[Senate Hearing 109-956]
[From the U.S. Government Publishing Office]
S. Hrg. 109-956
NOMINATIONS OF: EDWARD P. LAZEAR,
RANDALL S. KROSZNER, AND KEVIN M. WARSH
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
NOMINATIONS OF:
EDWARD P. LAZEAR, OF CALIFORNIA, TO BE CHAIRMAN OF
THE COUNCIL OF ECONOMIC ADVISERS
__________
RANDALL S. KROSZNER, OF NEW JERSEY, TO BE A MEMBER OF
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
KEVIN M. WARSH, OF NEW YORK, TO BE A MEMBER OF
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
FEBRUARY 14, 2006
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate/
senate05sh.html
-------
U.S. GOVERNMENT PRINTING OFFICE
37-071 PDF WASHINGTON DC: 2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP,
Washington, DC 20402-0001
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Mark F. Oesterle, Counsel
Mike Nielsen, Professional Staff
Aaron Klein, Democratic Chief Economist
Dean V. Shahinian, Democratic Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
TUESDAY, FEBRUARY 14, 2006
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Bennett.............................................. 2
Senator Schumer.............................................. 3
Senator Sarbanes............................................. 4
Senator Carper............................................... 18
Senator Reed................................................. 24
NOMINEES
Edward P. Lazear, of California, to be Chairman of the Council of
Economic Advisers.............................................. 6
Prepared statement........................................... 32
Biograpical sketch of nominee................................ 35
Randall S. Kroszner, of New Jersey, to be a Member of the Board
of Governors of the Federal Reserve System..................... 6
Prepared statement........................................... 32
Biograpical sketch of nominee................................ 57
Kevin M. Warsh, of New York, to be a Member of the Board of
Governors of the Federal Reserve System........................ 8
Prepared statement........................................... 33
Biograpical sketch of nominee................................ 72
(iii)
NOMINATIONS OF:
EDWARD P. LAZEAR, OF CALIFORNIA,
TO BE CHAIRMAN OF
THE COUNCIL OF ECONOMIC ADVISERS;
RANDALL S. KROSZNER, OF NEW JERSEY,
AND KEVIN M. WARSH, OF NEW YORK,
TO BE MEMBERS OF THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
----------
TUESDAY, FEBRUARY 14, 2006
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 2:36 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order. We are
sorry about this morning, but as I said to you privately, the
floor takes precedence over everything.
This afternoon, we will consider the nominations of three
very distinguished individuals. Our first nominee is Dr. Edward
Lazear, nominated by President Bush to be a Member of the
Council of Economic Advisers. The Council of Economic Advisers,
established by the Employment Act of 1946, provides the
President with economic analysis and advice on the development
and the implementation of domestic and international policy
issues. Upon Senate confirmation, President Bush would
designate Dr. Lazear to serve as Chairman of the CEA.
Dr. Lazear currently serves as Professor of Human Resources
Management at Stanford University, and as the Morris Arnold Cox
Senior Fellow at the Hoover Institution. Previously, Dr. Lazear
taught at the University of Chicago's Graduate School of
Business, and he has been a visiting professor at many
universities and institutes around the world. Dr. Lazear
received a Ph.D. in economics in 1974 from Harvard and has a
B.A. and M.A. in economics in 1971 from UCLA.
Dr. Lazear also serves as a Research Associate at the
National Bureau of Economic Research. Many people are also
familiar with his work on the President's Advisory Panel on Tax
Reform. Dr. Lazear is a Founding Editor of the Journal of Labor
Economics, published by the University of Chicago. His 1996
book, Personnel Economics, was selected by MIT Press as an
outstanding book and by Princeton as one of the 10 most
important books in labor economics. Dr. Lazear is well-
respected for his wide ranging research on employee incentives,
promotions, compensations, and productivity in companies.
The Committee will also consider two nominees to serve as
Members of the Board of Governors of the Federal Reserve
System, Dr. Randall S. Kroszner of New Jersey and Mr. Kevin M.
Warsh of New York.
This afternoon will be Dr. Kroszner's second nomination
hearing before the Committee. In November 2001, this Committee
considered his nomination to serve as a Member of the Council
of Economic Advisers. He was confirmed by the Senate for this
position and served at the CEA through July 2003.
He currently serves as Editor of the Journal of Law and
Economics, on the Board of Directors of the National
Association of Business Economists, as a Research Associate at
the National Bureau of Economic Research, and as a Senior
Fellow at the FDIC Center for Financial Research. He has also
edited a number of academic journals, including the Journal of
Financial Services Research, the Journal of Economics and
Business and Economics and Governance. He has been a Visiting
Scholar at the International Monetary Fund and the London
School of Economics.
He has spent time as a Visiting Scholar at the Federal
Reserve in Washington, DC, and at regional Federal Reserve
Banks in New York, Kansas City, St. Louis, Minneapolis, and
Chicago. He received his Ph.D. from the Economics Department of
Harvard University and graduated magna cum laude in 1984.
Our second nominee to the Board of Governors is Mr. Kevin
M. Warsh, who currently serves on the President's National
Economic Committee. Mr. Warsh is also no stranger to this
Committee. During his tenure on the NEC, Mr. Warsh directed
policy on a wide array of financial issues, including the
implementation of Sarbanes-Oxley, regulatory reform for
Government Sponsored Enterprises and terrorism risk insurance.
Mr. Warsh worked closely with Members of this Committee and
has earned our respect. Mr. Warsh is also Executive Secretary
of the National Economic Council. Prior to coming to
Washington, he was the Executive Director of the Mergers and
Acquisitions Department of Morgan Stanley's Investment Banking
Division. Mr. Warsh is a graduate of Stanford University, where
he graduated with honors in economics. He received his J.D.
from Harvard Law School, where he graduated cum laude.
We look forward to hearing your statements this afternoon
and to an interesting discussion to follow. At this time, I
will recognize Senator Bennett, and then, I will recognize
Senator Schumer for any introduction he wants to make.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you, Mr. Chairman.
I will just withhold my prepared statement and ask
questions at the appropriate time. I have met Dr. Lazear, who
has been in the office, and I am very impressed, and he and I
had a long conversation which I will not repeat here, but we
are on the same page on a number of very important issues.
Chairman Shelby. Senator Schumer is a Member of the
Committee. We generally do not have him down there; he is up
here, but----
Senator Schumer. Here I am.
Chairman Shelby. Senator Schumer, for any introduction you
want to have.
Senator Schumer. If you would like to nominate me to the
Federal Reserve Board, maybe----
[Laughter.]
Chairman Shelby. I did not go that far.
Senator Schumer. Exactly.
Senator Bennett. Would that get you out of the Senate?
[Laughter.]
Senator Schumer. Silver lining to every cloud.
Chairman Shelby. That would be a big cost, though.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you. Thank you, Mr. Chairman.
I would like to welcome all the nominees here today. I want
to welcome Mr. Kroszner and I want to welcome Mr. Lazear, who
was born in New York but who left awhile ago; and a special
welcome to Mr. Warsh, a New Yorker.
I have said many times before this Committee to Mr. Warsh
and to recent nominees in our meetings that our country is in
need of economic leadership. Leadership, in my opinion, is, for
the most part, nonideological and nonpartisan; true leaders
that are committed to keeping America great by creating policy
that will once again, for instance, get the United States to
the top of rankings in areas like math education.
Right now, we are in 21st place, tied with Poland, Hungary,
and Spain, according to the OECD. We will not stay the greatest
country in the world if that continues to happen. Creating
policy that will cut our budget deficit as opposed to creating
a budget deficit larger than nondefense, nonsecurity,
discretionary spending and creating sound trade policy that
demands that our trading partners, like China, play by world
economic rules to further avoid the widening trade gap.
All three of our nominees today, Mr. Chairman, have an
opportunity, as a matter of fact a responsibility, to be the
economic leaders that I am speaking of, and I will be watching
all of them. And I am particularly pleased to be here to
nominate one of those potential leaders. I am here today to
introduce Kevin Warsh, who is nominated to be a Member of the
Federal Reserve Board of Governors. Mr. Warsh is a lifelong New
Yorker. He was born and raised in the capital region near
Albany in the City of Loudonville, where he attended Shaker
Senior High School, a high school I have had the occasion to
visit.
From Shaker, Mr. Warsh went on to Stanford University,
where he graduated Phi Beta Kappa with a degree in public
policy. Later, he studied economics and regulatory policy at
Harvard Law School, where he focused his coursework on market
economics and debt capital markets, taking classes at the
Harvard Business School and the MIT Sloane School of Business.
I know that you are proud to be here to support Kevin
Warsh--I am saying this to Jane, I want to welcome her, another
New Yorker, whose family I am proud to know, and I know that
Jane is proud to support Kevin, who decided shortly after
September 11 to leave Wall Street and accept his calling to
public service, a commitment he is now clearly stating he is
willing to make for 14 years, which is a long time.
For the last 4 years, Mr. Warsh has served as the Special
Assistant to the President for Economic Policy and Executive
Secretary of the National Economic Council. His areas of
expertise have ranged from domestic finance, banking, and
securities regulatory policy to consumer protection. He has
advised the President and senior administration officials on
issues related to the U.S. economy, particularly fund flows and
capital markets, securities, banking, and insurance issues, and
he participated in meetings of the President's Working Group on
Financial Markets.
Prior to working in Washington, Mr. Warsh had a
distinguished career on Wall Street as a Member of the Mergers
and Acquisitions Department at Morgan Stanley, where he
ultimately served as Vice President and Executive Director.
So it is without question, Mr. Chairman, that Mr. Warsh is
tremendously accomplished for a man his age, and for that
reason, it is no surprise that he is already no stranger to the
Federal Reserve. He spent a considerable amount of time over
the past few years working with the System. He worked closely
with Federal Reserve Governors, including Chairman Greenspan,
on a host of economic issues and worked closely with Timothy
Geithner, another gentleman I am proud to know, he is President
of the New York Federal Reserve Bank, on broad issues facing
the securities and banking industries.
In our conversations, Mr. Warsh has assured me he will
continue to focus on consumer protection issues at the Fed, an
area many do not always see the Fed having oversight of, but
protecting the rights of consumers through increased and
significant disclosure mechanisms is very important as well.
His significant finance experience as a banker and
regulatory experience on the NEC will prove valuable, as the
Fed carries out its responsibility beyond monetary policy, its
responsibility beyond monetary policy, its responsibility to
the supervision and regulation of bank and financial holding
companies and State-chartered banks.
He is committed to strong capital standards, effective
supervision, and meaningful market discipline of these
institutions. He knows unequivocally that the Fed must be
independent, nonideological, and nonpartisan, and for this
reason, I am proud to support his nomination.
Chairman Shelby. Thank you, Senator Schumer.
Senator Sarbanes, any opening statement?
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. I will take just a moment, Mr. Chairman.
