TYPE: COMMITTEE HEARING

LENGTH: 19772 words

COMMITTEE: HOUSING AND URBAN AFFAIRS COMMITTEE

SUBCOMMITTEE: SENATE BANKING

HEADLINE: U.S. SENATOR PAUL SARBANES (D-MD) HOLDS HEARING ON FINANCIAL ILLITERACY

SPEAKER:
U.S. SENATOR PAUL SARBANES (D-MD), CHAIRMAN

LOCATION: WASHINGTON, D.C.

WITNESSES:

CHAIRMAN ALAN GREENSPAN, FEDERAL RESERVE BOARD
SECRETARY PAUL O'NEILL, DEPARTMENT OF TREASURY
CHAIRMAN HARVEY PITT, SECURITIES AND EXCHANGE COMMISSION

BODY:

 
U.S. SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS HOLDS
A HEARING ON THE SCOPE OF FINANCIAL ILLITERACY
 
FEBRUARY 5, 2002
 
SPEAKERS:
U.S. SENATOR PAUL S. SARBANES (D-MD)
CHAIRMAN
U.S. SENATOR CHRISTOPHER J. DODD (D-CT)
U.S. SENATOR TIM JOHNSON (D-SD)
U.S. SENATOR JACK REED (D-RI)
U.S. SENATOR CHARLES SCHUMER (D-NY)
U.S. SENATOR EVAN BAYH (D-IN)
U.S. SENATOR ZELL MILLER (D-GA)
U.S. SENATOR THOMAS CARPER (D-DE)
U.S. SENATOR DEBBIE STABENOW (D-MI)
U.S. SENATOR JON CORZINE (D-NJ)
U.S. SENATOR DANIEL AKAKA (D-HI)
 
U.S. SENATOR PHIL GRAMM (R-TX)
RANKING MEMBER
U.S. SENATOR RICHARD C. SHELBY (R-AL)
U.S. SENATOR ROBERT F. BENNETT (R-UT)
U.S. SENATOR WAYNE ALLARD (R-CO)
U.S. SENATOR MICHAEL ENZI (R-WY)
U.S. SENATOR CHARLES HAGEL (R-NE)
U.S. SENATOR RICK SANTORUM (R-PA)
U.S. SENATOR JIM BUNNING (R-KY)
U.S. SENATOR MICHAEL CRAPO (R-ID)
U.S. SENATOR JOHN ENSIGN (R-NV)
 


*


SARBANES: The committee will come to order.

We begin today the first of two days of hearings on the state of financial literacy in the United States.

We're very pleased to have this panel with us. This panel had originally been scheduled for the 20th of September, but in view of the developments of the 9-11, we actually shifted the subject to the financial markets and the measures taken to assure their timely reopening and functioning. Actually, they reopened after only a few days of interruption and on its first day The New York Stock Exchange handled the largest volume of transactions in its history, and I want to express my commendation to the three: Treasury Secretary O'Neill, Chairman Greenspan and Chairman Pitt, for their expert contribution to that effort. I know that they were very intimately involved and Chairman Pitt, I think, was in New York for a good part of that week before the reopening took place, and I think that was a very impressive accomplishment and I want to put that on the record this morning.

We're going to depart a bit from the usual procedure. Secretary O'Neill has a commitment on the House side, which was made some time ago and which he needs to honor, but he very much wanted to be with us this morning because he has a keen interest in the subject matter of the committee's attention. And so, we're going to take Secretary O'Neill's statement. If he has time, perhaps put a few questions to him before he departs, and then we'll go back to the normal course with statements from the members of the committee and then we'll hear the testimony of Chairman Greenspan and Chairman Pitt.

So with that, Secretary O'Neill, we're very pleased to recognize you. We appreciate your being with us and we particularly appreciate your own keen interest in the subject matter of the committee's hearing this morning.

O'NEILL: Mr. Chairman and members of the committee, thank you so much for accommodating me in this way so that I would have an opportunity to be here with you.

I do have a prepared statement of some length that I think comprehensively covers the subject of the committee's attention. And rather than read through it, if I may, I'd just make a few comments and then see if you have a few questions for me before I have to depart for the Ways and Means Committee.

SARBANES: The full statement will be included in the record.

O'NEILL: Thank you, Senator.

As you noted in your own opening remarks, financial literacy, and more broadly, education, particularly the foundation of education for every human being, is something that I have come to care a lot about and to be involved in in many different ways over the last 30 years.

Just to mention a few of those: During the period of 1989 to 1992, I was the chairman of President Bush 41's Educational Policy Advisory Committee and helped to formulate the national education goals that were established in that time period. During Governor Ridge's time in Pennsylvania -- when I was in Pennsylvania -- I chaired the state Education Standards Committee. And through the whole period that I was in Pennsylvania, I chaired a group of people at the local level who were dedicated to the idea that every child can learn. It's just a matter of our organizing ourselves to achieve that purpose for every human being.

More directly to the subject of financial literacy, it is more and more imperative, it seems to me, that every American citizen be financially literate, and this ties very well to my notion that by the age of 10 every child should have the ability to read and write and compute at a level that if they never saw the inside of a formal education institution again, they would have the foundation stones that if they had the will would permit them with access to a library to develop their brain power and their knowledge to the fullest possible extent.

Obviously, in order to do that, one needs to have all of the foundation stones, which means reading and reading comprehension and computational capability, and the ability to express oneself in writing at a competent level. I believe if we can and when -- let me say better, when we reach that objective, financial literacy will come along without a special attention.

In the meantime, we do have problems, I think, in the subject of financial literacy with the population that is adult or nearly adult because they have not achieved or received these foundation skills in their earlier years. And so, this committee and other committees of Congress have focused particularly and specifically on the issue of financial literacy, I think appropriately so.

We, in the Treasury Department, have several efforts that we are pursuing to help with the accomplishment of this objective. And, as I say, for myself, education is the foundation of a civil society and this aspect of education fits very neatly into the legislation that was passed last year, with the president leading the charge saying no child should be left behind.

I would make a plug for what I would consider to be a subordinate idea to that of the president's no child left behind, which is an idea that says every child, one at a time. In my experience on working in this subject at the local level, I found that schools don't learn and classrooms don't learn. The issue of learning and attaining knowledge that's necessary to function as an adult human being happens one at a time.

And I believe we're not going to achieve the objective of no child left behind until we recognize that fundamental issue that people learn one at a time and we so organize ourselves to assure that every child is learning, and that we assess the learning process on a very regular basis so that where we're not creating building blocks in a person's mind, we recognize it early and not wait until a child gets to be 10 to discover, as we know do, that 20 percent of them can't read and write and compute. At a national level, 20 percent of 10- year-old's can't read and write and compute. It's not to say that they can't do it well, they can't do it period. So it's obvious we have very fundamental issues to deal with.

Financial literacy, in my judgment, should be integrated into the basic learning process and it's not too early to start when we teach people how to add and subtract.

And Chairman and members of the committee, with that, I'd be happy to take a few questions before I have to go.

SARBANES: Well, we understand your time constraints. Let me put one question, then I'll yield to some of my colleagues.

Senator Corzine and I wrote to you back in the summer when we saw the announcement that the Department of the Treasury was considering a financial literacy initiative, and indicated we thought that was a very high priority and, in fact, Senator Corzine got some very -- an important amendment into the Education Act with respect to providing financial literacy programs in the school system.

Well, one of the things I've been very interested in is these first accounts, trying to the get unbanked into the banking system. That's not directly a financial literacy issue, but if they become part of the banking system, I think they get a lot of protections and benefits. We've provided a substantial sum of money to try to get first accounts going to serve low and moderate income individuals and I'm interested in how the Treasury's doing in implementing that program.

O'NEILL: Senator, as I recall, the rules have been issued and distributed at the end of December and we're looking to beginning to make grants under that program banner in the next three months, I think. So we're moving ahead and we're very anxious to see how this works. It has been an initiative shared by the Treasury Department and you particularly and members of this committee and we're anxious to get it into place and see how it works.

SARBANES: Good. Well, we intend to follow that very closely. Look forward to continuing to work with you on that.

Senator Shelby?

SHELBY: Thank you, Mr. Chairman.

Mr. Secretary, isn't accurate information -- financial information -- essential to every economic decision maker, whether it's at the very high levels of finance or the low levels of a man on the street, a woman on the street?

O'NEILL: Yes, sir. No doubt about it.

SHELBY: And without that, financial literacy wouldn't matter, would it? You've got to have accuracy. You got to have truth.

O'NEILL: Financial literacy necessary to know when you don't have what you want to have.

SHELBY: Well, you could be the most literate person in the world and can still not be informed -- if there was one set of information here and one set for you on the street.

O'NEILL: Certainly true.

SHELBY: And that shouldn't be, should it?

O'NEILL: Absolutely not.

SHELBY: OK.

Thank you, Mr. Chairman, that's all.

SARBANES: Senator Dodd?

DODD: Yes, thank you very much, Mr. Secretary, for being here. And I just want -- I'm going to raise this will both of the other witnesses later on -- and my colleagues have heard me talk about this over the years and it relates to the literacy issue and that is among young people and credit cards.

And I've tried on I don't how many occasions to adopt some legislation -- most recently I think this past year -- that would require that if you're under 21, when you demonstrate an ability to pay or have someone co-sign it, or thirdly -- either one of these things -- show that you've taken some literacy course in what the responsibilities of debt are.

You know, the statistics are still pretty stunning. I had them for you -- here they are -- 78 percent of college students have at least one credit card. The debt now is almost $3,000. It's gone up 46 percent since 1998. Nine percent of students carried balances of debt in excess of $7,000, almost 10 percent. We had the number of bankruptcies declared by people under the age of -- between 18 and 25 went from 60,000 in the early 1990s -- in 1990 rather, to 118,000 in 1999. Seven percent of all personal bankruptcies are taken by people under the age of 21. I mean, that's stunning, those statistics and they seem to be getting worse.

And again, I don't want to deny anyone a credit card, but all I'm suggesting in the first two instances, you either demonstrate an ability to pay, which any older person would have to do -- co-signed, or that you would be required to have some knowledge of credit. I wonder if you might just comment on that, without seeing the specifics of the bill? I'm not asking you to endorse a bill, but just to comment on the general proposition.

O'NEILL: You know, for all of us who have children or grandchildren who have gone through a learning experience with credit cards, we can relate to some of the statistics you're talking about. You know, you watch young people go through their own learning experience. It's so easy to turn over a card and to end up with unserviceable debt. One would wish the young didn't have to learn lessons we've already learned for ourselves.

But it's a very complex issue because at the same time we're saying, well maybe children -- or young people shouldn't have access without some special provisions until they're 21, 18-year-olds are serving in Afghanistan. And so, there are certain times and rites of passages, I suppose, and for me at least, the question of what the federal government should do on behalf of we the people in setting demarcation lines and limits on individual freedom is a really complicated issue.

And while I can relate to the concern that you're expressing that, not just young people, but many people have inadequate financial literacy and abusing and, in fact, destroying their credit-worthiness are really complicated issues. I think at the federal level, we need to be very careful about how much we interfere with the rights of individuals to make their own decisions, including ones that turn out not to be everything we would hope they might be.

