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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives McCollum, Roukema, Bachus, Castle, Campbell, Royce, Manzullo, Ryan, Ose, Sweeney, Biggert, Terry, Toomey, LaFalce, Vento, Frank, Waters, C. Maloney of New York, Watt, Bentsen, J. Maloney of Connecticut, Lee, Goode, Mascara, Inslee, Jones, Capuano and Sanders.

    Chairman LEACH. The hearing will come to order.

    The committee meets today to receive the Semiannual Report of the Board of Governors of the Federal Reserve System on the Conduct of Monetary Policy and the State of the Economy as mandated in the Full Employment and Balanced Growth Act of 1978.

    Chairman Greenspan, we welcome you back to the committee. It has long been my view that no committee has a greater oversight obligation than this committee, with its jurisdiction over the Federal Reserve Board and its conduct of monetary policy.
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    In order that all Members may have an opportunity to examine the Chairman, it is the intent of the Chair to allocate opening statements to the Chairman and Ranking Member of the full committee, as well as the full Subcommittee on Domestic and International Monetary Policy. All other opening statements will be included for the record.

    In this regard, it has come to my attention that the semiannual report on the conduct of monetary policy and the state of the economy is one of many such reports scheduled to terminate at the end of the year under a 1995 statute. I would like to assure Members of the committee that we are working closely with House leadership to rectify this issue on a timely basis. But whether or not there continues to be a legislative mandate for regular congressional review of the Fed's conduct of monetary policy, it would be the committee's intent to require the Chairman to report regularly on the state of economy and the Federal Reserve policies to sustain economic growth and promote the fullest credible employment of the American work force.

    The combination of a more disciplined fiscal policy promulgated by Congress and prudential stewardship of monetary policy by the Federal Reserve has produced the longest peacetime expansion in modern U.S. history. The facts speak for themselves. The unemployment rate is at a 29-year low, inflation is at a 33-year low, inflationary pressures appear subdued, and the Federal budget surplus is growing.

    In this reinforcing cycle, low inflation and low real interest rates have produced real wage increases for the American people. It is a circumstance which has remarkably caused the ability of this Congress to deal with issues like Social Security to become much more manageable.
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    In this context, let me just stress that as Chairman of the committee of oversight over monetary policy, I take as the highest obligation the necessity of maintaining the independence of the Federal Reserve System, which I consider to be the 20th Century's most innovative institutional addition to the science of government at the national level.

    Let me just request unanimous consent to put a fuller statement in the record and also ask unanimous consent for other Members to revise and extend their remarks and put fuller statements in the record.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you very much, Mr. Chairman.

    Chairman Greenspan, we are delighted to have you with us again today. When you have a job description, I am sure the very first few words will say, ''Testify before Congress with some frequency.'' Then you will put a smiley face, because that is clearly the most pleasurable aspect of your job, I am sure. We surely will work together with the Chairman in order to ensure that the law says that you must perform this joyous task with great frequency.

    Mr. Chairman, as you often noted, the United States economy is doing quite, quite well; and Chairman Leach ticked off some of the indicators which reveal that. Surely this is due in considerable part to a reduction in the Federal deficit; surely it is due in considerable part to the fact that the Federal Reserve and the Treasury Department have effectively managed exposure of the United States economy to the financial and economic crises and difficulties going on internationally.
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    Right now I am most concerned about the international economy and how monetary policy can and will be used to balance domestic and international priorities. Our economy might yet be affected by the past, present, and future international problems, and problems abroad are adversely affecting certain sectors of our domestic economy which averages often mask.

    In addition, foreign capital flows to the United States have financed our current account deficit without allowing the problems normally associated with such a deficit. I am concerned about what the prospects are for a possible drying up of those capital flows, what could cause it, if there is anything on the horizon that might do that, and what would the consequences be, and what responses would be available to us, either through fiscal or monetary policy.

    Moreover, clearly the problems of a global economy are not over. East Asia is not recovering as quickly as we would like. Japan remains reluctant to adopt adequate policies to bring itself both out of recession and to resolve its bad bank debt problem. The situation in Latin America is murky. The European monetary union is brand new. And according to some information I saw recently, even Germany suffered a negative real growth in GDP in the last quarter.

    There are some other issues of concern I hope we can address this morning. I believe it is your position that the economy may have grown too fast in the last quarter and that it could signal potential inflation. Some individuals are concerned that the Fed might, in contemplation of this, be considering increasing interest rates in the future, and yet this obviously would have its downside, too, especially because of the huge amount of consumer debt.
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    Others believe the Federal Reserve is going to rely on the bond market to raise rates. I am interested in your thoughts on that, what are the prospects for that, and what your attitude toward that is.

    I am also concerned about what the role of the Fed and the Treasury is in foreign exchange markets. The position is that there is no intervention, and that our trading partners are not manipulating exchange rates to enhance their trading position with us. Yet our domestic interest rates relative to interest rates abroad clearly affect international trade and capital flows, and I am interested in your comments on that.

    Most especially we have almost as much trade with Canada and Mexico, our two border countries, as we do the rest of the world. They are now our top two countries, and we have seen a real devaluation in the currencies of both of those countries. Both are either at or near their historic lows.

    This has significance for the totality of our domestic economy, but it has special significance for border communities on the north, from the State of Washington up through New York to Maine. And of course on the entirety of our southern border there has been greater devaluation and volatility with the peso by far than with the looney.

    I am very interested in what the prospects might be for future stability in that currency relationship and what the importance of that might be, too.

    These are just some of the myriad of questions that I am hoping you will be able to address as you proceed this morning. Thank you very much.
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    Chairman LEACH. Thank you, John.

    Mr. Bachus.

    Mr. BACHUS. Welcome, Chairman Greenspan.

    Most Americans realize that the economy is doing quite well. I don't think you can turn on the TV set, listen to the radio, without realizing that we have an exceptional economy. But as good as it is, I am not sure that most Americans or that most of us even realize how exceptional it is in certain respects.

    When you look at the record, at the hard numbers, it becomes apparent that the United States is enjoying a period of almost unparalleled economic prosperity. Some Wall Street pundits have described this as a ''Goldilocks'' economy, and that invites skepticism when you use euphoric terms like that. I am sure it sort of bothers you. It is somewhat troubling. But I would say that if there ever has been a Goldilocks economy, it is now. It is difficult to really know why it is so good.

    The porridge in the ''Goldilocks'' fable was neither—it was not too hot and it was not too cold. I think that is what the economists refer to when they refer to a ''Goldilocks'' economy. But in fact, this economy—I think what they mean is it is hot where it should be hot and it is cold where it should be cold. I think they are referring to that.

    What I mean by that is, as you know, we throw these figures around, but they are really astounding, and that our gross domestic product grew last year at slightly over 4 percent. In the last quarter of last year it grew at about 6 percent. Yet we had an inflation rate of about 1.5 percent last year, which is an astounding combination. Economists tell us that that just cannot go on.
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    The other thing I think is exceptional about this economy is how it has reached down to the workers that are most vulnerable. I noticed that Senator Sarbanes—I had read an article in the New York Times where it said that the current economic expansion has been a terrific boon to workers, especially those at the bottom of the pay ladder who have had the most trouble getting and keeping jobs, especially good ones. I had that in my remarks, and then I noticed that he complimented you for it.

    But I want to again compliment you and for your leadership in being a part of creating such an economy.

    I would just end by saying that last year we created 2.8 million jobs, 2.8 million jobs in the economy. January figures are in, and the economy created 245,000 additional jobs in January, so this is an exceptional story.

    I will conclude by saying this, that when it can't get any better—that is what people keep saying, unfortunately, it can't get any better. I think the stock market is pricing in a Nirvana ad infinitum. They are pricing in that it is going to get better, it is great, it is going to keep getting better. I know you are concerned about this, but I am not sure what you can do when things are working very well. I am not sure what you can do.

    I know there are cold spots. I know our farmers are suffering. I know low commodity prices are causing the domestic oil industry concern. Our exporters, because of the appreciating dollar, are being hurt. But, all in all, I think it has been a very good year. I think your policies at the Federal Reserve have been outstanding, and I compliment you.
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    Thank you.

    Chairman LEACH. Thank you.

    I see Ms. Waters is not with us. Please proceed, Mr. Greenspan.

    Mr. SANDERS. Point of parliamentary privilege, Mr. Chairman.

    Chairman LEACH. Yes, of course.

    Mr. SANDERS. I apologize for having come a little bit late, but I thought it was the custom that each Member have a chance to make an opening statement. I think that is a pretty good precedent we should maintain.

    Chairman LEACH. First, it is a sometime custom in the committee. Second, opening statements under the rules of the House are the prerogative of the Chair.

    One of our problems, and I respectfully appreciate what the gentleman is saying, but we have a 60-Member committee, and under the five-minute rule, with the math on that—and we have a Chairman—when we double that, which is the implications of opening statements, we have real difficulty.

    Mr. SANDERS. I agree with that, Mr. Chairman.
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    Chairman LEACH. In any event, what I have tried to do, among other things, is shorten the opening statements to three minutes and parse it out.

    I would say, by the way, that because we have had two on our side and one on your side, if the Ranking Member would like to allow a second speaker on his side this morning, I would be very amenable to that.

    Mr. LAFALCE. I would certainly request that, Mr. Chairman.

    Chairman LEACH. It is up to your discretion to designate who.

    Mr. LAFALCE. Thank you very much, Mr. Chairman.

    Chairman LEACH. The gentleman had an inquiry.

    Mr. SANDERS. Your point about five minutes for 60 Members is exactly right, but there is no rule it has to be five minutes apiece. You could limit it to a minute or two.

    This is an important discussion. Mr. Greenspan is not here every day. I would respectfully request a minute or two minutes, and there may not be a whole lot of folks who would like to talk, but I think that is a good practice.

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    Mr. LAFALCE. May I ask which Members of the Democratic side would like to speak for a brief period of time? Would you please——

    Mrs. JONES. I give my time to my colleague. I would encourage you to give any time you are going to give to me to Mr. Sanders.

    Mr. SANDERS. Thank you.

    Mr. LAFALCE. How much time do we have allotted, two or three minutes?

    Chairman LEACH. What the Chairman had designated in advance was four Members would be allowed to speak for three minutes each, and if you would like to allow Mr. Sanders to speak for three minutes, I am quite amenable.

    Mr. LAFALCE. I give Mr. Sanders three minutes, yes.

    Mr. SANDERS. Thank you very much, Mr. Chairman.

    I would just like to say this. In recent times, Mr. Bachus and I, we find ourselves usually in agreement, but I would suggest we have a disagreement this time.

    There is no argument that in recent years the economy has in fact been very good, but we should not overdo it in terms of what is going on for the average working person in this country.
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    The good news is that for the last couple of years, for the first time in decades, we have seen wages go up for lower-income workers and middle-income workers, for the first time. But the fact is that the median family income in 1996 was $1,000 less than in 1989. The inflation-adjusted earnings of the median workers in 1997 were 3.1 percent lower than in 1989. Over the period from 1989 to 1997 real hourly wages either stagnated or fell for most of the bottom 60 percent of the working population.

    So while we can say that in the last few years for the average worker things have been getting better, the reality is that most workers in America today are working longer hours and lower wages than was the case ten or twenty years ago. If we say this is as good as it is going to be, that is a pretty pessimistic outlook.

    More importantly, and this is a point that I want to stress because it is not talked about too much, according to the Economic Policy Institute, the typical married couple family worked 247 more hours per year in 1996 than in 1989. That is more than six or seven weeks worth of additional work. That means all over this country, and I am sure it is in your districts as well as in mine, you see people working two jobs and three jobs.

    In the beginning of the 20th Century, workers fought and they said, we want a 40-hour work week; that is what we want.

    One hundred years later workers are working 45, 50, 60 hours a week. Wives are working alongside of husbands because we need two breadwinners in the family to pay the bills. So to my friend, Mr. Bachus, I say, yes, we have seen improvements in the last couple of years, and we should be proud of that and continue that effort.
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    But if we look at what is going on for the average American worker today, in many respects he or she is not where they were twenty years ago. We still have 43 million people without any health insurance. People can't afford the cost of college education. We have the highest rate of childhood poverty in the industrialized world, the greatest gap between the rich and the poor.

    So if we sit here and say, ''Gee, we are living in utopia, it is not going to get any better than this,'' boy, I think that would be a very sad and unfortunate statement. That would be my point, Mr. Chairman.