I am pleased to join with you in welcoming the nominees
before the Committee. The positions that we are considering
today, one for the Council of Economic Advisers and two for the
Board of Governors of the Federal Reserve System, are among the
more significant economic positions in our national government.
Dr. Lazear has been nominated by the President to be a
Member of the Council of Economic Advisers, and I understand
the President under the Act has the authority to designate one
of the Members of the Council as Chairman, and it is the
intention that if Dr. Lazear is confirmed, he will be appointed
as Chairman of the Council of Economic Advisers.
I have a longstanding interest in the CEA. I worked for
Walter Heller when he was the Chairman, and I just want to
quote into the record from the Employment Act of 1946 which
established the Council of Economic Advisers: ``The Council
shall be composed of three Members, who shall be appointed by
the President and with the advice and consent of the Senate,
and each of whom shall be a person who, as a result of his
training, experience, and attainments, is exceptionally
qualified to analyze and interpret economic developments, to
appraise programs and activities of the Government, and to
formulate and recommend national economic policy to promote
employment, production, and purchasing power under free
competitive enterprise.'' That is quite a charge, I might say.
Dr. Lazear has been an academic economist for 30 years now.
He has received a number of awards for his scholarly work. In
addition to his work at Stanford, he has also been an adviser
to a number of governments that have moved from command to
market economies, and he recently served on the President's
panel on Federal tax reform.
Our two nominees to be on the Federal Reserve System's
Board of Governors, of course, in addition to having a vote on
the Open Market Committee, which determines the Nation's
monetary policy, the Fed plays a critical role in regulating
and protecting the safety and soundness of our Nation's banking
system and enforcing many of our consumer protection laws.
The two nominees are replacing Governors who, in my
opinion, have served with great distinction. Dr. Kroszner's
seat was previously held by Governor Gramlich, and Mr. Warsh's
seat was previously held by Chairman Bernanke. Both of these
nominees have worked in important roles as part of President
Bush's economic team. Dr. Kroszner served on the President's
Council of Economic Advisers for 2 years in addition to his
career as an Economics Professor at the University of Chicago.
Mr. Warsh is, of course, well-known to the Committee, having
worked in the White House as Special Assistant to the President
for Economic Policy and as the Executive Secretary of the
National Economic Council to the President for the past 3
years. Prior to this experience, he worked on Wall Street at
Morgan Stanley.
Mr. Chairman, I look forward to hearing the witnesses.
Chairman Shelby. Thank you. If you would stand and be
sworn.
[Witnesses sworn.]
Dr. Lazear, we will start with you. All of your written
statements will be made part of the record. If you have anyone
you want to introduce your family you have here with you, you
may proceed.
STATEMENT OF EDWARD P. LAZEAR, OF CALIFORNIA
TO BE A MEMBER AND CHAIRMAN
THE COUNCIL OF ECONOMIC ADVISERS
Mr. Lazear. Thank you. I would like to introduce my wife,
Vicky, who is right behind me.
Chairman Shelby. Thank you.
Mr. Lazear. Chairman Shelby, Ranking Member Sarbanes, and
Members of the Committee, it is a great honor to be here today
to be the President's nominee to be Chairman of the Council of
Economic Advisers. The Council, which has been in existence for
60 years now, is charged with the task of advising the
President on economic issues. Throughout its history, it has
remained a body of experts and academicians who have taken it
to be their duty to inform policymakers in an unbiased and
professional manner.
One colleague recently told me that in Washington, when
people want the correct answer on economics, they go to the
Council of Economic Advisers. The best compliment that can be
paid to the CEA is that the CEA ``tells it like it is,'' so
that the President and Congress, who are charged with the
responsibility of weighing all factors, can make the best
decisions possible.
I was going to give you a bit of my background, but the
Senators have done such a great job of describing, and I think
I will skip that and simply close by mentioning that before I
left California to testify, my senior colleague, Secretary
George Schultz, told me that the role of the Chairman of the
Council of Economic Advisers is to be an economist, to be
straight, and to bring economics to the table, leaving the
politics to others. If confirmed, I will devote all of my
energy to ensuring that policymakers have the best economic
analysis possible.
Thank you, and I welcome your questions.
Chairman Shelby. Mr. Kroszner.
STATEMENT OF RANDALL S. KROSZNER, OF NEW JERSEY
TO BE A MEMBER OF THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Kroszner. Thank you very much. I would like to
introduce my mother, Helen Kroszner, and my niece, Kimberly
Kroszner.
Chairman Shelby. Thank you.
Mr. Kroszner. Chairman Shelby, Senator Sarbanes, Senator
Bennett, and other Members of the Committee, I am pleased to
have the opportunity to appear before you today as one of
President Bush's nominees to serve on the Board of Governors of
the Federal Reserve System. I am honored that the President has
nominated me to serve on the Board. If I am confirmed by the
Senate, I will work to the best of my abilities to fulfill the
significant responsibilities of this office.
After studying economics as an undergraduate at Brown
University, I earned a master's and Ph.D. degrees in economics
from Harvard University. I then joined the Graduate School of
Business at the University of Chicago, where I am a Professor
of Economics and have been teaching money and banking since
1990. I will not go through the details of my background,
because again, the Senators have done a terrific job of
summarizing those background qualifications.
As a Member of the President's Council of Economic Advisers
from 2001 to 2003, I have had policy experience in a variety of
areas, including banking and financial regulation,
international financial crises, and macroeconomic forecasting.
In this capacity, I witnessed firsthand the importance of
having accurate and timely economic statistics in order to make
sensible policy judgments and decisions. I spearheaded an
initiative to improve the quality of government statistics and
enhance the protection of confidential information reported to
the Government, resulting in the Confidential Information
Protection and Statistical Efficiency Act of 2002. After
returning to the University, I was delighted to be appointed by
the Secretary of Labor to the Federal Economics Statistics
Advisory Committee, which meets regularly with the major
official statistical agencies to discuss how to improve
measurement of economic activity. If confirmed, I would be
devoted to further enhancement of the quality of economic
statistics.
Monetary policy is a fundamental responsibility of the
Federal Reserve. Long-run price level stability is crucial to
achieving maximum employment and overall economic stability.
Under Chairman Greenspan and Chairman Volcker before him, the
Federal Reserve has achieved much success in reducing and
stabilizing inflation and inflation expectations. This success
has helped to contribute to a tendency for the fluctuations in
employment and output to be lower than in the past, and a
reduction in the frequency and severity of recessions. If
confirmed, I would look forward to working with Chairman
Bernanke and other Members of the Federal Open Market Committee
to continue to underscore the role that long-term price level
stability has in achieving prosperity and maximum employment. I
also applaud the increase under Chairman Greenspan in monetary
policy transparency, which helps to reduce uncertainty for
households, entrepreneurs, and investors, and thereby
contributes to economic stability and growth.
The Federal Reserve also has a fundamental responsibility
for protecting the stability of the country's banking and
financial system. Much of my research and work with central
banks has been devoted to analyzing banking and financial
regulation as well as banking and financial crises. The safety
and soundness of the U.S. banking and payment system is
critical to achieving economic growth, maximum employment, and
general economic stability, and the Federal Reserve works
closely with other regulators to achieve this goal. The Federal
Reserve also has an important role to play in responding to and
mitigating the impact of financial crises and shocks. If
confirmed, I will work vigorously to protect and promote the
safety and soundness of the system.
The Federal Reserve has an additional important
responsibility to consumers and users of the banking and
financial system. Discriminatory or abusive lending practices
should not be tolerated, and the privacy of individuals and
their financial data must be protected.
The Federal Reserve is active in promoting financial
literacy, and as an educator, I believe that financial literacy
is fundamental to the proper functioning of the financial
system. If confirmed, I will place a high priority on these
responsibilities and look forward to being actively involved in
promoting financial literacy.
Thank you once again for holding this hearing, and I look
forward to your questions.
Chairman Shelby. Mr. Warsh.
STATEMENT OF KEVIN M. WARSH, OF NEW YORK
TO BE A MEMBER OF THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Warsh. Chairman Shelby, Senator Sarbanes, Senator
Bennett, thank you very much for allowing my colleagues and I
to appear before the Committee, and before I get started, allow
me to introduce my wife, Jane, and some dear friends who have
joined us today.
First off, I wish to express my sincere appreciation to
President Bush for nominating me to serve as a Member of the
Board of Governors of the Federal Reserve System.
As the Members and staff on this Committee know, I have
served on the National Economic Council for about the last 4
years, focusing on matters of domestic finance, capital
markets, banking, securities, and insurance-related issues. In
that capacity, I have had the privilege of working, Chairman
Shelby, with you; Senator Sarbanes, with you and your staff as
we have tackled many of these issues together. If confirmed, I
look forward to continuing that productive close relationship
going forward in carrying out the important responsibilities
that this Committee and this Congress have assigned to the
Federal Reserve.
Market participants, policymakers, and the American people
have all come to rely on the good judgment that flows from the
Federal Reserve's independence and credibility. If confirmed, I
can assure this Committee I will be devoted solely to the
Federal Reserve's statutory mandate for monetary policy; that
is, to ensure price stability and to ensure maximum output in
employment and growth and will work to promote a secure, fair,
and efficient financial system.
The flexibility of our capital markets from which I come
have really been tested in recent years, and they have been
matched only by the resiliency of the American labor force. The
Federal Reserve has been successful in chartering these waters
but must remain attuned to any economic consequences that might
arise.
Under Chairman Greenspan's leadership, the Federal Reserve
has made significant progress in explaining its policies with
greater transparency. As a result, market volatility is lower;
our markets are deeper, broader, and more dynamic than ever
before. Pools of free-flowing capital, in turn, have provided
real-time, forward-looking information to help Federal Reserve
officials make appropriate decisions. I hope that my prior
experience on Wall Street, particularly my nearly 7 years at
Morgan Stanley, would prove beneficial to the deliberations and
communications of the Federal Reserve.
Over the course of the last generation, the Federal Reserve
has compiled an enviable track record in achieving price
stability and successfully anchoring long-term inflation
expectations. This stability has contributed to low long-term
interest rates and promoted strong employment growth and
productivity gains.
The Federal Reserve's work, however, goes on. Its
responsibilities, of course, extend beyond monetary policy to
the supervision and regulation of bank and financial holding
companies. In working with other financial regulators, the
Federal Reserve should continue to promote three complementary
pillars of prudential oversight to which Senator Schumer
referred: Strong capital standards, effective regulatory
discipline, and meaningful market discipline, and these are
principles to which I am committed.
Finally, if confirmed, I would work to ensure that the
Federal Reserve continues its important role in promoting
literacy and fair dealing for consumers. The knowledge and
credibility that the Federal Reserve brings to bear should help
to bring people on the fringes of our financial system into the
mainstream.
The Federal Reserve's decisions significantly impact
America's families and businesses, and I would take on the
responsibility of joining the Board of Governors of the Federal
Reserve System with great humility and would be honored if the
Senate saw fit to approve my nomination.