DODD: To be continued, I guess, and thank you.

SARBANES: Senator Bennett?

BENNETT: Thank you, Mr. Secretary, and thank you for your testimony, both written and oral.

Let me just share with you an experience I had when I was teaching a class on financial management. And after I had gone through the formal presentation and was open for questions, a woman said to me, "I just had a windfall of about $1,000 I wasn't expecting and I've got this money. Tell me an investment that I can put this in that will be worthwhile." And I said to her, "Do you have any credit card debt?" And she said, "Yes." And I said, "All right. I have an investment that will pay a minimum of 16 percent, that has absolutely no down-side risk whatsoever. And the 16 percent is guaranteed." And she said, "Well, that's wonderful. What is it?" I said, "Pay off your credit card bill." And she said, "No, no, no, no, no. I'm making my payments on the credit card bill. I want this money to grow. I want it to be something."

And we had this exchange and I could never get her to accept the idea that paying off her credit card was a good investment. It becomes a semantic kind of thing. We think of an investment and money growing as a good thing and we think of our credit card payments as the regular course of doing business, and we never get quite the understanding that paying off debt at a certain level -- certain carrying cost -- is an investment at that level. Whereas debt at a lower level, say a mortgage and the benefit you're getting out of it tax wise and other with rent, is a good kind of thing.

I just leave that with you to plug into whatever information you may be putting out because most Americans don't speak the language that leads them to understand where their financial interests will best be served.

O'NEILL: Senator, I think your example illustrates in a very important way how much this issue of financial literacy is ingrained into decisions that people make every day in their lives all over this country and that's why this is such a worthy subject that you all have undertaken to work on. And I am committed, as I'm sure my friends here are, to helping in every way that we can to do our part to raise the standard of financial literacy for our American people.

Mr. Chairman, I must go. I thank you all very much for letting me be here.

SARBANES: Senator Corzine has had a keen interest and wrote you this letter.

O'NEILL: I'll explain to the Ways and Means Committee, Senator Corzine, why I'm late.

CORZINE: I'll be brief.

I would hope that we could work together following on a concept that you talked about with regard to education, which I think most of us would put solidly on the same side that you would be on basic education. But I think there is a need for curriculum and real proactive educational process, or otherwise people don't understand what interest rates are, compound interest, how to put together tax returns and how to deal with mortgages.

And I was a little concerned that you were arguing that the 10- year-old who learns how to read and calculate will automatically get the result, and that doesn't seem to be the case even among students that are having adequate educational experiences with regard to reading and arithmetic and other issues.

Are you familiar with some of the statistics of how poorly all of our students do with regard to some of these various fundamental issues.

O'NEILL: Yes. Indeed I am, and I pointed out, you know, one of the confounding things in all of this is that the national statistics show 20 percent of our children can't read and write and compute at all. And if they can't read and write and compute at all, teaching them financial literacy when they are 12 doesn't seem like a very rewarding process to me.

And so, I was making the case that we need to establish the basics. And I would say this, in my own experience and looking at the data, I am absolutely convinced that every 10-year-old has the capability to learn to add and subtract and do multiplication and division in their head at 12 times levels and with those foundations, it is possible to understand all the rest of esoteric mathematics. But without that foundation, we're not going to get there.

And what I'm saying is I think it's important that we integrate financial literacy concepts into the regular curriculum and not treat it like a separate subject. It can be part of reading; it can be part of elementary arithmetic, building a foundation up so that, in fact, by the time a child finishes the eighth grade, they should have most of the foundations to understand most of what one would consider to be financial literacy, including the credit card example that Senator Bennett gives.

And then I'd say just one more thing. If you include in financial literacy all of our citizens understanding the tax code, I'm not sure I agree with you that's possible.

CORZINE: All I would cite is 82 percent of high school seniors in a 2001 survey failed a 13 question personal financial quiz. I'm sure that encompasses the 20 percent that you're talking about that didn't get the basic skills, but it also includes a whole wealth of kids who may have those fundamental skills. And so, I think that question of whether you have particular curriculums or whether it's embedded is a fair debating point among educators.

O'NEILL: The tax code was a joke. I'm sorry.

SARBANES: I was just going to say, as you depart, maybe Senator Enzi wants to leave you with a final thought.

ENZI: Recognizing the importance of the Ways and Means Committee, just tell them that I let you go even though I was the second person here.

(LAUGHTER)

O'NEILL: Thank you all very much. Nice to be with you.

SARBANES: I understand Sheila Bair is going to stay behind if we had further questions. She's a very worthy stand in so we appreciate that.

O'NEILL: She is a wonderful public servant and she is really on top of these issues in great detail. So I commend her to you and I'm sure she will give you great answers to any questions you may have for Treasury.

SARBANES: Thank you very much, Mr. Secretary. We look forward to working with you on this issue.

O'NEILL: Thank you.

SARBANES: I'll say to the committee members, we'll revert to the regular procedure. I have a short statement I'd like to make here at the outset and then I'll recognize other members and then we'll go to Chairman Greenspan and Chairman Pitt.

There is a vote scheduled at 10:30, so I would hope we could move along and hopefully get the testimony in before that time. We'd have to adjourn briefly and come right back.

As I indicated at the outset, we had originally scheduled this hearing for the 20th of September. It was obviously put off. It seems always things are happening that could warrant putting it off and I don't know that this circumstance is any different right now, but I wanted to press ahead.

I would say to my colleagues that I hope we can stay away from monetary policy in the question period, particularly with Chairman Greenspan. The chairman is scheduled to come back before the Congress in just a few weeks, both House and Senate, to present the Fed's semi- annual report -- monetary policy report -- to the Congress. And, of course, we will have a hearing here at the beginning of next month because the chairman will go to the House side first, devoted to that subject. So I hope we can focus with both of the chairmen on the financial literacy.

And I would also say to my colleagues, a week from today the committee will begin the first in a series of hearings on the issues raised by Enron, but not only Enron, by other things that have occurred in the corporate world, and we'll have a series of hearings stretching through the rest of this month and into next month. We intend to go into it in a very thorough and comprehensive way. We get the benefit of a lot of very expert opinion, and we hope at the end of that process to be able to move ahead with what we think would be an appropriate work program.

I want to say just a few words about the financial literacy issue that's before us today. I think this is very important. It's by no means a magical solution. It won't solve all the problems that confront consumers with respect to financial decisions and I, frankly, think that you need a framework that also includes strong legal protections, vigorous enforcement and best industry practices with respect to the availability of responsible credit.

In fact, I agree here with a three-pronged approach which was outlined to the committee last year by Roger Ferguson, the vice chairman of the Federal Reserve Board in his confirmation hearing when he said, quote, "Legislation, careful regulation and education are all components of the response to these emerging consumer concerns."

There is very substantial evidence that Americans do not have an adequate basis for making sound decisions about their personal and household finances, especially given the myriad choices they face.

Now, Senator Shelby touched on an important point and that is, you may be very financially literate, but if you're not given the proper information, you can't do very much. But a number of organizations have sought to assess the level of American's grasp of financial matters and their survey of evidence consistently shows very substantial gaps.

We know that there are some costly consequences of financial literacy: The increasing reliance of the high-cost fringe financial sector by men and women who find themselves closed out of a mainstream banking institution.

SARBANES: Millions of people in this country are without bank accounts. They are, in effect, unbanked, the status which usually carries with it heavy financial penalty. To conduct even the most essential transactions, like paying bills or cashing checks, unbanked Americans must rely on financial operations, which have large and often hidden fees. Furthermore, without access to banking facilities they face serious obstacles to saving and accumulating assets and to building credit.

The growth of various predatory lending practices when people are persuaded to borrow on terms they do not fully understand and cannot afford -- single premium credit life, yield spread premiums, various payday lending -- all contribute to an environment in which consumers are very vulnerable to overcharges and to hidden costs.

There's an issue I hope to develop in this committee at some point, and that is the exploitation of remittances. Millions of Hispanic and indeed other workers support families in their home countries by sending a portion of their earnings home in the form of remittances. This has long been a common practice among newly arrived Americans. Today's workers, however, are paying very high fees for the service, as much as 20 percent in some cases, and they are given an exchange rate which is both highly disadvantageous and often not disclosed and the amounts are quite large, taken in the aggregate and I think it warrants examination. In fact, a return of a larger percentage of these remittances to the home country would be a form of economic assistance that would amount to a considerable amount of money once one looks at the figures.

If financial literacy is important in the short term as we go about the business of our daily lives, I think it's also critical to our future. It's constantly asserted that Americans are spending too much on consumption now, with little thought to the years ahead. America's personal savings rate has averaged an anemic 1.6 percent for the last year. Consumer debt has grown at a much, much faster rate. Secretary Summers actually thought one benefit of an emphasis on financial literacy would be to raise -- that one benefit that might result would be to raise the savings rate in the United States. That's a micro economic benefit, which if it were to occur, I think would be very significant.

We also know that the largest generation in this nation's history is approaching retirement. One example of the challenges facing us with respect to retirement is the status of women who face particular challenges as they grow older. Millions of women either because they have been widowed or divorced find themselves in charge of their household's finances at or near retirement age without having had significant financial education. At that point, they're expected to make very complex financial choices which will affect them through their retirement.

These hearings, which have been long in the planning stage, take on a special urgency in the context of our present circumstances. The economy is in recession. Its future course remains unclear. Recent events in the markets threaten to undermine the confidence on which the functioning of the markets depends. I believe that it is long past time for the public and private sectors to come together in a national strategy to raise the level of financial education in our country. These hearings are a first step in that direction.

Tomorrow we will hear from a number of organizations that have been working to enhance financial literacy, but today, of course, we begin with our three public sector witnesses, who I think are uniquely qualified to examine this question and I look forward to hearing from both of them.

Chairman Greenspan actually has on a number of occasions highlighted the importance of this issue. Last year in an address to the Federal Reserve's Consumer Affairs Research Council, the chairman stated, and I quote him, "Efforts to increase awareness of and access to information that promotes financial literacy are increasingly seen as necessary to ensure that consumers can meet their immediate obligations as well as achieve their broader goals of buying a home, funding higher education for themselves, for their children, and preparing for retirement."

And, of course, Chairman Pitt's agency, the SEC, bears a unique responsibility now, and for the first time in our history, over half of our population qualify as investors, either directly or indirectly. Many of these people have had little preparation for these financial responsibilities which they now confront.

So, I thank the witnesses for appearing this morning and I yield to Senator Shelby for any opening statements.

SHELBY: Thank you, Mr. Chairman. I will be brief. First of all, I want to thank you for pursuing this hearing. I think it's very important.

I think it's important for all of us to recognize what we can and cannot hope to achieve when considering a topic as broad as financial literacy here. I think we can find ways to better inform American consumers and investors so that they're more likely to achieve their financial goals in the marketplace. But, we cannot eliminate risk from the world.