    Chairman LEACH. Thank you very much for the representation.

    Chairman Greenspan.


    Mr. GREENSPAN. Thank you very much, Mr. Chairman.

    Mr. Chairman and Members of the committee, I appreciate the opportunity to present the Federal Reserve semiannual report on monetary policy.

    The American economy over the past year again performed admirably. Despite the challenges presented by severe economic downturns in a number of foreign countries and episodic financial turmoil abroad and at home, our real GDP grew 4 percent for a third straight year. In 1998, 2.75 million jobs were created on net, bringing the total increase in payrolls to more than 18 million during the current economic expansion, which late last year became the longest in U.S. peacetime history.
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    Unemployment edged down further to a 4 1/4 percent rate, the lowest since 1970. And despite taut labor markets, inflation also fell to its lowest rate in many decades by some broad measures, although a portion of this decline owed to decreases in oil, commodity, and other import prices that are unlikely to be repeated. Hourly labor compensation adjusted for inflation posted further impressive gains. Real compensation gains have been supported by robust advances in labor productivity, which in turn have partly reflected heavy investment in plant and equipment, often embodying innovative technologies.

    Can this favorable performance be sustained? In many respects the fundamental underpinnings of the recent U.S. economic performance are strong. Flexible markets and the shift to surplus on the books of the Federal Government are facilitating the buildup in cutting-edge capital stock. That buildup, in turn, is spawning rapid advances in productivity that are helping to keep inflation well behaved. New technologies and the optimism of consumers and investors are supporting asset prices and sustaining spending.

    But, after eight years of economic expansion, the economy appears stretched in a number of dimensions, implying considerable upside and downside risks to the economic outlook. The robust increase of production has been using up our Nation's spare labor resources, suggesting that recent strong growth in spending cannot continue without a pickup in inflation unless labor productivity growth increases significantly further.

    Equity prices are high enough to raise questions about whether shares are overvalued. The debt of the household and business sectors has mounted, as has the external debt of the country as a whole, reflecting the deepening current account deficit. We remain vulnerable to rapidly changing conditions overseas, which, as we saw last summer, can be transmitted to the United States markets quickly and traumatically.
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    In light of all of these risks, monetary policy must be ready to move quickly in either direction, should we perceive imbalances and distortions developing that could undermine the economic expansion.

    The Federal Open Market Committee conducted monetary policy last year with the aim of sustaining the remarkable combination of economic expansion and low inflation. In the wake of the Russian crisis last August and subsequent difficulties in other emerging market economies, investors perceived that the uncertainties in financial markets had broadened appreciably, and as a consequence they became decidedly more risk averse. As a result, quality spreads escalated dramatically, especially for lower-rated issuers. Many financial markets turned illiquid, with wider bid-asked spreads and heightened price volatility, and issuance was disrupted in some private securities markets.

    To cushion the domestic economy from the impact of the increasing weakness in foreign economies and the less accomodative conditions in U.S. financial markets, the FOMC, beginning in late September, undertook three policy easings, reducing the Federal funds rate from 5 1/2 percent to 4 3/4 percent.

    Our economy has weathered the disturbances with remarkable resilience, though some yield and bid-asked spreads still reflect a hesitancy on the part of market participants to take on risk.

    The Federal Reserve must continue to evaluate, among other issues, whether the full extent of the policy easings undertaken last fall to address the seizing-up of financial markets remains appropriate as those disturbances abate.
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    To date, domestic demand and hence employment and output have remained vigorous. At the same time, no evidence of any upturn in inflation has as yet surfaced. The U.S. economy's performance should remain solid this year, though likely with a slower pace of economic expansion and a slightly higher rate of overall inflation than last year.

    The stocks of business equipment, housing, and household durable goods have been growing rapidly to quite high levels relative to business sales or household incomes during the past few years, and some slowing in the growth of spending on these items seems a reasonable prospect. Moreover, part of the rapid increase in spending, especially in the household sector, has resulted from the surge in wealth associated with the run-up in equity prices that is unlikely to be repeated, and the purchasing power of income and wealth has been enhanced by declines in oil and other import prices, which also are unlikely to occur this year.

    Assuming that aggregate demand decelerates, underlying inflation pressures, as captured by core price measures, in all likelihood will not intensify significantly in the year ahead, though the Federal Reserve will need to monitor developments carefully. We perceive stable prices as optimum for economic growth. Both inflation and deflation raise volatility and risks that thwart maximum economic growth.

    The economic outlook involves several risks. The continuing downside risk posed by possible economic and financial instability around the world was highlighted earlier this year by the events in Brazil. Although financial contagion elsewhere has been limited to date, more significant knock-on effects in financial markets and in the economies of Brazil's important trading partners, including the United States, are still possible. Moreover, the economies of several of our key industrial trading partners have shown evidence of weakness which, if it deepens, could further depress demands for our exports.
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    Another downside risk involves a potential correction to stock prices. Such a decline would increase the cost of equity capital, slowing the growth of capital spending. It would also tend to restrain consumption spending through its effect on household net worth.

    But on the upside, our economy has proven surprisingly robust in recent years. More rapid increases in capital spending, productivity, real wages, and asset prices have combined to boost economic growth far more and far longer than many of us would have anticipated.

    This ''virtuous cycle'' has been able to persist because the behavior of inflation also has been surprisingly favorable, remaining well contained at levels of utilization of labor that in the past would have produced accelerating prices. That they have not done so in recent years has been the result of a combination of special one-time factors holding down prices that I have already mentioned and more lasting changes in the processes determining inflation.

    In the current economic setting, businesses sense that they have lost pricing power and generally have been unwilling to raise wages any faster than they could support at current price levels. Firms have evidently concluded that if they try to increase their prices, their competitors will not follow, and they will lose market share and profits.

    Given the loss of pricing power, it is not surprising that individual employers resist pay increases. But why has pricing power of late been so delimited? Monetary policy certainly has played a role in constraining the rise in the general level of prices and damping inflation expectations over the 1980's and 1990's. But our current discretionary monetary policy has difficulty anchoring the price level over time in the same way that the gold standard did in the last century.
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    Enhanced opportunities for productive capital investment to hold down costs also may have helped to damp inflation. Through the 1970's and 1980's, firms apparently found it easier and more profitable to seek relief from rising nominal labor costs through price increases than through cost-reducing capital investments. Price relief evidently has not been available in recent years, but relief from cost pressures has. The newer technologies have made capital investment distinctly more profitable, enabling firms to substitute capital for labor far more productively than they would have a decade or two ago.

    The surge in investment not only has restrained costs, it has also increased industrial capacity faster than factory output has risen. The resulting slack in product markets has put greater competitive pressures on businesses to hold down prices, despite taut labor markets.

    The role of technology in damping inflation is manifest not only in its effects on U.S. productivity and costs, but also through international trade, where technological investments have progressively broken down barriers to cross-border trade. The enhanced competition in tradeable goods has enabled excess capacity previously bottled up in one country to augment worldwide supply and exert restraints on prices in all countries' markets.

    Although the pace of productivity increase has picked up in recent years, the extraordinary strength of demand has meant that the substitution of capital for labor has not prevented us from rapidly depleting the pool of available workers.

    The number of people willing to work can be usefully defined as the unemployed component of the labor force plus those not actively seeking work, and thus not counted in the labor force, but who, nonetheless, say they would like a job if they could get one. This pool of potential workers aged 16 to 64 currently numbers about 10 million, or just 5 3/4 percent of that group's population, the lowest such percentage on record, which begins in 1970, and 2 1/2 percentage points below its average over that period.
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    The number of potential workers has fallen since the mid-1990's at a rate of a bit under 1 million annually. We cannot judge with precision how much further this level can decline without sparking ever-greater upward pressures on wages and prices. But should labor market conditions continue to tighten, there has to be some point at which the rise in nominal wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will begin to accelerate.

    Before closing, Mr. Chairman, I would like to address an issue that has been receiving increasing attention, the 20th Century date change. While no one can say that the rollover to the year 2000 will be trouble free, I am impressed by the efforts to date to address the problem in the banking and financial system.

    For our part, the Federal Reserve System has now about completed remediation and testing of its mission-critical applications. We opened a test facility in June at which more than 6,000 depository institutions to date have conducted tests of their Y2K compliant systems, and we are well along in our risk mitigation and contingency planning activities.

    As a precautionary measure, the Federal Reserve has acted to increase the currency in inventory by about one-third, to approximately $200 billion in late 1999, and has other contingency arrangements available if needed.

    The banking industry is also working hard, and with evident success, to prepare for the event. By the end of the first quarter, every institution in the industry will have been subject to two rounds of on-site Y2K examinations. The overwhelming majority of the industry has made impressive progress in their remediation, testing, and contingency planning efforts.
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    Americans can justifiably feel proud of their recent economic achievements. Competitive markets, with open trade both domestically and internationally, have kept our production efficient and on the expanding frontier of technological innovation. The determination of Americans to improve their skills and knowledge has allowed workers to be even more productive, elevating their real earnings. Macroeconomic policies have provided a favorable setting for the public to take greatest advantage of opportunities to improve its economic well-being.

    The restrained fiscal policy of the Administration and the Congress has engendered the welcome advent of a unified budget surplus, freeing up funds for capital investment. A continuation of responsible fiscal and, we trust, monetary policies should afford Americans the opportunity to make considerable further economic progress over time.

    Mr. Chairman, I have excerpted from my prepared remarks and would request that the latter be included for the record.

    Chairman LEACH. Without objection, of course.

    Mr. Greenspan, I want to just begin with a question, asking you to put some macroeconomic meaning to the political discussions of the day. By that, it seems to me that we have a lot of divisive political rhetoric between the political parties, but there is surprisingly not as much distinction in the end effect of policies advocated.

    For example, generally speaking, as you look at the surplus which Republicans claim disproportionate credit for, the Republicans want to either save the surplus or use it for tax cuts. The Democratic Party in large measure wants to dedicate to Social Security 60 percent, which the Republicans also have endorsed, and advance a bit IRAs and increase a little bit domestic spending, and Republicans would increase a little bit military spending.
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    But isn't it true that, macroeconomically, the notion of putting 60 percent aside for Social Security is the equivalent of reducing the deficit, and then expanding IRAs is the equivalent of a tax cut? And that when you are really looking at the differences between the parties, it is a very small percentage of the presumed surplus and how to allocate it in the years ahead. Is that a valid way of looking at this issue?

    Mr. GREENSPAN. I think so, Mr. Chairman. There seems to be a general conclusion, and a proper one, that allowing part of the surplus, indeed, a significant part of the surplus, to run will maintain a level of national savings in this country which is crucial.

    The one thing that is economically unquestioned is that we are about to have in the early part of the 21st Century a very major increase in the proportion of retirees to working people. Unless we wish to have difficulty in allocating the then gross domestic product between workers and retirees and an increasingly friction-based argument, it is crucially important for us to accelerate the building of our capital stock and its efficiency so that there will be more than adequate goods and services for retirees when they retire, the big Baby Boom retirees, and of course continued rising standards of living for our working people. That means that we need to have adequate savings to do that.

    My sense of the political rhetoric of late is that there is a growing awareness of that, and I agree with you, that it does seem to cut across parties.

    Chairman LEACH. My final question relates to commodity prices. As you know, worldwide, developing countries are seeing certain difficulties because of low commodity prices. Internally in this country the agricultural economy is reeling in very major ways. Do you have any advice on how to rebolster the Midwestern farm economy and address this issue?
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    Mr. GREENSPAN. One of the problems with the Midwest farm economy is it is an extraordinarily productive segment of our economy, and the production for export has, of course, been a very crucial aspect over the generations of our farm system. It is difficult to measure exactly how effective the weakness in Asia has been on our farm exports, but my recollection is that our exports of agricultural commodities to Japan, which is one of our very largest customers, has gone down very dramatically. Needless to say, the rest of Asia is also weakened quite considerably.

    When you take out a substantial chunk of demand on American agricultural resources, the fact that prices have gone down is, I would suspect, by no means a great surprise. Prices of wheat and soybeans, corn, are all down quite significantly. Hogs, until very recently, as you know better than anybody, underwent an extraordinarily sharp contraction in price.