Thank you, and like my colleagues, I would be happy to
respond to your questions.
Chairman Shelby. Thank you, Mr. Warsh.
Dr. Lazear, you recently spent several months reviewing
various aspects of the U.S. tax system and methods for
reforming it to enhance economic growth. I am a strong
proponent of a simplified tax structure, which would eliminate
the inefficiencies of our current system and end the waste of
vast resources currently dedicated to taking advantage of all
the complexities that we have.
What three words would you use, if you could, to describe
our current system?
Mr. Lazear. Three words? Chaotic, somewhat inflexible, and
not necessarily conducive to economic growth.
Chairman Shelby. What would be the benefits of moving to a
more straightforward structure?
Mr. Lazear. Mr. Chairman, as you know, the President, in
setting up the tax panel, instructed us to think about some of
the things you mentioned; simplification in particular, but
also growth and fairness.
Now, when we think about these different aspects of tax
policy, we have to realize that sometimes, there are tradeoffs,
and that is one of the things that confronted the tax panel.
When we thought about it, we came to the conclusion that
the most important thing that we could do for the economy was
to propose a tax system that would be not only simple but that
would also focus on growth. And the reason is that if we think
about the importance of economic growth, although
simplification is extremely important, economic growth swamps
it over any period of time.
So if we are thinking about a 10-year period or so, and we
could raise the growth rate by even a quarter of a percent per
year, we would have very significant effects on the economy.
Chairman Shelby. What aspects of our tax structure would,
in your judgment, be most in need of reform?
Mr. Lazear. There are a number of issues that come to my
mind in terms of thinking about the tax system. As you know, I
am sure, the tax panel recommended that we eliminate the AMT.
The AMT is a tax structure that has really run amok. There was
a good purpose for it initially. The idea was to make sure that
every American citizen paid taxes if they were able to do so,
and there were some people who were escaping that.
So the AMT targeted certain individuals, but over time,
because of some quirks in the code, the AMT actually ended up
going after individuals who it was not intended to go after.
Chairman Shelby. Unintended consequences, perhaps?
Mr. Lazear. Absolutely, Mr. Chairman.
Chairman Shelby. Mr. Kroszner and Mr. Warsh, the new Fed
Chairman, Dr. Bernanke, is a well-known proponent of inflation
targeting. He talks of price stability, which you both alluded
to. What are your views, both of you, on inflation targeting?
Do you believe an inflation targeting regime is consistent with
the Fed's other goals, those of long-term sustainable growth
and full employment? We will start with you.
Mr. Kroszner. Thank you very much, Mr. Chairman. The
credibility of the Fed is crucial. It is really what contains
expectations about inflation, and that has a large effect on
interest rates and ultimately on economic activity.
The Fed very clearly has a dual mandate from Congress to
pursue low and stable prices as well as maximum employment.
There are different monetary policy approaches for the Federal
Reserve to achieve this, and one is the way that Chairman
Bernanke has proposed, some variation of an inflation targeting
regime. There are many different approaches that fall under the
rubric of inflation targeting.
I think the key behind it is trying to provide clarity and
transparency about monetary policymaking and monetary policy
processes, because I think what the Fed should be doing is not
increasing volatility but trying to reduce volatility, trying
to make it clear what the Fed is going to do, and that is the
best way for individuals, for entrepreneurs, for households,
and investors to make good decisions.
So it is one possible way to increase transparency. I have
an openness to different kinds of approaches, but the key is to
have a policy and approach that reduces uncertainty, reduces
volatility, provides a good backdrop for individuals and
investors to make decisions and for the Fed to maintain its
dual mandate of pursuing low and stable prices, at the same
time maximizing employment.
Chairman Shelby. Mr. Warsh.
Mr. Warsh. Chairman Shelby, I, too, strongly share the
Federal Reserve's dual mandate, and in that context, I think
the questions about inflation targeting really are ripe for
discussion. I think a discussion that Chairman Bernanke has
suggested that if confirmed, we would be party to, because it
is likely to be an ongoing deliberation.
I think the transparency that has come to the Fed--really
over the course of the last 10 or 12 years--has been
incremental in nature, and I think it has been able to provide
guidance to the capital markets that are keenly focused on the
Federal Reserve's moves and its actions.
Inflation targeting may well be the next step--if we mean
or suggest a numerical range which is further reinforcing the
types of estimates that the markets expect of the Federal
Reserve and that range is really an objective guided by market
facts and does not in any way restrict the ability of Governors
or of the Chairman to make policy judgments.
Because at the end of the day, at the FOMC, there will be
imperfect information, and I think it is essential that
inflation targeting, if it is thought of really as an
objective, another data point for the markets, the markets
might well see that as additional clarity and provide some
incremental benefit going forward. I think that is a
deliberation we look forward to participating in.
Chairman Shelby. Mr. Warsh, I want to ask you a question
about the Basel II capital requirements. The Federal Reserve,
as you well know, is presently in the process of implementing
the Basel II Capital Accord, which will establish new capital
requirements for our largest banks. Due to the vital role
capital requirements play in protecting the safety and
soundness of the U.S. banking system, I believe it is important
that there be no surprises in the implementation of Basel II,
especially unanticipated reductions in capital requirements.
Last year, this Committee held a hearing at which several
witnesses expressed concerns that the adoption of Basel II
would result in the lowering of capital requirements. In
addition, last year, the fourth Quantitative Impact Study
unexpectedly showed that Basel II would result in substantially
lower capital requirements.
What steps need to be taken to make sure that Federal
banking regulators, Congress, and the public at large are
confident that the implementation of Basel II will not
adversely impact the safety and soundness of the U.S. banking
system?
Mr. Warsh. Thank you for that question, Chairman Shelby. I
share the view of the importance of getting these capital
standards right. The Basel II process, upon which this
Committee has really spent a lot of time and attention, has
been much debated among our various banking regulators, and I
would say that there has been a meaningful and open dialogue
between and among them and with this Committee.
The QIS-IV results that you reference were a surprise. I
think that the ``doctrine of no surprises'' should be the rule
of thumb going forward. My understanding is that the Federal
Reserve, working with the other bank regulators, have decided
to go forward sometime this spring with a new proposed
rulemaking to try to address some of the unexpected results of
the QIS-IV results.
Chairman Shelby. Including capital?
Mr. Warsh. Including capital, absolutely, Senator, and I
think what you rightly do is point out that the capital
standards are very important. The risk-based capital standards
are very important, but so, too, are the rest of the tools in
the supervisor's toolkit.
So as we proceed in the Basel II process, I think it is
very important that the leverage ratio, another important
measure of capital, be maintained; that the rest of the prompt
corrective action authority be maintained, and our regulators
are going to evaluate these standards during a lengthy process
over the course of the next several years.
One of the things that I think would be very helpful, which
the regulators are keen to adopt, I believe, is as the Basel II
standards are practiced, to really make sure there is a
parallel run of Basel I and Basel II to ensure that these
capital standards stay robust, because at the end of the day,
as bank regulators and as the Committee of oversight, there are
really few things as important as the safety and supervision of
these underlying entities.
Chairman Shelby. Do you know of any bank, any financial
institution, that has been well-capitalized, well-managed, and
well-regulated that has gone under?
Mr. Warsh. I do not, Senator, but I think the most
important thing you point out is that these capital standards
must remain robust, and they must taken into account risks that
were hard to envision when Basel I and other capital standards
were put in place.
Chairman Shelby. Thank you.
Senator Sarbanes.
Senator Sarbanes. Mr. Chairman, I have a number of
questions, but why do I not just follow-up on the Basel II
inquiry first?
Chairman Shelby. Go ahead.
Senator Sarbanes. And this is obviously directed to Mr.
Kroszner and Mr. Warsh. As I understand it, the Federal bank
regulatory agencies have indicated that even if the Basel II
risk-based capital agreement is implemented, the minimum
leverage capital ratio will be preserved as a critical feature
of the U.S. bank capital regulation. Is that your
understanding, and do you agree with that?
Mr. Kroszner. Yes, that is my understanding, Senator.
Senator Sarbanes. And do you agree with it?
Mr. Kroszner. I certainly do agree with it.
Senator Sarbanes. Mr. Warsh.
Mr. Warsh. Yes, I concur, Senator Sarbanes, and I think it
is an extremely important supplement to the Basel II Accord.
Senator Sarbanes. Now, this latest QIS-IV study showed a
much larger reduction in capital than the study that had
previously been cited to the Committee at our hearings. It
showed an aggregate capital reduction of 15.5 percent, a median
capital reduction for the participating institutions of 26
percent; one participating institution had a capital reduction
of nearly 50 percent.
Now, even though the QIS-IV resulted in capital reductions
that apparently all the bank regulators viewed as acceptable,
the decision was made to go forward this year with a proposed
regulation utilizing the same formula that produced the QIS
results. Is that your understanding?
Mr. Kroszner. I am not familiar with the specifics of what
the Federal Reserve has gone forward with, but I certainly do
know that I was concerned about the reductions in capital that
were suggested by the QIS-IV. I know that there are others in
the regulatory community who are concerned about that and are
continuing to take comment and working to make sure that we do
not have significant reductions in capital if we were to go
forward with this regulation.
Senator Sarbanes. Mr. Warsh.
Mr. Warsh. Yes; I am again also not specifically familiar
with the changes that are being contemplated in anticipation of
the next proposed rulemaking. My understanding, Senator, is
that the comments and the results from the QIS-IV process,
particularly when you have cases of individual institutions
that have very different capital even though they have very
substantially similar assets, is something which ought to be
considered, and hopefully will be considered, in the context of
this rulemaking.
Senator Sarbanes. If we run an impact study, and it gives
us these kinds of results, we should not just be continuing
along the path, should we? Should we not be pulling back and
reexamining what is out there if it is producing these kinds of
results in an impact study? Do either of you think that the
results of the impact study are acceptable results?
Mr. Warsh. Senator, in my view, I think those results
proved to be a surprise that, again, having similar assets with
different capital----
Senator Sarbanes. It is not satisfactory.
Mr. Warsh. I do not think it is satisfactory if a company
that has similar assets ends up holding very different capital,
and my understanding is that safeguards are being built into
the Basel II process going forward to address just your
concerns.
Senator Sarbanes. If they had similar capital but at much
lower levels, would that be acceptable to you?
Mr. Warsh. It strikes me, Senator, as though the most
important thing is that the modern risk management techniques
be taken into consideration so that the Basel II standard
matches that underlying risk but, again, not to the detriment
of the other parts of the supervisor's toolbox that I mentioned
before, such as the leverage ratio.
Senator Sarbanes. Mr. Kroszner.
Mr. Kroszner. It is very important not to allow capital to
get too low. I think we saw that in the United States with the
savings and loan crisis. I have done a lot of research that
conforms with what many others had found, that low capital led
to bad choices by the savings and loan industry, an inefficient
banking and financial system, and a large cost to taxpayers.