Fundamentally, our market system requires the existence of risk and reward to function. In order for markets to efficiently operate, individuals must be able to properly identify and assess the risks and the rewards. Without timely disclosure of the appropriate information, analysis is impossible. Decisions are merely guesses. Furthermore, where criminal activity occurs and little is done to prevent or appropriately punish it, people are not true market participants; rather they are unknowingly playing a rigged game that they can never win at at any level.

I believe we must recognize that individuals are responsible for their choices. Recognizing this however, does not mean abandoning people in the marketplace. Instead, it requires the complete opposite. Congress must ensure, Mr. Chairman, that markets provide full and timely disclosure and ensure that the law is actively and uniformly enforced. Under these conditions, the market will provide the greatest benefits to all of us and then financial literacy will take care.

Thank you.

SARBANES: Thank you very much.

Senator Dodd?

DODD: Thank you very much, Mr. Chairman. And again thanks to our witnesses.

This will be a very important two days. It's not going to probably attract the same degree of attention that other hearings focusing on Enron specifically will in the short term. But in the long term, what we do in this subject matter, may have as much to do with minimizing the kinds of problems that we, at least, know about now in the Enron situation, from occurring again. So, Mr. Chairman, I think this is extremely worthwhile. It's very forward looking.

Senator Corzine mentioned the statistic of 82 percent of high school seniors -- I think it's seniors -- that failed the basic quiz on what interest rates were and credit cards and the like. There's a series of data and statistics, Mr. Chairman, which you, I think, assembled which I'm going to ask unanimous consent be made a part of the record. I assume it would be anyway, but some of them are just stunning in their revelation and there's a chart that indicates where they've come from.

I certainly agree with Senator Shelby and others, obviously having accurate information is absolutely, critically important, but when you read that two-thirds of investors believe that there's an agency some place or an organization that ensures you against loosing money in the stock market, you get some idea of the gap that exists even with people who are making investments. So these numbers are terribly important to look at and be aware of.

I mentioned to the Secretary of the Treasury the numbers relating to credit cards and, again, credit card debt and I realized that there are a lot of factors for this, but it's just alarming to me when I see the tremendous increase and the amount of consumer debt in the last few years -- 1995 to 1998, the medium amount of family debt jumped from $23,000 to $33,000, an increase of 42 percent in three years. That service of payments constituted approximately 14 percent of Americans' disposable income, and the ratio of debt to after-tax income in the average household was 85 percent. Today it's 104 percent.

And again, going on down in the numbers; Americans owe more in debt to credit cards than they do education obligations -- and the numbers I mentioned earlier about young people. Again, I realize the tremendous value that credit cards have provided to people who would not have been able to become consumers without that kind of assistance, but it's getting out of hand, it seems to me, and I don't have any quick solutions for you, but it seems to me that the subject of literacy and consumer debt are not unrelated and we've got to find some way to connect these.

We need some more than just sort of warning people about it. It seems to me some guideposts here about what people can do, what credit card companies can do, what steps they ought to be taking to minimize that risk is important.

And again, I'll ask unanimous consent, Mr. Chairman, that this short statement be included in the record. But I think these are extremely important hearings and I look forward to the testimony from both these very knowledgeable witnesses.

SARBANES: Thank you. Without objection, the material will be included in the record.

Senator Bennett?

BENNETT: Thank you, Mr. Chairman, and I'll follow your admonition to avoid talking about monetary policy with Chairman Greenspan.

SARBANES: It's a great temptation.

BENNETT: It is a great temptation, but there is a temptation I can't resist, because everything has been said about consumer education, that I think needs to be said, and I won't go on to repeat it. I'm concerned about the level of economic literacy in the congress. And we're having a debate about stimulus packages, about what stimulates the economy, and what doesn't.

Yesterday, Robert Bartley had an editorial in The Wall Street Journal, quite frankly, on this issue of gains, and the Phillips Curve, and other issues, which dominate the policy debates around here. And I know that the Nobel Committee seems to alternate between giving a Nobel Prize to a very conservative economist, and the following year, a Nobel prize to a very liberal economist so that they're hedging their bets, that no matter who comes out, the Nobel people will say it was a Nobel laureate that led us to the promised land, either way.

And if Chairman Greenspan could find his way clear to comment a little on the question of economic education in terms of fiscal policy, I'd be grateful. If he decides to hide behind your caveat and say, we'll deal with that later, I would understand that as well.

Thank you, Mr. Chairman.

SARBANES: I'm reminded of President Truman's story that he wanted a one-armed economist. And they asked him why, he says, "I'm tired of getting this on the one hand and on the other hand advise."

Senator Corzine?

CORZINE: Thank you, Mr. Chairman. And I welcome the witnesses and thank them for their thoughtful presentations that they will be making.

You know, this is an issue that I think is fundamental to the sound workings of free markets. If you're committed to the economic system that we have and that has prospered in America, I think it has to be built on an understanding of the workings of it.

I'm extraordinarily troubled by the kinds of statistics -- level of understanding among our students but, frankly, it's a lifelong issue. Those most vulnerable in our society appear to pay the highest price for lack of financial literacy, and I think the chairman cited some of those statistics on remittances and I think you can see 9 and 10 percent charges for cashing checks for the unbanked. And then, we find, quite frequently, the predatory lending that comes with refinancing homes of seniors and others that are often cited.

So we've got a problem that faces our total population and I think it begins with a solid curriculum, as one begins their educational process. You know, a lot of us went back to business school so we could understand what compound interest was about and other kinds of issues, and I just don't think this is a priority and we end up with results that I think make Americans more vulnerable than would otherwise be the case.

So I think this hearing is terrific; that we're spending the time on this. I hope we can flush it out in something that is in practical terms, other than saying that people ought to inform themselves more because I think this is something that -- not unlike science, not unlike other complicated issues in life -- needs some detail in the educational process and one that adult education would be fine too. So I look forward to it.

I have a longer statement that I'd like to put in the record. But I think it's terrific what we're doing. I also want to thank Senator Enzi and Senator Akaka for their help in the financial literacy issue that was included in the ESA bill.

SARBANES: Yes, thank you. The statement will be included in the record.

Senator Enzi.

ENZI: Thank you, Mr. Chairman. I do thank you for holding this hearing. And I know that it was planned months ago, and was to be held at about the time that the September 11 events happened. And we did have this same panel before us at that time. But our topic changed to stock market stability. And I think it made an impact, thanks to the caliber of the people that were able to be at that hearing. I think it made a difference in convincing America that the stock market was still capable of functioning, and that it still would do a good job.

It's imperative that we do focus on this financial literacy. And it's a little different area of discussion than you normally get to do, or than we normally get to do. But it's very basic to the future of our country. And as Senator Corzine mentioned, we did an amendment to the elementary and secondary education act -- No Child Left Behind -- that allowed the flexibility so that money could be spent for doing financial literacy. And I think that's a good first step.

Now, I've taken a look at some of the education plans, or some of the courses that are being provided in schools. And one of the distressing things that I found was that while they allocate the students a certain amount of money to work with, say $2,000 a pay period, one of the things they usually forget to do is take out withholding, and social security, and Medicare first. And that leaves that as a much later literacy shock for those kids. And they do need to learn at an earlier age that death and taxes are the only things that are sure.

Evidently the programs that are in place aren't making it, because we have this huge college debt. I think it's an average of $2,748. And then that translates into some adult problems, after they get out of college. I used to be the mayor of a boom town -- this is 25 years ago. And the people that come to a boom town are the young people that don't have jobs. And they leave their source of normal financial advice, which are parents. Now, they don't always take that advice, but the advice is often given, and is still something they have to mull through their minds. But these kids came to Gillette (ph), and made and average of about $60,000 a year. And that was far more than their parents had ever dreamed of making. And what we discovered is that you could broke on $60,000 a year. And this in the 1970's. And at that time, $60,000 was worth a lot more.

But we tried to find some way to get some financial literacy programs going. And it's hard to find a credible source. The ones that were willing to do it were the churches. But the churches are the ones who are always asking for money. And the banks would be a good source, but they're looking for bigger customers, usually, than the people who are in financial difficulty. So, I'll be asking to see what you think would be good sources of advice for these people.

Now, I am encouraged by some programs that are happening. In my home state, the Wyoming Community Development Authority has joined with Fannie Mae, and they're educating first-time home buyers. And they're doing this by distance education. And they're having a lot of applicants. It's a relatively new program. But they're about to have their 1,000th customer. And incidentally, the financial institutions give a little break in the interest rate, if people take this financial literacy course on how to buy a house. And it gets into several of the other aspects of financial literacy, as well.

And the Wyoming students have been doing well on tests. Eighty- two percent of school seniors fail, nationally. We have a much better rate in Wyoming. It still can be improved quite a bit. And of course, the Enron situation shows that people need to have a little bit more financial literacy when it comes to dealing with their 401K plans. And a little reminder not to put all the eggs in one basket, and there will be a lot of other financial literacy lessons that will be coming out of hearings that will be held in the next several months.

So, I think this is really a prime area of investigation that we need to do. And I'm so pleased that we have such a distinguished panel to do it. And I thank the chairman for having this.

SARBANES: Thank you.

Senator Stabenow.

STABENOW: Thank you, Mr. Chairman, for holding this hearing.

And to our witnesses, Chairman Greenspan, Chairman Pitt, welcome.

I share, along with all of my colleagues, a great interest and belief that this is a critical, long-term issue and part of the solution, as we move forward on a number of fronts.

Last December back in my home state of Michigan, I attended an event at Eastern High School in Lansing, Michigan, where the Michigan Jump Start Coalition for personal financial literacy released the findings of a statewide survey in conjunction with the National Institute for Consumer Education. And it was much like what we have been hearing today in terms of the numbers.

I'm very pleased to see that the Michigan legislature, in a bipartisan way, is moving forward on literacy education. I commend them. One of the interesting findings in the survey that was released back in December in Michigan was the fact that students who participated in the stock market game, which was a national investment game, did better in the survey than people who had entire courses in money management or even an entire course in economics.

And I say that only because I believe that from the standpoint of learning that we need to be looking at interactive learning, reality- based learning. And that, clearly, on the survey, students were learning much more through an interactive approach then they were through other, more traditional classes that have been developed.

I also wanted to recognize, as others have, Freddie Mac for their Don't Borrow Trouble campaign, which they've brought to southeastern Michigan, to Detroit area.

Mr. Chairman, I know you've been a real leader and at the forefront of that.

And I want to thank them because the efforts of Freddie Mac, as well as Fannie Mae, their counterpart, I think are critical in tackling abusive lending, especially as these two companies move increasingly into the sub-prime lending market.

But we have some real challenges for adults, as colleagues have raised as well, in addition to the next group of adults as our children are moving up through the system.

Mr. Chairman, I would ask that my entire statement be placed into the record.

And again, welcome those who will be speaking to us in the next two days. And I hope that we can develop some recommendations, as well as, in the long run, in predatory lending, some legislative actions that will help address those critical issues.

SARBANES: Thank you very much, Senator Stabenow. We'll include the full statement.

Senator Akaka.

AKAKA: Thank you very much, Mr. Chairman, for convening this first hearing on the state of financial literacy and education.

And I want to add my welcome to Secretary O'Neill, Chairman Greenspan and Chairman Pitt to this morning's hearing. And I look forward to their views on this important subject.

