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Mr. GREENSPAN. That was a year ago.

Senator SARBANES. They do not clash today, do they?

Mr. GREENSPAN. Well, to go back, I redid the calculations of what would have happened to the current policy budget as of January 2001 if you had the economic data that we have today. And what that would have done would be to move the point at which we would get to irreducible levels of Federal debt about 2 years.

Senator SARBANES. There is a different policy budget now. They do not clash on the basis of the different policy budget, do they? Mr. GREENSPAN. You mean at the moment?

Senator SARBANES. Yes.

Mr. GREENSPAN. Well, no, because basically the policy is changed.

Senator SARBANES. That is right.


Senator SARBANES. Now, I take it that you would come back to your traditional position of preaching the virtues of debt reduction ahead of either a large tax cut or large spending increases; is that correct?

Mr. GREENSPAN. That is what I have done today, Senator.

Senator SARBANES. All right. I wanted to be clear on that. The reason I am trying to be clear on it is I am really struck by this interpretation of your San Francisco speech. And I know Senator Wyden asked you about it, but I am going to pursue that for just a moment.

John Berry, in the Post, just a few days ago, talking about that speech, said, "Part of the confusion over the speech was due to the subtlety of Greenspan's intended message. Greenspan chooses his words very carefully, keenly aware that his public utterances are closely parsed by the markets and often move global stock and bond prices. An economist who speaks in highly technical language about extremely arcane subjects, he also is so aware of his reputation for impenetrable prose." And of course that is a continuing problem; that is why I said it was a miracle when Senator Byrd said he was asking very straightforward questions and getting very straightforward answers. In fact, in some of the press leading up to this, one article is headed, "What is Greenspan Trying to Say? Market Swoons on Debate. Tomorrow's Senate Testimony Could Clear up the Confusion." And I want to try to clear up the confusion.

Berry says in this article, "Greenspan's intended message”-because some have said, well, it was over interpreted—“intended message was that the recession was likely to end soon, but that a quick, sound rebound was not assured."

And later, in trying to interpret it, he says, "However, in last week's speech, Greenspan cautioned that it was too early to be sure about the nature of the recovery"-and he quotes from your speech-"despite a number of encouraging signs of stabilization. It is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold,”

Now, is that an accurate portrayal of your position?

Mr. GREENSPAN. I tried to, in my prepared remarks today, address the issue in the manner in which if there was any confusion,

I tried to, as best I could, eliminate it. The difference betweenwhat I was endeavoring to do back there in San Francisco was to indicate that something really quite important has happened in the past year or maybe the last several years. The flexibility and resilience of this economy has clearly improved immeasurably. And the reason we know that is that it has responded with such great flexibility to what has been a very severe set of pressures. I interpret that as a rather positive view of the world at large. And what I was endeavoring to do was to put it in context so we did not assume that everything forward is going to become a type of economic expansion which has occurred out of previous recessionary periods.

Senator SARBANES. Do you think it is premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold?

Mr. GREENSPAN. No. I do not think we are going to know that for several months.

Senator SARBANES. So you think it is premature?

Mr. GREENSPAN. Well, we are just at this particular point, turning, as best I can judge. In other words, we are close to zero GDP change.

Senator SARBANES. Well, those are not my words that I asked you. Those are your words.

Mr. GREENSPAN. I know, but what I am trying to say is that anyone who thinks they can state with great conviction at this particular point has not been in the forecasting business as long as I have.

Senator SARBANES. Mr. Chairman, could I just put two very quick questions?

Chairman CONRAD. Yes.

Senator SARBANES. In responding to Senator Allard, you indicated you were in favor of spending caps on discretionary spending. Is that correct?

Mr. GREENSPAN. That is correct, Senator.

Senator SARBANES. Is that an implied criticism of the President's indication that he is going to ask for a 14 percent increase in the defense budget?