I can assure you, Senator, that I would not support any
regulatory moves that would subject the taxpayer to excess risk
or undue risk. And certainly, capital is an important
protection in that system.
Senator Sarbanes. Let us examine this phrase ``too low.''
When Vice Chairman Ferguson of the Fed was before us, and this
was one of the issues that we looked into, that the Chairman
focused some attention on, and the question was raised that
Basel II was going to lower some capital standards. Chairman
Ferguson said, ``I would not jump to conclusions yet that it is
going to lower capital overall in the industry. I think it will
create greater dispersion of capital because there will be
those banks that need to have higher regulatory minimum
capital, and there will be some that will need to have lower
regulatory minimum capital. When this Basel Committee got
started in this process, the goal was to keep capital at about
the same level as it is now, and thus far, first indications
from early quantitative study,'' this was before this QIS-IV
that we referred to, ``suggest that indeed if it lowers
capital, it will be a very small amount, maybe 6 percent or
so.'' Do you agree with the Ferguson statement that the goal of
Basel II was to keep capital at about the same level as it is
now?
Mr. Kroszner. Senator, I was not privy to the discussions
that led to the initiation of Basel II. My understanding was
that there is general dissatisfaction with the ability of Basel
I to take into account the more complex risks that have
developed since Basel I was first implemented. So, I cannot
comment directly on the initial motivation, but I do think it
is important to ensure that capital is sufficient when we have
new and more complex risks.
Senator Sarbanes. What does that mean in relation to the
current level of capital? Are you open to substantially
reducing the current levels of capital?
Mr. Kroszner. As I had said before, Senator, it is very
important to maintain the minimum leverage ratio, and so, I
would not, regardless of what processes we have in Basel II, I
would certainly not want to reduce that at all. So that being
part of the initial capital level from Basel I, I certainly
would not want any reduction of that.
Senator Sarbanes. Of course, the purpose of Basel I was to
increase the amount of capital in the banking system, was it
not?
Mr. Kroszner. Again, I do not know what the particulars
were for that motivation. Certainly, we have seen a large
increase in the average amount of capital in the U.S. banking
system over the last decade or so.
Senator Sarbanes. Mr. Warsh.
Mr. Warsh. I, too, Senator, look forward to getting our
hands on the data, seeing on a bank-by-bank basis what the QIS
results would suggest and to make sure that the risk inherent
in each of these banking institutions demands a degree of
capital that is appropriate. And it strikes me that this is the
overwhelming goal of Basel II, which is to make sure that the
capital is more than sufficient to make sure that the safety
and soundness is strong and to make sure that the safety net
exists. And beyond that, it is hard for me to judge based on
the data that we have seen at this point.
I would only note that I think it is important going
forward that there be a parallel run of the new proposed
standards with the old standards, so to the extent there are
surprises, that they would come to the attention not only of
the Federal Reserve but also, of course, to other people such
as Members of this Committee that are looking at the issue.
Senator Sarbanes. Now, the Fed has taken the lead in
negotiating this internationally, but it is my understanding
that any decision on how the United States acts has to be a
shared decision by all the bank regulators. Is that your
understanding?
Mr. Kroszner. Again, Senator, I am not sure of the
specifics of how things work with respect to the law and
regulation. Certainly, I think it would be very important to
have agreement among the regulators on something so important
as capital, and certainly, I would strive for that.
Mr. Warsh. And Senator Sarbanes, I do think we would be
well-served by having our four regulators on an issue of this
level of importance speak at the end of the day with one voice.
The only other note that I would make, Senator Sarbanes, is
that U.S. financial institutions are exceptionally well-
capitalized generally and are able to provide their products
and services on an international basis. And their
capitalization is a focus not only of the bank regulators but
also of the marketplace and of their customers domestically and
overseas, which should provide another important check on their
capital levels.
Senator Sarbanes. I have used a lot of time. I will come
back.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you. We will have another round.
Dr. Lazear, productivity for the fourth quarter of 2005
declined 0.2 percent in the business sector and 0.6 percent in
the nonfarm business sector. The productivity declines were
unexpected by a lot of the market watchers. What is your
assessment of these numbers? Do they represent a one-time
aberration, or do they signal something else? And given your
extensive background in labor economics, what advice would you
be giving us, and what advice would you be giving to the
President, maybe, would be better on long-term growth prospects
in the economy?
Mr. Lazear. Thank you, Chairman Shelby. That is obviously
an extremely important issue.
Labor productivity is a key determinant of wages. If we
look over even the very short-run, we know there is an
extremely close relationship between wages and productivity, so
we want to make sure that productivity continues to grow. In
the fourth quarter, productivity was down, and that was a
reflection of the fact that GDP did not grow at the rate that
we had expected.
Most view that as an aberration and a result primarily of
three factors: First, Federal spending was down in the fourth
quarter; second, there was a drop in auto sales, which was
really a reflection of the fact auto sales in the third quarter
had been accelerated; and third, the hurricanes had an enormous
impact on petroleum.
Those are not expected to continue into the future, so most
who have been looking at the fourth quarter view that as a blip
rather than a trend and expect a continued strong economy.
Chairman Shelby. Dr. Kroszner and Mr. Warsh, housing
markets: The possibility of a housing bubble has been
circulating in the popular press for a long time. Households
have used interest rates-only loans and more exotic adjustable
rate mortgages to make homes affordable while at the same time
increasing household vulnerability to financial risk.
What effect would a slowdown in the housing sector, we have
already seen some of it but a real slowdown, have for our
overall economy, and how do you believe the Federal Reserve
should respond?
Mr. Kroszner. Thank you very much, Senator.
Certainly, the former Chairman of the Federal Reserve,
Chairman Greenspan, had suggested that there may be some
markets that have some froth associated with them, particularly
some localized housing markets. I do not think it is the role
of the Federal Reserve to be second guessing asset prices or
asset price movements, but as you point out, Mr. Chairman, it
is extremely important for the Federal Reserve to think about
how to respond to such changes and to such movements.
So first, of utmost importance is making sure that the
safety and soundness of the banking system is not at risk, and
so, ensuring that there are proper standards for lending,
making sure that the banks and other financial institutions who
are lending into the housing market fully understand those
risks and appropriately capitalize against them is of first
order importance. I believe the Federal Reserve has been
monitoring that issue, and obviously, that is something that
needs attention to ensure that the safety and soundness of the
banking system and that lending in the mortgage market is not
subject to difficulties.
Second, I think the important thing is as there are any
changes in asset prices to just be fully aware of them and be
very careful to respond to any changes that would affect
household wealth, that would affect consumption, that would
affect overall economic growth. And so, again, being very aware
of what is going on and then thinking about what the
appropriate monetary policy responses would be to that are key.
Mr. Warsh. Chairman Shelby, I share the view that the
housing price run-up in recent years is part of what has
contributed to a strong consumer demand that has impacted GDP.
If you look at the underlying fundamentals for housing over
large parts of the country, however, with a low interest rate,
low inflation environment, it should not surprise us that
housing prices have been on the up slope.
When you look at what the impact would be on Federal
Reserve monetary policy in particular, we would look at the
outputs, what are the results of that, and what are the results
if, for example, home equity withdrawals were to dissipate here
early in 2006.
One thing that the regulators did some months ago was to
provide some increased coordination of regulatory guidance--
with respect particularly to nontraditional mortgages--to make
sure that the underlying banks and financial institutions are
safe and sound and, at least as important, to make sure that
they are providing these sorts of nontraditional products to
people that are fully qualified for those products. The
purpose, of course, is to try to mitigate any dislocations and
any troubles that might impact consumer demand.
Chairman Shelby. Thank you.
Dr. Lazear, the Social Security system clearly faces
challenges in its future financing that will prove difficult to
resolve the longer we wait. The Medicare program probably faces
a more significant financial problem.
As a key economic adviser to the President, if you are
confirmed, and you will be, how would you recommend that the
Administration approach these problems? That is, is there a set
of guiding principles that should be kept in mind as the
Administration proposes various reform options, because we know
what the entitlement are slated to do to the budget.
Mr. Lazear. Mr. Chairman, as you point out, entitlements
are growing and continuing to grow, and they are becoming a
larger and larger part of the total budget. So if we do not
succeed in getting entitlements under control, we will not be
able to get the budget under control. So everything having to
do with deficits and everything else that is of concern to us
today are related to the issue that you raise.
There are a number of possibilities for constraining the
growth of entitlements and expenditures and doing so in a way
that does not create harm to the typical American. I think that
a number of things can be done in terms of solvency of the
system. I think that we need to think about removing regulatory
risk from the structure by getting the money back into the
private sector. I think there are a number of ways suggested by
the President and that your Committee, the Senate, and Congress
in general has thought about, and those would be the lines
along which I would go.
Chairman Shelby. Thank you.
The Fed is a bank regulator, which you both will be part
of. Much of the attention surrounding the Federal Reserve has
to do with implementation of monetary policy. However, we all
know that some of the duties of the Fed is bank regulation, and
that also poses unique challenges. The largest and the most
sophisticated banks develop, and market, complex financial
products.
Do you believe the current structure of financial
regulation under the Fed and the other regulators is adequate
to the task of overseeing the increasingly complex institutions
and the products that they bring forth? In other words, it has
to be one of the challenges to you as regulators at the Fed.
Mr. Warsh. Chairman Shelby, I think that the question is
particularly valid today, as we have seen an increase in
sophistication of products, and we have seen the capital
markets, in effect, providing credit that a generation or two
ago was really coming from commercial banks on their own
balance sheet.
Chairman Shelby. Right.
Mr. Warsh. I think the challenges remain more robust and
real today than perhaps they have been in some time. My
understanding and knowledge of our existing regulatory
structure, however, does not suggest to me that it should be
scrapped; that is, our regulatory structure has built into it a
degree of competition between the States and the Federal
regulators and between and among Federal regulators, including
the bank regulators and the SEC.
So, I think it is incumbent upon us, if confirmed, as
regulators to continue to reach out so that as a Government, we
better understand these products, we are better able to ensure
we understand who is taking that risk and who are the
counterparties to that risk.
But I think our existing system, including such mechanisms
as the President's Working Group on Financial Markets, is a
very effective way for regulators to share this information and
try to come to some broad policy prescriptions as these
challenges move forward.
Mr. Kroszner. I would agree with that greater complexity of
financial products in the financial markets present greater
difficulties for the regulators to assess the risks, who is
bearing those risks, and what the extent of the risks are.
I think the regulators do have the tools to be able to
approach those, to be able to understand those, but it is very
important to have a coordinated approach amongst the different
regulators so that there is a good sharing of information, that
there is a good working relationship among them. The
President's Working Group is one such example, to make sure
that we are aware, that the regulators are aware of the risks
both to the individual institutions, to individual borrowers as
well as to counterparties; who those counterparties are, who is
bearing that risk, and if something goes wrong with one of
those counterparties, if they cannot pay, what is the
consequence for the rest of the system? Is that just limited to
the two parties who are associated with one particular
contract, or will that have a broader systemwide effect?