    My own judgment is that short of a significant building back of export demand it is going to be difficult to work our way through this particular problem; and, obviously, we have also had difficulties, which I think Mr. LaFalce was referring to earlier, in the sense that, for example, on the wheat front, our two major competitors are Australia and Canada, both of whom are major commodity producers who have had the same problems and whose currencies vis-a-vis the American dollar have weakened considerably, with the obvious implications relevant to competition in the world markets for some of our major grain products.

    So all in all, if one looks across the spectrum of what the problems are, they just fall very directly in the area of deficient export demand, and that is substantially attributable to the very sharp contraction in the demand for American farm products from Asia.
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    Chairman LEACH. Thank you.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you very much.

    Mr. Chairman, I raised a number of issues in my opening statement. If you recall some of them, I will let you address them directly. If not, I will reiterate some. Do you recall some of the points I raised?

    Mr. GREENSPAN. You raised a number of interesting points. Which would you like me to respond to?

    Mr. LAFALCE. All right. Let's deal with the question of what I perceive as the reluctance on the part of the Fed to raise interest rates, a disposition not to decrease them, I could be wrong in that impression, and a reliance on the part of the Fed for the bond market to increase rates.

    Mr. GREENSPAN. Again, we don't endeavor to try to manipulate the bond market to act as a proxy for Federal Reserve action. The major reason is we wouldn't know how, because it is just not something that we are capable of doing without major secondary distortions and unexpected feedbacks on the economy.

    What we do in monetary policy, as I have mentioned before this committee on many occasions in the past, is endeavor to respond to the full complex of events; both real, meaning goods and services; and financial; and employ monetary policy in a sense to endeavor to affect the marginal changes that are going on in the financial system.
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    Obviously, we can't fully control the economy and have no interest in doing so, but we do impact upon the financial system, and that does affect aggregative demand. But to say, as a number of people have said, that we control the bond market and that therefore we have the capacity to employ not only the Federal funds rate, which we do have full control over, and the bond market, which we do not, and that we use these in some combination is just contrary to the facts.

    Mr. LAFALCE. Let me switch now to the exchange rate relationship that exists internationally, and most especially with our two major trading partners. We have an increasingly shrinking—or I shouldn't say shrinking, but an interrelated global economy. If this is to continue with some predictability and sustainability, it seems to me that there must be stability within the exchange rate relationship, more so in the future than we have seen in the past.

    We have seen significant depreciation in the Canadian dollar and much greater depreciation in the Mexican peso, as just two examples, since we entered into our trade agreements about a decade ago with the Canadian-American FTA and, earlier this decade, the NAFTA.

    As part of your dealings in the global scene with this new global economic architecture, what are we discussing that could achieve greater future currency stability?

    Mr. GREENSPAN. Mr. LaFalce, as I have testified before this committee previously, starting in the early part of the 1990's there was a very dramatic increase in the amount of cross-border finance. That is, I used to characterize it as the new financial system, which in many respects is not inappropriate, in the sense that there are really quite major differences which result very largely from technological changes which have proliferated in the early 1990's that have had a very dramatic effect on the nature and the number of different types of financial products, which, by unbundling risk, have increasingly served consumers and businesses in a more effective manner.
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    The consequence of this is that we are dealing with a far more potentially volatile set of movements of finance, and this is an issue which clearly both we and the Treasury, as well as our other colleagues in the international financial arena, have addressed increasingly and in more detail as we have learned, essentially by doing, what this new international financial structure is and how it functions.

    We have drawn certain conclusions. One, it would be desirable, were it possible, to have much more stable exchange rates than we have seen. I don't think anybody seriously questions that. But, obviously, volatility in exchange rates creates risks. It creates all sorts of negative implications with respect to all types of investments.

    The question is, how do you do that? We have concluded that the means that have been used in the past, that is, so-called sterilized intervention, just does not work. It may have worked in part a little in the past, but even that is dubious. But every analysis that anybody has done has concluded that that is not the way to do it.

    The problem of monetary policy, employing that to affect the exchange rate, will often get you into the position where your exchange rate will be soft when your economy is soft, and the obvious monetary policy reaction would be to increase interest rates to harden the currency, but that would be wholly inappropriate for domestic policy purposes.

    Cutting the rest of the detailed argument short, it comes down to the general conclusion that the best way to maintain, in general, stable exchange rates is to maintain a stable international economy, and very basically, a low inflation economy. There is nothing more relevant than stable prices to create stable exchange rates.
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    We are, nonetheless, examining this whole issue in greater detail. We have continuous discussions with the Treasury and with others in other countries, as I indicated. And this larger group will be coming forward with ideas and particular programs which are directed at the new international financial structure and, very specifically, the type of regulatory structure which is appropriate to that.

    One of the issues undoubtedly will be endeavors to make sure that exchange rates, in the context of the total, are as stable as we can make them. But if we try to do it in a manner which is counterproductive, it will have very negative effects on the total system.

    Mr. LAFALCE. Thank you, Mr. Chairman. My time has expired, but I would like you to expand either personally or in writing about divisions that may have existed at your recent meeting with the Germans and the French on one hand with respect to some bonds and the position that you and Mr. Rubin took. Maybe we could just have some follow-up personal dialogue.

    Chairman LEACH. Mr. McCollum.

    Mr. MCCOLLUM. Thank you very much.

    Mr. Chairman, I think most of us would agree, I suspect we would get virtually unanimity, that the monetary policy leadership you have provided over the past few months has been excellent. The economy is not only doing well, but despite those treacherous waters that you are foreseeing coming up ahead, the Board has done quite well. The Open Market Committee has done quite well.
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    But the other half of the matter, which probably leads to as many disturbing consequences for your monetary policy decisions, is the fiscal policy decision the Chairman of the committee alluded to a minute ago.

    I found it intriguing last week that the Wall Street Journal editorial board chose to engage you in somewhat of an open public dialogue. They suggested criticism because they say that you urged surpluses to be dedicated to reducing Government debt before taxes are cut.

    They went on to say some intriguing thoughts about the importance, relative importance, of paying down the debt or not. They suggest that paying down the country's debt would not make the Nation better off, and they suggest that the argument of crowding out, which I have heard a long time since I have been on this committee, by Government spending is not a valid argument.

    They go on to suggest that the national debt does not really matter, at least it is a secondary issue to the economy, until it starts to exceed 100 percent of GDP or so. They go on to say what matters is outlays the size of Government relative to the private sector and marginal tax rates, the measures of incentives.

    In other words, they say that this is what constitutes the latter three, the engines of economic growth, and that we really shouldn't be focused on fiscal policy and paying down the debt at this time because it doesn't exceed 100 percent of GDP.

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    How do you respond to that? I found that the most succinct statement on the other side of the question of debt that I have read in a long time, and I thought I would give you the chance to respond.

    Mr. GREENSPAN. Thank you, Congressman.

    I happen to agree with the general position that the smaller the total of Government both receipts and expenditures are relative to the private sector, the better off we are with respect to economic growth.

    The question of what the optimum size of the debt is is a factual question. The issue really, as far as I can see, is that the evidence is fairly convincing that the lower the debt, the lower long-term borrowing costs. It is not as though when you hit 100 percent of the GDP something happens. That particular relationship, as best I can judge, carries all the way down below 100 percent.

    So that the question really gets down to, in a period such as we are now in, reducing the debt because we need increased savings. I shouldn't argue that that would not become private savings. It might if you basically cut taxes. I am not sure about that.

    But I think the main thrust of the issue is one that we have to increase savings for reasons I mentioned before about the issue of the demographics that are coming up.

    But to the extent that we can reduce spending and return that to the taxpayer, I am fully supportive of that, and that is the type of tax cuts that I would like to see. I don't like to see tax cuts which are effectively those which are made available by increasing debt.
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    And this is where I think there are disagreements, but I must say that in the broad, general thrust of that editorial, I didn't find difficulties with it. But I do think that their notions, very specifically, about the lack of debt reduction having positive effects is not, in my judgment, verified by the facts.

    Mr. MCCOLLUM. What you are talking about when you are talking about the debt and the interest on the debt is that huge percentage of our budget that goes to paying the interest. If I recall now, it is somewhere around 30 or 40 percent or so of the entire spending we have to put out right now is on interest on that debt. I assume that is what you are talking about, the interest costs?

    Mr. GREENSPAN. No, I was talking about interest rates within the economy. In other words, when you look across the spectrum of countries and within economies, the lower the overall level of public debt, the lower tends to be the level of interest rates. That is clearly the case in Europe, and as best I can judge, it is also the case here.

    Mr. MCCOLLUM. It sounds to me what we need is a balanced approach on how we need to get there in some manner which gets there within the framework of your concerns and at the same time keeps the economic engine running. That is always going to be a debate up here.

    But you do not oppose tax cuts, it is just which ones they are and when they come?

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    Mr. GREENSPAN. On the contrary, I have been very supportive of marginal tax cuts. Indeed, as you may recall, I am quite a strong supporter of reducing the capital gains tax and even eliminating it. At the appropriate time, I am very much strongly in favor of tax cuts. It is at this particular time that that would not be my first priority. It is my second priority, as I think I have mentioned to this committee before.

    That is, if you can't, for political reasons, hold the surplus in place and reduce the debt, then I would be far more supportive of cutting taxes than increasing spending.

    Mr. MCCOLLUM. Thank you very much, Mr. Chairman. Thank you.

    Chairman LEACH. Mr. Frank.

    Mr. FRANK. Thank you, Mr. Chairman.

    It is somewhat unaccustomed, particularly for those of us on this side, to referee the dispute between yourself and the Wall Street Journal editorial board. I admire your effort to turn the other cheek. I think it will be unavailing.

    But I do take it that there is disagreement. Your first priority right now, your first preference, would be to reduce the debt?

    Mr. GREENSPAN. That is correct.

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    Mr. FRANK. And theirs would be not to worry about the debt until it reaches 100 percent of GDP, but to cut taxes. So there is that disagreement between you and them.

    Mr. GREENSPAN. I would assume that is the case.

    Mr. FRANK. You assume it?

    Mr. GREENSPAN. Because I must admit I read it when it was originally written, but I can't say I can quote you verbatim.

    Mr. FRANK. The particular editorial?

    Mr. GREENSPAN. Yes.

    Mr. FRANK. Did you read it when it was originally written before it was published or after it was published?

    Mr. GREENSPAN. I misspoke. My apologies.

    Mr. FRANK. But you didn't answer that question.

    Mr. GREENSPAN. I will answer it. I read it probably the same time you did.

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    Mr. FRANK. No, I didn't read it and have no intention of reading it.

    Mr. GREENSPAN. I read it when it was published.

    Mr. FRANK. I do want to acknowledge, and I think that is actually indicative—I want to acknowledge my appreciation of your willingness over the years to resist people who might have seen you as an ideological confrere and were in fact sometimes angry at you for not giving in.

    I think it is enormously to your credit that interest rates were not raised in anticipation of an inflation rate that prevailing doctrine predicted a few years ago. There were people who said if the unemployment rate got as low as it did and growth stayed as high as it did, inflation would be inevitable. I realize that you deserve a great deal of the credit for resisting that, and I think you have been proven correct. Of course, the award for being proven correct is people are mad at you, but you are used to that.

    I do want to acknowledge that I think your willingness to, in fact, look at the facts and make these judgments based on the empirical evidence has been very important.

    I am particularly struck that, while we mentioned the Wall Street Journal, the New York Times financial pages also were from time to time disappointed in you for not raising interest rates when the rules said they should have been. Now, without ever acknowledging their error, now they have converted, so I think that is important.

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    The second thing I want to acknowledge is I appreciate your reference here to even more public announcements. You mention that there will now be sometimes announcements of a change in—I was about to say a change in orientation, but I am reluctant to use that phrase—but a change in general inclination by the Fed, even without a change in actual interest rates.

    I am glad you are doing that. I think it validates the fact that your increased openness since 1994, announcing FOMC policy on the same day, has been very useful.

    I hope you will agree that one of those who was pushed hardest was our former Chairman, Mr. Gonzalez. He used to argue strongly, and now obviously he had some disagreements with you on some things, but it does seem to me much of what Mr. Gonzalez argued about, an ability for the system to tolerate more openness and more publicity, has in fact proven beneficial. I thought that was important.