Mr. GREENSPAN. The discretionary spending procedures basically are caps that the Congress puts on. I am just saying as the general procedure, that it is a very good idea to have caps. What caps do is to limit the spending off the Congress' and the Administration's priorities. I happen to think that defense expenditures are very high priority at this particular stage. And you do what you have to do, but that does not mean you should not try to cap other types of discretionary spending in order to keep the budget under reasonable control.

Senator SARBANES. Would you cap defense spending as well? Mr. GREENSPAN. I would not say that because defense spending basically

Senator SARBANES. Well, we did it before.

Mr. GREENSPAN. Well, what I am trying to say is that

Senator SARBANES. The period that you reflect on, when we brought the budget into balance, I am sorry Senator Domenici left because he played a role in doing that-shifting over from a deficit equal to nearly 5 percent of GDP in fiscal 1992—this is your state

ment to a surplus equal to 2-1/2 percent of GDP in fiscal 2000 was truly remarkable. And of course many of us here in this room shared in that achievement, as of course did President Clinton, I might note. Those years actually paralleled his presidency.

Mr. GREENSPAN. The way that was done was by reducing the force structure and changing the underlying structure of our military posture. A great deal of spending that occurs in the Defense Department is longer term, especially in the procurement area, and even in maintenance and operations you do have long-term contracts involved, so that you can move defense spending down only with a significant lead, and you did have a significant lead, and the force structure was run down in a manner which enabled you to get to touch

Senator SARBANES. Let me get this clear. Are you in favor of excluding defense expenditures from spending caps if we have spending caps?

Mr. GREENSPAN. I might, yes. I think that they require a different type of evaluation than what we usually consider to be spending caps.

Senator SARBANES. And finally, what am I to make of your comment in the first paragraph of your written statement where you say, "I want to emphasize that I speak for myself and not necessarily for the Federal Reserve," as a sort of headline

Mr. GREENSPAN. The reason I say that is that for a number of the questions that have been posed to me, which I choose to answer, I do not want to imply something that my colleagues necessarily agree with. I think that a large number of them do, but I do think it is important to remember that a number of these issues have not been vetted through the official policies of the Federal Reserve.

When I come before your Committee, on so-called Humphrey Hawkins testimony, that is vetted testimony. At that point I am speaking for the Federal Reserve Board. Today I am not.

Senator SARBANES. Thank you, Mr. Chairman.

Chairman CONRAD. Senator Clinton. And let me just say that this will be the last questioner as we have tried to adhere for your time for departure, Mr. Chairman.

Senator CLINTON. Thank you, Mr. Chairman. And I too was with Senator Bond at the hearing where Mrs. Bush appeared, and I apologize that I missed the beginning of your testimony and the questions that were asked.

I agree with your framework of saying that our country needs to set objectives that we expect to be working toward achieving, and that we should do so by asking ourselves where we want to be in 2015, to pick a date. One could pick another date, but that was the one that you referred to, and I think that is a fair way to describe how we should go about determining our budgetary decisionmaking.

And I am following up on Senator Sarbanes' points because when you were here last year, I think many of us, although we were facing some economic indicators that suggested a downturn, believed we had more control over our destiny than perhaps we do right now, that given surpluses and given the rapid rate at which we were paying down debt, that even in the face of an irreducible debt

basis of your testimony, which led to the concerns you expressed, we could do the kind of planning that would get us to 2015, having dealt with, in a rational way, the demographic challenges that we faced.

Yesterday when Dr. Crippen testified, and certainly given the uncertainty that you reflect on the future of the recovery and its pace, I think many of us believe we had lost some of that ability for the long term, that we have perhaps even given away the capacity to make the decisions that would put us in a better posture than we see currently available to us.

Now, going back to the San Francisco speech, I just want to make sure that I understood something that I believe you said, because it relates to something we talked to Dr. Crippen about, that the diminished outlook for debt reduction has probably played a role in keeping long-term interest rates relatively high this year. Is that a fair inference from what was said in San Francisco?

Mr. GREENSPAN. That is correct, Senator. I said that there are, in my judgment, two elements involved. One was the expectation of an imminent recovery in economic activity, which would move, other things equal, long-term rates up. But I also stipulated that a deterioration of the long-term fiscal situation was also a contributor.

