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

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REP. NYDIA VELAZQUEZ (D-NY): Thank you, Mr. Chairman.

Chairman Greenspan, the trade deficit grew to approximately $145 billion in the first quarter of this year, escalating from the $127 billion deficit reached in the final quarter of 2003. To finance this trade deficit, the U.S. must borrow from foreigners at a rate of approximately $1.6 billion a day.

Do you believe that our substantial budget deficit, which is adding considerably to our outstanding public debt, will undermine foreigners' confidence that the U.S. will be able to pay back this constantly growing debt?

MR. GREENSPAN: So far, as best we can judge, foreign willingness to hold long-term obligations of the U.S. government is not diminished. Clearly, I can't say to you that there is no level at which they will start to respond negatively. And indeed, as I was indicating in conversations at the Senate yesterday, that with respect to financing our current account deficit, I think our concern is that unless we bring it down in some form or another, we will begin to build up a level of dollar claims against American residents which will eventually place our foreign trading partners in a position where even though they may say the rate of return here is very good, that they have to diversify out of the heavy accumulation of U.S. dollar obligations. There is, as I said yesterday, no evidence that we're anywhere near a problem of that nature. But if you project down the road, I can't see how we can avoid it one way or another.

REP. VELAZQUEZ: But, Mr. Chairman, many economists believe that if foreigners lose interest in loaning of money or buying up our assets, interests rates could soar, making it impossible to pay down our debt.

With no buyers to be found stock prices and real estate values will plummet and America could find itself in a long-term depression. Do you agree with this assessment?

MR. GREENSPAN: No, I do not. I do not largely because I cannot believe that we will allow ourselves to get in a position where, in order to finance our federal government deficit, we'd have to be reaching out both domestically and abroad to borrow money at very high interest rates.

REP. VELAZQUEZ: And how we will not allow ourselves-to find ourselves in that proposition-by reducing the deficit and I guess rolling back taxes?

MR. GREENSPAN: As I indicated earlier, I think that what we are missing at this particular stage is a process for approaching fiscal policy in the sense that, as I indicated earlier, we're confronted with something new, namely that our commitments are now very long term and our ability to forecast the way it's going to come out is rather limited.

This suggests to me that we have got to find ways in which we not only project short-term budgets, but we project long-term budgets and simultaneously find means by which, if our forecasts are turning out to be wrong, there's an automatic adjustment process-triggers, for example-which alter either tax rates or expenditure programs. So in effect, the deficit does not get to the point of extraordinary imbalance where we would be forced into a position where we'd be-could not get money to finance our deficits except at exceptionally high interest rates.

REP. VELAZQUEZ: Mr. Chairman, with the final approval of the J.P. Morgan-Bank One merger coming on the heels of the Bank of America-Fleet merger, the rise of a super-tier of U.S. banks is evident. These banks will each control $1 trillion in assets, together controlling more than 40 percent of the industry's total assets.

First, does such concentration pose risks to the banking system and, as a result, to the U.S. economy? And second, do you believe that our current system of regulation is sufficient to oversee such large and diverse corporations that pose such great risk to the financial system?

MR. GREENSPAN: Well, first of all, we obviously are observing the phenomenon and the trends to which you allude, and were it our judgment that we were in a potentially serious supervisory regulatory state, with respect to these large institutions, I would indeed be most concerned. These institutions are very large, but the crucial issue of concern is the degree of concentration in specific types of businesses or products.

And in many instances, although these are very large institutions, they are quite diversified, and hence they don't have the type of-they don't create the type of threat of systemic problems, which could readily be the case where there is significant concentration.

Nonetheless we do continuously monitor this issue, and I trust that the combining of both federal and, where applicable, state supervision, and the private sector's counterparty supervision, will remain sufficiently adequate to sustain what is, in effect, a reasonably good balance at this stage in our financial structure.

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

REP. VELAZQUEZ: Thank you, Mr. Chairman.

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