, which is their banking system. And their banking system, as you know, is in very serious difficulty. So that the ability of monetary policy to function, in my judgment, is impaired in a manner which makes it very difficult to read what basically the level of rates and the level of economic activity are doing. I think it's very difficult, and one should not generalize from the Japanese experience.

The issue of long-term rates is a quite important one, because while undoubtedly short-term rates do have significant impacts on the American economy, far more relates to longer-term rates. Longer-term rates are a function essentially of, one, inflation expectations and the underlying real rate itself. And what we have observed in this economy is that long-term rates did come down quite materially the tail end of the year 2000, but have essentially stabilized, as I think you've pointed out, for the last year or so. But they have stabilized at a relatively low historic rate. And, indeed, one can observe what's occurring in the housing market and basically see the impact of what mortgage rates have done.

So it's a complex issue, but at the moment I think that we do not see any really significant inflation premiums embodied in long-term rates. And that, frankly, is a good sign.

KING: One follow-up question, Chairman Greenspan, is regarding the Argentine and the Japanese economies, how significant do you think their doldrums are going to have on our prospects for long-term growth?

GREENSPAN: Well, as difficult as the problems in Argentina are, and they're really having considerable structural problems. And we only hope that they can correct them as quickly as possible. They have not had a contagion effect where one would ordinarily have expected them to have an effect, specifically in Brazil where markets are doing reasonably well, and especially in Mexico, which has done quite well.

So in Latin America it's important that Argentina stabilize as quickly as they are capable of doing. But fortunately, there's not been significant fallout.

GREENSPAN: Japan has been essentially stable for a decade now. Growth has been effectively zero, and it's difficult to read exactly how changes in the Japanese economy impact the rest of the world. Clearly, to the extent that they are the second largest economy in the world, they do affect us. And clearly what is going on in Japan is negative to the United States outlook.

But I do not perceive it as a major factor containing a recovery in the United States which we believe is just beginning to get under way.

KING: Thank you, Chairman Greenspan.

Thank you, Mr. Chairman.

OXLEY: The gentleman's time has expired.

The gentlelady from New York, Ms. Maloney?

MALONEY: Thank you, Mr. Chairman.

Mr. Chairman, I want to likewise thank you for moving quickly and dropping interest rates 50 basis points in the very uncertain environment the day the financial markets opened shortly after September 11.

As New York works to recover from the terrorist attack, it's critical that we have an accurate assessment of the economic damage to our city, state and the private sector. After having contacted CBO and many other agencies, no single federal entity is compiling an in- depth analysis of the economic impact on New York and cost to its institutions. I know the New York Federal Reserve has a very large and accomplished research staff, and I would like to appeal to you, and will do so separately to President McDonough, for just such a well-researched economic analysis. New York really needs your help. Could you help us with this?

GREENSPAN: Well, Congresswoman, I agree with you that the Federal Reserve economic staff is first-rate and a considerable part of what they do is a continuous evaluation of the Second District; obviously, New York City, the very major part of that district.

But I don't communicate to them, and I assume that you will speak to President McDonough. And my impression is that they're probably fairly far along in examining the type of issues that you think are important to be examined.

MALONEY: That'd be extremely helpful.

As a representative from New York, I am spending a great deal of my time on the recovery effort. One of the areas that I am hearing tremendous concern from my constituents is the lack of availability of terrorism insurance, the escalating cost of insurance. Many building projects and proposals have been not funded and turned down by the banks as being too risky, and there appears to be a credit crunch that is stalling the recovery of New York City and New York state.

I would like to hear your comments on the fallout from the lack of insurance -- terrorism insurance, and do you think a federal reinsurance program is necessary? Could you share your thoughts?

GREENSPAN: Well, we have obviously spent a good deal of time on exactly that issue, because it's a crucial aspect of a fairly large segment of the economy.

The difficulty that one has when dealing with terrorism insurance is that it is exceptionally difficult for an insurer or even a reinsurer to have any sense whatever of what the probability distribution of a terrorist event is, and more importantly what is its magnitude. In all insurance, you have to have some general knowledge of what the parameters of what could happen are, or you cannot set premiums. In this case, it is virtually impossible to do so, and a number of people have argued, I think somewhat effectively, that what may be necessary here is for the Congress to stipulate that in the event of a terrorist attack clearly defined as a terrorist attack, that the federal government, with some deductible, would cover the cost of that.

The problem that you have with trying to do it before the event is it's almost impossible to know precisely how to construct a response to it. But if individuals know that after the fact that it will, in fact, be covered, we may hope that you can construct a means by which there can be some form of reinsurance to remove the types of problems that we see.

This is an issue which I think there is considerable dispute on it, because we don't know what the nature of what it is we are facing. But I'm one who thinks that we ought to be addressing this not solely because of its impact on the economy, but there is a very difficult problem of how one handles things over which one is not responsible. The issue of home security is now, in fact, indistinguishable from our national defense budgets, and much of that has the same basis of taxation for financing.

MALONEY: Thank you very much.

And I ask unanimous consent to add additional questions into the record. Thank you.

OXLEY: Without objection.

The chair now would please recognize the gentlemen from Alabama, the chairman of the Financial Institution Subcommittee, Mr. Bachus.

BACHUS: Thank you Mr. Chairman.

Chairman Greenspan, first of all. I welcome your written testimony on Enron. You're on the president's working group, and I think what you said here is very valid as to what happened at Enron.

My question is -- I'm not going to ask you for a prediction; I'm going to ask you for what's happening real-time. I know you have folks at the Fed who look over data. You spend a lot of time on focusing on productivity. And my question is a simple one.

You talked about through the last decade a surge in productivity. Real-time, are we continuing to see an increase in productivity, or is it slackening, or is it constant or is it declining?

GREENSPAN: Well, Congressman, the data that now appear to be in real-time, as you put it, probably are exaggerating the underlying trend in productivity if for no other reason that the numbers look just too large to be credible. We're going to have another upward revision in the fourth quarter's productivity numbers. And if you take a look at the first quarter we already have a good deal of data in on both the numerator and denominator of output per hour. And at this particular stage, unless average hours worked rises very sharply in the February-March period, for which we don't as yet have data, and/or payroll numbers rise significantly, we're going to have a very large increase in the first quarter.

So while I doubt very much if they will be representative of the true underlying trend, they do nonetheless confirm that the long-term trend of productivity has managed to sustain itself through these very difficult times of, say, the second quarter of the year 2000 to date.

That doesn't necessarily mean it will continue, but since you didn't ask me for a forecast I won't make one.

BACHUS: (OFF-MIKE)

GREENSPAN: The real-time data are really quite impressive.

BACHUS: Thank you very much. I appreciate that. I'm going to yield the balance of my time to the gentlelady from Pennsylvania, Ms. Hart.

HART: Thank you, Mr. Bachus.

I have a question actually, regarding interest rates. They've, obviously, been quite helpful to some businesses, we've heard. However, in my district, there are some smaller and medium-sized businesses that now are having serious trouble getting access to credit caused by the new pressure on loan portfolios.

HART: Do you have evidence of the tightening of that kind of credit, particularly available to, kind of, the Main Street-type business? And if so, do you expect that to have a negative impact on our efforts to pull out of the recession?

GREENSPAN: Congresswoman, the evidence there is mixed. We are observing certain tightening in some of the banks of a modest type. We've not yet seen -- or I don't know whether you could say not yet, but we do not see the general pressure on small business as reported by the National Association of Independent -- I think it's the National Federation of Independent Business. They have a fairly extensive survey of their members of credit conditions available to them, and their surveys have not indicated any really serious concerns.

But it's highly unlikely in a period such as we've been running through that there wouldn't be some difficulties. Indeed, if somebody told me there were none, I would say the data are wrong. So there clearly are such events.

Hopefully, if the economy continues to show the signs that it has been exhibiting of late, some of that pressure will be removed. And I would hope that the opening up of profit margins and improved balance sheets would bring a number of especially smaller enterprises up to a level where credit availability is no longer a difficulty for them.

HART: Is there an action regarding that that you think the Fed could take or should take that would be appropriate that would help them?

GREENSPAN: I don't think that there's anything that we, the Federal Reserve, can do, and at the moment, frankly, I don't think anything really needs to be done because, unless I'm mistaken and this whole change in the economic environment is a false dawn, then things should improve.

HART: Thank you.

Also, there was a report released yesterday -- this is dealing with the steel issue and all the bankruptcies we've had in the steel industry -- American University released a report that if the administration didn't act strongly regarding the 201 and either implementing a tariff rate of maybe 40 percent or so, that about 325,000 American steel jobs would be lost in the coming months.

GREENSPAN: I'm sorry, how many?

HART: About 325,000.

GREENSPAN: There aren't 325,000 steelworkers.

HART: I think it's steel producing jobs around that industry.

GREENSPAN: I see. I see.

HART: And anyway, there already are a significant number of bankruptcies; there are many more companies, especially in the area I represent, and I think a lot of the areas in the Midwest and in the East, that would lose a lot more jobs. And the bankruptcies are also affecting suppliers and others.

What effect do you think that would also have on the economy in general? Do you think it's large enough to affect it in general? And do you think it would slow our pulling out of the recession as well?

GREENSPAN: As you know, the president has to make a judgment before March the 6th on the 201. It's a difficult decision for lots of obvious reasons. But I think the important issue which is on the table is not only the impact that it has on, one, jobs, and the 600,000 retirees in the steel industry who have, as we call, significant legacy costs; but it's also an issue of what a marked increase in steel import prices would do to the costs of steel-using industries, of which the numbers are quite significantly larger than the roughly 150,000 to 175,000 who work directly in the steel industry.

In my judgment far more important than that, because neither of those two issues are big as far as the domestic economy is concerned, is the implication for our international trade posture. And here the whole question of the importance of international trade and how we handle it is critical to, in my judgment, the next number of years, because even though I raised the issue of the flexibility and resiliency of our economy being the major reason for the fact that we didn't go into a severe contraction in this most recent period, what I didn't mention, but which is also the case, is a very marked -- a very substantial part of the economic growth that we've experienced in the post-World War II period occurs as a consequence of the opening up of international markets for which the United States has been the largest recipient of growth, as far as I can evaluate.

GREENSPAN: So I think the president's got a very difficult set of choices before him, and I wish him well.

HART Thank you, Mr. Bachus.

OXLEY: The gentlemen from Massachusetts, Mr. Frank?

FRANK: (OFF-MIKE)

This illustrates the dilemma, the colloquy you just had, which is this: You and many others believe, and I share that to some extent, that the increased open trade regime is helpful to the economy. One of the major obstacles is precisely the resistance engendered by the only 175,000 people who may lose their jobs. They tend not to think of themselves as only -- well, from the macro standpoint they're only; for them they're it. And I am afraid that we may be exacerbating that.

I read the administration's analytical perspectives on the budget, and they, in their analysis on page 24, come back to something we've discussed before, the NAIRU, the Non-Accelerating Inflation Rate of Unemployment, and give it a much higher rate than I think experience has shown. And their projection is that, given everything they want to do -- this is their optimistic projection -- if the administration gets all that it wants in the budget, unemployment will level off at 4.9 percent for the next decade and stay at 4.9 percent. That's about 25 percent higher than we had managed to get it during the growth.

And here's what troubles me. You say, and I hope you're right, and I'm inclined to agree, that the productivity gains that we have been having that we have been having are not going away. It's the productivity gains in part that helped us get the unemployment rate lower, consistent with low inflation. If, in fact, you're accurate, I hope you're going to tell me you don't agree with this. Because if you're going to go to a 4.9 percent best-case unemployment, we're talking about 4.9 percent after the recession in full recovery, if that's as low as we can get it, if, in fact, the administration is correct, and I don't believe they are, that there's an economic rule that says we can't go over 4.9 percent for any considerable period lest we trigger inflation, then not only is that going to be socially a problem, but it's going to exacerbate precisely the resistance to the kind of trade regime you want to see.

So I'd be interested in your comment. Do you agree with them that -- I know you've been skeptical about the whole concept of NAIRU, but is it, in fact, the case that we are going to have 4.9 percent unemployment best case going out; 25 percent higher then we've been able to get to?