    The one substantive point I had is, on page 13, I was pleased to note the following, because this is relevant. You say, talking about shifts in the market environment which have accounted for the lack of inflation, the benign overall price behavior, and you say, ''Undoubtedly, other factors have been at work,'' including the temporary factors, oil prices and other drops, and then, ''some more lasting, such as worldwide deregulation and privatization,'' and this I think is particularly relevant to us today, ''and the freeing up of resources previously employed to produce military products that was brought about by the end of the Cold War.''

    Now I cite that because, obviously, we have a dispute about what amount of military spending we need from a national security standpoint. But in every debate I have been in on military spending in the 19 years I have been here, there were those who argue that we shouldn't cut military spending because it would be bad economically. Indeed, we have some people who are very occasional Keynesians. When military spending comes up, they become very much in favor of the stimulative effects of Government spending.
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    I take it what you are saying is that dollar for dollar, military products, as you previously said here, have no end use, but are there as insurance—I think that is an analogy that you have used before, and to the extent you could put those same dollars into other areas, maybe education and job training, maybe into transportation, you are dollar for dollar likely to have a better economic effect, and in fact it is less inflationary.

    Is that an accurate reference to what you are saying here?

    Mr. GREENSPAN. Yes it is, Mr. Frank.

    Incidentally, I was referring not only to the United States but the whole Soviet Union and all other related——

    Mr. FRANK. I appreciate that. Because as my former colleague, Mr. Kennedy, used to—you may remember when we did international financial institutions—argue that one of the things we ought to be urging on developing nations was a reduction in their military budgets, because it was an unproductive use of their resources. So I take the point as one of general application.

    But that is an accurate statement?

    Mr. GREENSPAN. It is, indeed.

    Mr. FRANK. To the extent that you can reduce military spending, consistent with your security needs, that is going to have a good economic effect?
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    Mr. GREENSPAN. Yes.

    Chairman LEACH. Thank you very much.

    Mrs. Roukema.

    Mrs. ROUKEMA. Mr. Chairman, I certainly appreciate your response to both Mr. Leach and Mr. McCollum's questions regarding financial matters relative to Social Security paying down the debt, and I am in general agreement with that approach.

    I am going to go into a different area of questioning. Could you address the following question, which I believe is very relevant to the U.S. economy. I have noticed the news this week that hit the headlines about the extraordinary, and I mean extraordinarily large, layoffs at Levi Strauss. Are we are dealing here with exporting jobs, literally exporting U.S. jobs overseas?

    Do you view this as the beginning of a surge of U.S. job declines and exporting and wage depressions? How do you view it from your position, whether directly or only indirectly related to monetary policy?

    Mr. GREENSPAN. Congresswoman, the nature of the American economy has always been one of what Joseph Schumpeter, a long time ago called ''creative destruction''; that is, we continuously churn, in the sense that the capital in lower technologies is gradually moved to higher technologies, and that is indeed the way standards of living grow.
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    The problem that unfortunately occurs as a sidebar of that is that you find that there are a lot of people who have been in jobs for very long periods of time in industries whose technology is less than the cutting edge relevant to what is new. And even though there are major technological improvements in apparel and in textiles, nonetheless it is the economic forces that are shifting the capital out of those industries into industries at the higher level of technology.

    The problem that I think we have with that is not a macroeconomic problem. It has been going on for generations. I think that is a problem for how does one address the hardship that is created in these circumstances in a manner which does not distort the desirable moving of assets from one area to another.

    I do not think, however, that as you implied in your question, that this particular layoff is a signal that something very significant more is happening.

    Mrs. ROUKEMA. You do not?

    Mr. GREENSPAN. I do not. And indeed, what you see at this stage is the actual number of people seeking initial claims for unemployment insurance has fallen to very low levels, which suggests that since that is the broadest measure we have, that the layoff rate is really down quite significantly.

    Mrs. ROUKEMA. But this Levi Strauss announcement is an indication of a trend in job declines, would you not say so?
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    Mr. GREENSPAN. No, I wouldn't. I think that is a very specific problem associated with the industry and with the company. And it is to be regretted, but I can't say that I see it as a broadening issue.

    Mrs. ROUKEMA. I hope you are right. I am glad to hear that.

    Now, let me go back to what I think was Mr. LaFalce's related question regarding the G–7 meeting that you recently returned from. I understand Secretary Rubin was part of that meeting. Tell me, what are your views? Are we, the international community, making progress in the area of financial reform? Is there something that we are going to be able to do for the world's international financial architecture?

    And that, of course, is related to last year's IMF funding debate. I don't think we can do the IMF reforms in this short period of time, but give me your perspective on the results of, and progress at, the G–7 meeting.

    Mr. GREENSPAN. Yes. As I indicated earlier, we are seeing an evolving new international economy. It is changing very much relevant to what we have seen in the past. We are in the process of learning how it works as we are dealing with it, so it is sort of learning by doing. That is not the most desirable means that one can conceive of.

    Fortunately, the international trauma that came out of the Russian default created so much risk aversion in the system that the amount of capital flows, especially to emerging nations, has slowed down; and, indeed, there is some evidence that there is a general temporary slowdown in this huge surge in capital flows, which means that we probably have a little time to be deliberative in making judgments as to how the structure ought to be altered.
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    The G–7 meeting had very detailed discussions of this. The Bank for International Settlements in Basel is a significant player, as is the IMF and the World Bank. There are innumerable fora which are involved in trying to examine all the various different aspects of this, and I think we are moving forward.

    We are not moving forward in a dramatically rapid way, and I am pleased at that, because I don't think that this is either necessary or desirable. But I do believe at the end of the day we will find an appropriate mix of policies which will best address the appropriate supervision and regulation of this new international financial and trade system.

    Mrs. ROUKEMA. Thank you, Mr. Greenspan. If you do have further amplification or documentation, we would appreciate it if you could submit it to us in writing.

    Mr. GREENSPAN. Certainly.

    Mrs. ROUKEMA. Thank you.

    Chairman LEACH. Thank you, Ms. Roukema.

    Mr. Vento.

    Mr. VENTO. Thank you.

    Chairman Greenspan, thanks for your appearance this morning and your statement.
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    In trying to analyze this, obviously, one of the concerns we have in the months ahead is there has been a significant surge in terms of imports, and this could, of course, lead to some sectoral problems.

    Obviously, the steel issue comes to mind. We have concerns with that and with some agriculture products. In fact, the market for agricultural exports is really quite down. We are producing a lot more food, so we are seeing the effects of that in my home State, both in iron mining and, for instance, in various types of products—agricultural products—in place.

    At the same time, obviously, we would see a tendency in terms of the cuts, the lower prices in terms of some of these commodities, whether it is pork, grain, or steel, there is a tendency to hold down inflation. It is a major benefit that we are receiving right now. Obviously, in the oil sector we have the same circumstance going on. That isn't one that we have to worry about too much in Minnesota, but it is a factor.

    Monetary policy could help in terms of providing some stimulus. How do you see that being coordinated down the road in terms of providing that without overheating the economy? That is obviously the dilemma that we face.

    Mr. GREENSPAN. Mr. Vento, I think you raise the sort of fundamental dilemma of monetary policy in the sense that if you have an integrated, interrelated economy, such as that which is in the United States, the 50 States, that there can only be one monetary policy. We do not have the capacity to have different policies in different regions which have different difficulties. So what we have is a policy which endeavors to address the total system, and invariably it is not the appropriate policy for individual sectors.
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    I remember a colleague of mine a number of years ago talking about California. He said, if we didn't have a single currency and a single monetary policy, California would have a different set of policies than the rest of the country. Now, that cannot be done unless you split off parts of the system, and we don't do that because it is highly inefficient.

    As far as individual areas are concerned, I think that it is certainly the case that steel imports surged very dramatically and induced fairly pronounced declines in prices. From what we see, those prices are stabilizing, and indeed, orders are coming back a bit now, and the real pressures are easing in the steel industry. Indeed, there have been significant cutbacks in exports to the United States by a number of the countries which have been very large shippers here.

    So the system in steel does appear to be stabilizing. I don't know whether or not that has yet filtered back to the Mesabi Range. I suspect not. It takes a while. But the underlying demands are clearly——

    Mr. VENTO. I just think that—excuse me, Mr. Chairman, but I just think that we need to respond in terms of maybe with the reductions of interest rates, obviously on a national basis to deal with it.

    One of the aspects here in terms of—and I know my colleague from New York, Mr. LaFalce, talked about the instability of currency. But there have been some overtures especially to, in fact, harmonize currency values with the euro. Obviously, Argentina suggested using it as a benchmark. What is your view with regard to that and those particular initiatives? I noticed that the Secretary of the Treasury was less than enthusiastic about this prospect.
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    Mr. GREENSPAN. Yes, I thought for good reason. You become enthusiastic only when things make sense and are likely to work.

    Mr. VENTO. Some of this may be involuntary in terms of what Argentina may do or other countries may do.

    Mr. GREENSPAN. Remember, we have no objection whatsoever if Argentina or any other country decides unilaterally to make the U.S. dollar its medium of exchange. We do recognize that if you have a broadened set of regional areas, like, say, the euro for all of Europe, or most of Europe, and the dollar, say, for a goodly part of Latin America and the United States, there is no question that were that to happen you will get a lesser degree of instability in exchange rates.

    There are downsides, however. It creates additional pressures. There will be pressures in Europe because they have eliminated the capacity for exchange rate adjustment at their borders when problems are arising. That means that those adjustments are going to occur in different ways.

    The same thing would be true in Latin America. There is no question that there is very considerable value in having large currency blocks in that regard, but there are also significant downsides as well. We and the Treasury have been discussing these issues at some length.

    As you may know, we were approached by Argentina to consider certain broader aspects of the dollarization program, and there are numbers of discussions that are going on inside the American Government on the appropriate response to this. So it is an interesting aspect, and perhaps an inevitable aspect, of the major changes that are currently underway in the international financial system.
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    Mr. VENTO. Mr. Chairman, I will be submitting some questions in writing. Thank you.

    Chairman LEACH. Thank you.

    Mr. Bachus.

    Mr. BACHUS. Thank you, Mr. Chairman.

    Mr. Greenspan, yesterday when you testified before the Senate they asked you to also comment on financial modernization. As you know, one of the obstacles right now to the financial modernization legislation is this disagreement over holding companies and subsidiaries, and we discussed that the last time you were before the committee.

    We respect your opinion very much and respect the opinion of Secretary Rubin, so we are in, I think, an uncomfortable position in that we are continuing to get a mixed message.

    I would ask you this. I know that you and the Secretary are friends. I think that would be a fair comment, would it not?

    Mr. GREENSPAN. Indeed.

    Mr. BACHUS. And you have great respect for each other?
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    Mr. GREENSPAN. I certainly have great respect for him. I assume and hope he has respect for me.

    Mr. BACHUS. He has publicly said that he does. My question is this—and I think you think the President has tremendous intellect. That is so, is it not? President Clinton? This is not a trick question. He is very intelligent?

    Mr. GREENSPAN. Yes. I don't think there is any question about that.

    Mr. BACHUS. And I know that Secretary Rubin believes that, and I think most Members of Congress agree that he has outstanding intellect. That being said, I know you have great respect for his understanding of economic abilities, too, do you not?

    Mr. GREENSPAN. I do.

    Mr. BACHUS. Has there been any attempt—you know, the Congress has asked you and Secretary Rubin to meet together. Has there been any attempt for the President to become involved in those discussions?

    Mr. GREENSPAN. Not to my knowledge.

    Mr. BACHUS. To me it appears only natural that the President would get a three-way conversation between you, Secretary Rubin and the President, because his advice and consent I know is important to you, it is important to Secretary Rubin—that that meeting ought to occur.
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    Mr. GREENSPAN. Let me say this, Congressman. I think that getting financial modernization is a very important issue, as I testified before this committee a few days ago. I am more than willing to sit down and try to find a way in which we can coordinate these very—this is a very important issue. It really refers to the structure of American banking and finance in the 21st Century. It is not a technical question.

    I am more than willing to sit down, as I indicated previously, with Secretary Rubin and anyone else who wishes to participate in the discussions to find a way to meet their requirement, as they stipulated, for broader oversight of the banking system. We are willing, in effect, if it is necessary, to move the bill to give up some of our so-called turf, if you want to do it that way.

    But what our major concern is, is that it not be done in the manner in which the Secretary is now proposing it, which effectively would mean that you would get a major move of all of the affiliates of the holding companies which have any assets at all into the subs of the bank where they could get subsidies. And if they were reluctant to do that, I would assume their shareholders would push them, because it was so obviously the right thing to do.