Senator CLINTON. Well, I happen to believe that, and I think that the high long-term interest rates on a relative basis this year, despite your efforts at the Fed to use monetary policy on short-term rates, has had and will have a continuing negative impact on debt reduction which I think it is at least a fair bet will impede the recovery. I well remember the discussions that you were instrumental in in 1993, when the discussion about how we could craft a debt reduction plan that would lower long-term interest rates, spur economic growth, led to the decisions that were made in 1993.

What I am concerned about now is that just as in 1993, some people criticized the Administration at that time for keying economic policies to bond traders, which I remember very well. It turned out to be a pretty smart bet.

Now, my biggest problem with the tax cut last spring is that I do not think the bond traders were asleep, and whether my colleagues believed the projections of surplus and the impact on the debt as being overstated by those of us who expressed concern, I think the bond traders had a pretty clear and cold eye about what would happen. And as Senator Sarbanes, based on the Chairman's chart, has just reminded us, although in this first year the tax cut impact on the surplus has been minimal. The projected impact is as stated in that chart.

So here we are. I accept those who say politically there will not be any change, there will not be any repeal, there will not be any serious effort to rethink our changed circumstances, but I do not think the market and the cold clear-eyed bond traders are going to be impressed by our failure to exercise responsible fiscal policy in the face of changed circumstances.

So that leads me back to this discussion of a trigger, and I would just clarify, I think, a point that my colleagues, Senator Snowe and Senator Stabenow have repeatedly made, is that their idea for a trigger would not repeal a tax cut, but would delay one until it

could be paid for, and the paid-for part of that would take into account the various factors that would be available at the time however it was constructed.

And the final point that I just feel compelled to raise as well, following up on Senator Corzine's comment, is that I agree with your assessment, that the reaction to what has happened with Enron and Arthur Andersen is a healthy reflection of how much we value transparency and accurate information in order to have a functioning market system. But I do not think we are anywhere near the end of this story, and what will really count is what are the consequences. In fact we could further drag down business and consumer confidence, in my opinion, if the outrage is not followed by consequences. And one of my concerns is that at least at present, based on press reports, the discussion about the accounting information practices and how we go forward guaranteeing to people that their outrage is not misplaced raises some serious issues.

And I would, if you believe it within your purview as someone who looks at the entire economy, go at Senator Corzine's question a little differently, which is when the outrage has exhausted itself, will it be important for the continuing functioning of our markets to have an accounting system that is understandable and regulated in such a way that people can put their confidence in the results of whatever the statements might be.

Mr. GREENSPAN. It is hard to know what the next 2 years are going to unfold, or how they are going to unfold, but I think it is reasonably certain that what has come out of this particular event is going to alter the way not only accounting is done in a more transparent way, I think there are effects on corporate governance as well, because the incentive structures in audit committees within corporations, amongst accountants, at least in my judgment, are not optimum for the appropriate allocation of capital within our economy.

Senator CLINTON. Excuse me, Mr. Chairman. Are you suggesting that that will be a self-policing, self-regulating

Mr. GREENSPAN. I do not know.

Senator CLINTON [continuing]. Formation of human nature that will occur?

Mr. GREENSPAN. No, it is not human nature. Well, in part it is. I mean it is called self-interest. There is a very important economic value in reputation, more so than it has been in recent years, largely because we are increasingly moving toward what I would call a conceptual economy in which physical assets are a decreasing proportion of the market value of firms, and, as I indicated earlier, this reputation, capitalized and placed on the balance sheet, is called goodwill. And it is a major competitive advantage to be able to say to somebody, "Our accounts fully represent what is actually going on in our company." Indeed, those of us who have been involved in bank regulation are aware of the fact that those financial institutions which get into businesses which are somewhat obscure have found that the price-to-earnings ratios of those institutions are less than those who are in businesses which are fully exposed to the light of day in their accounting systems and in the structure of the type of risks they take,

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