And obviously, that is something that the regulators need
to be aware of, and my understanding is that the regulators are
looking at many of these issues and broadly have the tools in
principle to be able to deal with them.
Chairman Shelby. How important is it for the Fed as a
regulator, now, to work with the other regulators?
Mr. Kroszner. I think it is certainly important to work
with the other regulators. In our discussion of Basel II
earlier, we had discussed how important it was to have an
agreement on something as important as capital. And so, I think
it is very important that the regulators try to coordinate and
have similar views.
Will it always be the case that the regulators have the
same views? No; we have a system that has different regulators,
and we will have some differences of opinion. And I think some
differences of opinion are not a bad thing, and having fora
where there are people with differences to try to work them out
is very valuable.
Chairman Shelby. Senator Sarbanes.
Oh, excuse me, Senator?
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thank you, Mr. Chairman.
To our guests, welcome. Thank you for joining us today. I
am looking for an email that I just read from someone who knows
you, Mr. Warsh, and who had some very nice things to say about
you. I do not often read this thing in public. Is your wife
here with you today?
Mr. Warsh. She is, behind me.
Senator Carper. Mrs. Warsh, this is a valentine to your
husband.
[Laughter.]
Mr. Warsh. This is just where she wanted to spend
Valentine's Day.
Senator Carper. This comes from someone who previously
served at a senior level for one of our senior colleagues on
the Democratic side, and here is what he said: ``I do not
ordinarily have much nice to say about President Bush's
nominees, but I have had the opportunity to work with Kevin
Warsh on a number of issues in the past few years, and he is
really a rarity. Even when we have disagreed on the policy at
issue, I have on every occasion found Kevin to be a remarkably
balanced, even-handed, thoughtful, and astute person. I have
always been struck how someone that smart, brilliant, actually,
could also be so gracious. Kevin also has a terrific quality
that is increasingly rare in Washington. He is a great listener
and is always in learning mode. And every time I have met with
him, I have come away smarter.''
Now, I would just like to ask you for the record, how did
you end up to be the person who is described in this email?
[Laughter.]
Mr. Warsh. Well, Senator, thank you for reading the email.
When I came to Washington 4 years ago, I must admit I did not
understand much of Banking Committee issues from the
Government's perspective. Having been in the capital markets,
on Wall Street for nearly 7 years before, I came to these
issues with some of that background and really arrived here
seeking a whole lot of knowledge and seeking to make sure I
understood how work got done effectively and efficiently here.
So, I suspect it is at least in part because I came here
knowing so little about this process and have had the
opportunity to work with this Committee among others, and it
has really been a very productive relationship during this
period.
Senator Carper. My follow-up question is why do you suppose
I received an email like this about you but not about the two
colleagues sitting next to you?
Mr. Kroszner. I think my mother does not use email very
well.
[Laughter.]
Senator Carper. I do not think his mother was ever on the
Senate staff, so I think her hands and his are clean in all of
this.
Actually, the person who sent this, I know him pretty well.
For him to say these things about you is really high praise,
and I understand Senator Schumer did as well.
May I ask a question of Mr. Lazear, if I may. Talk to us
about savings rate. You may have already talked a bit at some
length, but I am going to ask you to revisit it. How do we go
about fostering savings, not from people whose incomes are in
the top 2, 3, 4, 5, percent in this country; the Administration
seems always interested in expanding IRA's or expanding health
savings accounts to give upper income people an opportunity to
participate more.
I worry not so much about the more affluent people saving.
I worry about less affluent people saving, and I would welcome
your thoughts in that regard.
Mr. Lazear. Thank you, Senator.
One of the things that came up when I was on the tax panel
was thinking very carefully about saving. As you mentioned, the
savings rate is low, and it is not only low across the board;
but it is also low particularly for low-income individuals.
We thought hard about that, and a number of the suggestions
that we came up with try to address saving not only among the
rich but also among middle and low-income individuals. One of
the things that we came up with that I would support was saving
at the level of the family, so there would be tax advantages
for individuals even at the low end.
Some of these would take the form of credits, refundable
credits to low-income individuals. One took the form of a
credit up to $500, that would be 25 percent of the savings for
low-income individuals, and we were trying to encourage
individuals to save. We had also suggested a saving-at-work
plan that would allow individuals to take some of their current
income and save it tax-free. And although taxes are not the
only consideration, obviously, we thought that these would be
steps in the right direction. So, I would support those.
Senator Carper. And I thank you very much for that. A
follow-up question, if I may.
I was reading in the paper today, I think we have actually
finally calculated the trade deficit from this past year. I
think it came in at about $725 billion. I think the trade
deficit just for the month of January alone is probably greater
than the trade deficits that we have had in most years that we
have been alive.
And just talk to us just a little bit of a primer about
how, when we run a large trade deficit like this, how does it
get financed? Who provides the money for us? How do we go about
continuing on this path. Is it sustainable? What do we need to
do?
Mr. Lazear. Well, as you mentioned, Senator, the trade
deficit is large. It has been large for a long period of time.
Senator Carper. Not at this rate. Even in the last 3, 4, 5
years, it has more than doubled, I believe. It was already big
then.
Mr. Lazear. Yes, it has gone up. It has gone up steadily.
We have been running a trade deficit for quite awhile, but as
you point out, it has gone up in recent years.
On the other side of the trade deficit, of course, is the
capital account surplus. And so, there are always two
interpretations of a trade deficit. One is that we are buying
more goods than we are selling, but on the other hand, the
capital account surplus means that the United States is such an
attractive market for investment opportunity that individuals
from abroad are investing in the United States and doing so at
a record rate.
Senator Carper. Can you give us an example of the kinds of
investments you are referring to?
Mr. Lazear. Okay; there are a number of investments.
Obviously, Government investment is one, and we do see
significant investment in Government securities in the United
States, primarily to----
Senator Carper. To help us finance our deficit?
Mr. Lazear. It does help us finance our deficit, because
the United States has to get these funds from somewhere, and as
you pointed out earlier, unfortunately, we are not saving
currently at the level that we should be. So in order to have
very high levels of investment without high interest rates,
which is key in terms of spurring the private economy to
economic growth, we have to make sure that we do have funds
from abroad.
So when we look at the trade deficit, it is a double-edged
sword. As you point out, it is not something that we want to
have persist over time, for very long periods of time. On the
other hand, we would like to see a soft landing. If, for some
reason, the trade deficit immediately reversed or went to zero,
that would also mean that our source of funds from abroad would
go to zero, and that would not be a very good thing for the
economy.
So we want to make sure that things happen in moderation,
that things occur at a gradual pace, and I would look forward
to advising policies that would make that kind of----
Senator Carper. In an article I was reading yesterday, one
of the suggestions, instead of continuing to watch imports grow
more rapidly than more exports, we should try the opposite. And
how might we go about doing that?
Mr. Lazear. One of the things that actually did happen very
recently was that the percentage increase in exports actually
exceeded the percentage increase in imports for the first time,
I think, in 15 years. What we need to see happen, of course, is
that----
Senator Carper. For what period of time? I am sorry.
Mr. Lazear. It was just the last quarter of last year.
What we need to see happen, though, over a prolonged period
of time is for other countries to make sure they open up their
markets to us. Ninety-five percent of the consumers in the
world lie outside the United States. One in five jobs in the
United States is associated with export trade, and it is
extremely important that we make sure that we have
opportunities to compete abroad.
As you know, the productivity of the American worker is
higher than the productivity of any worker in the world. If we
are on a level playing field, the American worker can compete
anywhere. So, I would work hard to make sure that we have
opportunities abroad to have our goods and services compete on
a fair basis.
Senator Carper. You will have no quarrel with me or I
suspect with any of us on that.
But I have heard through several people who have led the
Federal Reserve and people who have sat in the chair that you
are about to take and raising this question about rising trade
deficits, Federal budget deficits, the willingness of the rest
of the world to lend us money, and this is just not
sustainable. And for us to continue along this path and not
figure out how to get out of it, we are on a--I call it--the
road to destruction.
We have an opportunity to do something about it I think
later this week, maybe the following week. We watched the loss
of manufacturing jobs, and they are exiting our country at a
rapid clip, and one of the reasons why I think they are leaving
is because--there are a lot of reasons: Energy costs are one of
the reasons, especially natural gas, but another reason deals
with our civil justice system, and particularly, this week, we
are taking up the issue of asbestos litigation reform to see if
there is a way to come up with a system that is fair to people
that have been injured, to make sure that the people who pay
for their injuries and their impairment and breathing is the
defendants and the insurance companies, in this case, but to
try to make sure that we have a system at the end of the day
that increases the likelihood that the claims that are paid
will end up actually in the pockets of people who have been
hurt and frankly not in the pockets of people who may have been
exposed to asbestos or who will never be exposed to asbestos.
I will close with this. My colleagues, I asked somebody the
other day, I said do you think some of our policies in this
country are contributing to the loss of manufacturing jobs, and
he said we could not hasten their departure any more if we were
taking a stick and chasing them out of this country, and there
is an opportunity to do a number of things to stop chasing them
out of this country, and we have a chance to make a little
progress on it this week, and I hope to pursue some of the
other things that you have suggested here.
Thank you. Thanks, Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Just to follow-up on what Senator Carper has been asking
about, this is the U.S. trade deficit. Now, you said, Mr.
Lazear, that it was worsening at a continuing pace or something
of that sort. This seems to be at a fast accelerating pace. I
mean, $725 billion, this is by far the worst we have ever
experienced. The trade deficit with China last year was $200
billion, the largest we have ever had with any one country.
What are we to make of this? I mean, the current account
deficit now exceeds 6 percent of our GDP. Do you regard this as
a problem for our economy?
Mr. Lazear. Yes, Senator, I think it is a problem if it is
sustained into the long-run.
It is certainly the case that we can have at any period in
time trade deficits or trade surpluses, but over the long haul,
it has to be the case that these trade deficits are going to be
reversed, because countries are not going to be willing to
continue to give us goods in return for our capital forever.
So there is no question; I certainly agree with your
premise that over time, this has to be reversed. Just to
follow-up on your point, and that is that if we look at
manufacturing jobs and the concern that they might be related
to this, manufacturing productivity in the United States, as
you know, is very high and has grown more rapidly, actually,
than productivity in any other sector. Manufacturing
productivity was up over 4 percent last year.
That is a very good sign for the American worker, because
it means, again, that we do have the opportunity to compete
with anyone as long as we are given a fair access to their
market, and I think that would be the way to help erase some of
the deficits that you are concerned about.
Senator Sarbanes. Mr. Kroszner, do you agree that this is a
problem?
