Hearing of the Senate Banking, Housing and Urban Affairs Committee - Alan Greenspan Renomination of Federal Reserve Chair

Federal News Service

HEADLINE: HEARING OF THE SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE

SUBJECT: THE RENOMINATION OF ALAN GREENSPAN AS CHAIRMAN OF THE FEDERAL RESERVE BOARD OF GOVERNORS

CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)

WITNESS: ALAN GREENSPAN, CHAIRMAN OF THE FEDERAL RESERVE

LOCATION: 538 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
SEN. LINCOLN CHAFEE (R-RI): Thank you, Mr. Chairman.

And congratulations on your nomination for a fifth term. And you're one of the few in this town that has served under presidents of both political parties. And I particularly want to salute the work you did prior to coming to the Federal Reserve, in the early '80s, on the Social Security Commission, successful at raising the age of eligibility on a slow-glide path, from 65 to 67 -- something we haven't been able to do on Medicare. So congratulations.

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SEN. CHAFEE: Well, thank you, Mr. Chairman. Chairman Greenspan, you were hopeful that with the improving economy the revenues, added revenues, would help address the deficit. But there's also some unknowns, particularly on the prescription drug benefit, what exactly that's going to cost, and also what we're going to have to invest in stabilizing Iraq and the region there. So if the deficits do continue to grow, I know there are some that are concerned that it could produce a sharp devaluation of the U.S. dollar-something that did happen in 1985, which would in turn undercut European exports. And that would affect European economies. Is that of a concern to you?

MR. GREENSPAN: Senator, it's an issue which a number of people have raised, and obviously we have look at it, and there is very little evidence at this particular stage that the size of the total budget deficit and the pointer in directly relating to the fairly significant amount of our government issuances to finance that deficit, which are being purchased by foreign central banks, and indeed by others. And we look at it fairly closely. The markets seem to be adjusting remarkable well. And a goodly part of those securities which are purchased by foreign central banks are shorter term, so that there is no real base or concern that a lot of people have argued in favor of, namely that a major endeavor to disgorge those holdings could have a destabilizing effect back here, we don't think so. In other words, we think that, as I pointed out earlier, that the degree of flexibility in our financial system is sufficient to absorb very considerable amounts of change because, remember that our financing system is huge relative to the rest of the world, and the demand to hold U.S. dollars by foreigners is very high propensity, which continues irrespective of what you perceive correctly as these deficits, which we're looking at.

So, could it become a problem in the future? It could. But there is no evidence of which I am aware which suggests any such problems are on the horizon.

SEN. CHAFEE: Last year, I believe, we sold $208 billion of treasury securities just to Japan, China, and other Asian countries, just 208 billion just last year. But you're saying that's short-term and not of concern?

MR. GREENSPAN: Well, it's a -- $200 billion is not a small number, obviously. It's a big number, and it's-has, I think, as the treasury pointed out the other day, that of marketable securities, that foreigners own somewhat more than half currently. I don't-I think that if it were a significant problem, we would be seeing the forward edge of the problem already, but we don't. There is an unquenchable demand to hold assets of claims against American residents largely because they are presumed to be safe, and they are presumed to have significantly higher rates of return, adjusted for risk, than most other areas of the world.

SEN. CHAFEE: I've heard some people rail against the fact that it's not in our best interest to have the Chinese buying our T-Bonds, and that's all the fault of the deficit. If we didn't have this deficit, the Chinese wouldn't be buying our T-Bonds, and I guess that's the point I'm making.

SEN. SHELBY: Thank you, Senator Chafee. Senator Stabenow.