    The difficulty is that the reason that that is an issue is that that would make the Comptroller of the Currency the very major player in supervision and regulation. We have no objection to that. It is just that using that particular vehicle to do it strikes me as creating far greater problems for the international and the domestic financial system.

    And so that if they want to sit down and talk about the allocation of turf, so to speak, I am more than willing to do that. We don't need turf for all of the things that we are doing. But we do have a responsibility to maintain the systemic stability of our system, and in our judgment moving in the direction of operating subs instead of affiliates of holding companies is a potentially very serious question.
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    Mr. BACHUS. I appreciate that. And I respect your opinion and I respect Secretary Rubin's, we in Congress do. I am simply saying that you have a President who negotiated a Middle East peace agreement, he has negotiated with some very adverse parties in Northern Ireland, and here we have two of his appointees, and I would just invite or urge the President—I intend to write a letter to him and hope maybe Mr. LaFalce and maybe the Chairman will join with me and ask that you all put your heads together.

    Because I feel we would be much more comfortable if a consensus could be formulated. And I know there may be reservations, and I think certainly they would be trying to express those reservations, but at least to make that attempt.

    Mr. LAFALCE. Could I respond to that?

    First of all, I am very willing to proceed cooperatively with the Chairman and other Members of the committee in order to achieve consensus. And, second, we have heard from the regulators repeatedly on this issue, from the Chairman of the Federal Reserve Board, from the Secretary of the Treasury, from the Chairman of the FDIC, from past chairmen of the FDIC.

    It would be desirable if they could come into full agreement, but it is not necessary. What is necessary is for us to decide. I am personally of the opinion that it might be fruitless to pursue the achievement of a consensus among all the other parties outside the Congress. I am more concerned about the Members of this committee and this Congress coming to a consensus as to what is necessary to pass good financial services modernization. There will always be differences of opinion in the outside world.
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    Thank you.

    Mr. BACHUS. I will just respond, and I respect your opinion. I would just simply say that I think that if the Administration as one voice could move toward some consensus—and I would invite the President to become involved, I think particularly when we have two members of his Administration.

    I don't discount that these are serious differences, and I happen to believe that Secretary Rubin and yourself are more informed on these issues than the average Member of Congress, and even the average Member of this committee, more so than this committee. And it would certainly be of assistance to us.

    We all have great respect for the President's intellect and for his understanding of economic policies. I just—I believe it is time for that meeting to occur.

    Thank you.

    Chairman LEACH. If the gentleman will yield just briefly, just to put out the historical record. It is the case that we would all like the advice of the Treasury and the Fed coming together. As recently as last Friday representatives of both groups met, and very intelligent people seemed to have a difference in judgment.

    Mr. LaFalce is of course right, that in that circumstance in particular we have to reach a judgment. On the other hand, if there were to be a consensus, it would seriously be reviewed. This committee would never give carte blanche to a consensus arrived outside it, but it would certainly have a major impact on the committee.
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    The Secretary of the Treasury is the President's representative in this. Basically, I view Mr. Greenspan as part of the congressional branch appointed by the President. That is facetious, but technically the Federal Reserve is not quite within the Administration, although certainly the Chairman and the whole board are appointed by the President.

    Mr. BACHUS. I am not saying that a consensus is attainable. I am saying it ought to be attempted on something of what I consider to be this great economic importance and national interest.

    Chairman LEACH. I couldn't agree more. You have isolated the signal problem. You have also isolated the desire for consensus within the Treasury and the Fed. It may not be exactly achievable, in which case we are going to have to make some difficult judgments, and that sometimes is a circumstance that we are just obligated to do.

    Mr. BACHUS. It would be made less difficult. At least I would extend that idea. I plan to write the President. If anyone wants to join me and urge that—and I think the meeting ought to be the three of you all, initially.

    Chairman LEACH. Ms. Waters.

    Ms. WATERS. Thank you very much.

    I would like to thank Mr. Greenspan for coming over and sharing with us this important information on the economy and helping us to understand the direction of this Nation.
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    As you know, Mr. Greenspan, my continuing issue of capital formation is one that remains, the idea of getting an investment in inner cities so that we could realize some of the benefits of the growing economy is still a concern that I have that I will continue to talk with you about and not today but at another time.

    Even though you give some very positive descriptions of our balance of payments problem, I guess deciding that it has helped to hold down inflation, I wonder about our future relative to balance of payments and our ability to export and sell more, and I wonder about places that don't get talked about a lot.

    We have an African trade bill. I am told that we are trading partners with Africa, but I never quite understand the relationship of that trade to our economy and whether or not there is something there that we can develop further by way of this African trade bill. I would like to hear just a little bit about that.

    But I want to ask you a very controversial question about a country that is 90 miles from our shores where Europeans are developing and selling and appearing to be doing extraordinarily well and a country that needs everything and that has opened up investment opportunities and joint venture opportunities. They are so concerned about their ability to grow their country and to get what they need to do that that they are working with the other Caribbean countries and with the European Union to form a little bloc. I wonder what that will mean if they are able to do that.

    I am talking about Cuba. We have an embargo. I don't know what role you played in Helms-Burton, if they asked your opinion at all. But I would like to hear what you think about that.
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    Mr. GREENSPAN. Well, Congresswoman, the issue of Cuba goes back really to 1959 and 1960, as you know. And the politics, the international confrontations, the history is replete with more things than any of us could write about in 500,000 pages.

    The one thing I will say to you is that it is one of the very rare parts of the world where we probably have very little expertise and have given very little thought to; and the issue, as best I can judge, is really fundamentally a practical political one.

    I don't think there are great disputes about whether opening up their markets and having democratic elections and having something far closer to what exists among their neighbors as far as societies are concerned. That would be helpful and would clearly engage a goodly part of the American business establishment beyond the global markets. I would think that if the political issues were resolved—and I recognize there are very significant problems—there is very little doubt that, given the situation in Cuba, that one must presume that there is a great deal of potential investment if that were to become a free economy, which it is not.

    Ms. WATERS. As opposed to China?

    Mr. GREENSPAN. It is tough to make the economic distinctions. The main issues here are fundamentally political. It is the type of thing which central banks ought to stay away from, because I can give you my judgments about what particular aspects of the Chinese economy are doing, or probably even the Cuban economy, but it is so fundamentally political that I really can't address the issue in any useful way that I would feel comfortable with.
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    Ms. WATERS. And the African trade bill?

    Mr. GREENSPAN. The issue of trade is an issue of importance largely because the world is becoming increasingly integrated. That is, the technology has so dramatically altered the nature of the movement of goods and services and, very specifically, the movement of data, ideas and the like, through the huge telecommunications system, and so there is a real sense in which there is globalization in this world, and it benefits everybody. It has got obvious problems associated with it, but it strikes me as related to long-term policy, and I think most of us should be really endeavoring to find a way to increase trade while at the same time being aware that a lot of people are disrupted, a lot of companies are disrupted.

    My major point would be that we should address those individual disruptions and not try to block trade because it creates those disruptions, because trade is such a fundamentally healthy thing for standards of living, for everybody who engages in it.

    So I merely want to say that the issues are not trade. Trade is something we should very strongly support. But we should give very significant scrutiny to those who are hurt by trade problems and deal with them and, very specifically, rather than try to prevent the disruptions from happening by preventing trade from happening.

    Mr. BACHUS. [Presiding.] Thank you, Mr. Chairman.

    Mr. Castle, do you have questions?

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    Mr. CASTLE. Yes, and this is going to be tough because I have to ask a brief question or two, and I have to ask for a brief answer because we have a vote in about six or seven minutes here.

    But when we did the minimum wage a couple of years ago I ended up supporting it. I basically went back and looked at inflation over a period of time and what the minimum wage was, and they were roughly equivalent in terms of what the new minimum wage would be.

    Now there is a discussion of a new minimum wage. You probably opined on this before, and maybe I have heard you, but I can't remember the answer. I don't know if you feel that the minimum wage increase at the Federal level has any kind of an inflationary factor in it or not or is it irrelevant to the economy because it only pertains to a small part of the economy and, if so, if there is some way that we should be looking at that and judging it? So that is one question.

    Let me ask my second question. I am increasingly concerned about the proliferation of savings plans that we have in this country. I know that this last year the savings rate was down, in spite of—or maybe because of—a strong economy. People perhaps felt they didn't need to save. I don't know. And I think that there has been a wonderful job done with the IRAs, Roth IRAs, and tuition plans, but there are all kinds of income cutoffs, and there seem to be competing plans.

    Are we on the right track with respect to our tax-benefited savings plans in this country? Or should we be thinking about some kind of consolidated plans at the $2000 level, IRAs which have been around a long time? I would like your comments on those two subjects.
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    Mr. GREENSPAN. First of all, Congressman, the evidence that we have does suggest that there are inflationary impacts from increasing the minimum wage. My main concern is less that than the issue of individuals who become unemployed because of the minimum wage. The evidence as far as we are concerned is fairly conclusive in that regard, and being unemployed when you are a teenager, for example, which is where most of the issue lies, is very detrimental to getting on the first step of getting on the business ladder, getting a job, learning by training, and becoming a productive member of the work force.

    In today's environment that is not relevant because there is a huge demand for workers, well in excess of what the supply is, and, hence, the minimum wage is not, as far as I can see, having a specific impact now in that area. My concern is when the economy turns down at some point, and I do think that we are going to find: one, that teenage unemployment will be higher than it would otherwise have been; and two, that there will be inflationary impacts because of that. In other words, when you withdraw labor from the market, the inevitable effect is to increase the price level.

    With respect to the second question, I think you are raising a very important issue. There is a big dispute at this stage as to whether this proliferation of savings plans is indeed increasing the savings rates. There are some fairly sophisticated mathematical models which seem to suggest that there may be some positive effect, but, if there is, it is not a very large one and something of a more consolidated nature, something which really gets to the issue of private pension types of organizations, pension plans or savings vehicles, strikes me as probably wise to think about.

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    Mr. CASTLE. Thank you, Mr. Chairman. I am not going to ask any follow-up questions, except to say that I think that is an area that we really should be focusing on in this country. I have often found a confusion in governmental policy and tax benefit, and these things sometimes don't happen. When it is made simpler it tends to move forward, so I hope we all can make some progress on that.

    I yield back the balance of my time.

    Mr. BACHUS. Mr. Chairman, I was hoping I could get in the chair here and slip in another question, but Mr. Sanders has stayed.

    Mr. SANDERS. Obstinate that I am.

    Mr. BACHUS. Mr. Sanders.

    Mr. SANDERS. Thank you very much, Mr. Chairman.

    Ironically, I was going to ask a similar question to what Mr. Castle asked over on the minimum wage.

    Some of us see the positive signs in the current economy in that real wages for low-income workers have finally gone up after many years of stagnation and decline. I am surprised, therefore, about your response to Mr. Castle. Because one of the positive things—some people would argue that one of the reasons that wages for low-income workers have gone up is an increase in the minimum wage, and you and others argued that two years ago when we raised the minimum wage from $4.25 to $5.15 there would be massive unemployment among workers. Unemployment is now at a record low.
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    So my question is, I gather you still oppose raising—the President would like to raise the minimum wage by a buck over a two-year period. Many would like it to go higher. Are you still opposed to raising the minimum wage?

    Mr. GREENSPAN. I still think it is a bad idea, because, as I said to Mr. Castle, you don't see the effects when you have a huge demand for labor. The real crucial way to test whether it is a desirable thing to have is when the economy is slack.

    As far as I can judge from the data that we tend to find quite compelling is that teenage unemployment does go up with the minimum wage. If that is in fact the case, I think it is a disservice to the people.

    Mr. SANDERS. Unemployment now is almost at a record, and we have raised the minimum wage.

    Mr. GREENSPAN. You won't see it today. I agree with that.

    Mr. SANDERS. Let me ask you this question. If you are concerned about wage increases developing an inflationary spiral, how do you feel about CEOs of large corporations now making 200 times what their workers are making and getting huge golden handshakes and all this kind of stuff? Does that concern you?