Mr. Kroszner. Certainly, the rate of growth of the deficit
could not be sustained forever. And so, exactly as Professor
Lazear had said, ultimately, there will have to be some
balancing. We have been experiencing much greater demand growth
in the United States than in the rest of the world. This is
really a reflection of that, that we are buying a lot more than
the rest of the world is buying from us.
Something that would be very valuable is to pursue policies
that generated prosperity around the world, increased demand
abroad, increased demand at home and also increased savings at
home.
Senator Sarbanes. Now, Mr. Kroszner, you gave a speech in
December in which you said, ``the economy continues to post a
solid and consistent performance, no matter what Mother Nature
nor nattering nabobs of negativism may throw at it.''
Interesting turn of phrase, I might say. It is not
original, though.
[Laughter.]
Mr. Kroszner. I claim no originality for it, Senator.
Senator Sarbanes. No, I think there was an official from my
State who was the originator.
[Laughter.]
Mr. Kroszner. I believe you are correct, Senator.
Senator Sarbanes. Paul Volcker wrote an editorial in the
Washington Post. He said the following about our economy:
``Under the placid surface, there are disturbing trends: Huge
imbalances, disequilibria, risks; call them what you will.
Altogether, the circumstances seem to me as dangerous and
intractable as any I can remember, and I can remember quite a
lot.''
Warren Buffett recently said ``Right now, the rest of the
world owns $3 trillion more of us than we own of them. In my
view, it will create political turmoil at some point. Pretty
soon, I think there will be a big adjustment.''
And Robert Rubin, writing in The Wall Street Journal, said
``Virtually all mainstream economists take the view that
sustained long-term deficits will crowd out private investment,
increase interest rates, reduce productivity, and reduce
growth. The far greater danger is that these various imbalances
could at some point lead to fear of fiscal disarray and concern
about our currency, causing sharply higher interest rates in
our bond markets and the risk of a sharp exchange rate
decline.''
Do you consider Volcker, Buffett, and Rubin, to be
nattering nabobs of negativism?
[Laughter.]
Mr. Kroszner. Senator, there certainly are a number of
risks and challenges out there in the economy, and I would
certainly not want to minimize that. The reference there to the
nattering nabobs of negativism was, in terms of the speech,
focusing more precisely on consumer confidence numbers, and at
the time the speech was given, consumer confidence numbers were
relatively low. There were a number of challenges to them, but
consumers continued to spend.
And so, that was the particular focus of that comment. But
obviously, there are a lot of challenges, a lot of risks both
domestically and internationally. And as I had said in my
opening statement, it is extremely important for the Federal
Reserve to be monitoring the sources of those risks, to be
ensuring that there is sufficient capital in the banking system
so that if there is a change in the asset markets that the
banking system is sound, that credit will continue to flow, and
that it is very important to think about where the potential
risks may lie.
Senator Sarbanes. Mr. Kroszner and Mr. Warsh, what do you
understand the mandate of the Federal Reserve to be?
Mr. Warsh. Senator Sarbanes, I take the Federal Reserve's
mandate to be both price stability and achieving sustainable
growth in employment and outputs, along with, of course, a
third mandate to try to do that consistent with moderate long-
term interest rates. That mandate, as it has come to be known,
the dual mandate, is a mandate that I strongly believe in and
support.
Senator Sarbanes. Mr. Kroszner.
Mr. Kroszner. I certainly also agree that the dual mandate
is extremely important. It is very clear in the law that we are
to pursue both low and stable prices and maximum employment.
Senator Sarbanes. Where did that mandate come from?
Mr. Kroszner. My understanding is that is part of the
Federal Reserve Act and the amendments to the Federal Reserve
Act over time.
Mr. Warsh. I concur; that is a judgment that Congress made
for the Federal Reserve.
Senator Sarbanes. Do you believe the mandate could be
changed without changing the law?
Mr. Kroszner. Senator, I think the law speaks clearly so
that the mandate is set in law, and my understanding, although
not a lawyer, my understanding is that the Federal Reserve must
follow the mandate from this Act.
Senator Sarbanes. Mr. Warsh.
Mr. Warsh. I concur, Senator Sarbanes.
Chairman Shelby. Senator Reed.
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman, Senator
Sarbanes. Gentlemen, welcome.
Let me ask a question to all of you that concerns me, even
though I understand that you have different obligations and
duties in your prospective jobs. One of the most troublesome
aspects of the present economy is that people are working
harder, but they are not seeing any significant increase in
their wages.
Family income seems to be flattening out or even going
down. And I think we all feel that one of the fundamental
values or benefits of the free market system is that it is able
to give people who work sufficient wages to not only get by but
to also save, to provide for their families in a very
meaningful way.
And when that is not working, something might be wrong with
the economy, even if the stock market is doing well, and even
if capital transfers are doing well, and all these other
measures are doing well. So, I would begin with Mr. Warsh and
Mr. Kroszner, understanding from the Federal Reserve's
perspective, you will have a different one from Mr. Lazear. But
Mr. Warsh, what do you think we can do? What can the Fed do to
try to get at this issue?
Mr. Warsh. Senator Reed, the Federal Reserve's role,
obviously, is different from the role that Chairman-Designee
Lazear would have. But I think the Federal Reserve must remain
attuned to these issues, because included in the Federal
Reserve's economic forecasts are forecasts for what is the
state of the U.S. consumer, what is the consumer's ability to
contribute to the GDP growth that we have seen in recent years.
And with respect to wages, I would make two points: First,
historically, when we have seen massive ramp-ups in
productivity, as we saw in the late 1990's and have really seen
over the course of the last 5 years, we have typically seen
wage growth ultimately catch up to those productivity gains. I
think, Senator, you are making the valid point, which is we
have seen the productivity, but we have not yet seen the full
benefit of those wage gains accrue to this point. But those
lines have crossed historically, and I would be surprised if
that ultimate path is not repeated here.
Senator Reed. Not to interrupt, but the last take on
productivity, it seems to be dipping downwards, I think, the
last numbers I have seen, which might be a transitory event,
but if we have not caught up, and it is dipping down, then, we
are really in trouble under your analysis.
Mr. Warsh. Senator Reed, I share your view. I think there
is likely to have been a good bit of noise in that fourth
quarter data. I think when the fourth quarter data is restated,
we are likely to see that improve. And more importantly, as we
look to 2006 and 2007, again from the Federal Reserve's
perspective, trying to evaluate the economy, I think we are
going to continue to see productivity growth that is robust.
If you look at the period, for example, from 1973 to 1995,
productivity here in the United States was growing rather
smartly at about 1.5 percent. If we looked at productivity
growth rates from 1995 to 2001, they nearly doubled. What that
doubling means effectively is that our standards of living are
able to double that much more quickly, and the productivity
growth over the last 5 years is up yet again.
I think it is extremely difficult for policymakers to rely
on those sorts of productivity gains which may well have been
outsized in years past with any high degree of certainty.
The only point I am trying to make was that the wage growth
that we would have expected has probably been delayed by many
of the things that have impacted the economy in recent years,
including the war on terrorism, including the market
consequence of some of the corporate scandals. I would expect
wage growth to increase.
The second point I would make, Senator Reed, is when you
look at labor wages as to corporate costs, those costs have
been increasing over the last 5 years. But when we look at
take-home wages to median workers, they have not increased at
that same rate.
So what explains that difference? I think part of that
difference is that many of the costs of labor in corporations,
large and small, have gone in to fund health care, with costs
which have grown much faster than inflation, much faster even
than productivity. So while the worker is costing more to the
company, that worker does not feel richer when he or she gets
his or her paycheck.
So, I think the health care cost challenges, which are
before this Congress, continue to explain part of the
differential which you reference.
Senator Reed. Mr. Kroszner, please.
Mr. Kroszner. Yes, thank you. Family income is incredibly
important. Roughly 70 percent of GDP is consumption, and so,
that has to be the income of individuals, the income of
families in making their consumption choices. So it is
certainly important for the Fed to be cognizant of and
concerned about total income in pursuing the goal of maximum
employment and maximum growth in a low and stable inflation
environment. And so, certainly, we want to be very much aware
of that.
I think, as Mr. Warsh has pointed out, one sees a
difference in the total costs of compensation and the take-home
wages that individuals have been receiving, because there are
many benefits that they do not receive directly in their wages
but are a part of their total costs and compensation, and these
are areas that require a great deal of attention because they
are increasingly costly. They are causing the differential
between the take home pay and the amount of pay or the cost of
each of the individual workers, and that is something that
certainly is important to look at going forward.
Senator Reed. I thank both the answers, and I think it sets
it up very well for Mr. Lazear, who is the policy guy, not the
Fed guy, but just one other perhaps footnote is that what I am
observing anecdotally is that a lot of companies are trying to
solve this difficult medical cost dilemma by dropping people
off coverage.
So for some families, you are getting a double whammy: The
wages are flat, and they lost what they had before, which were
reasonably good benefits. But I think your points are well-
taken, and I would hope that on the Fed, you would consider
this issue as very central to what we all should be about.
And Mr. Lazear, please.
Mr. Lazear. Senator Reed, as you know, I spent my life
thinking about labor issues, and so, your concern about wages
is one that is certainly near and dear to my heart as well.
The one thing we do know is that wages are very closely
related to productivity, as pointed out, and productivity is
very closely related to two kinds of investment: Investment in
physical capital and investment in human capital.
One of the issues that we need to focus on in this country
is making sure that individuals have sufficient human capital,
sufficient skills to be productive in the labor market, and
that is particularly true at the bottom end and for some of our
more disadvantaged citizens.
I think that if we look at some of the programs that we
think about in terms of K-12 education, that would certainly be
one of the key aspects to focus on. We have done tremendously
well at the college level and the graduate level of education.
The United States leads the world in that. It is one of our big
export industries. We have many people coming into the country
for our education.
We have not done quite so well at the K through 12 level,
and I think that we need to focus on that, because individuals
who do not get to go on to college or graduate school suffer as
a result of a system that is not serving them well right now.
So in terms of even the short-run but certainly in terms of
the long-run, I think that the focus needs to be on the human
capital side.
Senator Reed. I do not want to presume--any more questions?
I just have a general question. One of the areas that concerns
me also is the abysmal household savings rate, and I appreciate
your answer before, but my time has expired, so if someone
wants to comment briefly, particularly--perhaps Mr. Kroszner,
from the Fed, from your perspective, your aspiration to the
Fed, what would you do about household savings?
Mr. Kroszner. I think it is very important for the Federal
Reserve to provide a stable macroeconomic environment, because
that is the best one in which individuals will have much more
certainty about their future, will be able to make their
savings and consumption plans most sensibly.
I think if the Federal Reserve causes uncertainty, causes
volatility, that is problematic for individual decisions. If
the Federal Reserve provides a very stable, very transparent,
clear environment that is pursuing its goals of long-term price
level stability that will maximize employment and maximize
economic growth, that is the best--from the Federal Reserve
perspective--that the Fed can do to provide an environment to
try to foster good decisions on individuals' parts and
particularly fostering savings.