GREENSPAN: I don't consider the fact that there's 50,000, 100,000, 175,000 jobs at stake an irrelevant consideration. Indeed, it's much less than that because, as you know, half the industry is mini-mills, and they are not in the same difficulties that the so- called traditional coke-oven, blast-furnace steelworks type of operation is in.

But my own judgment is that we should focus very significantly on making certain that those who, through no fault of their own, lose their jobs because of the opening up of international markets -- that we make certain that they are appropriately compensated or taken care of by any number of programs which one can conceive of.

FRANK: In the written part, I want to get to some other questions.

I'd be interested if you would give me a list of the ways of compensating people who are getting hurt this way that the Federal Reserve would think was a good idea. And the problem, of course, is that when the budgetary situation in which some of those things are being cut, not expanded. But I'd be interested in the programs you supported.

GREENSPAN: Yes. Let me put it this way. In this regard, I'm speaking for myself, not the Federal Reserve.

FRANK: Do you think 4.9 percent, though -- let's get to the macro question. Do you think 4.9 percent is as good as we can do for the next 10 years?

GREENSPAN: No, Congressman. I have not changed my view on that since we discussed it last. And I have serious questions about the concept itself, because I don't believe it's a stable number, and I don't believe that one can calculate...

FRANK: I think having the administration's official projection be that -- again, this is assuming they get everything they want in terms of policy -- we're going to be at 4.9 percent. That's very discouraging. So I hope the next time you and Mr. Hubbert are talking you might bring that up.

Let me ask you another question about long-term interest rates. In the written report we got, on page 23, it talks about the failure of long-term rates to continue to drop, although, as you said ,they have dropped some. And the report says, "They may also have been held up last year by an increased likelihood of federal budget deficits and investors' optimism about future economic prospects." Now that's another issue. Some have argued that the budget deficit is irrelevant or has only very slight relevance to long-term interest rates. Would you elaborate on that?

GREENSPAN: I've always argued that there is a relationship, and indeed I think the markets respond as though there is a relationship, and I think quite properly so.

FRANK: But if the markets respond that way then there is, obviously.

GREENSPAN: Of course.

FRANK: So you think there is a -- you're unusually reticent. I hope it's not simply the reluctance to disagree with the administration that gives this the shortest answer I've ever heard you give on an important issue.

(LAUGHTER)

Would you elaborate a little more? Do you believe that the switch in the federal fiscal situation from expected surplus to expected deficit has had an impact on keeping long-term interest rates from dropping as much as they otherwise might?

GREENSPAN: No. As I've commented and testified previously, I do believe that the extent to which interest rates have not come down as much as they ordinarily would have in a period, say, such as this, is partly the result of a change in the long-term fiscal policy.

FRANK: (OFF-MIKE) to talk to Mr. Hubbert about.

GREENSPAN: I agree with most of what he says, however.

OXLEY: The gentlemen from Louisiana, Mr. Baker?

FRANK: Well, the Republicans can ask you that, Mr. Greenspan.

BAKER: Thank you, Mr. Chairman.

Chairman Greenspan welcome. I wanted to return to what I believe is the underlying economic perspective of the statement this morning, which is essentially that an information-based economy must have access to accurate free-flow of information in order for it to function properly. Even with the free-flow of such accurate information, that would not predetermine the advisability of some particular capital investment decision. But real-time accurate information enables proper balancing of equities to minimize potential market distortions which have resulted from the release of misleading data.

BAKER: Thus any revision of a rule, regulation or statute that provides for additional transparency responsibility for disclosure of material, even more forward-looking statement responsibility should, to the contrary opinion of some, minimize, not enhance, market volatilities.

As I understand your statement, reputation capital or the belief that a nonmarket idea has significant value underscores the need for meaningful corporate disclosure.

Additionally, it is appropriate I think for careful review of all corporate governance standards, given the fact that reputation has driven many investment decisions.

Some have suggested that government regulation can move faster than the markets to preclude unwarranted activity. I don't believe that is well-founded. Certainly smart investment individuals know that Rule 10(b)(5) exists and fraudulent conduct can take you directly to jail without going anywhere else first. And for those who choose to distort and misrepresent, government can provide for consequences of that inappropriate behavior, but we can not preclude such behavior.

However real-time disclosure of accurate information to the markets provides a much more difficult problem for those who choose to pursue ill-advised course, and that is inability to secure the capital in the first place to engage in an ill-advised investment practice.

Therefore my question goes to the advisability of the committee's future work, not only to examine but to modify, where justified, disclosure requirements, the matter of disclosure, the nature of the disclosures to be made, the timing of the disclosures, to define more clearly the responsibilities of corporate executives and members of the board not only to disclose material facts, but to ensure the independence of the audit team in reporting of the accurate financial condition of the corporation.

Such a system should ensure that markets, and by that I mean every investor, has a platform to make a decision from which real information leads to sound investment strategies; not always success, but the best possible strategy one can devise from his own perspective.

BAKER: Looking backward, Rule FAS 133 (ph), for example, on the retreatment of derivatives reporting, even the fair disclosure regulation I would suggest, has not resulted in the type of disclosure regimes which I think enable competent investment decisions to be made. And we should be encouraging real-time material-fact disclosure, forward-looking statements in order to ensure that information flows precedent to the decision being made. Can you comment?

GREENSPAN: Yes, Congressman, I generally agree with the whole thrust of your remarks. Let me just say this: that it's a very complex issue, and clearly, as we move toward an increasingly conceptual environment, the values that are relevant to producing future income flows, and hence the market value of a firm, depend very much on -- as I said in my prepared remarks -- ideas which you cannot physically feel.

BAKER: Let me interrupt on that -- particularly on that point. A report that indicates the historical position of the corporation which is 90 days old does not indicate where an idea-driven corporation is going in the next 30 days. And the reporting system itself leads to some misrepresentation in the investor's mind.

GREENSPAN: I think that is a very relevant consideration. I would say that, in periods in the past when most wealth was visible, in other words, you had automotive plants, petrochemical feed stock operations, steel mills, there was the real assets which one could evaluate, and you couldn't spend what your open hearth furnace capacity was. It was real.

In today's environment, it is very important that the form of disclosure essentially fit the nature of the value-creation process.

BAKER: And that the disclosure is complete, so there's not off- balance-sheet obligations which do not reflect the true financial condition of the corporation.

GREENSPAN: I would say however that it is important to remember that no matter what you do, unless you change the incentives to game the GAAP accounting system, it will be gamed.

BAKER: Well, if an executive has a no-cost option...

OXLEY: Gentleman's time has expired.

BAKER: Just brief -- three seconds.

If an executive has a no-cost option, can run up the stock price, capture that, and then do a restatement of earnings six months later, the shareholder takes the loss; the executive doesn't. I think that's something we need to look at.

GREENSPAN: Agreed.

OXLEY: The gentleman from Pennsylvania, Mr. Kanjorski?

KANJORSKI: Thank you, Mr. Chairman.

Mr. Chairman, following up on Ms. Maloney's question on terrorist insurance, we're going to have a hearing later on this afternoon on that very issue to see whether or not -- what the risk is to the economy.

But I would like to find out whether or not the Federal Reserve has gathered any evidence that demonstrates that this has caused a drag on the economy, or what the potential future is. And most of all, how you see the potential (OFF-MIKE) exposure of our banks, and has there been any use of the failure to acquire terrorist insurance as a default mechanism in some of our financial institutions?

GREENSPAN: Congressman, we haven't seen any impact of that nature on the banks. Indeed, much of the problem is it's presumed that banks won't lend unless a particular borrower has forms of insurance which previously they did not need.

So, the problem is not threats to the banking system. The problem basically is whether or not types of real estate activity which occurred in the past very readily is being held up, whether construction is being held up, whether, in fact, there's a significant impact on the economy.

To date, in an aggregative sense, it does not appear to be the case. We are still struggling to get enough adequate data to make judgments, but clearly there have been effects.

GREENSPAN: What we do not know is what the aggregate size of those effects are, because we largely are dealing with anecdotal rather than macroeconomic data systems.

Hopefully, at some point we'll be able to get considerable more information. But at this stage, I think it's actually too early to make a judgment of that type.

KANJORSKI: But could I assume, though, that you feel the Congress should take action and provide some sort of backstop?

GREENSPAN: I personally do, yes.

KANJORSKI: Now, moving to an entirely different matter, the Federal Reserve and the Treasury Department have under consideration a proposal that would allow national banks and financial holding companies to engage in real estate management and brokerage, and the proposal has attracted considerable opposition here on the Hill. As you know, in passing the Gramm-Leach-Bliley Act, Congress did not intend for banks to engage in commerce, but this proposal, in my estimation, would subvert congressional intent. What is the status of this ill-conceived regulation, if we could get a report?

GREENSPAN: Well, Congressman, as you point out, there has been considerable discussion on this issue and the consequence of that is an extraordinary amount of comment that we have been getting as a consequence of our request for comment on various different types of rulings.

The result is, we have a lot of processing to do, so we will work through it. And obviously, since we have to coordinate with the Treasury Department, we will move as quickly as we can. But at the moment, it's going to be, in my judgment, a while just effectively dealing with the processing of comments that we have so far today.

KANJORSKI: Thank you, Mr. Chairman.

I yield back my time, Mr. Chairman.

OXLEY: The gentleman yields back.

The chair now recognizes the gentleman from the first state, Mr. Castle.

CASTLE: Thank you, Mr. Chairman.

Chairman Greenspan, let me preview a question I'm not going to ask you, but I'd like to submit in writing to you. And I know you've probably heard it before, but it relates to the creation of money and the selling of money by the United States, the Bureau of Engraving and Printing and the Mint, which, as you know, are done fundamentally differently. And it seems to me that the BEP's methodology is clear, more transparent, in terms of what they're doing, and also accounts for the dollars in a better sense.

At the Mint, I think the way they do it has a lot of obfuscation to it, that, perhaps, there's some controls on the Mint which are not totally in place; not that they're doing anything wrong with it. And obviously, it doesn't score income for Congress.

And the 50-state quarter program, which I was involved with, is going to produce now $5 billion to $10 billion in so-called profits. And that's something I think we need to look at. I'll submit that in writing.

My questions I want to ask you today relate to the economy, if you will. A year ago your outlook report delivered here predicted, and I quote, "stronger economic additions to emerge as the year progresses," end of quote, with the economy growing at a rate of 2 percent to 2.5 percent. The report also said that, and I quote again, "and end to profitable and investment opportunities in the technology area does not yet seem to be in sight" -- I guess, that was a longer term than a year statement -- "since households and businesses are still in the process of putting recent innovations in place."

Even without the 9/11 attacks, it does not appear the economy would have achieved the results -- the 2 percent to 2.5 percent results. To what do you attribute this under-performance?

GREENSPAN: Well, Congressman, I'm not sure that that statement is accurate.

CASTLE: (OFF-MIKE)

GREENSPAN: Well, no. I think it was less, but not all that much less. As we were going into the month of August, the economy was clearly gathering some stability and, as we've seen what's happened in the last few months, I'm sure we would not have made the actual -- the Federal Open Market Committee's forecast would have fallen short, but I'm not sure it would have fallen short by a particularly large amount.

CASTLE: So you're saying without September 11, we would have come close, even though we might not have achieved it.

GREENSPAN: Clearly, without September the 11th, the third quarter would likely have been no change or maybe a small plus or very small minus, and the fourth quarter would probably have done better. Now, whether or not that would have added up to the figures that we have, I don't know. But I think that the quality of the forecast, if I may differentiate from the numbers, was not all that far off, in my judgment.

CASTLE: Let me extrapolate on that and carry it to the future, which is what I guess what we're all more concerned about right now.

Economic indicators demonstrate that we are coming out of the recession, at least some of them do that I've seen, if we're not out already on a technical basis. I would like to factor into that what the economic impact of the long-term war on terrorism may be, which I think it is going to be, and also the Enron effect, which appears to be reduced capital markets of a substantial nature and other corporate uncertainty which is going on out there.

Will these eventually trigger a recession -- going back into recession? If so, what steps should we be taking in Congress to prevent or mitigate this?