Mr. Chairman, I wish to make a brief statement, and ask that my full statement be included in the record.

SARBANES: The full statement will be included in the record.

AKAKA: I became actively involved in this issue in 1999 after reading a study on financial literacy conducted by the National Council on Economic Education.

The disturbing results of that study caught my attention. In a basic economics test, half of the adults and two-thirds of the high school students received failing scores. More than half of the students and adults did not have a basic understanding of economic concepts such as money, interest rates and inflation.

After reviewing these test results, I investigated further the lack of financial literacy in our society. Americans of all ages and backgrounds face increasingly complex financial decisions as members of the nation's work force, managers of the family's resources and voting citizens. Many find these decisions confusing and frustrating because they lack the tools necessary that would enable them to make wise personal choices about their finances.

Increased education about basic economic concepts will help people to make better financial decisions and increase opportunities for participation in today's global economy. All citizens need to be prepared, starting from youth, to make informed decisions regarding fundamental undertakings such as purchasing your first home, financing a college education and saving for a comfortable retirement.

The Reauthorization of Elementary and Secondary Education Act included the Excellence in Economic Education Act as an amendment, which I introduced along with my colleagues Senator Corzine and Senator Enzi.

This legislation will significantly improve the knowledge of fundamental, yet critical, economic principles among our country's young people. The measure aims to increase student knowledge of and achievement in economics by providing our nation's teachers with the tools to enhance teaching methods of economics.

This legislation encourages economics-related research and development; dissemination of instructional materials and replication of best practices and programs. It also increases private and public support for economic education partnerships between schools and local businesses and private industry.

I was also pleased, Mr. Chairman, to support another financial literacy amendment sponsored by Senator Corzine that was also included in the legislation.

Today's hearing is a beginning of a national dialogue on financial literacy and education. I applaud the efforts of Secretary O'Neill, Chairman Greenspan and Chairman Pitt to bring attention to this issue and I look forward to your recommendations on how to increase financial literacy.

Again, I want to thank you, Mr. Chairman, for convening this hearing on financial literacy. Thank you very much.

SARBANES: Thank you, Senator Akaka. And thank you for your initiatives in this field, which have already made a significant contribution.

Senator Carper.

CARPER: Thanks, Mr. Chairman.

Gentleman, welcome. We're delighted to have you back before us, and thanks for coming today.

At one time I used to be the state treasurer of Delaware at a time when we had the worse credit rating in the country, closed out of credit markets, couldn't borrow money, couldn't balance our budgets. We were a mess. And I got to be state treasurer when I was 29 years old. It was a lot of fun.

And today we have a new state treasurer. His name is Jack Markell (ph). He doesn't have to worry about any of those things. What he's focused on is financial literacy and taking the problems to a lot of our schools were we focus big time on the three R's -- reading, writing and 'rithmetic.

And he's really done a nice job in helping to introduce a fourth R in our schools -- I call it relevance. Why is it relevant that we know how to read, write and do arithmetic? And one of the reasons is so that we can be financially literate and make some wiser decisions about our investments in our future.

I watched in the wake of Enron, and others have alluded to this, those are real smart people who didn't really know what was going on there. And some of them were folks at big accounting firms, others were analysts at a top Wall Street firm. We had some people at rating agencies who really didn't know what was going on very well. And they're well trained. They know those three R's, and the fourth one as well, the relevance. But they missed the signals and missed the boat for a lot of people.

I don't know that we can ever hope to work with kids and parents and schools and communities in Delaware so that they can catch what those other folks miss. I think that's probably the triumph of man's hope over experience. But we can sure do a better job. We try to do it in our own small way, in our little state. And I'd be curious to hear what others are doing, too.

I don't know to what extent this is one the Congress needs to focus on, to work on, but I think we all can do something and ought to do something. And I'm encouraged by your presence here and your attention to these matters that we're all going to do our share.

With that having been said, Mr. Chairman, I'd like to ask that the rest of my statement be added to the record and we'll hear from the folks we really want to hear from.

Thank you, folks.

SARBANES: It will be included in the record.

Senator Schumer.

CARPER: You mean me, Senator?

SARBANES: No, I didn't.

(LAUGHTER)

SCHUMER: But I thank you and I know we're trying to move along here.

SARBANES: Senator Carper didn't realize you had arrived.

CARPER: If I had, I would have acknowledged it.

SCHUMER: Exactly.

Anyway, thank you. First, I really want to thank you, Mr. Chairman, for having this hearing. It's such an important issue. It's not a sexy issue, but boy, oh boy, is it needed. And I'm so glad that you've made this a major effort of the committee this year.

And I thank we have such distinguished people at the table for the same reason.

You know, I guess, I don't think we've assessed, I don't know, at any level, whether -- what our education ought to be. I'd like to know, for instance, why this financial literacy shouldn't be the core curriculum in all our high schools.

Much of the work of this committee is because people don't have financial literacy. The chairman has been doing a great job on predatory lending. When the deeper and deeper you get into predatory lending, a lot of the problem is people just are so afraid to deal with a bank on a mortgage that they go to some scoundrel who says I'll package the whole thing for you, and they don't even realize the higher interest rates and all the other problems that occurr.

Credit card borrowing. Again, same problem. People just don't realize it. And this affects their lives daily. Our financial world has gotten so complicated, not just for mathematicians or to economists, but for average folks.

And our school cirriculum has done nothing to catch up with it. I'd like to know why this course isn't required either in addition to the highschool cirriculum, or tell me -- if they don't have room, is it more important to know trigonmentry or know financial literacy? I remember side-angle-side or cosines and tangents, and it hasn't affected my life much, I don't think, at least as best I know.

(LAUGHTER)

And, you know, a general broad education is important for everybody, but there is such a crying need for this kind of education that I think we ought to do a real assessment. It seems to me that in our pantheon of values in what we want our high schools to teach, this is left out and lots of other things are put in that may be important but seem to me to be not close to important as this.

So one of the thrusts -- I don't know, it's probably not the role of our committee or even Washington except in certain ways to prod -- I'm not sure of that. But I just like to urge all of our high schools to consider making financial literacy a mandatory course.

And with that, Mr. Chairman, I yield back my time and put my whole statement in the record.

SARBANES: Thank you very much, Senator Schumer.

Chairman Greenspan, we would be happy to hear from you.

GREENSPAN: Thank you very much, Mr. Chairman and members of the committee.

I am very much pleased to be here this morning to discuss the importance of improving financial literacy and learning for consumers.

SARBANES: Mr. Chairman, I am wondering if you could draw that microphone a little closer. It would be helpful.

GREENSPAN: Throughout our banking history, we have seen significant adjustments to enable markets to respond to the demand for services.

Structural changes in recent years have heightened competition, encouraging market efficiencies that continue to help drive down costs and foster the emergence of increasingly diverse and highly specialized organizations. These organizations provide consumers with increased access to a variety of credit and saving instruments.

For an increasingly complex financial system to function effectively, widespread dissemination of timely financial and other relevant information among educated market participants is essential if they are to make the type of informed judgments that promote their own well-being and foster the most efficient allocation of capital.

Indeed, surveys repeatedly demonstrate a strong link between education and the use of new financial technologies. For example, data from the Federal Reserve survey of consumer finances suggests that a higher level of education significantly increases the chances that a household will use an electronic banking product.

Specifically, in 1998, the typical user of an electronic source of information for savings or for borrowing decisions had a college degree, a level of education currently achieved by only about one- third of American households.

Overall, the most recent data from the survey of consumer finances exhibit a mixed picture of the financial status of households, providing evidence that we need to reach out to those who have not been able to participate fully.

For example, while the median real net worth for all families increased 17.5 percent between 1995 and 1998, this trend did not hold where the head of the household had a high-school level of education or less, family earnings were less than $25,000 annually, or the ethnicity of the respondent was non-white or Hispanic.

Through 1998, we found that families with incomes below $25,000 did increase their direct or indirect holdings of stock, and more reported they had a transactions account. However, they were less likely to hold non-financial assets, particularly homes, which constitute the bulk of the value assets for those below the top quintile according to income.

In considering means to improve the financial status of families, education can play a critical role by equipping consumers with the knowledge required to make wise decisions when choosing among the myriad of products. This is especially the case for populations that have traditionally been underserved by our financial system.

In particular, financial literacy education may help to prevent vulnerable consumers from becoming entangled in financially devastating credit arrangements. In the quest to stem the occurrence of abusive, and at times illegal, lending practices, regulators, consumer advocates and policymakers all agree that consumer education is essential to combating predatory lending.

An informed borrower is simply less vulnerable to fraud and abuse. Financial literacy can empower consumers to be better shoppers, allowing them to obtain goods and a services at a lower cost. This effectively increases their household budgets, providing more opportunity to consume and save or invest.

In addition, comprehensive education can help provide individuals with the financial knowledge necessary to create household budgets, initiate savings plans, manage debt and make strategic investments decisions for their retirement or their children's education.

While data to measure the efficacy of financial education are not plentiful, the limited research is encouraging. A recent study by Freddie Mac finds that home buyers who obtain structured home ownership education have reduced rates of loan delinquency.

Similarly, an evaluation conducted by the National Endowment for Financial Education on its high-school-based programs, found that participation in financial planning programs improved student's knowledge, behavior and confidence with respect to personal finance, with nearly half of participants beginning to save more as a result of the program.

These findings underscore the importance of beginning the learning process as early as possible. Indeed, in many respects, improving basic financial education at the elementary- and secondary- school level is essential to providing a foundation of financial literacy that can help prevent younger people from making poor financial decisions that could take years to overcome.

In particular, it has been my experience that competency in mathematics, both in numerical manipulation and in understanding its conceptual foundations, enhances a person's ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision-making. For example, through an understanding of compounding interest, one can appreciate the cumulative benefit of routine saving.

Some school systems have introduced financial management classes as part of their high school curricula, and many employers are taking up the challenge as well.

At the Federal Reserve Board, for example, interest in financial education prompted an employee committee to hold a seminar on financial planning strategies. And our consumer and community affairs staff hosted educational programs for Federal Reserve employees, providing information on qualifying for mortgage, managing debt and budgeting.

Both individually and through long-standing partnerships with a variety of local, regional and national organizations, each of the 12 Federal Reserve Banks and the board provide extensive information on these topics to a wide range of audiences, including school-age children, lower- and moderate-income families and minority and immigrant populations.

The scope of these activities range from the sponsorship of competitions in economic principles for high school students and workshops on wealth-building strategies to the development of computer-based tools for understanding the underwriting considerations for mortgage loans and creating household budgets and savings plans.

The Federal Reserve, thus, has a continuing interest in measuring the effectiveness of financial literacy approaches.

For example, we hosted a forum highlighting best practices in credit education, and we have included studies that evaluate the impact of such training initiatives in our call for papers for the community affairs research conference scheduled for the spring of 2003.

Additionally, our community affairs and public information offices have embarked on a national initiative to highlight the importance of financial literacy and heighten the visibility of economic education programs.