Senator Reed. If I may, Mr. Lazear, from the policy
perspective of the Council of Economic Advisers, what is the
significant thing that can be done to raise household savings?
Mr. Lazear. Senator Reed, again, I would focus on tax
issues. Our tax system right now penalizes future consumption
relative to present consumption. We would be well-served by
moving to a structure that is more flat, flat in the sense of
treating present and future consumption in the same way. I
think that would encourage saving.
Some of the things that we focused on when I was on the tax
panel involved helping low-income individuals save and trying
to provide some refundable tax credits that would be
instrumental in getting those individuals into the saving
picture, and I think all of those things could be useful.
Senator Reed. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Mr. Kroszner, I welcome the statement in
your opening testimony about the importance of accurate and
timely economic statistics.
I remember often in his testimony before this Committee,
former Chairman Greenspan would say that one area where he
supported more government investment was with respect to
statistics and that for a very small investment, he thought we
could get a very large payoff in terms of the accuracy of the
basis on which we were making important policy judgments. Dr.
Lazear, why do we not get you on the record on statistics and
then Mr. Warsh?
Mr. Lazear. One of the things we talked about in your
office, Senator Sarbanes, was the need for better statistics.
And actually, right after leaving your office, I started
thinking about some of the things that we really need to focus
on.
One involves some of these issues that came up earlier with
respect to jobs. We do not have very good data right now about
the kinds of jobs that the economy is creating and the kinds of
jobs that are being lost, and that would be one of the things
that I would like to focus on as Chairman of the Council of
Economic Advisers if confirmed.
There are a large number of other possible ways that we
could beef up the statistics. I know that you have a connection
to the CEA earlier, and you started working on those things
even when you were on the CEA. I think we need to be even more
diligent in terms of thinking about additional areas where
statistics could be useful to provide information to us and
then to you.
Senator Sarbanes. Mr. Warsh.
Mr. Warsh. Senator Sarbanes, I would say the underlying
dynamism in our economy has proven relatively difficult to be
measured by Government data, which is put together in somewhat
traditional ways. I think a lot of progress has been made in
trying to improve the quality of that data, but in light of
that problem, it strikes me that our markets, particularly our
capital markets, are able to provide some important price
signals with respect to the current account deficit, with
respect to policy actions, which is not a perfect measure of
how the economy is doing but is a necessary supplement given
the data that we have.
If U.S. companies were to try to make judgments based on
the sorts of data that you, Senator, have at your disposal as a
policymaker, they would be struggling. In fact, U.S. companies
have moved to just-in-time inventory, real-time data that
allows them to be much more nimble in their policy decisions,
and I think it is a helpful model for us all to consider.
Senator Sarbanes. The President's latest budget proposal
calls for the elimination of the Survey of Income and Program
Participation, the SIPP, which has been regarded as a unique
source of high quality policy-relevant data on the economic
well-being of the U.S. population.
And I really would put this to you to take with you as
something to examine. I think it would be a major step backward
to drop the SIPP, and since you have this concern for
statistics, I commend that to you for your thinking. I do not
know whether any of you is either aware of this or conversant
with this particular series.
Mr. Lazear. I certainly know the data set. I have not used
it, but many of my colleagues have, and I am certainly
interested in following through on finding out more about that.
Senator Sarbanes. The money laundering title of the USA
PATRIOT Act came out of this Committee. Chairman Shelby has had
a number of oversight hearings on money laundering, and I want
to ask the nominees for the Federal Reserve Board their
evaluation of where the Fed is in terms of its supervisory
activity with respect to money laundering.
There have been some serious criminal investigations by the
Department of Justice, which to some extent might suggest that
the regulatory authorities were not doing all that they should
have been doing for the matter to progress to the point where
the Department of Justice would come along and undertake
criminal investigations. I would like to hear from both of you
about this money laundering issue.
Mr. Warsh. Senator Sarbanes, while not privy to the details
of what the Federal Reserve is contemplating currently, I do
know that our bank regulators, along with different parts of
the Administration, have been trying to increasingly speak with
one voice and be coordinated; that is, FinCEN, the bank
regulators, other parts of the Government that are aware of
possible violations of the Bank Secrecy Act must, and I think
are, continuing to take that responsibility very seriously.
I believe that there was guidance offered toward the end of
last year to try to provide an ability for these regulators to
communicate, share information better between and among
themselves. But I would take that responsibility, if confirmed
at the Federal Reserve, very seriously, and I think part of the
supervisory role is to ensure that the Bank Secrecy Act, the
antimoney laundering initiatives which have been brought before
this Committee, are taken very seriously so that our banking
system is not used by people who are trying to circumvent our
laws and engage in terrorist activities.
Senator Sarbanes. Mr. Kroszner.
Mr. Kroszner. Senator, this is a very important issue. It
is intolerable to have our financial system be used to finance
terrorist activities or aid and abet terrorists in any way in
the United States or around the world. So it is very important
to vigorously enforce the antimoney laundering statutes, to
enforce the Bank Secrecy Act, and to ensure that we do not, in
any way, allow our system to be used by terrorists.
Again, I do not have the specific knowledge of exactly what
the Federal Reserve has been doing with respect to enforcement
activities, but I certainly do support maximal deterrence and
making sure that our system is not used by terrorists in any
way to aid or abet their activities.
Senator Sarbanes. Mr. Chairman, I just want to point out
because you have taken such a strong interest in this issue
that the September 11 Commission issued a final report on their
recommendations in December. Of course, they had made a whole
series of recommendations. They issued a final report on how
well they were working and how well they were being
implemented.
The only recommendation they got an A, an A-minus, was with
respect to terrorist financing. So they seem to have regarded
the work we did here, not only the statutory work but also the
oversight hearings, the follow-up, I remember a meeting the
Chairman convened in his office with representatives of the
Treasury to examine carefully what they were doing I think have
all produced a result.
Finally, the other issue I wanted to touch with you,
because it is one that, again, this Committee has had a keen
interest in is privacy and data security. We have had some
horror stories about the loss of people's sensitive
information, the breaches of the privacy of Social Security
numbers, credit and debit card numbers, security codes, bank
account information.
In fact, the Chairman convened, I think, three or four
hearings of this Committee on data privacy. How important do
you regard that issue? Everyone thinks the Federal Reserve
does--I mean, obviously, it does monetary policy, but it does
not only do monetary policy, and issues of this sort come
directly under your jurisdiction.
Mr. Kroszner. Certainly, protecting people's privacy is of
the utmost importance. In that Act of 2002, the Confidential
Information Protection and Statistical Efficiency Act of 2002
that I was very much involved in, the first part of it is
confidential information protection.
And so, one of the things that I wanted to ensure is not
only that we allow the statistical agencies to be more
efficient in the use of the data that they have but also that
the information collected from individuals and firms has the
highest level of protection possible. What this Act did was
actually raise the safeguards and raise the protections for
those. Obviously, this is an extremely important issue, and the
Federal Reserve has a role to play.
Some of the incidents that we have heard about have been
outside of the Federal Reserve's mandate, however. Some of them
have been associated with institutions that are not banks or
not regulated institutions by the Fed. But certainly, to the
extent that the Fed can ensure the confidentiality of and
protection of people's privacy, of their information in
financial institutions, I would work the utmost to make sure
that does occur.
Senator Sarbanes. Mr. Warsh.
Mr. Warsh. Senator, I think that part of the success of the
domestic economy has been an increasing reliance by consumers
in providing their financial information to those institution
which they believe are really trusted intermediaries.
So part of the reason why home mortgages are more prevalent
in the United States than they are among our European trading
partners is because of the depth and breadth of those
commercial financing and securities markets, all of which are
really critically important, then, to make sure that data is
private so that those people continue to participate in these
marketplaces.
I think this Committee took on the challenge of identity
theft in the reauthorization and signing by the President of
the FACT Act, which is an important step down that road. But
vigorous oversight by the regulators and oversight by this
Congress is probably necessary going forward.
Senator Sarbanes. The final question I want to put: Mr.
Lazear, you are going to be the President's Chief Economist, in
effect; I mean, that is the theory of it, at least, as Chairman
of the Council of Economic Advisers. But the two Fed nominees
are moving from being part of the President's economic team to
being members of the Federal Reserve Board.
We give Members of the Federal Reserve Board a 14-year term
if they get the full term. And of course, the purpose behind
that is to give them independence so that they will call it as
they see it and that the judgments will not be political
judgments but represent well considered economic judgments.
Given your past experiences as members of the President's
economic team, I think you need to address this question of the
independence of the Federal Reserve.
Mr. Kroszner and then Mr. Warsh.
Mr. Kroszner. The independence of the Federal Reserve is
fundamental to the Federal Reserve's mission. In order to be
credible and make sure to reduce volatility, to reduce
uncertainty, the central bank cannot be a political animal; it
must be an independent animal, and that was the Congressional
mandate in setting up the structure as you had discussed.
I have been an academic for most of my life. I did take 2
years to have the honor to be confirmed by this Committee and
to work in the White House as a Member of the President's
Council of Economic Advisers, which I think has given me a very
useful perspective on taking the academic and bringing it to
the policy world.
I fully understand that when I am at the Federal Reserve, I
am at the Federal Reserve; I am not part of any administration.
I am there as an independent person. The vast majority of my
life has been in academia, which, as you know, especially in
the University of Chicago tradition, is one in which there is a
lot of independence. Regardless of who may be giving a paper,
who may be putting ideas forward, whether it is a new assistant
professor, whether it is a Nobel Prize winner, those ideas are
debated on their merits, and it is not the source of them; it
is the substance of them.
And at the Federal Reserve Board, I assure you, Senator,
that is the approach that I would take, and I understand the
independence is fundamental to the successful mission of the
Federal Reserve Board.
Mr. Warsh. Senator, if confirmed, I think it is essential
that I take on the role to call them the way that I see them.
And I absolutely intend to do just that. I think it is a
dramatically different role than I have served and had the
privilege to serve over the course of the last 4 years. I am
very really comfortable taking off one hat and putting on the
other.
I think what is at least as important is the credibility
the Federal Reserve in the marketplace; given the
responsibilities that this Committee has given the Federal
Reserve, it is at least as essential that the markets believe
the judgments of the Federal Reserve, both Chairman Bernanke
and the Governors, are really impartial judgments that are
based on the best data and the best information that is
available. I think that is part of the reason why the markets
pay so much attention to the reactions of the Federal Reserve.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Chairman Shelby. Thank you, Senator Sarbanes.
I just want to throw out something you know just for
emphasis: Identity theft is costing billions and billions of
dollars. We have heard this. And we are trying to get a hold of
it. As regulators, you will be right in the midst of it, but it
seems to be not an issue that is going away despite our robust
economy and the use of everything, the legislation that we have
passed and the oversight that we do here. So we do want to work
with you at the Fed and the other regulators to try to combat
this, because it has reached epidemic stages, and I think it
could get worse. I pray it will not.