GREENSPAN: Congressman, I think not. Indeed, as I said earlier, I think, after the fact, we will look back on this Enron episode as a period when we put our corporate governance back on track, which would not have happened without it, in my judgment -- not fully. That is favorable to the long-term outlook.

If it were going to have a significant impact on the economy in the short run, we'd already be seeing it, Enron or not. And I don't deny that there may be other Enrons out there which we just have not -- that have not been exposed; that's conceivable to me. But it cannot be a large issue. Its almost too late for it to have had delayed effects which would be material. If they were going to occur, much of what we would have seen, much of what would have occurred would likely occur earlier rather than later.

CASTLE: I mean, I don't mean to get into an argument with you about this -- you know much more than I do -- or split hairs. But it does seem to me that some of these effects could be long-term...

GREENSPAN: Oh, yes. No, I...

CASTLE: ... in the Enron situation, much longer-term than we've seen, in terms of the accounting aspect of it, the effect on the corporation, capital markets, just a whole variety of changes which are going to occur.

GREENSPAN: Yes, Congressman, I don't deny that. I'm just basically saying that the order of magnitude is not material for the long-term outlook. It will affect it: There's no question that there will be long-term effects of Enron, and I think that's good, not bad.

OXLEY: The gentleman's time has expired.

The gentleman from Vermont, Mr. Sanders?

SANDERS: Thank you very much, Mr. Chairman.

It's nice to see you again, Mr. Greenspan.

GREENSPAN: Thank you.

SANDERS: Mr. Greenspan, as the nation's chief economist, I would like to tap your expertise.

Over the years, I think, as you know, you and I have disagreed on some major economic issues. As I recall, the last time you were here, you informed us, to my amazement, that you actually believe in the abolition of the minimum wage at a time when many of us think we should substantially raise the minimum wage.

But I also have a very difficult time in recognizing the kind of rosy economy that you are portraying, and that is not the economy that I see in Vermont and not the economy I think that exists in many areas of this country.

SANDERS: The reality is, as you know, that tens of millions of Americans today are working longer hours for lower wages. Twenty-five or 30 years ago, when you and I were a little bit younger, the norm was that, in the middle class, one breadwinner, one person could earn enough money to take care of the family. And today, for the middle class, that is very much the exception to the rule. The statistics are rather amazing about how many two-worker families there are because of the decline in real wages.

With a $400 billion trade deficit. Some folks -- my colleagues -- talked about steel, but it's not just steel. We have lost millions of decent paying manufacturing jobs to China, Mexico, and elsewhere, and they're often being replaced by part-time temporary jobs in the service economy which have no benefits, which are low wage.

We have 44 million Americans who have no health insurance. Millions of senior citizens can't afford their prescription drugs. One end of the country to another there's a housing crisis. Middle- class families are paying 50, 60 percent of their incomes from housing. Families are going in debt to pay for college. The child care situation is a national disgrace. So I don't quite see the economy that you are talking about for the working families of this country.

But, in fact, the issue that I wanted you to comment on had to deal with a front-page story that appeared in the Wall Street Journal on Monday. And that dealt with the growth of economic oligarchies in this country, and the reality that a small handful of corporate executives have enormous power today over the U.S. economy and perhaps never before in our history have so few people had so much power over the American economy as is the case today.

The Wall Street Journal gave some examples, and let me give some others. Twenty years ago, there were thousands of small cable TV companies; today, a pending deal would leave three companies in control of two-thirds of the market. We used to have many defense contractors selling defense products to the government; today, there are five. We used to have many -- at least eight baby Bell telephone companies; today, there are four.

In terms of the media, fewer and fewer giant media corporations control television, radio, newspapers and magazine. Oil -- in the wake of oil company mergers, five companies control more than two- fifths of domestic production. Agribusinesses; five firms now account for over 80 percent of the beef-packing market; six firms account for 75 percent of pork packing. Airline competition is almost nonexistent in many parts of this country.

So my question to you is, has the government been too lax in terms of enforcing antitrust regulations? Have we allowed fewer and fewer corporate executives to have huge amounts of economic power by controlling industry after industry? Is it morally right that CEOs of large corporations now make over 500 times what their workers make, and seem to make more money to the degree that they lay off American workers? Does any of this -- do you have any concern about any of these issues?

GREENSPAN: Well, Congressman, let me just say, there are a few qualifications I would make to the data that you cite.

First, to be sure, there has been a very considerable consolidation of defense procurement activities, because the defense budget, as a percent of the GDP, is very much smaller than it was in periods past. So when you have a declining industry, you'd expect that to happen.

SANDERS: $700 billion is not insignificant...

GREENSPAN: $700 billion is a good deal less than the -- remember we were talking about the relationship with the economy. So that if you go back 20, 30 years, the proportion of the economy which represented defense was much larger, and you can afford -- well, put it this way, there was enough business for a much larger of number of companies to function.

SANDERS: But it's not just Defense, Mr. Greenspan.

GREENSPAN: No, I understand that. I think we're down to -- to be sure there's been a consolidation in the oil industry, but remember that a very significant change has occurred in the last generation or so, when most of the oil -- a very significant part of the oil- producing properties have effectively been taken over by host countries, especially in the Middle East, so that the nature of the international oil companies have changed.

Now I'm not going to say what is in the media. The media is a very significantly controlled operation. That really gets down to what government policy should or should not be.

But we have an extraordinarily competitive economy today. It's more competitive than I ever recall it, and indeed the international aspects of the competition is one of the reasons why I think, contrary to the remarks that you've made, that the standard of living of this country is higher than it's ever been on average, and two...

SANDERS: I respectfully disagree with you on that. And I think the facts do not speak for what you said.

OXLEY: The gentleman's time has expired.

Does the chairman wish to continue?

GREENSPAN: I just, basically, wish to stipulate that we have an extraordinary standard of living. I don't deny that there are, as there always will be, significant parts of our population which are basically in difficulty in one form or another with respect to the economy. I think we ought to work as hard as we can to alleviate that.

But I don't think it changes the fact that the economy is doing extraordinarily well in an historic context; that all of the data that most economists would adhere to prove the standard living is higher than ever before on average; and if you wish to dispute that then, to be sure, we do have a very significant disagreement, as we always do.

OXLEY: Gentleman's time has expired.

Pivoting from one corner of the philosophical divide to another, I now recognize the gentleman from Texas, Mr. Paul.

(LAUGHTER)

PAUL: Thank you, Mr. Chairman.

Welcome, Chairman Greenspan. I want to start by referring to a speech you gave on January at the American Numismatic Society, where you spoke profoundly about monetary policy, where you expressed that central bankers have had this relative success over the past decades, and it raises hopes that the fiat monetary system can be managed in a responsible way. So I think you're still at that point of hoping that this system will work. I maintain that the jury is still out on whether fiat money will work on the long term.

And then you foiled it up by saying, in case it didn't work -- and I don't know whether you had tongue and cheek or not about this, but you said that we might have to go back to seashells and oxen as our medium of exchange. And then you reassured everybody that the open discount window would have an adequate supply of oxen.

Chairman Oxley, if we get this point, which I suspect we will some day, I ask you that we have hearings to debate the issue of what medium of exchange that we have before the Fed starts using oxen as a medium of exchange.

OXLEY: Are you referring to the chairman here?

PAUL: Yes. I hope that you will at least consider that.

But I think it is an important point, and I relate that to the Enron issue, because in many ways I think the system that you have been asked to manage it's similar to being asked to manage an Enron system. Because Congress is notoriously in favor of deficit spending; we are currently expanding the national debt at $250 billion a year and we have nearly a $6 trillion debt.

PAUL: Now, we create that debt by buying votes. We spend a lot of money.

Now, the Federal Reserve comes in and they buy that debt in order to maintain the interest rate that they think is the right interest rate, and they take that and use it as an asset. You put it in the bank, you call this debt that we created as an asset, and you use it as collateral for our Federal Reserve notes.

So that's a pretty good scheme. And I think in the moral terms, as well as the economic terms, it's very similar to what the Enron -- how Enron operates.

I'm not convinced this system works very well, because a lot of people here praise you for the adequate amount of liquidity -- and that's what inflation is: create more money, lower interest rate. Every time you ask for liquidity, every time you ask for lower interest rates, you're asking for inflation of the money supply.

And I think what we fail to do is every ask about the cost. Do we ever concern ourselves about the people who have had two-thirds of their income removed because they happened to be savers and living off interest, we gouge them with inflation, the loss of purchasing power, as well as taxing that, and yet a lot of people in this country have suffered from that particularly system?

Now, the analogy I would like to draw is something you said in your testimony on page 13, and you have mentioned several times now that Enron may be a good lesson. And I think it is. And I'm not for more of this regulation by SEC. I think you're correct that derivatives provide a market tool that is worthwhile.

But you said, "The Enron decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation, with very little, if no, physical assets." That's exactly what our monetary system is all about, and that's what I believe the dollar is vulnerable.

We in Congress do not have a responsibly to run Enron. Some other government has a responsibility to deal with fraud. We have a responsibility to the dollar. And I think that's what we fail so often to address around here.

And you said that, "Enron provides encouragement that the force of market discipline can be counted on over time to foster a much greater transparency." That's exactly what the market does with money. If you look at the rapid and the sudden devaluations of the fiat currencies around the world, if you look at what happened to us in '79 and '80, that was the market coming in and forcing vulnerability and transparency on us.

Now, gold gives you a hint as to what's happening. Gold has sent a mild message in this past year, in spite of the fact that central banks and others continually sell and loan out gold and pushing the price of gold down. But there is a message there.

So I would ask you, can you see any corollary whatsoever on what you're asked to do in running our monetary system to that which Enron was involved in?

GREENSPAN: I hope there are fundamental differences. I mean, there are -- first, dealing with essentially a fiat currency, what it is that we are doing is that the currency is granted value by fiat of the sovereign, as it is said in the textbooks. The issue there is that, in years past, there's been considerable evidence that fiat currencies have been mismanaged in general and that inflation has been too often the result.

What I was mentioning in the speech that you were referring to is the fact that there is some evidence that we're learning that lesson, learning how to manage a fiat currency. I've always had some considerable skepticism about whether that in the long run can succeed, but I must say to you, the evidence of recent decades is that it has been succeeding. Whether that continues is a forecast which I can't really project on.

The Enron situation is essentially one in which there was an endeavor to imply that earnings were much greater than they really, that increasing debt was hidden.

GREENSPAN: I think of no reason to have done what they did with their off-balance-sheet transactions other than to obscure the extent of the debt they had. And what essentially was squandered in that process was the reputational capital which they had succeeded in achieving over a period of time.

And I don't perceive that anything that we are doing as a central bank involves anything related to that. I hope that where we need to be transparent and indicate what we are doing, we do so, and we so except in those areas where it, as I mentioned to you previously, inhibits the ability to actually function as a central bank.

But as I say in summary, I hope your analogy is inappropriate.

OXLEY: The gentleman from California, Mr. Sherman?

SHERMAN: Thank you.

Thank you, Chairman Greenspan, for an outstanding presentation. As before, I've got far more questions than the five minutes allotted. So as in the past, I'd like to start off with some questions that I would hope that you and the Fed staff would respond to for the record.

We met here a year ago. Of course, you come every six months, but a year ago is the last time I had a chance to ask you a question. And we dealt with the incredible trade deficit, and I coined the term "trade debt," that is to say the trade deficit building up year after year, the transfer of assets abroad. And I'm still amazed that the dollar sells for more than the euro, and that we hope that this trade debt and deficit reach a soft landing. I don't know anyone who could have predicted that a country could run a trade deficit as long and as large as we have and still have such a strong currency.

I'd like to restate the concern that I expressed to you in this room a year ago and echo the comments of Mr. Kanjorski that real estate brokerage was never designed to be something included in the grant of powers to national banks and other financial institutions. Not only is it bad public policy, but I think that if the bank regulators go down that road, it will undercut your relationship with Congress.

We were in this room for literally hundreds of hours over a half a dozen or more years trying to paint a picture for ourselves as to what financial reform would mean and under particular statutory texts. None of us in this room ever put forward the idea that the bill we would pass would open this huge industry to those insured financial institutions.