GREENSPAN: In closing, Mr. Chairman, let me simply reiterate that the pace of technological change and competitive pressures can only increase. Building bridges between community organizations and our educational institutions and private business will be an essential aspect of our efforts to increase familiarity with technological and financial tools that are fundamental to improving individual economic well-being.

And the success of such efforts will have a significant bearing on how well-prepared we are to meet the challenges of an increasingly knowledge-based economy.

Thank you, Mr. Chairman. I would appreciate if my full remarks were included for the record.

SARBANES: The full statement will be included in the record. We very much appreciate it, and we appreciate your own efforts and leadership on this issue. It's been quite important.

I point out to my colleagues that we only have a few minutes left on this vote, so I'm going to recess the committee briefly, so we can go and vote. And then we'll hear from you, Chairman Pitt.

(RECESS)

DODD: The committee will be reconvened.

Senator Sarbanes asked if we continue to move along so we can not hold people up here.

And let me ask staff, where are we at this point?

STAFF: (OFF-MIKE)

DODD: Chairman Pitt, you're in the middle of your statement or just about to give it?

PITT: I think I was just about to give it.

DODD: Before I do that, I know my colleague from South Dakota was here. Here he is, Tim Johnson. I just wanted to make a few brief comments before we turn to Chairman Pitt.

JOHNSON: Well, thank you, Mr. Chairman.

I apologize for juggling several committees simultaneously this morning, complicating things.

I have a formal statement, but rather than sharing my fabulous insights on financial literacy with you and taking up some time here, I think we're better off to return to the panel for their testimony. But I would like to submit my full statement for the record.

DODD: Without objection.

JOHNSON: And I look forward to the testimony here, which I think is indeed going to be very valuable for the Congress this year.

DODD: Thank you very much, Senator.

And, Chairman Pitt, we welcome to the committee. We know you're busy and been on the job a couple of months.

You having fun yet, Mr. Pitt?

PITT: Almost. We're almost there.

DODD: Well, thank you for being here today. And obviously, your statement all related documents that you think are worthwhile will be included in the record.

With that, the floor is yours.

PITT: Thank you, Senator Dodd.

I'm pleased to appear before the committee on behalf of the Securities and Exchange Commission to testify about financial literacy and education in today's securities markets.

At the outset, I'd like to commend the chairman of the committee, Senator Sarbanes, for his perseverance in scheduling these hearings at the beginning of this legislative session and for his prudence in waiting to hold them until an appropriate time following the events of September 11.

I'm especially gratified that Chairman Sarbanes and the committee have taken the initiative to raise the visibility of this important issue.

As the events of last September demonstrated, our capital markets are the strongest and most resilient. As the events of last November demonstrated, even the best system can be gamed. These events demonstrate that financial literacy is a crucial foundation for partnership in our capital markets. People need to be able to read, write and speak basic financial concepts in order to make informed investment decisions.

The SEC's goal is to protect investors, and we will pursue securities law violations and financial fraud aggressively. But an educated investor is the best defense against fraud.

There is no magic bullet that will accomplish our nation's financial literacy goals. No one program can reach all groups. Educating people about how to manager their money effectively and achieve retirement security demands cooperation and partnership on all levels -- public and private, national and grassroots.

The federal government can play an important role in achieving financial literacy, both by working with localities and the private sector to initiate financial education and by creating and making freely available neutral unbiased information on saving and investing.

The commission partners with a number of public and private organizations. We give presentations to schools, investor clubs and religious organizations. We host investor town meetings across the United States. We produce and distribute an extensive array of free education material. This information is on our web site, http://www.sec.gov/.

And our web site also has interactive tools. For example, we created a mutual fund cost calculator, which allows investors to compare the costs of holding different mutual funds. We also have an extensive tutorial on the uses of margin.

But even the best educational materials will not do any good if people either do not know about them or fail to use them.

For example, people looking for investment tips on the Internet do not necessarily look at our web site first and review our educational materials. To try to reach this audience, we recently created a fake scam web site, http://www.mcwardle.com/ (ph), which was based on actual Internet scams that we have investigated and shut down.

This site promises unbelievable investment returns -- 400 percent in three months. Unfortunately, there are real scams out there that make similar promises and real people who fall for them.

A visitor to this site who tries to invest receives a message explaining the warning signs of Internet fraud and links to educational materials. I've included sample pages from the McWardle (ph) site as an attachment to my written testimony.

The McWardle (ph) site graphically illustrates what we have been telling investors for years: If it sounds too good to be true, it probably is. Guaranteed returns aren't. Check out the company before you invest. If you're being pressured to invest, especially in a once-in-a-lifetime deal that just can't miss, just say no. Understand your investments; if you don't understand an investment, don't buy it. Beauty isn't everything, don't be fooled by a pretty web site. They are remarkably easy to create.

PITT: This project cost taxpayers very little. It cost us $50, but it's paying huge dividends. Already we have had more than 1 million hits on the McWardle (ph) site.

The McWardle (ph) site is an excellent example of how we partner with others for better results. Co-sponsors of our site are the Federal Trade Commission, the National Association of Securities Dealers, and the North American Securities Administrators Association.

I've included in my written materials some of the thousands of favorable e-mails we are receiving from investors who were actually taken in by our fake scam.

We have other scam sites out there, as well, including one where we have partnered with the Treasury Department.

The crooks figured out a long time ago how best to separate people from their money, and it's about time that we use the same tactics to fight back.

Beyond educating investors, we are also looking to improve the quality of information they receive. Confidence in our markets begins with the quality of the financial information investors use to decide where to invest their hard-earned dollars. Comprehensible and reliable information is the life blood of strong, vibrant markets.

In his State of the Union address, the president called for stricter accounting standards and tougher disclosure requirements. He wants corporate America to be made more accountable to employees and shareholders and to be held to the highest standards of conduct. We share and embrace these principles. We are firmly committed to making disclosures more meaningful and intelligible to average investors.

To that end, this spring we will hold our first ever investor summit to solicit investor input. To the extent that we can improve the clarity and integrity of what investors read, we will succeed in improving financial literacy in America.

We look forward to continuing to work closely with this committee, as well as others, to advance financial literacy in America.

And I'll be happy to try to respond to any questions the members of the committee may have.

SARBANES: Well, thank you very much, Chairman Pitt.

I yield to Senator Dodd, and I'll do my questioning a little later.

DODD: Well, thank you, Mr. Chairman.

And thank you both, again, for your participation today.

And I think the benefit of having some of the comments made by our colleagues here earlier indicate the broadbase support for the subject matter at hand and how we can deal with it.

Let me say, Chairman Pitt, to you, I think the idea of the summit this spring, this is something that your predecessor did around the country on various occasions. I know he did one in Connecticut, we participated in, where it had sort of an open forum for people in the Stamford, Connecticut, area, and I think we had, 300 or 400 people showed up for just a discussion on what the SEC was doing. A variety of questions, open-ended forum. And I think he did those around the country, at least a number of them. So I think a very sound idea for getting out and listening to people around the country.

PITT: I agree with that, sir.

DODD: Well, I commend you for it. I think it'll help a great deal.

I wanted to raise, immediately, if I could, the issue of your budget. I listened to you yesterday testify, for a while anyway, in the House committee, and one of the issues you raised was the pay parity issue.

I was sort of surprised to read Mitch Daniels, the director of the Office of Management and Budget, said the pay parity was not warranted. You got a 4 percent increase in this budget. I know the budget was only submitted yesterday, but obviously news over events of the last several weeks, one might have thought that there might have been some readjusting of the numbers to put some additional resources.

I know you asked for about $500 million for the agency. The president's budget is around $440, I think is the number. Correct me if I'm wrong on some of these figures.

So there's a modest increase, yet, obviously, there's going to be greater demands placed on your agency, and the ability to track and keep people is going to be very important.

And I realize you've got a responsibility, these are overall budget issues. But this is just too important, in my view.

We're going to be asked here -- we're going to be asking you, I suspect, in the coming weeks -- you're going to be on your own initiative through the regulatory process, I think, taking some additional initiatives, if I heard you correctly yesterday.

To what extent can you comment on whether or not this 4 percent is going to be adequate, just based on what you'd like to do? Forget what we may ask you to do.

In addition, for instance, I was sort of stunned to know that there are only 25 or 26 people in the Accounting Enforcement Division. Correct me if I'm wrong on that number, as well. Senator Corzine and I had suggested, maybe, doubling that number. Maybe it isn't needed to go that high, but seems to me if you just did that alone that's going to put additional pressures on your existing budget.

So I realize it's a little awkward to ask this question of you, and knowing that you've been appointed by the administration. But I don't know how in the world we're ever going to deal with these issues if your budget is so restrained that you either lose people, can't attract people, or can't do what you'd like to do, let alone what Congress may ask the SEC to do, in light of the Enron situation.

PITT: Well, let me say that I don't feel any awkwardness in responding to your question. When I was before this committee for my confirmation hearings, both you and the chairman raised the question of whether I would be forthcoming with the committee and tell you what my views were, in terms of personnel, and I assured you that I would do that, and I intend to live up to that commitment, as well as every other.

When I first got to the SEC, and I've been there approximately five months, but when I first got to the SEC my thought was that we would submit basically a no-growth budget providing for normal inflation, plus an additional $76 million to fund pay parity, in the expectation we would get that.

I thought that after I spend two or three or four months seeing how the agency operated, I could come back and give you an intelligent view about whether we had needs or not.

Now, in the interim, unfortunately, first we had 9/11 and now I've got Enron. And the fact is that focusing on what our manpower needs has been a deferred set of experiences.

I start from the proposition that we should the use the people and monies we have efficiently before we come back and ask for more.

But on the pay parity aspect of it, I will say that we were disappointed with the decision of the Office of Management and Budget. We made that known to them that we thought that was a mistake.

I intend to work with them and try to persuade them as we go forward that, at a minimum, funding pay parity is absolutely critical to the agency. If not, the efforts of this committee and of the Congress in adopting pay parity will, in effect, have created a worse problem for us.

If there were no pay parity, no one would have expected to receive it. But now that we have a statute, not funding it creates a significant problem for me in retaining personnel.

But I believe that we'll be able to work with both the administration and the Congress and reach a successful resolution of this issue.

DODD: I thank you for your candor and your comments on that. I think you can count on many of us up here to assist you in that effort.

Let me ask you about the accounting enforcement area, since I've raised the issue with you.

First of all, am I correct on my numbers? Is that about the number of people you have?

PITT: I don't have the numbers in front of me, Senator, but I believe you are right. That's the approximate size .

DODD: That's about the size of a congressional office. A House office would have -- in fact, I think they have more employees than 20, to put it in some sort of context here.

Can you give us some idea of what you think about that? Do you believe, at this juncture, there is a need for more personnel? Or do you believe it's just a question of focusing the attention of the existing personnel on the problem?

PITT: One of the issues, I think, that's arisen since Enron has occurred is the fact that there seems to be a great deal more focus by corporations on the validity of their accounting procedures. It's unfortunate that it took something like Enron to achieve this result.

But I would say that our enforcement division, over the last three or four months, has opened up an enormous number of major investigations.