    Mr. GREENSPAN. If their shareholders are willing to do it, they are wasting their money in many respects, and I find a lot of that stuff frankly—I find a lot of what is being paid to individual CEOs not directed to the value that they are producing for their shareholders who are paying the bill.
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    Mr. SANDERS. Be that as it may, when we talk about inflation, then you may be right or may not. But what we are seeing, CEOs now make 200 times what workers make. You are expressing a concern of raising the minimum wage of over $5.15 an hour, but I would hope you would see that same concern about CEOs getting golden handshakes with tens and tens of millions of dollars.

    Mr. GREENSPAN. In both cases I am arguing that the Government should not be involved. I am being consistent in that respect.

    Mr. SANDERS. Let me ask you another question, the global economy. Some people would argue, including Business Week, the New York Times, the World Bank, many others, that IMF policy in Mexico, Asia, Russia, and Brazil has largely failed over the last several years. Are you prepared to join such institutions as Business Week in urging a rethinking of the fundamental tenets of the IMF in terms of austerity programs, capital flow, and so forth?

    Business Week, in a recent editorial, said, and I quote: ''The austerity policies of the IMF and the U.S. Treasury aren't part of the solution, they are part of the problem.'' I believe the World Bank said something similar. There is increased discussion that basic IMF philosophy has failed. Are you calling for changes in basic IMF policy?

    Mr. GREENSPAN. Let me just say that we are having conversations, as we always do, on issues of the structure of international financial institutions with the Treasury. We are the relevant agencies in this regard, or the ones who are most directly involved. The Secretary is the senior member of our representation with the IMF. I am the alternate delegate. We are the two who are effectively interfacing with that.
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    I don't think it is appropriate for me to be discussing what it is we discuss or the like. I think it is appropriate for us to be thinking about these issues; and, obviously, we are.

    Mr. SANDERS. I am not hearing you vigorously defending current IMF policies.

    Mr. GREENSPAN. You are not going to see me defend a number of things which are part of joint discussions with the Treasury, and there are certain things that I think when we are ready to announce something, I think you will hear an announcement, if there are such views. I don't want to discuss what goes on in these joint meetings. I think it probably would not be productive.

    Mr. SANDERS. Lastly, a brief question.

    I mentioned earlier that a recent report indicated that the typical married couple in the United States is currently working 247 more hours in 1996 than in 1989. Now, tell me, when we talk about the economic boom and the economy being so great, I know that in my State it is not uncommon for people to be working 50, 60, sometimes 70 hours a week.

    At the beginning of the century, as you will remember, I know you are a historian, workers said, ''We want a 40-hour work week. We don't want to work 50 or 60 hours.'' One hundred years have come and gone, new technology, and people are working huge hours.

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    What do you think? How can we lower the work week so people have more time for their kids, can relax, not be so stressed out?

    Mr. GREENSPAN. One of the interesting things, Congressman, is the fact that there was a very dramatic and protracted decline in the average work week for a number of years, and it stopped. And there is an interesting issue which I don't know, the issue as to the extent to which people do that voluntarily.

    You are saying in effect, and I am sure you are quite correct in this regard, that in certain instances people have been working more hours because they needed to. But I have always a suspicion that there is a desire to be working; in other words, that there are enough areas of our economy where people could very easily be working fewer hours and having more leisure time and are choosing not to.

    Now I don't know what the mix is, but I think it is a very interesting sociological, as well as economic, question.

    Mr. SANDERS. I would tend to agree with you, but you are certainly not denying that in many instances people are working longer hours and their wives are working, who might otherwise prefer to stay home with the children, not out of—not as something they want, but as something that they have to do?

    Mr. GREENSPAN. I am sure that is true.

    Mr. SANDERS. I would just ask you, Mr. Chairman, that when we talk about there being a booming economy, let us not forget that a lot of folks are not booming and they are working 50 and 60 hours a week.
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    Mr. GREENSPAN. There is a significant part of our work force who are not doing well and haven't been doing well for quite a long period of time. I don't deny that at all.

    Mr. SANDERS. Thank you, Mr. Chairman.

    Chairman LEACH. [Presiding.] Thank you, Mr. Sanders.

    Dr. Paul.

    Dr. PAUL. Thank you, Mr. Chairman.

    Mr. Greenspan, a lot of economists look to the price of gold as an indicator and as a monetary tool. It has been reported that you might even look at the price of gold on occasion.

    Last summer on a couple of occasions here when you were talking before the committees on securities and on derivatives you mentioned something that was interesting. You said that central banks stand ready to sell gold in increasing quantities should the price rise, which I thought was rather interesting.

    Then I followed up with a letter to you to ask you whether or not our central bank might not be involved in something like that, in the gold market. And you did answer me and stated that since the 1930's the Federal Reserve has had no authority to be involved with the gold markets.
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    I am quite confident that the Treasury has authority to be in gold markets, but you stated that the Federal Reserve did not. But this contradicts some reports that have been made by some Federal Reserve officials that said that the New York Fed was very much involved in the London gold pool from 1961 to 1971. But your answer implied that the Fed has never been involved since the 1930's, which I think is interesting.

    The reason why this could be of importance is that we do know that our Treasury was supporting a fixed price of gold at $35 an ounce in the 1960's, so therefore the price of gold of $35 an ounce was totally useless in predicting what might happen and what did happen in the 1970's. So if central banks stand ready to lease and sell gold in increasing amounts should the price rise, we are more or less, you know, in a time when the gold price is probably so-called fixed; and we do know that the evidence is there that central banks do loan gold, they sell gold. So could it be that the price of gold today is less valuable to the economists, who think that gold could help us, in thinking that maybe we are in a period of time comparable to what we had in the 1960's?

    Mr. GREENSPAN. I think the price of gold has, over the decades, been a generally usable indicator of what the level of inflation has been. Obviously, during the period of an active gold standard, which was really prior to World War I, the price level pretty much locked itself in to the gold price. In fact, by definition it did.

    The issue of buying and selling gold as the price changes is indeed exactly what we used to do. We used to, at a certain thing called the gold points, which was the price of gold plus the transportation cost differentials, we, that is, the United States Treasury, stood ready to buy and sell gold at a spread, as indeed all other participants in the gold standard did. So in that regard that was exactly what was happening.
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    But, needless to say, since we have gone off the gold standard, and especially since 1973, there has been basically a general float of the dollar vis-a-vis gold, which means that the gold price is like another commodity's price.

    Nonetheless, like a lot of commodity prices, and perhaps better than most, it has been useful, in my judgment, in trying to get some sense of what inflationary pressures have evolved in this country.

    Dr. PAUL. Even if the central banks, who are the major holders of gold, are willing to sell gold in order to manipulate the price or hold the price at a certain level? We are not on a gold standard, so what would the motivation be?

    Mr. GREENSPAN. They are not doing it for purposes of fixing the gold price. They are looking for it to reduce their stock of gold when they have sold on the grounds that: one, it costs to store the gold; and, two, it didn't obtain any interest. So they perceived it to be a poor asset to hold. But the purpose was not to manipulate the price of gold.

    Dr. PAUL. Another quick question on another subject, on Argentina. You stated earlier that you have been studying this and will answer the question about whether Argentina can use the dollar as their currency. It has been reported that there was a consideration, and I surely hope this is not true, that the Federal Reserve could become the lender of last resort, and they would have access to the discount window.

    Along that line, how does it work when a foreign country dollarizes and they expand their credit through fractional reserve banking? Does that put an obligation on us and can that interfere with the dollar's value?
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    Mr. GREENSPAN. That is a good question, Congressman. The answer is no. We view monetary policy in the United States as for the United States. We have no interest in, nor does the Treasury, of being a lender of last resort outside the United States.

    Dr. PAUL. Outside the IMF?

    Mr. GREENSPAN. The issue of whether or not another country wishes to use the American dollar as its medium of exchange is theirs to make. They can do it unilaterally. Panama did. Liberia did. If they choose to do that, that is their sovereign right to do that. But we have no obligation in that regard.

    Clearly, we do sense some obligation with respect to our Latin American colleagues for the same reason that we have had relationships with all of our trading partners. Their interests do concern us, and we would like them to be prosperous. To the extent that we are helpful in trade negotiations or other negotiations, that is fine. But lender of last resort, no.

    Chairman LEACH. Thank you, Dr. Paul.

    Mr. Ryan.

    Mr. RYAN. Thank you.

    Mr. Greenspan, I would like to ask you to comment on a few things, but first I would like to go off of that last question. Are you suggesting that you prefer unilateral dollarization for a country like Argentina versus giving an arrangement that gives them access to the Fed window? You are not advocating a treaty with Argentina to grant them access to the Fed window, you are suggesting that a unilateral dollarization is preferable from our point of view?
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    Mr. GREENSPAN. Access to the Fed window I think is nothing either we nor our colleagues at the Treasury think is a good idea. Indeed, we would oppose it.

    Dr. PAUL. Thank you. That is very informative. Thank you.

    I would like to pull back, broadly speaking, and I would like you to comment on a few things, namely, the worldwide call for new currency regimes, both in broad currency unions and in individual currency regimes. Do you believe that is preferable, to advocate more currency unions, such as the euro, for areas such as Latin America?

    And in individual nations, what is your preferable currency regime, generally speaking, a peg, a float, a currency board, or unilateral dollarization?

    Mr. GREENSPAN. The change in the international financial structure has re-raised all of these issues and put them really up front, whereas they had not been before. There is very considerable debating in the academic community and indeed among central bankers on all of these questions.

    The euro is going to be a very interesting experiment. It is going to teach us an awful lot about how those systems work when you start from scratch. It has not been tested yet. Obviously, it is going to take years before there have been really significant tests in that system.

    We all have a lot of general views as to what the appropriate currency regimes are. At the moment, most people I would suspect say that floating is perhaps the least worst of all of the various different——
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    Mr. RYAN. Do you share that point of view?

    Mr. GREENSPAN. I generally do. In other words, I would prefer to have a stable rates structure. I don't think it is feasible. If you can't have it and you have a very major set of financial flows, you are creating all sorts of problems in trying to fix rates, as indeed many of the emerging nations have exhibited in the last two or two-and-a-half years.

    I think currency boards work on occasion, under certain circumstances. I think crawling pegs, so to speak, I find not particularly useful. But we are going to know a lot about all of these things I would say in the next two or three years, because we are getting to the point where the amount of knowledge we are about to obtain on how all of this works is increasing very markedly.

    Mr. RYAN. Do you believe that we as a member of the G–7 should encourage other countries such as Russia to legalize the use of other currencies within their markets?

    Mr. GREENSPAN. It is really their judgment. If you are asking me whether or not they would be helped by an external currency such as the euro, for example, if they made it work, the answer is unquestionably, yes.

    It is regrettable at this particular point, but their financial system is in a high degree of instability. If they could find a way to make the euro their currency with all of the implications it has, which are really far more than most people realize—it is not only the political problems, but a very significant number of economic and central banking problems that would be involved—if they could make it work, by definition they would be a far more stable and far more productive economy. But it is not a simple issue of going from here to there.
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    Mr. RYAN. One more quick question. Could you comment directly on the deflationary signals we are being sent specifically through gold? The CRB commodity index is at its 24-year low. Do these indications tell you—how do they affect your judgment as far as judging inflation on the horizon, given these deflationary signals at home and abroad?

    Mr. GREENSPAN. They are one of the indications. In other words, clearly the general decline or weakness in commodities of every different type has been really quite apparent. It is telling something broader than what each individual commodity is telling you.

    Having said that, it is important also to remember that commodities are an ever-decreasing part of our economies. That is, high-tech and more impalpable types of economic products are becoming ever-increasingly more important, so you have to recognize that there is a very limited role for commodities as a price indicator, but it is a useful role. But I would not want to make it as the fundamental determinant, because it cannot be.

    Mr. RYAN. Because of this change in relationship, are you suggesting that the impact of these commodity indicators on your decisionmaking is changing? Is it lessening with regard to these other indicators?

    Mr. GREENSPAN. I would think so over the years, largely because the share of commodities in the total economy has been declining. But they still offer very useful indications for one very important reason. These prices are available not only daily, but hourly, and you get sometimes indications of what broader changes are well before the official data are available. So, in that regard, there is a timeliness about them which makes them more useful than the just general weights that one would have in that regard.
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    Mr. RYAN. Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Ryan.

    Mrs. Maloney.

    Mrs. MALONEY. Thank you, Mr. Chairman.

    It is always a pleasure to welcome one of the outstanding citizens from the great State of New York.

    Mr. GREENSPAN. Thank you.