And I noted that you have not acted precipitously in this area. You indicated that you're going to wait for a chance to respond to all the incoming comment. And if what it takes to avoid more precipitous action is additional incoming comment that needs response, I'm sure that can be arranged.

First, as to economic stimulus, there's two ways to do it: monetary and fiscal. The monetary has immediate effect: You could meet in the next day; the interest rates are lowered. It may not have an immediate impact. Fiscal takes months it seems for the IRS to even get the checks out to even have an effect, let alone an impact. Yet it's odd that this country is now thinking in terms of fiscal stimulus and monetary sedative, for want of a word to express the opposite of stimulus.

First, let me urge you to consider cutting interest rates one more time instead of increasing them. But second, assuming -- putting aside your well-known preference for lower total federal expenditures, and assuming those expenditures are going to remain the same, does it make any sense for Congress to be thinking of fiscal stimulus, while the Fed is at least rumored to be considering monetary sedative?

GREENSPAN: The problem with fiscal policy, as economists have come to realize over the decades, is that it's very difficult to implement in a timely manner, largely because our capacity to forecast in a specific time frame itself is limited.

GREENSPAN: Nonetheless, as I indicated over the last year or two, if it turns out that you can fortuitously time a tax cut in a period of economic weakness, it obviously does do some good.

I do think that the tax cuts of last year, in the middle of the year, did show up as increased expenditures in July and August. That's not the way they were constructed in that timing, but they turned out to be actually quite effective, as best I could judge.

But the broader question still remains whether it is possible to implement an effective fiscal policy with the inevitable time lags that are involved. I'm skeptical myself that it is feasible.

SHERMAN: Do we need stimulus at this time; let alone, is there any evidence that we need stimulus six months from now or a year from now?

GREENSPAN: Well, the question really rests on whether the level of final sales will kick in, as I put it in my prepared remarks, prior to when the obvious significant positive thrust coming from a reduction in inventory liquidation dissipates. It's too soon to make that judgment at this particular point. So one can argue that if one believes that it might not, that as an insurance policy you might want some fiscal stimulus.

My own impression is it's probably not necessary, as I indicated in previous testimony. But there is a credible argument for it as an insurance policy for those who believe that the economy may be at risk of not being able to follow through after we get the inventory turnaround.

OXLEY: The gentleman's time has expired.

The gentleman...

SHERMAN: If I could have just 10 seconds...

OXLEY: The gentleman from California, Mr. Cox?

COX: I'd yield 10 seconds to my colleague.

SHERMAN: I just want to point out that the cheaper insurance policy is for you to cut interest rates, which would have the stimulus effect if that was determined to be needed without increasing the national debt.

I thank the gentleman.

COX: Mr. Chairman, welcome.

As you point out in your testimony, the proper functioning of our markets depends upon investor confidence, and the Enron debacle, which is in major part an accounting scandal, has eroded public confidence in, among other things, financial reports generally. It has put a glaring light on the role of directors, particularly members of the audit committee. It has cast into doubt the adequacy of the entire accounting profession.

To address these problems, you, regulators, Congress, the SROs and the private sector know that we have got to take every responsible step to increase auditor independence, to strengthen the role of the audit committee -- of an independent audit committee, to fortify the accounting profession to attract highly skilled, intelligence people of integrity.

COX: And yet, if we survey the lay of the land today, we know that the market forces and trends and the incentives are all running in the opposite direction.

At a time when we need the very best people to serve on boards, the risk of such service is greater than ever. We can ask ourselves, based on very real experience of late, who would want to volunteer for service on an audit committee of any large enterprise today. Whereas 30 years ago, many top graduates of the nation's business schools headed for the accounting profession, that's no longer the case, and Enron has almost certainly made the problem worse.

The question I'd like to put to you is what we as Congress can do and what the private sector can do, what regulators and SROs can do, to address the problem of auditor compensation while still -- or not while still, but while actually increasing auditor independence? What can we do to encourage people of character and reputation to risk those irreplaceable assets to serve on the boards and the audit committees of the nation's businesses?

GREENSPAN: Congressman, this is an issue which the president's working group is deeply involved in at this particular stage.

One of the things that I think is becoming evident is that the change in corporate governance which has occurred over the generations, where you'd very rarely now have shareholder control in a limited number of hands so that, effectively, the directors are appointed and work for the shareholders, and the CEO is appointed and work for the directors; the fact that such a substantial amount of shareholding is now for investment and not for control has effectively switched the locus of control from shareholders to the CEO. And if the CEO endeavors to run the company wholly in the interests of shareholders, then there's no loss in the structure of corporate governance.

And it's in our judgment that what we have to start to do is to try to find those areas where the CEO's self-interest is diverged from that of shareholders, and try to find means and incentives which would restore what I think was the case 20, 30 years ago before short-term earnings expectations became such a critical issue in what individual corporate managements were able to do.

My own judgment is that you have to be careful about trying to presume that directors are really, truly independent. I've served on innumerable boards in the private sector, and there was an asymmetry of information between an insider in the corporation and an outside director which will never be brought together.

The result of that is that it is crucially important that the incentives require that the CEO behave in a certain manner, or be incentivized in a certain manner.

I've served on too many audit committees to know that, even though I would consider myself independent, I would consider myself knowledgeable, I did not know what questions to ask the chief financial officer during meetings to find out what is it that conceivably is going wrong in the corporation, and he wasn't about to tell me. So that there was a very difficult problem that one confronts.

And the mere presumption that you somehow make a bunch of people independent and have an independent audit committee, it won't work that simply. Because if you make everybody on the board independent, what's going to happen is you're going to have competing power centers both in the corporation. And in my judgment, corporate governance will suffer as a consequence.

GREENSPAN: So I think we will have to rethink...

COX: I wonder also if you're making the case for the complexity of the problem, I wonder if you could address the concern which, no matter how we address corporate governance issues remains, and that is how you attract quality people. Because I think we're going to see -- I think the accounting profession's taken a hit. I think that the ranks of boards and audit committees are going to take a hit, and we've got to have good people in these positions if we're going to lick these problems.

OXLEY: If I could interfere just briefly, we have a vote on the floor. Make that the last question: The chairman could respond, and then we'll take a break for the vote.

GREENSPAN: OK. Well, why don't I answer it later then if that's the case?

COX: Well, I'm happy to put the question to you now and hear your response and not put any further questions, so that we can then wrap it up, Mr. Chairman.

OXLEY: Yes. If the chairman would like to respond...

GREENSPAN: What specific question do you want to ask quickly?

COX: The brunt (ph) of my question is we are seeing increasing risks to the individuals who we want to be even more responsible than they have been in the past, and we've got to attract persons of training and integrity to these positions. What structurally can you recommend to the Congress that we might do to fortify the accounting profession and the ranks of our directors?

GREENSPAN: It's my impression, on the basis of experience I've had in the innumerable number of boards on which I have served, that if you get a chief executive officer who looks toward his outside auditor as somebody to tell him what he is doing wrong, rather than somebody who should try to acquiesce in a particular set of accounting principles, he will change the whole nature of the relationship between directors, CEOs, and he will certainly create the type of independence of the audit function that will attract numbers of people back into the accounting profession and create the type of directors who will be most effectively helpful to the CEO and to the shareholders in getting appropriate corporate governance.

OXLEY: The gentleman's expired.

The chair would declare a recess of the committee for the vote. We will reconvene in 10 minutes.

(RECESS)

OXLEY: Committee will come to order.

And the chair now recognizes the gentleman from Pennsylvania, Mr. Mascara.

MASCARA: Thank you, Mr. Chairman.

I'd like to revisit the steel crisis issue, Mr. Chairman. I come from southwestern Pennsylvania, where steel and coal used to be king. And as we all know, there is an apparent steel crisis. The steelworkers will be here tomorrow at a rally to stand up for steel, and I certainly will visit with them.

First of all, I happen to believe that the steel crisis is a microcosm of our failed trade policies. And don't want to get into that, because that's a long story.

But I respectfully disagree with you in an earlier comment to a question about what effect tariffs would have on steel and that perhaps prices would increase as a result of even as high as 40 percent -- the president on March the 6th will make a decision about the percentage of increase on steel tariffs. I don't believe that I've seen any decrease in the cost of automobiles, appliances as a result of the consumer consumption or the domestic steel users in this country of that cheap steel passing that profit on, or any part of it, to the people who buy automobiles and appliances. That's one point I want to make.

And I'm wondering whether you have any feel for what the president -- and not asking you to guess the president -- but what the president should do in regards to the March 6 decision that he has to make.

On Sunday, I was on KDKA television in Pittsburgh with the CEO of Weirton Steel that employs 3,500 steelworkers. He said that 20 percent would be of no help and that eventually the steel industry would die on the vine; that companies continue to go into chapter 11. In fact, Wheeling-Pittsburgh Steel, plant in my district, is now in chapter 11. And I was wondering whether you had any feel where that number should go, from 40 percent down, given that 20 percent won't work.

GREENSPAN: Well, first of all, I'm not clear as to what you mean if you put a tariff on that the price will not go up. If it doesn't go up, then it has no impact on the domestic steel price that the traditional steel operations are still under severe pressure, because their margins are not going to change. I'm not sure, if a tariff doesn't increase the domestic price, its impact on domestic profitability and employment is zero.

MASCARA: What I said, Mr. Chairman, is that the savings that the domestic users of steel to make their products with, that saving has not been passed on to the consumers.

GREENSPAN: Well, if it hasn't, then the profits of the steel- using industry must have risen significantly, and there's no evidence of that happening, Congressman.

MASCARA: Well, I don't have those facts here, but there is a concern that the steel industry will cease to exist. Have you considered the national security impact? Bethlehem Steel, which is one of the only producers of the steel that's used in the ships and tanks, is also in chapter 11 now.

And do you feel that if the steel industry does, in fact, cease to exist in this country -- those kinds of talks are going on currently -- what will we do in the event that we need to produce that kind of steel? Will we have to depend on foreign production of that type of steel?

GREENSPAN: Are you talking about defense?

MASCARA: Yes.

GREENSPAN: You're talking about steel plate...

MASCARA: Yes.

GREENSPAN: Well, first of all, I don't believe that it's credible to presume that the steel industry will no longer exist, because half of the mills, as you know, are electric arc furnace steel scrap consumers, and while they're under some pressure because of the obvious weakness in steel prices, they're doing reasonably well, and there's no evidence of which I'm aware which suggests that they're going out of business.

The crucial issue that really is involved with the notion of the traditional steel industry is there are certain types of steel which cannot be made effectively in a scrap furnace. In other words, the chemical control that you have of the scrap makes it difficult to create the type of steel which, for example, you need in an automobile for forming purposes and the like. And so that there is a need in the country for a certain what I would call ore-originated steel, because you can essentially control the metallurgy in an appropriate manner.

But that's not a very large number, and indeed, as you know, there's a good deal of slab imports which are made from ore and which are rolled into a type of cold-rolled sheet which the automobile manufacturers need.

As far as steel for defense, the amounts that we need are extraordinarily small, and I'm not convinced, at least from what I understand it, that with the appropriate amount of pellets within, say, a scrap mix, that a goodly part of the actual heavy steel that we need is not available.

But in any event, I mean, there's certainly not going to be a disappearance of the traditional steel industry. I do agree with you that it's under severe difficulty. And as one who's old enough to have visited the old Homestead Works when they were really extraordinarily effective and productive, I know what it means for that type of industrial structure to fade.

MASCARA: My time has expired, but apparently we disagree on some issues as it relates to the stability of the steel industry. There are hundreds of thousands of retired steelworkers who now may lose their health care and pensions. I think the president ought to do something and do it very quickly.

Thank you, Mr. Chairman.

OXLEY: Gentleman's time has expired.

Gentlelady from New York, Ms. Kelly?

KELLY: Thank you, Mr. Chairman.

Mr. Greenspan, you've been here a long time, and so I really want to make this fast, but I noticed something that I wanted to ask you about.

We saw in the news this morning the Commerce Department said that durable goods rose by 2.6 percent in January and they rose in December by 0.9 percent. But in your testimony, on page 4, you said, "As a consequence, although household spending should continue to trend up, the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles."