I believe that we are staffing what we have now, and staffing it adequately. But as the workload increases, and assuming it does, and if we are to take on additional responsibilities in response to Enron, either by our own regulations or by legislation from this committee, it may well be that we either have to divert manpower from other areas or we may have to suggest that we need additional manpower. We're not at that point yet.

But I want to make certain that the public is confident that if there are any incidents of improper behavior, we will go after them with great vigor.

DODD: I thank you. And as I said, you may want to talk to Arthur Levitt and some of the people who organized those summits or mini-summits he had around the country -- and going back to the literacy issues -- which I think were very, very successful. I think he enjoyed them as well as learned a lot from average small investors.

So the summit I think this spring is a good idea, but you may want to incorporate that as a regular series of activities for you, as chairman of the SEC.

PITT: One of the things I would say is I think that the town hall meetings that former Chairman Levitt came up with were an excellent idea. It's something that we intend to continue and maintain.

The investor summit is a somewhat different concept, because the people who invest as individuals, and particularly people in middle- and lower-income levels, have no lobbying groups, they have no organized representation. They can't even respond to our rule proposals, because often they don't know about it.

This is a way to give them a forum to come to us -- they can do it either on the Internet or in person -- so that we hear first-hand what their concerns are.

In addition, with respect to the specific problems of Enron, we have put forth the bare bones of a suggested methodology to respond to these issues, and we will be holding a series of roundtables specifically designed to deal with those issues. And those will be in locations other than Washington.

DODD: Thank you very much.

Mr. Chairman, I thank you.

SARBANES: Before I yield to Senator Shelby, I just want to note that the pay parity was part of a package that reduced significantly the fees that were being levied.

It never occurred to me, I have to say, that we should make the reduction in the fees contingent upon giving the pay parity, but obviously we should have done that. Obviously, we should have done that.

My own view is that -- I mean, I went down there when the president signed that bill. But it seems to me the OMB has in effect broken the spirit, obviously, of the package.

Now, the argument for doing it was very strong at the time; it's even stronger now, having been, as you've noted, held out to people and then snatched away. And I think, actually, that we've, in a sense, just been done in on it. I mean, who would have thought that in order to get in a sense the package implemented that we should have linked it and established a contingency?

PITT: Let me just say one...

SARBANES: It's not your problem. We'll address...

PITT: I do want to say this, though, that we have had very encouraging conversations with OMB. And my hope is that, working with them, we will be able to reach an appropriate resolution of the problem. But they have been responsive at least to our reaching out to them and having discussions.

SARBANES: Well, I mean, Daniels, you know, White House Budget Director Mitchell Daniels, Jr., said in an interview Friday that the administration doesn't consider the SEC's requests for pay parity justified. You know, the removal of fees was in the amounts of -- yes, billions.

PITT: And many of us had some real reluctance about that, for the very reasons that it was going to create this kind of a problem. I voted for it reluctantly, but I've got to tell you, I was nervous about it.

SARBANES: Fourteen billion over 10 years, about $1.5 billion a year, $14 billion over 10 years. And, you know, the pay parity was an important part of that package, at least for many of us. I think it's just breaking faith.

But nevertheless, Senator Shelby?

SHELBY: Thank you.

Chairman Greenspan, isn't accurate information essential to every economic decision-maker, from you, as chairman of the board of governors of the Federal Reserve, to the consumer doing his or her grocery shopping? Accurate information?

GREENSPAN: It certainly is, Senator, largely because, when you're dealing with a essentially voluntary system, which is what our society is, people make judgments, they exchange values between -- amongst themselves, all based on information of some form or another.

And for the system to work properly, you need a pricing system which reflects the value judgments of consumers. If you don't have that, the system will be suboptimal.

This means that accurate information readily available is essential for the system to function. To be sure, it's not a sufficient condition, but it is certainly a necessary condition.

SHELBY: Chairman Pitt, if consumers and investors believe that others have access to information which they do not have, it's going to affect their buying and investment activities, isn't it? And couldn't this have serious consequences for the overall economy?

PITT: Absolutely. The ...

SHELBY: They'll have no confidence in the market, the capital markets.

PITT: The essential factor here is confidence in our markets and the notion that nobody has an unfair advantage.

One of the things in light of Enron that we are committed to doing, and doing quickly, is to restore confidence in our system. It is a good system. It has flaws. They need to be fixed, and we are going to fix them.

SHELBY: If accurate information, honest information matters so much, which we all agree it does, shouldn't we find ways to strongly discourage those who impede the flow of information or would disclose outright false information, which you see from time to time and we've seen a lot of lately?

PITT: The answer is yes, but there is at least a slight caveat that I would add to that.

One of the things that we are proposing is a rule that would require companies to disclose, on a current basis, unquestionably significant information.

Under the law the way it is now, or the way the federal securities laws have been written, a company can avoid liability by telling no one significant information. In fact, that is the whole predicate of regulation FD. You can satisfy it by telling nothing to anyone.

We want to establish an affirmative disclosure requirement, so that companies are require to make meaningful disclosures at the time they occur.

SHELBY: Is it going to take legislation, us working with you, to do that? Can you do it through the SEC?

PITT: I believe we need to work together, because I don't want to make far-ranging changes without this committee's concurrence. But I believe we have all the authority we need to make these changes.

SHELBY: It seems to me like we're constantly hearing about restatements, audit failures and buy stock (ph) analysis. This is just endless.

For instance, I imagine some pretty smart and sophisticated people took the time to research companies like Waste Management, Syndent (ph), MicroStrategies, Enron, and Global Crossing, and then got taken for a big ride.

What does it take to survive in the marketplace? Does it take a PhD in finance? We're talking about education, you know, financial education. I think it first takes honesty, honesty in the markets, because if there's fraud and sharp dealing or something close to that, people will have no confidence in the capital markets, will they?

PITT: Senator, I agree with you. And if it takes a PhD for people to be able to invest, we have failed.

I believe that there are a number of things that need to be done in addition to making disclosure much more comprehensible. Financial statements cause one's eyes to glaze over. We want to have plain- English financial statements. We want to have accounting principles that deal with the concepts rather than trying to create a cookbook list of things that auditors can look at and then paint a picture of a company that isn't accurate.

SHELBY: I know my time's gone, but how do you as chairman of the SEC and perhaps we in the Congress deal with the honesty situation in the reporting of financial statements?

In other words, if things are off the balance sheet, partnerships and so forth, they're put off there to keep them off. I mean, it's intentionally off the balance sheet, debt and so forth. That is obviously, to an ordinary person, a misleading of the financial condition of a given company. And yet, the average person wouldn't know that.

PITT: That's absolutely correct. And part of the problem is that, more than a decade ago, a request was made to the Financial Accounting Standards Board to deal with these SPEs or special-purpose entities. And with some modest exceptions, they are still not resolved as to how to come out on those issues.

SHELBY: Can you resolve it? Obviously, they're not going to be able to resolve it. Can you resolve it, as the chairman of SEC, to where these instruments will be part of the overall financial statement, where people can need them and know what the true liabilities of a company are?

PITT: Several weeks ago, I went up to the FASB and I met with them. And we indicated that the process was not working, that we were not satisfied with it and that we needed a response on this particular issue before the end of the year, which they have committed to do.

I believe that the SEC has authority to do it directly. But I think having a private-sector standard setter is the right way to go, as long as it actually sets standards. If it doesn't function, that's a problem. And for a decade or more...

SHELBY: It has broken; it's failed. The private accounting system has failed on all these instances we're talking about.

PITT: Let me say I believe that for about the last eight to 10 years, the tardiness of the FASB has been transparent, but nothing has been done to fix the problem. We intend to fix it, and we intend to fix it quickly.

My own view is if you can have the private sector set the standards, that's ideal. But if they won't set the standards, we will either find another body that will or we'll do it ourselves.

SHELBY: Why don't you do it yourself, because it's shown to everybody that they haven't had the standards. They haven't done it. It's the fox watching the hen house. We've known that.

PITT: It's not supposed to be the fox watching the hen house.

SHELBY: Well, we're talking about reality here.

PITT: Yes. It's not supposed to be the fox watching the hen house.

But you raise another important problem, with respect to the FASB. It gets all of its financing from the accounting profession. We have said that we are not satisfied with that. We don't want the accounting profession to directly finance the FASB.

But having in place a group of people who are knowledgeable, who are expert and whose only mission is to promulgate comprehensible accounting standards is the most efficient and effective way to have better financial statements.

But if we cannot rely on this process, then they'll be no alternative. The SEC will have to take it on. I think that's decidedly less desirable.

SHELBY: Thank you, Mr. Chairman.

SARBANES: Senator Bunning.

BUNNING: Thank you, Mr. Chairman.

Chairman Greenspan, I'm impressed by the example you gave of education for your own employees. And I think every corporation ought to think in those terms. That is, protecting your employees from the personal devastation of debt is a legitimate productivity issue, because an employee who is constantly being badgered by collection calls, worried about losing mortgages, et cetera, is not as productive on the job.

Now, you're a regulator. You regulate banks. One of the most contentious issues within this committee -- I know the chairman and the ranking member have strongly different views about it -- is the question of CRA and what banks do to meet their CRA requirements.

Senator Gramm and Senator Shelby have both been targets of groups that have come to their homes, demonstrated, trampled down the flowers, what have you, because they were afraid that the position that Senator Gramm, Senator Shelby would take might interfere with the flow of CRA funds to their groups. And many of them are in the education business.

Is it a legitimate activity for the Fed to think about the regulatory oversight to say that groups could fulfill their -- or banks could fulfill their CRA requirements by doing educational outreach efforts in the field we've been talking about this morning? Or is that a total disconnect that I ought to forget, with some polite language from you, because you're always polite.

But is that something that might have some value to it?

GREENSPAN: First, I'd better ask our general counsel whether it's in our statutory authority in the CRA.

This is Dolores Smith (ph), one of our excellent staff, knowledgeable about everything.

DOLORES SMITH (ph): OK. There are some educational initiatives that are being sponsored by banking organizations. And, to my knowledge, they probably are receiving credit and probably rightly so.

BUNNING: So somebody smarter than I has already thought of it. So the next question is, does it make any sense to think about expanding?

GREENSPAN: Well, my judgment about the whole question of CRA financial education and all the relevant issues that surround it, is that we underestimate the importance of financial education in reaching the goals which CRA and the whole subsidiary of consumer regulatory structures endeavors to achieve.

Ideally, if everybody were fully rational and looked after their own self interest, the banks would not be leaving money on the table, so to speak, and not granting loans to a number of neighborhoods from which significant profits could be achieved.

And what we have found, as a number of people have begun to understand, that lending throughout the area of a bank's community will maximize earnings.

Similarly, we find that a number of people have absolutely no insights into numbers, per se. And you will get, for example, in all the areas where the chairman has been focusing, with respect to predatory lending -- predatory lending is not something which would happen, if everybody knew what they were signing...

BUNNING: That's correct.

GREENSPAN: ... and knew, indeed, what they were doing.

And here, education is critical. So that my view is that if there is one area in the whole consumer affairs lexicon that has been grossly underserved in this discussion that we've been having over the years, is how do we get people to understand what it is they are being confronted with?