Thank all of you for your appearance here today. We will
try to schedule a vote on your nomination as soon as we can.
Thank you very much. The hearing is adjourned.
[Whereupon, at 4:19 p.m., the hearing was adjourned.]
[Prepared statements and biographical sketches of nominees
supplied for the record follow:]
PREPARED STATEMENT OF EDWARD P. LAZEAR
Chairman-Designate, Council of Economic Advisers
February 14, 2006
Chairman Shelby, Ranking Member Sarbanes, and Members of the
Committee, it is a great honor to be here today as the President's
nominee to be Chairman of the Council of Economic Advisers. The
Council, which has been in existence for 60 years now, is charged with
the task of advising the President on economic issues. Throughout its
history, it has remained a body of experts and academicians who have
taken it to be their duty to inform policymakers in an unbiased and
professional manner.
One colleague recently told me that in Washington, when people want
the correct answer on economics, they go to the Council of Economic
Advisers. The best compliment that can be paid to the CEA is that the
CEA ``tells it like it is'' so that the President and Congress, who are
charged with the responsibility of weighing all factors, can make the
best decisions possible.
Let me offer a brief summary of my background. I was born in New
York, but raised in the San Francisco Bay Area, when my father, who
worked as a machinist in the defense industry, followed the work to
California. I attended UCLA where I obtained Bachelor's and Master's
degrees and then went to Harvard to get my Ph.D., all in economics.
After graduating, I taught at the University of Chicago for 19 years
and moved to Stanford University full-time in 1992, where I am
currently a Professor in the Graduate School of Business and a Fellow
of the Hoover Institution. I have founded two businesses and was the
chairman of my company from 2001 until recently.
I am primarily an applied economist and have worked in a number of
different areas. My specialty is issues involving incentives and
productivity. Although most of my work has been in microeconomics,
broadly defined, I have some well-known research in macroeconomics that
examines the effects of government policies on employment. I have also
spent much of my career studying education and am currently the sole
economist on a National Academy of Sciences standing board that deals
with education issues.
My government experience is varied. I have advised a number of
countries on economic growth and reform, specifically Eastern European
nations as they moved from command to market economies. I was also a
Member of the President's Advisory Panel on Tax Reform last year. I am
currently a Member of Governor Schwarzenneger's Council of Economic
Advisers.
Before I left California to testify, my senior Stanford colleague,
Secretary George Shultz, told me that the role of the Chairman of the
Council of Economic Advisers is to be an economist to be straight and
to bring the economics to the table, leaving the politics to others. If
confirmed, I will devote all of my energy to ensuring that policymakers
have the best economic analysis possible.
Thank you. I welcome your questions.
----------
PREPARED STATEMENT OF RANDALL S. KROSZNER
Member-Designate
Board of Governors of the Federal Reserve System
February 14, 2006
Chairman Shelby, Senator Sarbanes, and Members of the Committee, I
am pleased to have the opportunity to appear before you today as one of
President Bush's nominees to serve on the Board of the Governors of the
Federal Reserve System. I am honored that President Bush has nominated
me to serve on the Board. If I am confirmed by the Senate, I will work
to the best of my abilities to fulfill the significant responsibilities
of this office.
After studying economics as an undergraduate at Brown University, I
earned M.A. and Ph.D. degrees in economics from Harvard University. I
then joined the faculty of the Graduate School of Business of the
University of Chicago, where I am Professor of Economics and have been
teaching Money & Banking since 1990. I have researched and published on
topics including domestic and international banking and financial
regulation, corporate governance at both financial and nonfinancial
firms, international banking and financial crises, debt defaults, and
monetary economics. I am Editor of the Journal of Law and Economics and
have been Associate Editor of a number of scholarly journals, including
the Journal of Financial Services Research.
I have had extensive and regular contact with the Federal Reserve
System as a visiting scholar and consultant to regional Federal Reserve
Banks including Chicago, New York, Kansas City, Minneapolis, and St.
Louis, as well as to the Federal Board in Washington. I also serve on
the Academic Advisory Committee of the Federal Reserve Bank of Chicago.
I have visited and consulted for many central banks and finance
ministries around the world, including Central Bank of Argentina, Bank
of Sweden, Swedish Finance Ministry, Bundesbank (Germany), and the
European Central Bank. I have also visited and consulted for
international financial institutions, including the Bank for
International Settlements, the International Monetary Fund, World Bank,
Inter-American Development Bank, and Asian Development Bank.
As a Member of the President's Council of Economic Advisers (2001-
2003), I have had policy experience in a variety of areas including
banking and financial regulation, international financial crises, and
macroeconomic forecasting. In this capacity, I witnessed first-hand the
importance of having accurate and timely economic statistics in order
to make sensible policy judgments and decisions. I spearheaded an
initiative to improve the quality of Government statistics and enhance
the protection of confidential data reported to the Government,
resulting in the Confidential Information Protection and Statistical
Efficiency Act of 2002. After returning to the University, I was
delighted to be appointed by the Secretary of Labor to the Federal
Economic Statistics Advisory Committee (FESAC) which meets regularly
with the major official statistical agencies to discuss how to improve
measurement of economic activity. If confirmed, I would be devoted to
further enhancement of the quality of economic statistics.
Monetary policy is a fundamental responsibility of the Federal
Reserve. Long-run price stability is crucial to achieving maximum
employment and overall economic stability. Under Chairman Greenspan and
Chairman Volcker before him, the Federal Reserve has achieved much
success in reducing and stabilizing inflation and inflation
expectations. This success has helped to contribute to a tendency for
the fluctuations in employment and output to be lower than in the past
and a reduction in the frequency and severity of recessions. If
confirmed, I would look forward to working with Chairman Bernanke and
the other members of the Federal Open Market Committee (FOMC) to
continue to underscore the role of long-term price stability in
achieving prosperity and maximum employment. I also applaud the
increase under Chairman Greenspan in monetary policy transparency,
which helps to reduce uncertainty for households, entrepreneurs, and
investors, and thereby contributes to economic stability and growth.
The Federal Reserve also has a fundamental responsibility for
protecting the stability of the country's banking and financial system.
Much of my research and work with central banks has been devoted to
analyzing banking and financial regulation as well as banking and
financial crises. The safety and soundness of the U.S. banking and
payments systems is critical to achieving economic growth, maximum
employment, and general economic stability, and the Federal Reserve
works closely with other regulators to achieve this goal. The Federal
Reserve also has an important role to play in responding to and
mitigating the impact of financial crises and shocks. If confirmed, I
would work vigorously to protect and promote the safety and soundness
of the system.
The Federal Reserve has an additional important responsibility to
consumers and users of the banking and financial system. Discriminatory
or abusive lending practices should not be tolerated, and the privacy
of individuals and their financial data must be protected. The Federal
Reserve is active in promoting financial literacy and, as an educator,
I believe that financial literacy is fundamental to the proper
functioning of the financial system. If I am confirmed, I will place a
high priority on these responsibilities and look forward to being
actively involved in promoting financial literacy.
Thank you for holding this hearing, and I look forward to your
questions.
----------
PREPARED STATEMENT OF KEVIN M. WARSH
Member-Designate,
Board of Governors of the Federal Reserve System
February 14, 2006
Chairman Shelby, Senator Sarbanes, and Members of the Committee,
thank you for the opportunity to appear today and for the expeditious
scheduling of this hearing.
I wish to express my sincere appreciation to President Bush for
nominating me to serve as a Member of the Board of Governors of the
Federal Reserve System.
I have served on the National Economic Council for the past 4
years, focusing on domestic finance, capital markets, banking,
securities and insurance related issues. In that capacity, I have had
the privilege of working closely and productively with Members and
staff of this Committee. If confirmed, I look forward to continuing
that cooperative relationship, along with Chairman Bernanke and the
Board of Governors, in carrying out the important responsibilities that
Congress has assigned to the Federal Reserve.
Market participants, policymakers, and the American people rely on
the credibility and sound judgment that flows from the Federal
Reserve's independence. If confirmed, I will be devoted solely to the
Federal Reserve's statutory mandate for monetary policy--to preserve
price stability and foster maximum sustainable growth in employment and
output--and will work to promote a secure, fair, and efficient
financial system.
The flexibility and resiliency of the U.S. capital markets are
matched only by the remarkable innovation and adaptability of our
Nation's workers. Both of these markets--capital and labor--are a
source of great strength to the American economy, and have proven in
recent years equal to the task of cushioning external shocks to the
economy.
The capital markets, from which I come, are the transmission
mechanism for monetary policy. Under Chairman Greenspan's leadership,
the Federal Reserve took meaningful steps during the past decade to
describe and explain its policies with greater transparency. As a
result, market volatility is lower, and our capital markets are deeper,
broader, and more dynamic than ever before. Pools of free-flowing
capital, in turn, are able to provide real-time, forward-looking
information to help Federal Reserve officials make appropriate policy
decisions. I hope and believe that my prior experience of nearly 7
years at Morgan Stanley--as an investment banker and mergers and
acquisitions adviser--would prove beneficial to the deliberations and
communications of the Federal Reserve.
Over the course of the last generation, the Federal Reserve has
compiled an enviable track record in achieving price stability and
successfully anchoring long-term inflation expectations. This stability
has contributed to low long-term interest rates and has promoted strong
employment growth and significant productivity gains. The Federal
Reserve must remain attuned, however, to the possibility of unexpected
shocks.
The Federal Reserve's responsibilities extend, of course, beyond
monetary policy. It is responsible for the supervision and regulation
of bank and financial holding companies and State-chartered banks that
are members of the Federal Reserve System. Working with other financial
regulators, the Federal Reserve should continue to promote three
complementary pillars of prudential oversight: Strong capital
standards, effective supervision, and meaningful market discipline of
these institutions. I am fully committed to these principles.
The Federal Reserve also maintains significant responsibility for
promoting an efficient and effective financial system, including
protection from systemic risks. As a staff participant on the
President's Working Group on Financial Markets since 2002, I would hope
to continue to contribute as a Member of the Board to its important
work in the years to come. The Federal Reserve remains on the front
lines in avoiding financial crises--or mitigating their consequences--
should they occur. The American people have come to rely upon the
Federal Reserve in times of significant financial distress, and it is a
responsibility that I take seriously.
Finally, if confirmed, I will work to ensure that the Federal
Reserve continues its important role in promoting financial literacy
and fair dealing for consumers. The Federal Reserve's knowledge and
credibility should continue to be brought to bear to help bring those
on the fringes of the U.S. financial system into the mainstream.
In conclusion, the Federal Reserve System's decisions significantly
impact America's families and businesses. I would take on the
responsibility of joining the Board of Governors of the Federal Reserve
System with humility, and would be honored if the Senate sought fit to
confirm my nomination.
Thank you. I am happy to respond to your questions.