That seems to be somewhat in conflict with the numbers, and I wanted to know if you believe that this is a trend in durable goods and one that's likely to continue or would you -- I wonder if you'd address that for me.

GREENSPAN: I would say, looking at the data we saw today, and clearly it's encouraging, that the markets are coming back, but they went down an awfully extended way, and they were under really severe pressure. So I think that it's going to take a while to be sure that we're getting the type of response that we're going to ultimately need.

There are a number of elements in the capital goods markets which are still quite weak, and indeed some of the anecdotal stuff especially. And in telecommunications area, for example, orders are not showing very much.

GREENSPAN: They did improve in this morning's numbers, and that was encouraging.

But all I would say to you is that, yes, the durable goods orders were somewhat better than I would have expected this morning; that if they continue that way, then I think things will clearly improve. But it's too soon to make those types of judgments. You need a good deal more time to see that this recovery is taking shape in integrated form.

KELLY: So you don't feel that the numbers with -- over the past two -- I know that the projections in December has projected zero growth, or negative, and we got a 0.9 percent. And here we are in January with a 2.6 percent. You're saying that you don't feel that that yet is enough to make a trend?

GREENSPAN: No, I think it's certainly enough to indicate that the hypothesis that we're coming out of what has been a period of significant stress, that the probability is improving. It's nonetheless still early in the sequence.

KELLY: Let me just throw something else in that equation. According to the National Association of Realtors, existing home sales for January set a monthly record. They topped out the 6 million mark for the first time.

On page five of your testimony, you say, "In recent months, low mortgage interest rate and favorable weather have provided considerable support to home-building. Moreover, attractive mortgage rates have bolstered the sales of existing homes and the extraction of capital gains embedded in home equity that those sale engender."

With all that said, do you feel that this is a trend in the new home sales? And do you think that's a sustainable trend for the near future, or do you think that trend may slow down?

GREENSPAN: You mean the 6 million annual rate figure that -- that's clearly not going to be sustained. I mean, there's just no evidence that we're off on a different track.

Because remember that existing home sales is essentially a rate of turning over of the existing, essentially, single-family housing stock plus condominiums. And historically, that ratio doesn't change all that much. It's a gradual change in households, and the turnover is related very largely to demographic forces, as well as the obvious economic forces which I cited.

So if you're asking me, do I think the 6 million number will stay up there, I think unlikely. But nonetheless it's still impressive.

KELLY: But you do -- would you say that you feel that the trend toward increasing home sales would continue, whether it hits that mark or not?

GREENSPAN: Well, I think the trend of existing home sales has been relatively flat at a reasonably high level for quite a long period of time. And if we can even maintain that I think we're doing well.

KELLY: Thank you very much. My time is up.

Thank you, Mr. Chairman.

OXLEY: The gentlelady's time has expired.

The gentleman from Washington, Mr. Inslee?

INSLEE: Thank you.

Mr. Chairman, we've all been talking about the concerns about Enron and the prospect of other Enrons out there, of other organizations that would overstate revenues and understate costs.

And I know of at least one other large organization that's exactly in that position of deceiving, essentially, their shareholders in that regard -- you're smiling; you see where I'm going with this -- which is the United States federal government.

And it's my belief that our deceit of our shareholders, sort of, makes Enron look like small potatoes, considering the phony accounting that we indulge in that, I believe, is leading us to chronic deficits over the next decade unless something happens.

And let me just list three of those that I believe are phony bookkeeping that disguises the fact that we're going to have these chronic deficits. We're already over $100 billion this year, as you know.

You know, we tell the American people the tax exemptions that are now in the code aren't going to be renewed when the administration makes their projections. We all know that's not true; they're going to be renewed. Everybody in this towns knows it, including the folks in the White House.

We know that the AMT eventually is going to be fixed, have to be fixed, because so many millions of Americans will be subject to it. Everybody in this town knows that, and yet we don't tell the American people that. We base projections on that phony statement.

We know there's going to be relief for Medicare of some of the cuts that have damaged health care in this country. And everybody in this town knows that this is going to happen.

Now, assuming that's true, looking at the numbers, we're in for, at least in my view, long-term deficits somewhat approaching the history of the 1980s, which is a movie we saw once before, of big tax cuts, big defense buildup and unrestrained domestic spending.

And I guess my question to you is, if we end up back in that pickle because of our Enron-like activities at the federal level, what impact do you think that could have on the U.S. economy in the next decade?

GREENSPAN: Well, obviously, if we resort to a significant amount of deficit spending, the question essentially is, how is it financed?

And it's financed, basically, by extracting capital from the private sector. And to the extent that you do that, obviously the capital assets which are produced are generally less productive in producing economic goods than is the case when a government's drain on resources is neutral or zero, or even slightly at surplus.

So that it's merely a simple question of how it's financed and what the implications of that are. And history tells us that it's not very helpful.

INSLEE: Well, you know, I think there's another downside too, and let me just ask you about this. And that is that, essentially, the administration is financing this budget deficit by raiding Social Security.

INSLEE: And, of course, Congress and the administration has told Americans for the last couple of years that, you know, raiding Social Security was no longer going to be countenanced in this town, and that's exactly what we were doing. And now because of these phony numbers that we're posting about, we're going to be again raiding Social Security for the next decade to finance this deficit.

I've heard it expressed that that in itself is a problem when you talk about Americans' confidence. And I can tell you that people right now, because of that, seriously question whether Social Security's going to be there for them.

I was meeting with a group of young people in their early 20s. They honestly don't believe Social Security is going to be for them, and one of the reasons they do is because of this budget that the majority, and I'm not a part of that here, has passed, puts back in these deficits.

So, I guess, is that a factor that we should consider when we look at what people are doing in their personal investment decisions?

GREENSPAN: Well, first of all, Congressman, remember that the types of accounts which are kept both at OMB and CBO are reflective of the laws passed by the Congress. In other words, if the statute stipulates that a certain law is to end as of a certain date, it -- meaning well, basically CBO, because OMB can assume that its extended if it wants -- but CBO cannot. In other words, it's not making the laws; it's merely registering what the accounts imply under existing statute. So I would think that if you want to alter that, you're going to have change the statute or change the rules on which you request CBO to give you the types of data which they do.

With regard to the issue of Social Security, if the Social Security trust fund goes to zero, the chances that benefits will be curtailed, in my judgment, is zero. And the reason for that is I see no credible scenario in which the Congress would fail to adhere to the benefits as now appear in law.

So I don't think that it's a credible issue to be concerned about what is happening to the Social Security trust fund, if the issue is whether benefits will be continued. Because I've been around this town long enough to know that that's not the way it works.

And I think if you're talking about making certain we keep the books balanced, I would also suggest that we try to resolve the issues that are real, and I don't think it's a real issue. Nor do I think the American people have to be concerned about their benefits disappearing if the fund disappears.

Now, what I think younger people are concerned about is the rate of return that they're getting in benefits from the numbers that they put into the fund is much lower than, for example, my generation. I mean, you look at what I put in and what I got out, or what I would have gotten out if I had retired at 65, is an extraordinary rate of return. And Social Security was remarkably popular for my generation. I don't think it is for the younger generation, but because of the fact that they're not perceived as getting back an adequate return.

OXLEY: The gentleman's time has expired.

INSLEE: Thank you, Mr. Chairman.

OXLEY: Mr. Chairman, we're glad you didn't retire at 65.

The gentlelady from Illinois?

BIGGERT: Thank you, Mr. Chairman.

And thank you, Mr. Chairman, for staying this long to allow us to ask questions.

As you're aware, the electronic transfer of value was not interrupted by the tragedy of September 11, but as I understand it for a period after September 11 many of the banks really didn't know what their true financial position was because of -- it was impossible to move the checks and payments around the country, particularly because of the airlines not flying and for various other reasons. But is the Fed doing anything to ensure that the payment mechanism is going toward -- or using the technology, such as electrification of paper checks, to facilitate the stability of that system?

GREENSPAN: We are, Congresswoman. We were, sort of, taken aback by the extent to which the amount of telephonic exchange and data processing exchange, which presumably was supposed to be backup in the lower Manhattan area during the period subsequent to September 11 -- we had assumed that a goodly part of that backup would work. The trouble, unfortunately, is a lot of the backup went over the same cable lines that the original systems went, and were quite useless for a while. And as you point out, we had a very significant amount of float in the system as a consequence of the airlines effectively stopping and not delivering.

We have a proposal, I believe it's up to the Hill now, on truncation of checks and the effective implementation of a significant amount of electronic processing to move the checks through the system in a much more facile way.

BIGGERT: Do you think that Congress needs to pass such a bill, or that -- check truncation, or can the Federal Reserve do it through their rules and regulations?

GREENSPAN: No, I think we need legislation.

BIGGERT: Thank you.

Let me just turn for a minute just to trade. I don't think we've talked too much about that. Do you think that -- what effect would a free trade are of the Americans have on the U.S. economy? And are we -- can we afford to wait for the time it seems to be taking to get that through?

GREENSPAN: Well, I think the evidence increasingly is persuasive that the greater the amount of cross-border trade, the higher the standards of living everywhere. And to the extent that we can facilitate the emergence of greater trade irrespective of where, provided that the individual trade groups do not themselves become protectionist, then it's all to the good.

And all I can say, Congresswoman, is I trust that we will move forward expanding trade and gain the benefits and recognize that the problems that that invariable creates for a number of our industries which are under severe competitive pressures; that we recognize that we should find ways to assuage those problems.

BIGGERT: Is there any difference between bilateral trade agreements, or multilateral? Should we be looking -- if we can't get the free trade area, start with bilateral?

GREENSPAN: I would say that the greater the number of players, let me put it that way, the better. So multilateral and indeed global is by far the best. Bilateral trade is helpful, but only as a fallback position, because it is better than no trade, but certainly not as good as global trade.

BIGGERT: Great. Thank you.

Thank you, Mr. Chairman.

OXLEY: The gentleman from Kansas, Mr. Moore?

MOORE: Thank you, Mr. Chairman.

And, Chairman Greenspan, I very much appreciate your being with us again today.

Secretary Paul O'Neill recently increase the statutory limit on the public debt from $5.9 trillion to $6.65 trillion -- about three quarters of a trillion dollars. I guess my question is -- and I don't know if there's any good answer to this -- are we opening up the checkbook, so to speak, if we increase it by $750 billion, say, as opposed to $250 billion?

MOORE: Do you have any thoughts about that?

GREENSPAN: Well, first of all, I think that I'm not a great proponent of this type of legislation to begin with, because I think that the Congress enacts tax structure and it enacts appropriations, and the difference between those two is the change in the debt. To then have to reauthorize a different level of debt is very much like trying to restructure arithmetic. I mean, you've already done it, and it's not really appropriate to then put on a debt ceiling and then find yourself with contrary law. Because clearly you cannot simultaneously have your tax legislation, your appropriations and your debt ceiling -- they may not be agreement, in which case some law is being violated, and I think that is inappropriate.

MOORE: Is there any benefit, though, to such a check and saying, "We're going to have a public discussion about this before we increase the public debt any more"?

GREENSPAN: Well, first of all, I should hope one does that in the appropriations discussions. I mean, that's where...

MOORE: Sure.

GREENSPAN: ... theoretically it occurs.

The problem I have in dealing (ph) with the specific legislation is that if you're going to do it -- and as I say, that's not what I would do -- I would put it on the debt to the public, which is truly the difference between receipts and outlays in the unified budget. The inclusion of the $2-odd trillion -- a little more than $2 trillion in intragovernmental holdings, in my judgment, serves no useful purpose. And that, as a consequence of that, even granting that a debt ceiling might be usable, that's not the one I would use.

MOORE: Chairman Greenspan, you've talked about the importance of confidence of the people in the economy and how that affects the economy, and I wonder, is there a relationship between fiscal surpluses and/or debts and long-term interest rates? And I've heard some people in the past, for example, say -- and maybe this too simplistic, and you can tell me if it is -- that if we're able to pay down $100 billion or $300 billion or $500 billion in debt, that it would beneficially affect long-term interest rates.