And the only way to do that is to enhance the educational capability in areas related to finance. And that is basically, simple mathematics, whether it's -- Senator Schumer was saying trigonometry may not be relevant, but compound interest is. And that presupposes a fairly sophisticated knowledge of arithmetical relationships.

People may look at a 400 percent interest rate, which is in the document they're about to sign, and they sign it. And you have to ask yourself, why are they doing that? Well, the obvious answer is they don't know what they're doing.

And it's crucially important, to whatever extent that we can do it, to enhance the educational capability of the American people, because, as this financial system becomes ever more complex, the issues are going to become far more difficult to deal with. And we need education to keep up with the complexity of the system.

BUNNING: Thank you.

I just have a memory, as you talked. I learned how to write out a check, which I had never done before, and suddenly had to have a checking account, from the bank that gave me the checkbook. And the bank officials sat down and could tell that I really didn't have a clue as to how to deal with this and explained to me how you wrote out a check. Now that's something I could have learned in sixth grade. It's not that difficult.

BUNNING: But it was the financial institution I was dealing with that gave me that information -- how to write it out and how to keep the checkbook balanced and so on.

So I agree with you that it's to the bank's self-interest, that is the legitimate bank as opposed to some of the predatory institutions we've been talking about, self-interest that their customers be as informed as possible.

And CRA is something that banks are always looking for ways to qualify. And I would just encourage you to see what you could to do to expand that activity on the part of the banks you regulate.

GREENSPAN: Well, I think that's a very thoughtful suggestion, Senator. I thank you.

BUNNING: Thank you.

SARBANES: How do we establish this Financial Literacy 101 that we'd like everyone to go through, in terms of trying to educate them? I mean, where should that happen, or who should do it?

Should someone amongst the government agencies put out a pamphlet that sort of says, "What you should know about credit cards," that everyone would be induced to read before they took the credit card? I mean, if you want to take it to an extreme, I guess you could say, "Well, you can't get a credit card if you don't pass the credit card test," like you can't get a driver's license if you don't pass the driver's license test.

I mean, I'm just using credit card as one example. You could take other examples, as well. And you say, you know, you have to pass this minimum standard of knowledge before you can assume these obligations.

We have figures here that -- 78 percent of college students have at least one credit card, many have four or more. The average credit card debt among undergraduates in 2000 was $2,748. Nine percent of students carried a balance exceeding $7,000. The number of young Americans between the ages of 18 and 25 that have declared bankruptcy in the 1990s nearly doubled from 60,000 to 118,000; 2,000 young people accounted for about 7 percent of the nation's personal bankruptcies.

I mean, where do we put the finger?

Now, I was interested, Senator Carper said, well, you know, he was the state treasurer and his state has undertaken this responsibility of sort of conducting, I gather, a full-scale financial literacy educational program. I'd be interested in your thoughts on this.

GREENSPAN: Well, Senator, we try ourselves to do a lot of it, in the sense that we do have booklets on a number of different issues, including credit cards, trying to enhance financial education.

I think the way to come at this problem is to understand...

SARBANES: If I'm a parent, can I write to the Fed and get a package of those booklets and give them to my son or daughter -- I was going to say as a Christmas present, but a lot of people wouldn't think it's much of a Christmas present...

(LAUGHTER)

Give it to them under some rubric, you know.

(CROSSTALK)

SARBANES: Yes, or something, as required -- or I tell them you can't get your driver's license until you work through these booklets and take the test in the back of them, for which I have the answers, before I'm going to allow you to move ahead and get your driver's license.

You know, it sounds sort of funny, but it's really serious. We got people out there taking on these obligations; they have no idea what they're doing.

GREENSPAN: No. I agree with that.

You don't need to get a package for Christmas. I mean, one of the great advantages of technological advance in recent years is, it's all online. And people are going to our web sites, I guess, the regional banks, as well as the Fed's web site, has got a very large quantity of such material.

But let me be more responsive, Mr. Chairman, to the substance of your question.

Financial information and financial understanding is derived from simple arithmetic, and primarily one must start at the base. If you do not understand arithmetic -- if you don't understand how to multiply, divide, you're not going to understand finance, period. So that it's crucially important that at a very early age that people understand numbers.

And I find that a very significant part of the problems that very well-educated people have when they look at the type of literature we're just discussing is they do not understand it. More importantly, they're embarrassed to suggest to you that they do not understand it.

And the reason they don't is they're not used to dealing with numbers, per se. I mean, I learned fractions very young, because I had to calculate baseball averages...

(LAUGHTER)

... and you've got an incentive to do it. And by the time I got to fractions in school, I mean, I was a whiz, provided it had something to do with ratios usually under .04, because I didn't know anybody with batting averages over .04.

(LAUGHTER)

But the point is that, you've got to have a numerical base. And I would suggest that, crucially important, and this probably goes back to grade school and high school, is to make financial education, even in the simplest form, sort of the class right above arithmetic. In other words, have people actually engaged in doing interest, compound interest, know what it is. And indeed, my recollection is that they do that.

And I think it develops at the high school level, and that's where it really has got to be, because by the time you get to college if you cannot handle a credit card, it implies a state of knowledge which is really quite inferior to what one should have by that point.

SARBANES: I don't recall. Is it you or the SEC who has those kits that you send to the middle-school math teachers?

STAFF: Treasury does.

SARBANES: Is it Treasury that does that?

STAFF: The Bureau of Public Debt, yes.

SARBANES: What?

STAFF: The Bureau of Public Debt.

SARBANES: What's that called?

STAFF: Money Math.

SARBANES: That's it. I'm sorry. So it's Treasury that does that.

STAFF: It's Treasury, yes.

SARBANES: And you send them out to all...

STAFF: That's right. I think over 100,000.

SARBANES: Why don't you describe that for us, just briefly.

STAFF: Well, it's a math program for grades seven to nine that focuses on money skills, and it's been very successful. We've sent out over 100 kits to over 110,000 middle schools at this point. It's very much in demand and pretty pervasively used.

If I could just build on...

SARBANES: Could we get a copy?

STAFF: Kit? Sure. Absolutely.

SARBANES: Just so we see what you're doing with the middle school students, so we don't get embarrassed, as Chairman Greenspan says, by admitting we don't know. It may be very helpful to us. So we'd like to see what you're doing in that regard.

STAFF: If I could just add -- build upon what Chairman Greenspan said. I think there's a prime opportunity, pursuant to implementation of the president's education program, which requires that standards be developed at the state and local level in both reading and math, and that there be measures for assessing progress in those standards. School districts throughout the country right now are dealing with developing those standards.

And what we would like to do is encourage them as part of developing the standards and building the curricula to support the standards to interweave financial education into that process.

It's good for separate personal finance courses to be offered, but we think, as Chairman Greenspan said, these are fairly complex skills that need to be built upon and offered year after year. And if they can be integrated into courses that are already required in reading and math, we think that would be an immediate way that school districts can respond to this need for greater financial literacy and a process that they're required to do right now, pursuant to the president's education bill.

SARBANES: Senator Dodd?

DODD: Thank you, Mr. Chairman.

Just picking up on that. There are some very creative ideas out there. In Lime, Connecticut, a little town neighboring my town, they have a bank at the grade school, where people actually take on responsibilities. It's just a very creative fun things to do.

I like what the chairman was talking about in keeping baseball data. I know, John Henry, the new owner of the Red Sox, describes in detail -- I've read stories about him -- where as a kid growing up on a farm in Illinois, he would try and figure out the baseball percentages, the percentages of the players, before the papers came out in the morning. It's exactly the same thing he did that developed his interests.

So there are wonderful ways in which people can become more knowledgeable about it.

DODD: I think weaving it into the curriculum, as well, obviously math is an obvious one, and reading. But there are other disciplines as well, in which understanding financial institutions and history and so forth, the role they played in our history as a nation, can be very, very important as well. It's just that the paucity of it, I think, contributes to what we found.

I just want to make a couple of points and a question if I could, Mr. Chairman. One is, I, you know, FASB's located in my state, Norwalk. And I hear my friend from Alabama, and I hear the chairman. I happen to think Ed Jenkins (ph) for instance has done a terrific job at FASB. And I don't disagree with my colleague from Alabama either about the idea of possibly making it a federal agency.

But I want to point out that, in a lot of circumstances -- and I recall some of them here, when I watched Ed Jenkins sitting at the very table you are, getting blistered by people over pooling and purchasing practices in the accounting area. And he stood his ground, despite the fact that there, as my colleague properly points out, these are paid for on sort of an SRO status. But these are very, very good people, and they work very, very hard, have a lot of integrity.

And there's clearly a need here to improve the Accounting Standards Board, how it works and operates. But I didn't want this hearing to end on a note where it was sort of the impression that these people were in the tank when it came to the accounting profession, because I don't think that's the case at all, nor do I think, Chairman Pitt, that's the impression you wanted to leave, but...

PITT: I appreciate your making that point. That is not the impression I want to leave. I actually would place the fault with our agency. I think we have a responsibility to oversee the process, and I think we have not done that. That's one of the reasons that it's a high priority on my list when I came into the job.

DODD: I thank you.

I want to just point out, the chairman made the point on some of the education efforts that are going on. The state of Wisconsin, I'm told, has a very good program in their -- includes personal finance instruction in the school curriculum, according (ph) to (ph) the Wisconsin director of the office of financial education for the State Department of financial institutions. States that include such finance classes in their schools tend to have lower rates of bankruptcy throughout the state.

So at least, I don't know, maybe other states that are taking the lead on an individual basis, Mr. Chairman, but I think it's worth noting.

I wanted to ask you, Chairman Greenspan, if I could -- I know we're going to have hearings -- that the chairman has laid out a very thorough set of hearings on the Enron issue.

But I wanted to raise a question for you, Chairman Greenspan, about the pension issue. There's a lot of discussion about how this ought to be handled.

There have been some suggestions. Two of our colleagues, Senators Bingaman and Senator Collins, would require employers to make available independent, qualified investment advisers to provide financial advice to employees interested in investing in 401(k) plans and the like.

Would you mind just sharing with us some of our thoughts on this issue? This is a very complex issue and one that really has got to be handled carefully, in my view.

And I -- some of the ideas are very tempting because of what you heard happened to these folks at Enron. But I want to make sure, in doing and addressing that issue, we're not going to do in some way do real damage to people's ability to invest in their own companies and their pension plans.

And I'd be interested, just as a generic comment, what your thoughts may be on the issue.

GREENSPAN: Well, first of all, Senator, the pension industry in the most general sense is really a relatively recent phenomenon. Aggregate amounts of pension funds invested 30, 40, 50 years ago are really quite small.

It's become an extraordinarily important part of the American economy in the sense that you have people making judgments as to the value of existing assets in the economy, and that is what governs, what generates real, new plant and equipment. And it creates the overall economic system that we have.

So, that financial intermediary, which is what it is, has become one of the crucial aspects of the overall American economy which moves savings into investment.

It is crucially important that that be done efficiently and be done in a way in which not only do individuals put aside monies for their retirement and understand what they need, and this clearly is a crucial issue, but it is invested in a manner which optimizes the structure of the real investments which we create in this country.