    Mrs. MALONEY. I have heard you say many times, and the President say many times, that we are moving towards a world economy. Throughout your remarks you talk about the problems of the rest of the world. Roughly a third of the rest of the world is experiencing a recession.

    I would like to know, Mr. Greenspan, what would be the effect of raising interest rates on these countries, and how much do you take into consideration the influence on world markets when you are formulating monetary policy in the United States?

    I read in The Washington Post this weekend that you have to read so much more now, since you are not just following the American economy, you are following the world economy. I think it is a stunning statement on the health of our own economy that so much of the world is having financial difficulties, yet we have not experienced it in our own country. My question is, how much of an emphasis do you now place in your decisions on monetary policy, and what would be the effect of raising interest rates on roughly one-third of the world that is suffering this recession?
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    Mr. GREENSPAN. Our interest rates or theirs?

    Mrs. MALONEY. Ours.

    Mr. GREENSPAN. OK. What we do, Mrs. Maloney, is to endeavor to understand how the world at large is impacting on us. And that is becoming ever-increasingly more complex; and, as a consequence of that, I think that we need to spend a good deal more time, as indeed I am, in trying to understand what is going on out there.

    As I said to one of your colleagues earlier, we are learning while we are doing. In other words, we don't have simple textbooks at this stage which suggest exactly how the world works the way we sort of thought we did 30 years ago. That means we are functioning in a manner where we need ever-increasing detail and understanding of the various different cross-currents to get a sense of how it is going to impact on the United States.

    Our central focus on policy is the United States. I don't deny that we take considerations of what is going in the rest of the world as important, because it does impact us. And to the extent that it impacts us, we essentially obviously consider it. Whether we lower or raise interest rates, the essential focus is our long-term goal, which is maximum sustainable economic growth in the United States. And to the extent that we succeed in that, that is the best we can do for any of our trading partners. Because to the extent that they rely on our markets, if we are doing well, they are doing well.

    I would never want to be concerned about how our individual policies impact everybody else, because we would never be able to get a sensible policy for the United States, and I think that would not be appropriate for us. Indeed, as I read the statutes which give us the authorities that enable us to function as a central bank, it is the United States, and solely the United States, which must be the focus of our policies.
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    Mrs. MALONEY. In reading the reactions to your comments yesterday in Bloomberg and the Wall Street Journal and others, some of them interpreted your comments as ''it might be good, it might be bad.'' The bond markets, as you know, fell. Is that the message you were trying to send, the reaction of the markets?

    Mr. GREENSPAN. I try, with my colleagues, to say what we want to say, and I am speaking for the Board, not for myself, when I come before this committee, especially in our formal presentations under the Humphrey-Hawkins Act. I don't want to go beyond that. Whether or not people interpret what we are saying the way we thought they would interpret it, I would say some do, some don't. That has just always been the case.

    I find more often than not that there are diametrically opposite interpretations of what I say, which probably means we have succeeded.

    Mrs. MALONEY. Thank you.

    If I could ask one brief question that builds on your former question, Mr. Chairman?

    Chairman LEACH. I might come back.

    Mr. Royce.

    Mr. ROYCE. Thank you, Mr. Chairman.
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    Secretary Greenspan, I remember that some four years ago you testified before the committee. I think we were still running $200 billion budget deficits at that time. You said that if we could slow the rate of Government spending and bring the budget into balance, that interest rates would probably fall by 2 full percentage points at least. Since that time, interest rates have fallen by 3 percentage points in terms of the long-term Treasury rate.

    Another comment you had made was that the ideal capital gains rate in terms of economic growth was zero; and, indeed, as we lowered the capital gains rate to 20 percent, we have now seen actually an increase in economic growth and additional revenues come in.

    So we have a situation now over the last three years where we have seen the greatest economic growth that we have seen for some time—unemployment at a 30-year low, the Federal budget surplus is growing.

    I wondered if you would rank the factors, maybe five factors, that contributed to this. One would be balancing the budget, presumably. Another might be the capital gains tax cut. Another would be globalization and that effect, the information revolution, and credible monetary policies.

    Which of these do you think, in ranking order, would be most important in terms of establishing this 4 percent economic growth a year, and can we sustain it?

    Mr. GREENSPAN. I would say the number one is clearly the fall in the rate of inflation. Because what we have observed over the years is that as the inflation rate moves toward price stability, that the volatility and risk premium associated with inflation falls. That is a very positive contribution.
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    Technology has also been a crucial issue. That is the result of synergies of previous technologies which are not easy to forecast but which invariably have had a major effect.

    I think, but I don't know for sure, that the capital gains tax reduction engendered increased revenues, but what obviously even more increased revenues than that was the fact that, as inflation declined, long-term risk declined, and the markup on long-term earnings rose, which led to a huge increase in asset prices, specifically equity prices. That obviously had a major impact, as best we can judge, on the revenues, which has moved us into a significant surplus on the unified budget at this particular point.

    It is very difficult to make judgments of exactly how the capital gains tax impacts on the economy. My major point four years ago, and indeed it is today, is I find it a not particularly useful means of raising revenue. Irrespective of what its impact is, I would say it is not a good way to raise revenue, because it is directly on capital—capital is where we get increasing standards of living.

    Mr. ROYCE. Let me ask you about one of the worries that I have. Let me ask you how you react to the concern that the savings rate arguably would have to continue to go lower since the other drags on the economy such as the rising trade deficit and slowing global demand means that growth here depends on continued consumer spending. How do you react to that?

    Mr. GREENSPAN. I think you are raising the basic issue a number of people have raised; namely, that the spreading out, the decline in the private savings rate and the continuation of very strong capital investment is stretching the financial funding system, and something has to give, and indeed, something will give at one point or another. It is hard to know exactly how it is going to rebalance.
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    Our judgment, and it is a judgment which we recognize has uncertainties associated with it, is that the level of consumption growth, which has been extraordinarily strong, will slow down. Indeed, that is the essential content of my prepared remarks.

    We believe also that the dramatic expansion and capital investment will slow down to a more long-term sustainable path, and that will close the gap between private savings and investment.

    The presumption is that public savings, largely through the surplus in the unified budget account, will continue. That offsets this gap in large part, as indeed does the current account deficit. But—then that has to all close and balance. That is true by just the nature of the fact that savings must equal investment at all times in our economy.

    Something will give. Something will eventually change the pattern. But there are a number of different ways that that can happen.

    Mr. ROYCE. Thank you, Chairman Greenspan.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Chairman and Mr. Royce.

    Mr. Bentsen.

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    Mr. BENTSEN. Thank you, Mr. Chairman.

    Chairman Greenspan, I have about three questions I would like to get to you. The first is maybe more of a statement based upon some earlier comments of both the Chairman and then Mr. McCollum with respect to the Wall Street Journal, and I didn't read the opinion piece that was discussed.

    But looking at the Fed's February 23rd Monetary Report, I think the answer that you gave, and I just want to verify this, you wouldn't support borrowing to pay for tax cuts or new spending, for that matter, is that correct? Do you think that is an inefficient use of resources?

    Mr. GREENSPAN. I think that, in line with the statements I have made before this committee on many occasions in the past, I believe that we would be far better off with lower levels of spending and lower levels of taxes.

    I do think that having a budget deficit is not a good idea, and having lower debt is a good idea as far as long-term economic growth is concerned. I don't know whether that responds to your question.

    Mr. BENTSEN. But spending surplus on tax cuts or new spending in lieu of paying down publicly-held debt does have a cost associated with it, the carrying cost of that debt, correct?

    Mr. GREENSPAN. Yes.
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    Mr. BENTSEN. And you would be opposed to that?

    Mr. GREENSPAN. Under most circumstances, I am usually in favor of reducing taxes, as I am reducing Government expenditures.

    In today's environment, where we have the economy going flat out at this particular point and we have a substantial unified budget surplus, from an economic policy point of view I envisage the best thing that we can do at this particular stage is to allow that surplus to run.

    What that means, of course, is that the debt to the public declines, interest costs on that debt decline and, in my judgment, that contributes to lower long-term interest rates.

    Mr. BENTSEN. Your report also—and I am going to have one other question I want to try to get in. Your report also indicates that social insurance tax receipts as a source of Federal revenue increased by 6 percent in step with growth and wages and salaries. That is as a result of increased profit, I would assume. In part that is helping raise personal income. I think that is what you are saying in your statement.

    Is that also a reflection—or is it too early to tell if that is a reflection of increasing the gross national savings rate by booking the surplus and paying down the debt?

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    Mr. GREENSPAN. No, I think it is more likely at this stage the result of the fairly dramatic increases in productivity which have been occurring in large part, as I indicated in my prepared remarks, as a consequence of the rate of return on new investments rising. So that, as productivity rises, as nominal wages and salaries rise, you pick up increased Social Security taxes and other types of taxes on the wage base.

    Mr. BENTSEN. In the long run, that should be helpful to the trust funds, though, correct?

    Mr. GREENSPAN. Yes, of course.

    Mr. BENTSEN. Let me ask, and I hope you get to testify before the committee on the budget. It may be that we go ahead and mark up a budget without this, with only one set of hearings. But because there are a number of—I would like to talk to you in more detail about the President's proposal at the appropriate time, but I am not going to bring that up here.

    Let me talk about another issue with respect to the oil economy. In your report, a lot of times you state what the level of imports is with respect to oil. I didn't find it, but I may have skipped over it.

    Previously, we have seen imports rising to the 50 percent level of consumption. I would assume that it is greater than that now with the world oil glut. We have discussed this before, but I would like to raise it again.

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    You also state in your testimony, I believe, that a decline in oil prices, which are at the lowest level in a 25-year span, I think, and particularly at the retail level, was unlikely to recur.

    So I guess you are projecting—and I have a two-part question. I guess you are projecting that you think oil prices and, thus, gas prices, will start a trend back up, although we haven't seen any evidence of that so far.

    Second of all, as we get to the 60 percent, or whatever the level of imports is, and we see not just a decline in production in the United States, but an elimination of production capability through more rigs going off-line, the capping of marginal wells, where the recovery cost goes up quite dramatically to bring those capital items back into line, are we looking at the possibility of a transfer of wealth in our oil production capabilities outside the United States, and is that something we should be more concerned about than the usual concern of competitive or comparative advantage in means of production?

    Mr. GREENSPAN. We are merely reflecting in the oil price essentially what the futures markets are showing. In other words, West Texas Intermediate, as you know, is selling at a premium in the far distant months, and that is the best guess that we can make at this particular point.

    But as you have experienced more than most anyone around here, those prices fluctuate, because it is very tough to get a good fix on the balance of world crude oil supply and demand because there are so many players; not only producers, but huge numbers of consumers all over the world. It is a major international commodity.
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    The issue of how we deal with our resources, the clear problem that we have, obviously, is that the cost of producing crude in the Middle East, specifically in Saudi Arabia, is very significantly below our marginal costs, even among our best wells and our best fields.

    We have to make the judgment, and I guess we do it by implication, about what we wish to do about that. And the general judgment is that we are allowing the market to do what the markets do, namely, allocate resources to various different places of production.

    The consequence of that has been, as you point out, a fairly significant contraction in strip oil production in the United States, which continues. The rigs in operation have fallen very significantly, and basically because the incentives to find new oil or gas, for that matter, at these prices is clearly far less than it has been.

    It is pretty easy to define what the nature of the problem is. It is another issue altogether to get a rational national policy to address it, or whether a national policy is even appropriate. I think that is an issue which has always engaged the Congress as long as I remember, and I suspect that will continue to be the case.

    Mr. BENTSEN. You are not willing to give an opinion as to whether or not there ought to be a national policy, or what that might be? With respect to oil and gas?

    Mr. GREENSPAN. Frankly, Congressman, I lived through too many national oil policies which didn't work all that well that my enthusiasm is less than terrific.
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    Mr. BENTSEN. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. My apologies to Mr. Goode, but Mr. Watt was here at the beginning of the hearing. Let me just say the order will be Mr. Watt, Mr. Goode, and then we will come to Mr. Sherman.

    Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I have three areas that I would like to get Mr. Greenspan's comment on.

    First of all, 10 or 15 years ago we heard a lot of comment and concern about the balance of trade, and there seems to be, as we have moved toward a world economy, less and less concern about that, less and less discussion of it, at least. I wonder if you might comment briefly on the growing deficit, trade deficit balance and the impact, either good or bad or indifferent.