GREENSPAN: No, I think that's right. And indeed, just remember, it's other things equal.

MOORE: Yes, sir.

GREENSPAN: I think the evidence pretty much is conclusive on that, although I must tell you that there's a very considerable degree of differences amongst economists, and clearly -- I don't want to get into the details of it, but you will find people who don't agree with that. I think everyone agrees that under extreme circumstances where, in fact, you have huge deficits and inflation is being engendered, that long-term interest rates go up. And indeed, in those types of economies you cannot sell long-term debt; no one will buy it.

But there is a legitimate dispute as to what the relationship is between surpluses and deficits. When those are in a relatively narrow range, is it conceivable that the changes are very modest? And the answer is yes, it is conceivable, and that may indeed be the case.

MOORE: One of the members said that they were happy that you hadn't retired when you were 65, and I was listening to NPR this morning, they were talking about the possibility of your departure prior to the expiration of your term. And I, for one, hope you stay.

GREENSPAN: Thank you very much.

OXLEY: The gentleman's time has expired.

The gentleman from California, Mr. Royce?

ROYCE: Thank you, Mr. Chairman.

Welcome, Chairman Greenspan.

What I wanted to ask you about specifically were some of the incentives that are currently in place for management, incentives especially in terms of the evolution of compensation packages with stock options, which at times, in some firms, have management pushing for very aggressive accounting methodologies and then, at the same time, have management deciding who is going to do the audit and then trying to influence the outcome of that audit.

ROYCE: And it seems to me that one of the questions would be, can we change the structure in some way so that either the audit committee is truly independent and truly picking the auditor -- the auditor responding to the audit committee rather than to management?

And do you do that by setting up some special regulatory structure where the audit committee reports separately? Or do you do that by maybe requiring audit insurance, perhaps; rather than the mandate of an outside audit, have the insurer, have the vested interest for transparency in the accounting?

Or do you look at these public companies that are on the New York Stock Exchange or the NASDAQ and say, "All right. Give the Exchange the responsibility of picking the auditor"?

Any of these approaches might make the audit truly representative, even in these cases like Enron's, because it would change the incentive structure. Either that or change the incentives for management's compensation, which would be another way to approach the same problem and have management act in the interest of the shareholders.

But could you maybe respond to those concepts and whether you think they're viable?

GREENSPAN: Well, I do agree that how a firm is audited and by whom is quite important.

The issue that I think is crucial here is that, if properly constructed -- the structure of corporate governance -- that it's in the interest of the CEO to see that you have an effective external audit -- and remembering, it's an audit of the internal auditing system.

You certainly want an auditor who knows your business, knows your company and, consequently, the reason why it's important to at least have the corporation either choose or acquiesce in a specific choice of an auditor is that it is quite credible to get somebody who doesn't have a clue as to what, in fact, he's auditing.

And the experience of the auditing profession is under such conditions you find that embezzlements occur far more readily in the early years of a new audit system than they do later on. So you have to be careful about unintended consequences of altering a system which has evolved over the years.

The president's working group has been instructed to look into this issue in some considerable detail, and we are in the process of doing that.

My general impression, personally, having looked at a whole series of ways of coming at this, that, because, under the vast majority of corporate relationships with outside auditors, the outside auditor not only is a good independent auditor but also is very helpful to the CEO in overseeing how his own internal system works and suggesting to him what he can do to improve the internal workings of the system.

And it's my judgment, having seen this function for decades, it's best when you have a good relationship between the auditor and the CEO.

If, however, it turns out, as I fear regrettably seems to have been the case in the Enron situation, that a number of internal strategies thought up by internal auditors were agreed to by the external auditor, only to find later on that it had to be reversed -- now, that is a very unfortunate circumstance and probably regrettably is a consequence of incentives not being appropriately positioned.

GREENSPAN: I reemphasize, as I've said to your colleagues in earlier questioning, if you can somehow find a way to create a set of incentives for the chief executive officer to function solely in the interest of the long-term values of the shareholders, then the whole issues of independent directors, independent auditors and good corporate governance system comes into play.

ROYCE: As part of that, just to follow-up, would part of that potentially be looking at the way in which proxy votes are manipulated by management and vesting more direct power in the shareholders by making changes or recommending changes in the system where management can't corral, basically, proxy votes in order to...

GREENSPAN: Well, that, obviously, is the type of thing which I think is an appropriate issue for evaluation.

The way, regrettably, the system works today is that the vast, vast majority of votes by shareholders are either 99-1, 98-2; if it's 95-5, it's perceived to be a disaster for management. Now, what that clearly tells you is that the slate of directors, the various issues presented to shareholders for authorization, largely comes from the CEO. And unless and until you change the incentives for the CEO to do things in a different way, the issue of gaming the system, the gaming the GAAP rules endeavoring to make it appear as though short-term earnings growth reflects longer-term earnings growth, so long as there are incentives for management, and specifically the CEO to do that, I don't care what else you do, it will not work.

OXLEY: The gentleman's time has expired.

ROYCE: Thank you, Chairman Greenspan.

OXLEY: The gentleman from Massachusetts, Mr. Capuano?

CAPUANO: Thank you, Mr. Chairman.

Chairman Greenspan, thank you for that last clarification. You just answered one of the questions I was going to ask you. I don't think your answer earlier was as clear as the answer you just gave in differentiating short-term interest and long-term interest. I think you just did it, and I appreciate that clarification.

One of the questions I do want to ask you, though, is, have you had an opportunity to review the CBO report that came out roughly about a month or two ago? It looked at the economic stimulus proposals that are currently floating around Capitol Hill.

GREENSPAN: I'm aware of it. But I must say to you, Congressman, I did not look at it in detail.

CAPUANO: Fair enough.

GREENSPAN: I'm familiar with the general procedures, though.

CAPUANO: OK. At some point, since you're not familiar, in general their conclusions were that the proposals currently floating around will not sufficiently or accurately stimulate the economy in a short-term basis. I would appreciate it if you and our staff could review that report and comment on it to see if you would agree with their conclusions or not. If that's an appropriate request to make of you.

GREENSPAN: What I'd like to point out, however, is remember that the agreed procedures in which they make those evaluations are what economists call a static model in which feedback affects are not countered. Everybody who works in this field knows that that's a very major shortcoming of this procedure. But because there's such dissent as to what to do with respect to the feedbacks, there's, sort of, a fallback position that we all agree, at least that's the first approximation.

So I think you have to be a little careful about making judgments as to what the economic effects of particular proposals are with a static model.

We'll be glad to take a look at it and respond to it, obviously. But I just wanted to clarify that the ability of those models to forecast, even in a dynamic sense, has not been impressive, and therefore, their ability to project the economic consequences of a program are somewhat marginal.

CAPUANO: I understand that, and I respect the limitations. But that's why I'm asking you to take a look at it, so we can have somebody else with a different view take a look at it.

I guess, the thing I always ask you when you come by relates to productivity, and a little bit on unemployment. And I'd like to start with the unemployment rate.

The numbers in the report -- not your statement, but in the report that accompanies it -- cites a 5.6 percent rate in January. Do you know whether that report -- I had read earlier that that number did not include 900,000 unemployed people who had been taken off the roles because they had stopped seeking employment. Is that an accurate belief, or an inaccurate belief?

GREENSPAN: Well, it is certainly the case that the unemployment rate is measured by the number of people who are seeking jobs in a certain actively defined way, and that the ratio of those who are employed, plus unemployed, by that definition, is the labor force. And the unemployment rate is the ratio of unemployment to the total.

To the extent that people withdraw from the labor force, either go back to school or are discouraged workers or any of a number of reasons not to be seeking a job according to the definition, they do not appear in the unemployment data.

CAPUANO: The reason that it concerns me obviously is that 900,000 is a big number. Any number in addition to that's a big number, but also as the unemployment rate whatever level it is, once it levels off, those people many of them will try to get back into the work force, therefore extending the length of time that the unemployment rate is high. And that's why I wanted to get a clarification.

GREENSPAN: Let me just say one quick question about the 900,000. That's a sample statistic, and my suspicion is that it's exaggerated because we only have 50,000, 60,000 sample of households. But the issue you're raising is a valid one.

CAPUANO: And I guess I'm going to make a comment that I've made to several members of the administration that when I read unemployment rates, I hate reading percentages alone. And I would ask that in the future as you talk about them, you talk about absolute numbers.

Even a 5.6 percent unemployment rate is 8.1 million Americans, which is larger than the work force, the total work force, of all but three states. Which is larger than the combined work force of 16 states. It's a huge number of individuals. And I just think that, out of respect to them and to get a real handle on what a percentage really means, that absolute numbers should be at least in a footnote someplace.

GREENSPAN: They actually are reported in some detail in the reports themselves.

CAPUANO: OK. I didn't see them here..

OXLEY: Gentleman's time has expired.

CAPUANO: Thank you, Mr. Chairman.

OXLEY: Gentlelady from California, Ms. Lee?

LEE: Thank you, Mr. Chairman.

Good to see you. Let me ask you a couple of things about CRA ratings, but first let me just preface this by saying that we all, on both sides of the aisle, agree that home ownership is key to the accumulation of wealth, to acquiring equity, so that working men and women, working families, minorities can send their children to college, can start a small business. I mean, equity in one's home is really the primary way that the majority of Americans ever see any wealth, in terms of accumulation.

One of the areas which many of us have been concerned about is the disparity in home ownership in the minority community. I believe, nationally it's about 47 percent as compared to white ownership at about 72 percent. So we've been in touch with you with regard to the lending practices of some of the banks in California, which have received very outstanding or highly satisfactory CRA ratings, yet have a very poor record of minority lending.

Let me just give you an example of what I'm talking about. Citibank, for example, less than 2 percent of its California conventional home loans were made to African-Americans, also for Latinos. Yet it received an outstanding on the lending test. Bank United made less than 1 percent of their homeowner loans to African- Americans, but also received an outstanding in terms of their CRA ratings.

Chase Manhattan received a high satisfactory CRA rating, and I could go on and on and I thank you for providing the basic raw data for us to compile this analysis, which was actually put together by the Greenlining (ph) Institute.

So, what I'm asking you today Mr. Chairman is how do you reconcile these great CRA ratings with the poor lending practices of these institutions, and what do you think we can do about it?

I actually wrote to you February 20 and made some suggestions in terms of a follow-up meeting and how to really begin to sort this through. I'd like to get your take.

GREENSPAN: Let me just say I just signed off on your response to you. You'll probably get it this afternoon.

GREENSPAN: Let me just say briefly that there are a number of issues that we take into consideration by law on CRA rating. More generally, it's got to do with making certain that the individual institution have appropriate credit availability for the total community, and that there are a number of other issues involved other than mortgage loans.

Secondly, as I think we may have discussed with you at another time, it's important in looking at the issue of mortgage extensions to look not only at the bank itself but its subsidiaries, because many banking organizations do a goodly part of their mortgage lending through subsidiaries rather than through the bank itself.

And these numbers in which you are citing refer to as I recall conventional mortgages only. And you'll find that FHA and VA, which is a fairly significant amount of the lending, show very significantly different figures from the ones that you cited now.

I don't know what those data will show because we have not compiled them, but I do suggest to you that before you reach conclusions on this issue, that it's probably worthwhile to look at in the broader sense.

There are a number of other technical issues which are involved in our CRA ratings, which I try to outline in the letter we're sending up to you, and I hope it's a satisfactory response. If not, come back and I'll try to respond again.

LEE: Thank you, Mr. Chairman. I appreciate that.

And let me just, while I still have a couple of seconds left, would like to just ask you with regard to the issue of housing production as a viable economic stimulus initiative or plan. Housing production creates jobs, yet we haven't been able to find the resources to establish a massive housing -- affordable housing production strategy. I've introduced a bill with my colleague Congressman Sanders to call for a $15 billion federal investment in affordable housing production. How do you see this right now in terms of the recession, and does a housing production program make sense in terms of job creation?

GREENSPAN: Well, Congresswoman, as I mentioned previously, residential building has been holding up remarkable well through this period of contraction. And by all historical standards, it's reasonably high at this stage. And as you know, even though you point out the differentials between minority and non-minority home ownership, both are rising significantly.

