Hearing of the Senate Banking, House and Urban Affairs Committee Subject: The Federal Reserve's Monetary Policy Report

HEARING OF THE SENATE BANKING, HOUSE AND URBAN AFFAIRS COMMITTEE
 
SUBJECT: THE FEDERAL RESERVE'S MONETARY POLICY REPORT

SEN. THOMAS CARPER (D-DE): Thanks, Mr. Chairman.

Chairman Greenspan, welcome. We're delighted to have you with us today. One of my colleagues said earlier today that the president shouldn't try to fix monetary policy any more than the chairman of the Federal Reserve should try to fix fiscal policy. I was just thinking, how many presidents have we seen in my lifetime who have tried to fix monetary policy? And I won't—I'm not going to ask you to address that question, but we—I think most of us here know that there's been some precedent for that.

I shared with you in a conversation we had with some Democrat and Republican centrist senators not so long ago from conversations I had with business leaders back in my own state Delaware, where we talked about what we needed to do to get the economy moving. And they talked a whole lot about uncertainty. They spoke of the uncertainty that we've faced with investor confidence, lack of investor confidence over the last year, and hopefully, the steps that we have taken here today in pushing forth, moving forth the nomination of Bill Donaldson to chair the Securities and Exchange Commission will help to alleviate some of that uncertainty. As time goes by, the implementation of the Sarbanes-Oxley legislation will hopefully help to boost investor confidence, as well.

We have uncertainty because of the fear of terrorist attacks. We're in—what are we in—orange alert these days and a whole lot of uncertainty that continues to swirl around that. We've faced the uncertainty of the election; we've survived the elections; we now know who's in the majority and who is not. We still face the uncertainty of a potential war with Iraq, the effect that that war will have on energy prices, on the availability of oil; the prospect of an altercation with North Korea as we deal with them and their problems.

We have all kinds of uncertainty that flow out of class action lawsuits, where little local courts in places like East Saint Louis, Illinois, and places in Alabama and Texas are making national class action really law for our country. We see uncertainty face these companies, tiny little exposures to asbestos that are actually taking them under and putting them into bankruptcy.

We see uncertainties with spiraling health care costs. And we see uncertainty with the trade deficit, where we've gotten to be better at exporting jobs, not just manufacturing jobs, but jobs that are high-paying jobs—software jobs, technology jobs—that are going -- (inaudible) -- than we would like to think.

The last thing I wanted to say, I had an interesting meeting with Dan Crippen, recently departed CBO chairman. And he put in context the administration's tax cut proposal and talked about its effect on the economy. He looked ahead for the next 10 years and said GDP for the next 10 years will be about $120 trillion, $130 trillion, maybe $140 trillion. He also said the size of this tax cut proposal that we're looking at is $650 billion; $140 trillion economy for the next 10 years, about a $650 billion tax cut. And what he said then really helped me put it in context. He said it's a 65 cent change to a $140 economy.

Sometimes we delude ourselves, I think, by presuming that a tax cut or spending policy is going to somehow move the economy, when actually, what we do is relatively small compared to the size of the economy itself.

And I would just say to my colleagues, and certainly to you, and to the administration, we need to deal with uncertainty to get the economy moving. You've done a great job in monetary policy; you've done a terrific job and are to be commended for that.

Thank you.

SEN. THOMAS CARPER (D-DE): Mr. Chairman, again, thanks for all of your time and insights today. I'm going to follow up on Governor Miller's and Governor Bayh's questions with one that also relates to the states.

We've heard from the states repeatedly over the last year or two that, particularly for those whose tax system is piggybacked on the federal system, that when we make reductions here, then the—there's an effect on them as well, reducing their revenue base. With the latest proposal from the administration—which I think in theory on the double taxation of dividends makes sense, it's logical. I, like you, would say if we're going to do that sort of thing in the context of maybe a broader tax reform that it be deficit neutral and that we do it on the corporate side rather than on the approach that the administration seems to be taking. But I'm hearing from some of my old governor friends that—their concerns about the cost of issuing tax debt and how that might be affected if we approach the taxation of dividends as the administration has proposed. Any thoughts as to—to how we could minimize the effect, the impact on the states by taking a different course?

MR. GREENSPAN: Senator, you're referring to the issue that—municipal finance, the interest rates that are involved would be affected by essentially creating a whole new segment of demand for untaxable issues, so to speak.

SEN. CARPER: Yes, sir.

MR. GREENSPAN: It depends on whether you, you know, whether you are—this is a half full/half empty glass problem, because the double taxation of dividends is a subsidy to the municipalities in the sense that it gives them less competition and hence better financing capability. If you look at it that way, then the question is you're eliminating the subsidy. Well, if you look at it the other way, you're taking away a subsidy which is deserved. And I don't have a clue how to answer that question.

SEN. CARPER: All right. Let's try another one. Your—I going to quote you here on page five of your testimony, which says, "The intensification of geopolitical risks makes discerning the economic path ahead especially difficult. If these uncertainties diminish considerably in the near term, we should be able to tell far better whether we're dealing with a business section and an economy poised to grow more rapidly—our more probable expectation—or one that is still laboring under persisting strains and imbalances that have been misidentified as transitory." And then, skipping down a couple lines, you say, "If, instead, contrary to our expectations we find that despite the removal of the Iraq-related uncertainties constraints to expansion remain, various initiatives for a conventional monetary and fiscal stimulus will doubtlessly move higher on the policy agenda."

There's a couple different ways a person could read this. I—my own view is that the greatest impediment to economic growth in this country is the uncertainties; a lot of them outside of our country. But I alluded to some of those earlier. Are you saying here that before we use the other quivers in our monetary—of our monetary -- (pause) -- arrow holder are we -- (laughter) --

SEN. : Quiver.

SEN. CARPER: -- (laughs) -- quiver—out of our monetary quiver or out of our fiscal quiver, that we should first try to deal with some of these uncertainties.

And then once we've dealt with those, then let's see what further we need to do on the monetary side or on the fiscal side. Is that what you're saying?

MR. GREENSPAN: Yes, Senator.

SEN. CARPER: On the monetary side, what could that include?

MR. GREENSPAN: Usual monetary policy initiatives.

SEN. CARPER: Well, you've done a lot. And there are some on this committee who have been rather critical of your stewardship on monetary policy. I'm certainly not among them. But what further can we do? You've taken the fed funds rate down, you've loosened up money supply; what further is there to do?

MR. GREENSPAN: Well, the general position of the Federal Open Market Committee at this particular stage is that we are holding at the 1-1/4 percent federal funds rate and view the outlook as—the balance of risks as essentially balanced on both the up side and the down side. And one of the reasons is the large uncertainties with respect to the geopolitical risks.

As I said several times this morning, our judgment as best we can make it is that there seems to be a fairly significant, almost inexorable endeavor on the part of the economy to move forward, but it's being held back by these set of forces; and if that's the correct interpretation and we are viewing it correctly, then we will find that, at least in my judgment, the issue of the discussion of stimulus will probably just go away.

Because of the fact we're apt to know the resolution of that within a period which doesn't stretch out indefinitely into the future, I've concluded, as I've indicated previously here, that we're probably more sensible to wait to see what happens before we embark upon a number of programs which may, in fact, from a stimulus point of view not be necessary. Remember that I'm in support of the president's program on the elimination of double taxation of dividends not for short-term stimulus purposes. I think it's a very sensible long-term program.

SEN. CARPER: Thank you.