Hearing of the House Committee on Financial Services - Federal Reserve Monetary Policy Report

Federal News Service July 21, 2004 Wednesday

HEADLINE: HEARING OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES

SUBJECT: FEDERAL RESERVE MONETARY POLICY REPORT

CHAIRED BY: REPRESENTATIVE MICHAEL OXLEY (R-OH)

WITNESS: ALAN GREENSPAN, FEDERAL RESERVE CHAIRMAN

BODY:

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REP. GREGORY W. MEEKS (D-NY): Thank you, Mr. Chairman.

Let me do this first, just following up on Mr. Frank when he talked about tax policy, et cetera.

You know, some people are born on top of the mountain, and some people are born on the rough side of the mountain. I happen to-grew up on the rough side of the mountain, had to climb up. And when you look at the tax policies that we're talking about, sometimes when they just benefit 2 percent of America and doesn't consider individuals who have grown up on the rough side of the mountain, you know, where hope and opportunity-I would not be here if it was not for public education, public housing and some-health care that my parents had. And when you talk about the tax policies that we're putting forth, I don't-never hear the considerations that are taken in place in regards to that so that we don't have to worry about countries, as the report recently indicated, in South America who no longer want to be part of a democracy.

That being said-and I would like sometimes, not today-you know, when we talk about the tax policy, the effects that it may have on individuals who are on the rough side of the mountain who may need a hand up-let me ask these questions, and I'll try to just ask three questions, different subject matters, real quick-because I know time expires real fast-just so that we could try to get some answers.

The first question is whether or not comparative advantage still holds true for the American economy, because you know one of the biggest issues that we're talking about now is outsourcing. And traditional economic theory supports free trade based upon the concept of comparative advantage. We thought that the service jobs, the technological jobs would stay here in America. We're now finding that they're going overseas out to individual countries where there are highly educated but less expensive workers.

So my first question is do you believe that we need to rethink our ideas about free trade, and in light of what might be diminishing comparative advantage and technology and education in the United States? That's number one.

And then I want to switch to just a question in regards to what's taken place in the Senate committee with Richard Shelby, who's planning to introduce legislation that would create a stand-alone regulator for GSEs that would be completely separate from Treasury and HUD, and that the new regulator would have the authority over mission, goals and products and risk-based capital. I just wanted to get your thoughts on such a proposal, particularly in light of the fact that the Federal Reserve has moved to strip Fannie Mae and Freddie Mac and other government-sponsored enterprises of their ability to obtain daily interest-free loans from the Fed.

And lastly, if we get a chance to-on another topic that's been very much before this committee-and I know that you're a bank regulator, but I wanted to ask you a question about the securities industry because both John Reed, as interim chairman of the New York Stock Exchange, and now John Thain as CEO, are making various changes to their structure, particularly in relation to separating the regulatory structure from running the securities auction.

Nevertheless, there are some who will say that the era of self- regulation is over. And I want to know that-whether or not do you believe that self-regulation should end and be replaced by direct federal regulation, and what do you think about the trade-through rule? Should it end or be expanded?

MR. GREENSPAN: I'll try to answer those fairly quickly. Each one is a 20-minute lecture, as you well know.

I would merely repeat, on the first question of free trade, I think the United States has immeasurably gained from the opening up of markets in the post-World war II period, and we more than anybody have gained by the tremendous rise in trade throughout the last half- century. And I think were we to start to pull in our horns in any way because we're fearful of competition, which we seem to be handling rather well, I think we'll find at the end of the day that it will diminish our growth in standards of living and we'll likely find that a number of consequences which we hadn't expected would have created a far more negative view of the way the world was working than we would like. So I would emphasize, as I did to the chairman, that the advantages of globalization have been profound for the United States and I hope we carry them forward.

We do have problems with the distribution of income, which I've addressed with-previously, but that's a different issue and does not relate to the question of whether we have free trade or not.

With respect to the GSE regulator issue, I have not or any of my colleagues have commented on the specific structure of the form of the regulator. I in testimony have argued the necessity of increasing the share of purchased home mortgages by the GSEs which are securitized rather than kept in portfolios at-we at the Fed perceive is a significant subsidized rate, but we haven't thought through any of the issues with respect to the structure of where the regulator is located and what he does.

With respect to what the Federal Reserve federal-the so-called overdrafts that the Federal Reserve essentially has been changing, what happened was that we perceived that as a matter of convenience, it was quite helpful to treat GSEs differently from other private corporations in the payment of-in various different payments of principal and interest to the banks.

What occurred as a consequence of our veering from how we handle other corporations, other private corporations, was to create a huge increase in what we call daylight overdrafts, which were very large intra-day lending. And what we chose is that as these drafts got very large and these institutions got very large and the amounts got very large-was to effectively handle these issues of payments exactly the way all private organizations do. We will be working in that direction, and I think it's very much to the advantage of the financial system as a whole. But that, in of and itself, has got nothing to do with the regulator question, in any sense.

For your final question, I think self-regulation is an extraordinarily important issue, or-and the more general private- sector regulation, essentially counterparty regulation or self- regulation, is in-a very important element in the regulatory structure generally. And I trust that we, in our endeavor to get the proper balance between federal, state and private regulation, keep in mind our purpose is to get the optimum functioning of our particular financial and in fact, in this case, business organizations as well.

REP. OXLEY: The gentleman's time has expired.

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