You may recall when I was in San Francisco I think I quoted a number of those statistics And the rise in minority home ownership, black and Hispanic, it's really quite impressive. I mean, I grant you it's still not where I would like to see it. I think that the more people who own homes, the greater their interest in the community in which they function, and the more effective they are as citizens. So that's clearly a desire over and beyond the economics that are involved.

But so far as residential construction is concerned, it's doing reasonably well, and you have to ask yourself, in allocating funds, as to whether, in fact, that's the most appropriate and effective use of the funds you're referring to, rather than some other priority. And that's a judgment that the Congress has to make.

LEE: Thank you very much.

GREENSPAN: You're welcome.

OXLEY: Gentlelady's time expired.

Gentlelady from Illinois, Ms. Schakowsky?

SCHAKOWSKY: Thank you, Mr. Chairman.

And, Chairman Greenspan, I appreciate your spending so much time with us this morning and that I have the opportunity to ask a few questions. I'm going to ask them all, and if you have time to respond to all of them fine. Maybe otherwise in writing later I hope you will.

Last year you stated some support for a large tax cut. And that support, I think, was based, at least in part, about some concerns that you had about too-quickly paying down the public debt. I'm assuming that those concerns have changed somewhat, and I wanted to ask you if you have a different view on the wisdom of those large tax cuts, particularly those that go to the very wealthiest of Americans.

Secondly, on the economic stimulus package, the one that passed the House and others that have been recommended by the leadership emphasize major tax cuts, it seems to me, over investment.

SCHAKOWSKY: That is, speeding up the tax cuts that were passed; giving new ones, largely, to corporations, some to very profitable corporations. The one that passed the House would have given rebate of $254 million to Enron. I wondered if you had comments on the thrust the economic stimulus package, the one that passed and the ones that are being considered in the House.

Third, on the issue of predatory lending, which has been very dear to my heart, I know that the Fed and other regulators have suggested that Congress should act. We haven't act in any way. I'm wondering if you feel that we still should take some steps to deal with that problem.

And finally, I can't stay away from Enron too far. Your board of governors disclosed that Ken Lay, at some point last October, during a period when the company was looking for some help from senior government officials, did make a call to you. I was wondering what he said in that call and what your response was. Those are my questions.

GREENSPAN: First of all, the issue that I was concerned about a year ago reflected the notion that if you believe the CBO data that we would create far too rapid a decline in the debt outstanding, which would require an accumulation of assets by the federal government, which I thought was very bad policy. In the event taxes were cut, spending was increased and that problem was, if you want to put it that way, taken care of. So I no longer have that problem, but it was the tax cuts and the spending increases which, obviously, obviated further action. So, yes, it is no longer a concern of mine.

Secondly, on the economic stimulus proposals, as I said previously, it really comes down to a judgment as to whether you think that the emerging stabilization that has now occurred after the significant weakness in the economy is a prelude to a self-adjusting recovery after the rate of inventory liquidation dissipates. If you believe that there is not enough potential final demand, then one could argue for some form of stimulus program.

I've argued that it's probably not necessary. The economy is very likely to recover without it. And that would be my judgment. But it is a credible argument to say that stimulus might be helpful in this particular context.

SCHAKOWSKY: And the stimulus being, as I said, heavily weighed toward tax cuts, rather than investment.

GREENSPAN: I'm sorry. Tax cuts instead of investment?

SCHAKOWSKY: Instead of, for example, housing, school construction, et cetera.

GREENSPAN: I see. Yes. That's a judgment that the Congress has got to make. I'm not certain that, without getting into the full detail, you can very easily determine the differential...

SCHAKOWSKY: Well, I guess, the question is, though, whether or not you believe that tax cuts -- speeding up the current tax cuts or giving more corporate tax cuts is viable as an economic stimulus.

GREENSPAN: Oh, if you're asking me, would it stimulate the economy, the answer is probably yes.

On the issue of predatory lending, as you know, we have just recently come out with a ruling related to that and the Congress has it under consideration. And it's a disputable issue, because there's, sort of, a fairly strong argument that subprime lending is a general issue. It's not a bad thing under certain conditions. When carried to what we call predatory levels, it is.

And a lot of people have difficulty differentiating what is and is not predatory in the subprime categories. And I think that's one of the reasons why it's getting difficult to come to conclusions on this issue.

OXLEY: The gentlelady's time has expired.

The gentleman from Tennessee, Mr. Ford?

FORD: Thank you, Mr. Chairman, Mr. Oxley.

And Chairman Greenspan, in fairness to my good friend, Ms. Schakowsky, what you may call spending, we call investment up here. So I think that's what she might have been referring to.

Mr. Chairman, I have two quick questions. Last year before the committee, at least one of your trips to the committee, you advocated the idea of a trigger mechanism, where tax cuts would be delayed if the fiscal situation worsened; obviously, meaning if our projections or expectations of revenues did not meet the grandiose projections made by some of my colleagues. In your testimony last year, I think you specifically said you supported a trigger mechanism largely because the uncertainties that one has with respect to 10-year budget forecast are very high.

Two parts to the question. In retrospect, with the dramatic reduction or deterioration of projected revenues that we've experienced, do you think a trigger mechanism would have been helpful?

And two, three's been considerable talk here from some of my colleagues on the other side of the Hill and the Senate and here, regarding efforts to revisit the tax cut, and that parts of the tax cut and even to revoke parts of it, that have not gone into effect yet. President Bush had eloquently and forcefully suggested that he would not support such an idea and has even equated revisiting the tax cut with actually raising taxes.

FORD: I'd be curious to get your thoughts on both strands of that question, Mr. Chairman. And I, too, am glad you didn't decide to retire once you reached the eligible age.

GREENSPAN: Thank you.

First of all, the trigger I was referring to is a trigger on both taxes and spending initiatives. And the reason for that is that the federal budgetary process, which 15, 20, 30 years ago never really got beyond one or two years out, largely because the vast proportion of it was discretionary and the Congress could very readily reverse or sunset any type of program it wanted with ease; that's increasingly less credible as the greater proportion of spending outlays become what we used to call uncontrollables -- entitlement programs of some form or another.

Under those conditions, you have no choice but to make long-term forecasts, because even if you don't make a forecast, there's an implicit forecast in the actions you're taking in the Congress. So it's better to have a bad forecast than none at all.

But those forecasts, as you point out, are bad, and hence it's far superior to have some form of mechanism which recognizes the fact that if they are really very far off, that the actions which were promulgated on them will not take place. So I still believe that that process should still exist.

I have no particular comments on the issue of what one would do or not do about existing programs, but the point that the president is making with respect of changing the existing tax structure now, say, reversing, implying some form of tax increase, is correct in the sense that there are some parts of the economy where people are making judgments about the future, making current investments which are go/no go investments depending on what the presumed tax structure is in the future.

So if you change rates -- if, for example, implicit, you had a tax cut pending and you go back to neutral, that effectively creates an effective tax increase for somebody who is making an investment.

FORD: I understand that, but I guess that obviously a lot of things have changed since we passed that tax cut and, as you've indicated, the fiscal situation, irrespective of what occurred on September 11, has changed things dramatically. And I would imagine, as you chair a board that has consistently lowered short-term rates for a period of time, you're in the business of adjusting. So as much as I appreciate your point, I'm a little confused by it.

I know my time is running out, and I'd love to maybe get a longer answer from you, Mr. Chairman, on that, but the last time you were before the committee I raised -- or the last time I had an opportunity to address some of my thoughts to you before the committee -- my state, from Tennessee, where I'm from, and other states were experiencing enormous budget shortfalls, and we see now that many other states are faced with the same crises.

The National Governors Association met last week here, and I don't know if you had an opportunity to address them. I know some of my colleagues and members of the administration had that opportunity. One of the things that they declared, Mr. Chairman, was that, quoting, "The current fiscal crises for states, compounded by unsustainable growth in the Medicaid program, is creating a situation in which states are faced with either making massive cuts in programs or being forced to raised taxes significantly."

My question last time dealt with, I couldn't understand for the life of my how you could reconcile the idea of growing, exploding surplus projections with the reality of states facing budget shortfalls.

And I guess my question is, as those of us at the federal level try to boost the economy -- and you've tried to address some of these questions were -- while maintaining some fiscal discipline, what would be the effect of the budget problems of the 50 states? And will any drastic spending cuts or even tax increases at the state level offset our efforts here at the federal level; and for that matter, offset the Herculean efforts that your organization has engaged in over the last year or so?

GREENSPAN: Well, as I think I may have answered last year, one of the reasons why we had this extraordinary federal surplus and difficulties in the state areas, is that there were a significant amount of tax cuts that occurred within the states to essentially remove considerable surpluses that were emerging. And so, when the situation turned around, you would expect, as indeed has happened, states are in far more difficulty, far greater difficulty than the federal budget system is.

But as you point out, Congressman, from the point of view of looking at the economy overall, you consolidate the federal and the state and local systems, so that, clearly, cuts in spending in state and local authority or an increase in taxes has the same effect, essentially, as that which would occur at the federal level.

FORD: Mr. Chairman, I know my time is up, but just one last point.

You mentioned how there may be those who are depending on the tax cut that was passed and the idea that tax cuts will kick in. I just can't imagine that too many of my friends, at least the ones I've spoken to -- and I don't know a lot of friends with big estates, but the one or two I do know, they've indicated they have not made any dramatic changes in their estate planning as a result of what we passed last year.

So as much as I appreciate that comment, I can't imagine...

GREENSPAN: No, I wasn't referring to the estate taxes, I was referring to the individual income taxes.

FORD: Right, but -- fair enough, fair enough.

Thank you for letting me go over my time. Thank you, Mr. Chairman.

OXLEY: The gentleman's time has expired.

The gentleman from Texas, Mr. Hinojosa?

HINOJOSA: Thank you, Mr. Chairman.

Chairman Greenspan, could you give us an idea of how the decline in long-term rate would impact the household incomes? And possibly what effect it would have on individuals, like the one you were just talking about, in making decisions to make investments, whether they be in their investment portfolio of securities or businessmen wanting to invest in, say, equipment and machinery in their factories?

GREENSPAN: Congressman, in our type of economy, long-term interest rates play a fairly significant role. Most of us deal with it wholly from the mortgage market only, in that clearly what the interest rate is on these 30-year, fixed-rate mortgages has a fairly significant impact on what your monthly payment is and does have a major effect on how one behaves.

There are also relevant where you are involved in investing in plant and equipment, as you point out, because, to the extent that you're borrowing money over the long run, that has a very major effect on the potentially profitability of that investment. And clearly, lower interest rates imply that the profitability, under any existing state of technology, will be higher for corporations who borrow money to finance it.

So it's generally a very important element within the economy. And one of the reasons why we are so focused on keeping inflation expectations down is inflation expectations are a critical factor in the determination of long-term interest rates. And if inflation expectations go up, it tends to inhibit a lot of economic activity in this country.

OXLEY: The gentleman's time has expired.

The gentlelady from Indiana, the very patient lady, is now recognized?

CARSON: Thank you very much, Mr. Chairman.

And thank you very much, Mr. Chairman, for your patience.

I'm going to ask you this question because you are perceived, and correctly so, to know everything; and that is a compliment, it is not a put-down at all. And we appreciate very much that you're here today.

Indiana has a spiralling rate of foreclosures, housing -- home foreclosures among their citizens. Could you tell me why that is?

GREENSPAN: Well, I think the foreclosure rate generally and, more importantly, the bankruptcy rate for individuals has been going up recently in large part because the economy is weak, the unemployment rate has gone up, and there's been, obviously, specific difficulties.

I don't know the situation specifically in Indiana, but there's no reason to believe that that's dramatically different.

I should say that the foreclosure rate, while it is up, is not up a great deal, as I recall, at the national level. And it varies by whether it's FHA, VA, conventional, and as a consequence of that, it's very hard to generalize. But the basic reason is that the economy has been weak.

CARSON: Do you see, Mr. Chairman -- one quick other question -- any reversal of that trend, given all of these people that are going to be propelled into homelessness, if you will?

These are homeowners, people that were taxpayers, people that were long-time employees, and now they're losing their place of abode.