    Second, there is a proposal on the table that the President addressed in his State of the Union Address to increase the minimum wage. I would like to get your opinion about what, if any, impact that would have on the continuing movement in the economy.

    Third, obviously, given historical patterns, we can't continue to go on like the economy has been going. I am wondering what impact you see if there is a slowdown in the economy for the last hired in this employment cycle and typically the most vulnerable people who are probably the least skilled and more likely to lose their jobs if there is a slowdown.
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    If you could comment briefly on those three things, it would help me to evaluate all the perspectives and probably help me to have some more intelligent discussions with my constituents when I go back home, also.

    Mr. GREENSPAN. Well, Mr. Watt, I think you raised really an interesting question, because I think you are right, that the concerns about trade are less than they were 15 years ago. My suspicion is that there is a greater acceptance that we are living in a world economy and that trade is a crucial element in that.

    It is possibly also the case that there is an increasing acceptance of the fact that—what most economists think is demonstrable—namely, that standards of living do really rise with the division of labor and trade that goes with it.

    The issue of the trade deficit, which is rising, is a complex question at this particular stage because there are two issues that are really relevant here. One is that the trade balance and its financing—one of the characteristics of this trade balance or the trade deficit is that it is in part engendered by the fact that there has been a fairly strong demand for U.S. dollars, especially drawn into the United States to supplement what has been meager domestic savings.

    If you have a lot of foreign savings coming into the United States, it necessarily means that you are also having a current account deficit, and that it is hard to know how the whole system is directly being put together because we only see the end result of that.

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    But we are very much aware and spend a good deal of time focusing on this interaction to understand how our economy is behaving and, therefore, what is the appropriate monetary policy.

    With respect to the minimum wage, I will repeat what I mentioned to your colleagues who have asked similar questions. My concern with the minimum wage is that the evidence that we have seen over the years very clearly indicates that young teenagers are the ones whose employment seems to be significantly impacted by that. It wouldn't be in today's environment. The demand for labor is so strong that anybody who wants a job has a very considerable chance in getting it, and I doubt very much if the minimum wage is having an important impact.

    I am concerned, however, the next time the economy softens, because not only would a higher minimum wage tend to price out of the market the number of teenagers who want to get on the lower rungs of the ladder of learning how to get into the business world, get on-the-job training and the like, but knocking them off the ladder is not very helpful.

    Which gets to your third issue, which is one that I think we all struggle with with respect to hiring policies and who gets laid off when the economy weakens. That clearly is not a problem today. On the contrary, what we have seen is a fairly dramatic increase of employment of those with less than high school educations; that we are seeing for the first time significant absorption of a lot of people who were not capable of getting on the lower rung of the ladder and work their way up who are now being able to do that.

    I would be concerned that the next time the economy weakens that it is going to reverse, which is one of the reasons why we believe that it is very important to keep this economy going as long as we can in the context of stability. Because, clearly, the longer time people have to get on-the-job training, the more likely they are to be continued to be employed when the economy inevitably slows down, and that is inevitably going to be the case.
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    So it is a set of tough decisions, but policy has never been easy. It has gotten likely to be less easy because of the new complexities with which we are dealing.

    Mr. WATT. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Watt.

    Mr. Goode.

    Mr. GOODE. Thank you, Mr. Chairman.

    Much has been said about the economy being good, and my area is one of the weaker areas. The seniors are all concerned, or many are concerned, about their Social Security checks. I know that you stated that you would not be in favor of the Social Security revenues being invested in common stocks. Is that right?

    Mr. GREENSPAN. Yes.

    Mr. GOODE. How about investing in corporate bonds, AA and AAA? Would you still have a similar reservation?

    Mr. GREENSPAN. My major concern, Congressman, is that unless you increase national savings in the process, to the extent that you increase the rate of return on Social Security investments you decrease the rate of return exactly the same amount in the private sector, where people's savings are largely for retirement as well.
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    So in the broadest sense, merely shifting who invests in what will change what each individual pool is earning, but it is by no means clear that it increases the total amount of monies available for retirement of our population when it goes to retirement age.

    So my main concern with all of this type of discussion is that somehow it appears as though there is a free lunch here. There is not. If it actually increased national savings in the process, then it is a different issue. But I can find no reason that is of a positive nature to change the pattern of Social Security investments, because it can only be by switching the investments with the elements in the private sector, which essentially are also for the purpose of creating retirement income. I think it gives a sense of well-being to the Social Security Trust Fund which is unreal, and I think that is a mistake as far as national policy is concerned.

    Mr. GOODE. To follow up, then, would your answer be similar if we switched the bonds for the future from non-negotiable in the Social Security Trust Fund to negotiable and if you made your check for your 6.2 employee and your 6.2 employer tax payable to the Social Security fund instead of the U.S. Treasury, like it is now?

    Mr. GREENSPAN. I am not sure about the last, which I am not familiar with, but I will say that whether or not you are holding marketable securities or special issues doesn't matter in the slightest. It is the same security.

    Mr. GOODE. Which would you—do you think—I know a lot of the seniors in my area would feel safer if the check for the Social Security taxes was made payable to the U.S. Social Security fund and there was a real fund instead of the U.S. Treasury.
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    Mr. GREENSPAN. I think there is no doubt that there is an important question here about whether the trust fund should be split off from the budget. I think there is a good argument to be made of really taking Social Security off-budget. We do it in a mechanical sense now, but when you negotiate with respect to the issue of what expenditures are and taxes are, you think wholly in terms of the unified budget, or almost wholly in terms of it. All of the agreements, all the deals, all the caps and the pay-goes, they are all unified budget.

    If you took Social Security fully off-budget, made it a special trust fund, even investing in U.S. Treasury securities, and dealt with the on-budget issue, I think we would get a higher rate of savings in this country. That in my judgment is crucial.

    Mr. GOODE. That would be good?

    Mr. GREENSPAN. Yes, indeed.

    Chairman LEACH. Thank you, Mr. Goode.

    Mr. Sherman.

    Mr. SHERMAN. Thank you, Mr. Chairman.

    I have a brief amount of time. I would like to comment on a couple of the exchanges, and then ask the question I came to ask.

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    I know that Mr. Watt asked about the trade imbalance. I would point out that during this there has been a tendency to always blame America for the trade imbalance. First, we were told our products were no good, and then our autos got better.

    Then we were told our Federal Government was no good because we were fiscally irresponsible, and there was a direct correlation between the budget deficit and the trade deficit, and now we are the most fiscally responsible Government in the developed world.

    I think ultimately our trade imbalance is, in large part, the responsibility of our trade negotiators, who have taken the position that we would like the honor of defending the world for free and are willing to make major trade concessions in order to obtain that honor.

    But rather than ask the Chairman to address that, I am going to have the honor of asking those same questions to the Secretary of State Albright tomorrow.

    I do also want to comment on the exchange with Mr. Goode. I know that the Chairman has been a supporter of a capital gains tax reduction or elimination, and I would say in my 15 years of experience as a tax lawyer and CPA no one ever was influenced by me on the spending-saving decision. They are influenced by the tax law and their tax advisors, only on what to invest, in the decision.

    For us to give the rich major tax incentives to move their money from debt instruments to equity instruments because that is allegedly important for the economy, but then to say that it does not help the economy when the Social Security Trust Fund does the same thing is somewhat baffling.
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    I tend to think that nothing we do, at least with the clientele I serve, the upper income that could afford my fees, will influence the trade-spend decision. First, they bought the Rolls-Royce; then they drove it to my office and told me how much money they had to invest.

    But what I want to turn to is Mrs. Maloney's questions about the effect that the Fed's decisions have internationally, because I think when the history of the latter part of this decade are written, there are two possible histories.

    One will be the ''Age of Greenspan,'' a discussion of how America finally found fiscal discipline and created long-term low inflationary growth. The other will be a history that America fiddled around with its domestic economy while ignoring the fact that Russia was disintegrating.

    I grew up in the 1960's when the bumper stickers, along with the peace sign, said that ''One nuclear bomb could ruin your whole day.'' In the language of this committee, I would say that ''One thermonuclear explosion can adversely impact your entire fiscal quarter.''

    Obviously, the primary focus of the Fed has to be non-inflationary growth for the U.S. economy, but reasonable minds have differed by as much as 50 basis points on what the right course is. Within that reasonable range, the question is, is there anything that U.S. monetary policy could do to reduce the likelihood that Russia will continue to disintegrate? Would a reduction in American interest rates allow the Russian government to survive, which is important for the Russian people, but to continue to control its nuclear weapons?
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    If so, would the Fed view that as an important goal, or will we have the first non-inflationary period of growth of 10, 15 years interrupted sometime next decade when we find out that several hundred nuclear weapons have leaked out of Russia and that a few of them had exploded in American cities?

    Mr. GREENSPAN. It is not conceivable to me that anything that we in the Federal Reserve could do in either raising or lowering interest rates would have any material effect on the Russian financial system. They have very serious problems, as you know, and they are struggling with them.

    At the usual G–7 meeting over the weekend, a group of us in Frankfurt met with our Soviet colleagues, or rather, our Russian colleagues, and it was a very interesting discussion. Very interesting discussions were going on.

    Mr. SHERMAN. I think we are all acutely aware of the issue of the existence of nuclear warheads in an economic environment which is deteriorating, and the maintenance of the system to make sure that those systems are in sound order is not cheap. They have a very large system. They have very large requirements; and they have, as everyone has indicated, a very difficult problem.

    To the extent that they have difficult problems, you don't think 25 or 50 points on world interest rates—their problems are so extreme that it is not at the margin, where it pencils out—it is not that kind of decision?

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    Mr. GREENSPAN. No, it is not. It may have been three or four years ago when they were actually coming back. The price of oil declining actually really did a great deal of damage to their economic recovery. But now I would say that the issues are far more fundamental and essentially things which they are going to have to themselves get resolved.

    Mr. SHERMAN. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much. We have had our last round.

    The gentleman from California would like to ask one brief follow-on question. I have, of course, asked about the price of corn, Mr. Bentsen the price of oil. I assume your concern is artichokes and eggplants out there.

    Mr. ROYCE. Thank you, Mr. Chairman. Those will be submitted for the record.

    One last question. History has not had happy results with central governments investing taxpayer dollars into the market. Italy in the 1930's comes to mind. But one of the experiments we have seen over the last few years, maybe 18 years ago, was written getting its taxpayers through a choice in the individual social security accounts system, a choice in investing some of their savings for their retirement into the marketplace. The choice, the decision not being made by the Federal Government, but instead being made under constraints that it be in some AAA bonds and blue chip stocks, that this be controlled by some means by the Government. But, nevertheless, that then arguably helped handle an anemic savings rate. Some of the states did this because their own social security systems were changing as a result of demographic changes in the population, Chile and England being two.
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    What would your thoughts be, theoretically, on, as we move forward on this debate on Social Security, allowing some element of choice to the individual to make such investments in blue chip stocks and bonds of sound investments?

    Mr. GREENSPAN. The crucial determinant is whether or not the process increases the national savings rate. I have always argued that if you move funds into private either defined contribution or defined benefit plans, that the requirement that they be fully funded, or at least the defined benefit would be fully funded, in my judgment would make it easier to get a higher savings rate, and that therefore I support it for that reason.

    I think that there are a lot of arguments that I have heard for private investments which I don't find persuasive. But the issue of full funding is to me a crucial one, and a higher savings rate would be implicit in that. I have always supported that, supported a significant part of Social Security moving into the private sector for precisely that reason.

    Mr. ROYCE. Arguably over the next 20 years this could help change the negative savings rate into a positive rate? I know we have seen that in some countries.

    Mr. GREENSPAN. I would think so. I would think that, in fact, that is precisely what I am saying would happen, and I would hope it would be, in fact, the case.

    Mr. ROYCE. Thank you, Mr. Greenspan.

    Thank you, Mr. Chairman.
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    Chairman LEACH. Thank you.

    Mr. Chairman, I have several more questions, but I really think we appreciate your coming, and this would be a good time to bring this to an end. We appreciate your perspective, and we thank you and your staff for your assistance on a host of issues.

    Is there anything you want to say in conclusion?

    Mr. GREENSPAN. No, thank you very much. I think it has been a most interesting session today.

    Chairman LEACH. Thank you. The hearing is adjourned.

    [Whereupon, at 12:48 p.m., the hearing was adjourned.]