And I think the issue you raise is very important. That is, to be sure, there are changes which clearly have to be made, and I think the president is moving in the right direction on that. But as you make them, it's very crucial to continuously ask the question, "What are the secondary, unintended consequences of the actions you're taking?"

Because the system in general with certain obvious flaws -- and I guess Chairman Pitt and I could go through a number of them that we perceive that need to be corrected, and I trust they will be -- but even granted those flaws, it is really quite an impressive system. And it's carried this country to a very high standard of living, and we ought to be very careful about how we approach changes.

DODD: I thank you for that, and that's very worthwhile. And I presume we're going to have a chance to maybe come back and ask you to participate in this discussion with us. Obviously, Chairman Pitt will be, but I think it would be very worthwhile to have your thoughts as well.

Mr. Chairman, I just have a couple of other questions. Do you mind if I ask them, or maybe my colleague from Alabama wants to add something? I'm sorry, I apologize.

SHELBY: I'll yield to him (OFF-MIKE).

DODD: Well, one is, there were two very interesting articles, going back now to the subject of literacy, that I thought was important, that relate to it anyway.

One was in the Wall Street Journal on January 2. It noted that consumer debt is at record levels. We've all talked about that already. And it raised what I thought was a very critical question. I just want to read you very briefly from the article.

It says, and I'm quoting here, "In the short term, consumer spending stimulates the economy. But the usual growth in consumer borrowing during the current recession also poses a danger, that at some point consumers will have to divert more and more of their income away from spending on goods and services and toward repaying their debts. Such a shift would slow the economy, reducing the chances of a speedy recovery.

"That is, of course, unless consumers default and under the weight of all their debt, or that debt, packing the bankruptcy courts and spreading financial distress among their creditors. Either way, many economists argue the current mountain of consumer debt is likely to mean trouble."

So I would like to ask Chairman Greenspan and Ms. Bear (ph) how we might better educate, obviously, about the issues of consumer debt. And then relate that, if you could, to the second article, which appeared in the New York Times on January 13.

And it says here, it says, "When it comes to saving for retirement, Americans are not rational. They know that they do not put enough away, surveys show. Over a lifetime, people rationally save an optimal amount, mainstream economics holds. Confronted with the reality that people do not save enough, the mainstream has no solutions except to reiterate that people are rational, so whatever they save must be enough."

I wonder if you think people are currently not saving enough for retirement and that this behavior defies economic interpretations under the rubric of rational behavior.

And I wonder if you might comment on both of those and what we might do. And what ideas do you have about what we discussed here to try and convince people that savings -- why can't they see that as an attractive alternative to them right now?

SARBANES: I understand that one out of every seven dollars of disposable income is now -- has to be committed to paying debt, and that that's at a very high level, historically. But that's a spike up in the debt burden people have to service and in the amount of their current income that they have to commit -- of their current disposable income, that they have to commit to that purpose.

GREENSPAN: Mr. Chairman, I am planning to devote some time to that issue, hopefully, at the committee hearing that you are going to have on the monetary policy oversight. Because it is a very important question as a global economic issue.

But getting to the micro question that Senator Dodd raises, economists may argue that, if people act rationally, they will do such and such. But there's a premise that's missing in that relationship, is that they have to know what to do.

The issue of trying to make a judgment as to, given your current level of income, what you expect it to be, what you expect your family obligations to be, and what you would like your post-retirement standard of living to be, are very complex issues to determine no matter how rational you are.

GREENSPAN: Then you begin to put into that ingredient, into that mix, the question of what interest rates you expect, what do you expect in equity price values, and it's an extraordinarily complex calculation.

People who are in the business to do it well, if they come off even remotely forecasting what happens in the future at all, are pleased. So it is a very complex and difficult issue. And it's at the root of the notion of financial literacy.

Indeed, all of the tools that we talk about with respect to financial literacy converge on the question of one saves for retirement, in what form and in what manner.

And I should think that the general thrust of where we ought to go, if we did nothing other than to say how do -- how should people effectively save for retirement, what they would learning the process of making those judgments would serve them well in virtually every other activity relative to finance that they're apt to confront in their lifetimes.

SARBANES: Senator Shelby?

SHELBY: Thank you.

SARBANES: Senator?

DODD: No, I just wondered about the first statement too about the danger where people start, instead of investing in goods and services, that debt becomes such that they're just paying off debt, and economists arguing that this is of course, going to have the very opposite effect.

GREENSPAN: Oh, no, indeed, if -- well, first of all, let me just say you could be perfectly knowledgeable and you can be perfectly rational and decide to build up a very large credit debt at the age of 20 in the expectation that you are going to be earning some extraordinary amount of money and be able to pay it off within two years.

Now you may be right, you may be wrong. But you can do that rationally. The question is, people don't understand the risks that they confront. And I think part of financial education is a very healthy examination of history, and history suggests that education is often a very useful activity.

DODD: Ms. Bear (ph)?

BEAR (ph): I think a lot of people, Senator Bennett's example earlier in the course he taught, a lot of people understand it costs money to borrow money. And the longer you take to pay it back, the more it's going to cost you. Again, it goes back to fundamental lack of understanding of compound interest, how it works for you, if you're saving, how it works against you if you're borrowing.

Again, the problem comes back to financial literacy. We think in the long term the best way -- it's a problem of epidemic proportions as those numbers indicate. In the long term, getting more financial education in the school, we think, is going to be key to the solution, because it's the best venue we can think of to reach a very broad segment of society.

In the short term for the adult population that currently lack adequate financial skills, we think workplace education programs hold a lot of promise. DOL has done a lot of good work in that area. There is a tremendous amount of resources currently available. Chairman Greenspan -- the FED has a fabulous Web site, but people aren't using it. Or if they're trying to use it, they don't understand because they just don't even have the basic skills to absorb the resources that could be provided.

I would also like to add, I think this has been overlooked in the press accounts of the president's retirement security proposals that he unveiled last week. But financial education is the key component of that. One of the proposals is to require that all plans provide quarterly earning statements so that there's better and more timely information about your asset values in your individual accounts.

We're also going to be requiring specific disclosures about the value of diversification, the dangers if you don't have a diversified portfolio. And again, providing that kind of information through the workplace, kind of with your employees, you're kind of a captive audience to be able to disseminate the information, we think is going to be effective. We hope it will be effective.

DODD: That's good.

The last thing, Senator Sarbanes will recall, Senator Shelby as well, going back years now, but we had under some of the truth and lending proposals and the credit card legislation, just even getting on the solicitations, to let people know what annual fees would be, what interest rates would be and so forth, in clear, bold lettering, even putting examples of what would happen if you borrow a certain amount and you only pay the minimum each month, what you're ultimately going to be paying. Just letting people know in those simple examples, I got to tell you, it wasn't easy. That sounds today, we had huge battles over this.

So there is a long history here, unfortunately, of financial institutions resisting things as simple as just putting people on notice as to what they're obligations were in the solicitation, period.

And so I just mention that as background.

But anyway, thank you very much.

SARBANES: Thank you.

Senator Shelby?

SHELBY: Mr. Chairman, I'm not here today to assault the accounting profession, per se. But I am here to call into question a lot of practices that have brought about the payment of billions of dollars because of accounting failures of flawed accounting and so forth. I think that's part of our obligation.

I also believe that's a part of the chairman's, the SEC's, obligation. And I know he will do the job, because he's well prepared for the job that he holds now.

Who is in the tank here? Who is in the tank? Obviously, it's the investors that are in the tank if they don't have accurate information, notwithstanding how educated they are on financial dealings. If they don't have accurate information, something is wrong.

Who else is in the tank? Pension holders. We can go on and on, but who is really at risk? The capital markets are at risk because people will shun them because the average person will not have confidence in them.

And I think there's a lot of people in America and the world looking at our markets today. We've always been told by your predecessors and others that the SEC was on top of things. You know, they rout out the evil in it, or the fraud in it .

But I think we can't have business as usual in the accounting profession that we know and have relied on for a long time. So I believe that there has got to be a resolution to it, a strong resolution, not just move on to the next story. So I believe either the SEC will have to step in here, with higher standards or something, or we will have to step in some way. Sometimes it calls for that.

The SEC, as I understand it, is the watchdog, to use a term, over the capital markets. And you have a lot of power over, ultimately, over the accounting profession, as we know.

I think the facts, Mr. Chairman, call for a resolution. And I know you will have hearings on this and other hearings will go. But I think the bottom line you will ask, "Can the accounting profession police themselves?" That's going to be one argument, and say, "Gosh, these are great people," and a lot of them are. But can they police themselves or will they have to be policed?

I don't think today that it has shown that they can police themselves. I will have to be shown.

So, we know something is wrong. I also believe you cannot mandate honesty. You can legislate honesty. But you can set the standards so high at the SEC, and accounting and legal professions, medical professions, that when people really try to game the system, beat the system or bordering on fraud if not perpetrating fraud, that if they're made examples of, it sends a notice to everybody else.

I believe, to say the least, the accounting profession is on trial in a big way right now.

Thank you.

SARBANES: Thank you very much, Senator Shelby.

In drawing to a close, let me note that the committee will continue examining this subject tomorrow, with a panel of witnesses, including representatives from the Americans for Consumer Education and Competition, from the Consumer Federation of American, from the American Savings Education Council, from the American Association of Retired Persons, and from the National Council of LARASA (ph) and additional witnesses.

On Thursday, we will look at the Superior Bank failure. We asked at that time for the Treasury IG, the FDIC IG and the GAO to examine that situation. And they are prepared to report. So we will receive their reports on Thursday of this week.

Beginning next Tuesday, the committee will start a series of hearings on the various issues that have arisen out of Enron and similar situations that have occurred, which will continue on through the rest of the month and into the month of March.

SARBANES: And we hope, or intend, through those hearings, to lay a comprehensive basis to examine the situation with an eye towards what is systemic or structural changes are necessary in order to either prevent or at least substantially minimize the chances of similar reoccurrences in the future.

Now, lots of people are running around pointing fingers at lots of other people. It's interesting to watch, but we hope through this set of hearings, to really give a very thorough and careful set of hearings to develop the substantive basis for making these judgments in terms of what ought to be done about the future, to give the public some confidence and assurance about the workings of our financial markets.

It's an important strength of the American economy, and if that confidence erodes, it has not only the consequences, the very tragic, human consequences that we're seeing every day, but in my opinion, it also has severe implications for the overall workings of the economic system.

So we need to obviously move on this matter, and move in a way that really puts in place important remedies.

I want to thank the panel very much for coming. It's been very helpful.

And the committee 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:  PAUL S SARBANES (94%); TIM JOHNSON (57%); JACK REED (56%); EVAN BAYH (56%); CHARLES SCHUMER (56%); DEBBIE STABENOW (55%); ZELL MILLER (55%); CRAIG THOMAS (55%); JON CORZINE (54%); DANIEL K AKAKA (54%); PHIL GRAMM (54%); A WAYNE ALLARD (53%); MICHAEL B ENZI (52%); JIM BUNNING (51%); MICHAEL CRAPO (51%); JOHN ENSIGN (50%); 

LOAD-DATE: February 10, 2002