Do you see any reversal of the trends that have precipitated that chronic situation among so many people?

GREENSPAN: I think so, Congresswoman. The evidence that we're seeing nationwide is that we seem to have stabilized, that a lot of the weakness that we saw earlier seems to be dissipating. And while I've argued that it's too soon to say that we're on our way back and moving at a reasonable pace, nonetheless there are signs that those types of improvements are taking place. And if they do, that will be by far the most effective program to address the particular concerns that you have in that regard.

CARSON: How are they beginning to reverse? And I know -- I don't want to hold you, but what signs do you see, related to what?

GREENSPAN: Well, what we see, for example, is that the gross domestic product, which was negative during the third quarter and appeared to be going into the fourth quarter as a significant negative, at the end turned out to be a small positive. And for the first quarter, the numbers do, at this moment, appear to be positive, as well.

So we are beginning to see the forces which engendered the rise of unemployment starting to simmer down. And while we're not to the point where I think you can essentially say that we're over the hump with respect to unemployment, we're approaching it.

OXLEY: The gentlelady yields back.

The chair now recognizes the gentleman from New York, Mr. LaFalce.

LAFALCE: Chairman Greenspan, in my introductory remarks I asked some largely global questions, which we didn't have an opportunity to get into. Now I'd like to get into some more local and specific questions.

You and I, I'm sure, are equally concerned about unfair and deceptive practices within the field of financial services. It's my understanding that some 25 years or so ago a law was passed that delegated responsibility to the Federal Reserve Board to promulgate regulations articulating what an unfair and deceptive practice is.

Correct me if I've been misinformed, but it's my understanding that we haven't seen regulations in the past 25 years from the Federal Reserve Board.

I've also been advised that the comptroller of the currency recently brought a lawsuit saying that we could operate under the aegis of the law itself, absent regulations. And that was challenged in the courts by the financial institutions. The initial lower court holding was that, indeed, the comptroller was correct. I don't know the status of that case on appeal.

But could either you or Mr. Mattingly advise me as to what the status of that is?

GREENSPAN: I would say you would be much better advised by Mr. Mattingly.

(LAUGHTER)

LAFALCE: Virgil?

OXLEY: The gentleman would identify himself for the record, please.

MATTINGLY: It's Virgil Mattingly. I'm the general counsel of Federal Reserve.

OXLEY: Thank you.

MATTINGLY: The comptroller has taken that position, the one you articulated, in several cases. And so far, my understanding is he's been upheld on that.

LAFALCE: OK, but can we go to the first issue, Virgil, and that's, what's taken 25 years to articulate those regs?

MATTINGLY: The board wasn't required to issue regs. It was given the authority to identify practices for banks that would be unfair and deceptive. And I think the board has done that, my recollection is, once, only once.

LAFALCE: Only once in 25 years. But it's also my understanding that there's an expectation that the Federal Reserve will promulgate regs. As a matter of fact, that was the gravamen of the argument that was used against the comptroller. And the comptroller -- nobody seems to dispute that.

You know, I mean, 25 years and one example, it seems to me you could be a bit more aggressive.

(LAUGHTER)

MATTINGLY: That may be so. But as you are well aware, during that 25 years, Congress itself has passed a lot of laws that have applied to banks, that have dealt...

LAFALCE: But the unfair and deceptive practices have not been dealt with adequately. You need to become much more aggressive on this. And I would like to have a meeting with Chairman Greenspan and you and the other member of the Federal Reserve board who's responsible for this issue, in order to discuss the possibility of a much more aggressive Federal Reserve Board on this issue.

GREENSPAN: Certainly.

LAFALCE: Thank you.

OXLEY: Gentleman yields back.

Let me, if I can, Mr. Chairman, use the prerogative of the chair to ask you a few questions as we wrap up here. And you've been very gracious with your time, and we most appreciate it.

Recently, Secretary of the Treasury O'Neill suggested that CEOs of public companies be required to personally certify financial states -- such CEOs be held personally liable for such certifications, therefore -- thereby avoiding or not having the protection of insurance. Do you have any opinion on that proposal?

GREENSPAN: Well, the general proposal is to switch the onus of decision making with respect to a whole series of corporate governance questions which we've been discussing today to the CEO. I fully support that. I think, having served on many boards -- indeed Paul O'Neill and I served on the Alcoa board together. There's no question in my mind that, unless you get the CEO effectively saying not, "We have met every GAAP requirement, and therefore we have no liability further," that he has to be able to say that, "Irrespective of any particular GAAP regulation, the accounts which we have appropriately certify what this company is all about."

Now the question getting down to the issue of penalties to induce the CEO to make sure that that is done gets to the question in his mind on the degree of D&O insurance -- director and officer liability insurance. And that there's no doubt in my mind that if you created some inability to get full liability insurance under certain circumstances, it might be helpful. Although the law, as I understand it, now stipulates that deceptive certifications do not cover you under a particular insurance requirement.

My general view is I think that Secretary O'Neill is definitely going in the right direction on this. There is a question that has arisen with respect to if you construct an issue of increased liability on the part of the CEO that you will engender a huge new flood of lawsuits, which clearly will not be to the interests of either the company, the country, and I do suspect it's something we ought to try to avoid.

So there are possibilities of doing what the secretary wants to do, but to delimit the way in which the individual CEO's liability is adjudicated.

OXLEY: Along those lines, some folks have suggested that corporate governance issues should be dealt with at the federal level, as opposed to the traditional state level. Do you have any comments in that regard?

GREENSPAN: I really don't. I'm aware of the arguments. I don't feel myself sufficiently in control of the facts to make a judgment at this stage.

OXLEY: That hasn't deterred others from making those same suggestions, but I'll pass on that.

Let me ask you a couple of questions on derivatives, since they have been mentioned a number of times in several different areas. In the year 2000, Congress passed the Commodity Futures Modernization Act which exempted or excluded many types of derivatives transactions from the Commodity Exchange Act.

OXLEY: Some have recently questioned this decision, certainly in the wake of Enron. Is this still sound policy, or is it in need of discussion?

GREENSPAN: I think not, Mr. Chairman. I think that the legislation that you passed in 2000 strikes me as appropriate and still valid.

OXLEY: And why would you say that in light of the great deal of criticism that comes from a number of quarters, that at least part of the reason for the Enron collapse was this, quote, "deregulatory" move by the Congress in 2000?

GREENSPAN: That's not my impression of what happened. I mean, what I sensed happened is that they ran into losses which they basically endeavored to obscure. And there is nothing that they did which could not have been done in 20 different ways. It had nothing to do with derivatives, except that derivatives happened to be one of the vehicles that were involved. But the issue that I'm aware of had nothing to do with the legislation that passed in the year 2000.

There is a question as to whether the specific issue of exempting over-the-counter energy derivatives from the Commodity Exchange Act -- and the argument there is that somehow that Enron was not controlled and it should have been.

GREENSPAN: But what that issue is is in the law that regulation of transactions between professionals is wholly inappropriate in that specific regard, and I see nothing that's changed from the discussions we all had when that particular act was under review.

OXLEY: Mr. Chairman, some would say that in the case of Enron that the Enron collapse really began when the price of commodities, particularly oil and gas, declined. And as a matter of fact, you can look at some rather startling charts that indicate that Enron's stock went up almost equally with the commodity prices and then plunged at the same rate.

Is that a valid trigger for the Enron collapse or is there some other theory out there that's just as credible?

GREENSPAN: Well, as far as I could see, there are two issues involved. One is the underlying earning power that Enron engendered, and I would presume that since they were very heavily in the issue of energy, that the higher the price at any fixed margin, the higher would be their earnings.

But I think the evidence will probably show, when we finally know what all of the evidence is, that the triggering point had nothing whatever to do with that; it had to do with the loss of -- I guess I would call it reputation capital. That is, as I indicated earlier on, Enron is a classic case of a company whose market value is very significantly dependent on the reputation of the firm, and when it became apparent that the data that they were putting forth as representing their earnings figures were indeed false and had to be recalculated, they lost a very large part of their reputational value, and indeed it was that that ultimately did them in.

Had they, for example, recognized the losses that they actually had in these affiliates early on, I have no doubt it would have hit their stock some, but it would have had a negligible impact relative to what actually happened. It was a very expensive business mistake which they made.

I do not think that had they had a correct set of accounts that -- they'd still be in business, their stock price would be lower. Their stock price would be lower because basically energy prices are lower, and their margins presumably wouldn't have changed, so their earnings would have been less viable. But they would not be in chapter 11.

OXLEY: One of the former officers stated publicly that he thought that the Enron situation was a classic run on the bank, and that seems to be what you are referring to. However, I guess there are some differences as to what triggered that run on the bank. Your estimation is that it was this reputational capital that was depleted rapidly, which goes to the whole question of public confidence and the like in the system.

GREENSPAN: Yes, as I said in my prepared remarks, Mr. Chairman, a company whose assets are substantially physical, real -- and I used the example of an automobile assembly plant -- could conceivably have the reputation of its management sullied considerably or come under a cloud, and yet the company would still have sufficient physical assets to engender incomes which would give it a considerable capital value.

But that was not the case of Enron. Their actual real assets -- pipelines and various energy-related assets -- were a relatively small part of the market value of the firm.

OXLEY: And, finally, I couldn't let this pass by, and that is a question on netting. You and I have had these discussions numerous times, and as you know, the netting provisions are currently in the bankruptcy bill that's in the conference committee. Mr. LaFalce and I are both conferees. And as you also know, Mr. Toomey of our committee has introduced legislation also in that regard.

I know you haven't changed your mind on this, but I'm wondering if you could help us and help the listening public understand the importance of enacting netting legislation this year.

GREENSPAN: Mr. Chairman, as I indicated in my prepared remarks and later, I think that the extraordinary expansion of derivatives has been a major factor in creating an increased degree of flexibility and resiliency in our system, and that they are a very effective tool that used for good is exceptionally effective and used for ill can be just the same. It's neutral with respect to that. But because it's such a valuable potential tool, it's important that it function as efficiently as possible.

The legal uncertainty that still exists on certain types of derivatives, which did not appear in the original act which gave legal certainty to netting, are a cloud over these markets which if we can dissipate sooner rather than later would be very helpful.

GREENSPAN: There is no downside of which I'm aware of in passing this legislation. And as you know, it was in the bankruptcy legislation there solely for the purpose of trying to integrate something, which I presume has fairly broad support, in a bill which had some conflicts associated with it.

So I would just merely argue that, unless I'm mistaken about this issue of there being no downside, there's an awful lot of upside to its enactment.

OXLEY: Thank you.

Let me yield to my friend from New York.

LAFALCE: I thank the chair for yielding.

Chairman Greenspan, I couldn't agree with you more on the issue of netting. And I don't think there's a controversy about that issue, but there is great controversy about the bankruptcy bill. Now, in the previous Congress we separated the netting bill from bankruptcy and passed it independently.

In light of the Enron, Global Crossing and other debacles, don't you think it is advisable to separate the netting bill from the banking conference, pass it separately in the House and separately in the Senate, and send it to the president for his signature as soon as possible?

GREENSPAN: Oh, I would agree completely with your remarks, Congressman.

LAFALCE: Thank you.

OXLEY: Mr. Chairman, we appreciate your appearance here today. And as always, most enjoyable and your knowledge is exceeded only by your patience and goodwill. And we look forward to seeing you in July.

The committee now stands adjourned.

END

NOTES:
[????] - Indicates Speaker Unknown
   [--] - Indicates could not make out what was being said.[off mike] - Indicates could not make out what was being said.

PERSON:  MICHAEL G OXLEY (92%); JIM LEACH (57%); MARGE ROUKEMA (56%); RICHARD H BAKER (56%); SPENCER THOMAS BACHUS (55%); PETER T KING (55%); MICHAEL N CASTLE (55%); ED ROYCE (54%); FRANK D LUCAS (54%); RON PAUL (53%); SUE KELLY (53%); CHRISTOPHER COX (52%); PAUL E GILLMOR (52%); STEVEN C LATOURETTE (51%); WALTER B JONES (50%); 

LOAD-DATE: February 28, 2002