Partial transcript of Greenspan 2-25-98 testimony:
BENNETT: I've been fascinated by your testimony and more fascinated by your answers to some of the questions that we've received, and have written down a few comments that you've made, because I want to go in a direction that I'm sure will not surprise you.
You've said we haven't seen a phenomenon like this, as you were describing certain aspects of the economy. We have a phenomenon facing us that we've never seen before that I want to pursue, and this is the year 2000 problem, or in the shorthand that we've learned around here the Y2K. My wife says to me, "What does Y2K stand for?" And I very knowledgeably say, "Year 2000." And she says, "Why do you use Y2K instead of year 2000? You only saved a single syllable."
(LAUGHTER)
Last week, Governor Kelley from the Federal Reserve said, "The Federal Reserve believes that certain countries" -- I'm quoting -- "believes that certain countries around the world have not embarked on aggressive compliance supervision and examination programs so that there is a likelihood that banks in those countries have not yet begun to effectively address the problem and will now find it increasingly difficult to be ready." Unquote.
Chairman Levitt of the Securities and Exchange Commission has expressed, both publicly and more emphatically privately to me, his concern about the inability of financial institutions -- and
particularly in his case stock markets -- to comply with the Y2K requirement.
We've had testimony before my subcommittee in which the chairman has been active, more active than I think he is on other subcommittees, because of his interest in this -- that have suggested that there is a significant chance that a worldwide recession could be triggered by the inability of companies to meet their supply deadlines, to meet their customer requirements, because their
computers are shut down because of the Y2K problems.
The first general question, as you look ahead for '98 and '99, do you factor in or have you started to factor in any concern about what might happen if there are banks or stock exchanges or large manufacturing companies, primarily outside of this country, that could fail to meet deadlines -- in the case of companies
-- or fail to clear financial instruments -- in the case of banks -- and what effect that would have on the economy worldwide and here in the United States?
GREENSPAN: Senator, you're quite correct in saying this is really a unique event in that we have no precedential capabilities of evaluating it.
We do know certain things. If the chairman is going to do a mea culpa, I'll do a mea culpa, too. I'm one of the culprits who created this problem. I used to write those programs back in the '60s and '70s...
(LAUGHTER)
... and was so proud of the fact that I was able to squeeze a few elements of space out of my program by not having to put 19 before the year. And back then it was very important. We used to spend a lot of time running through variousmathematical exercises before we started to write our programs so that they could be very clearly delimited with respect to space and the use of capacity.
It never entered our minds that those programs would have lasted more than a few years. And as a consequence, they are very poorly documented. If I were to go back and look at some of the programs I wrote 30 years ago, I mean, I would have one terribly difficult time working my way through step by step. And to try to infer how one reads a program, when there are lots of alternate ways of doing things and all you've got is the code in front of you, is not simple.
It, therefore, is a very difficult problem to get your hands around. We do know that if every individual institution were separate and not interrelated, we wouldn't care all that much.
GREENSPAN: The trouble is that there is a perversity of incentive in this type of problem in that you can be extremely scrupulous in going through every single line of code in all of your computer operations, make all the adjustments that are required and get essentially a system, whether you are a bank or an industrial corporation, and say we have solved the 2000 problem, and then find
that when the date arrives, all of the interconnects that are now built in start to break down. So, it's not an issue of getting -- of being worried that there is a large number of non-compliers who haven't gone through the system.
You can end up with a very small number of non-compliers and have a very large problem. We know that a lot of the countries abroad have smaller problems than we do because they are buying -- a substantial part of their systems are newer equipment which already embodied much larger capacities and got -- didn't have to use two digit, but could use four digits for purposes of defining what year it was.
- I'm quoting -- "believes that of the newer equipment is without difficulty. We, nonetheless, have such a large, high degree of uncertainty about what actually is out there that we cannot but employ very substantial amount of resources to find means to reduce the probability of the inevitable difficulties that are going to emerge.
In measuring the impact on the economy, we first try to evaluate the amount of resources which are being diverted from otherwise productive endeavors, especially in information processing, which much go to the year 2000 problem, which means the productivity must be reduced.
People are doing things which are no longer productive and really it's sort of maintenance, and so that you get output in a sense but it's not increased productivity. It is un-increased real standards of living. In that sense, we can measure the degree of these several hundred billion dollars which are involved in trying to bring the year 2000 problem -- to resolve the year 2000 problem.
GREENSPAN: The difficulty is that we don't know what part of that several hundred billion dollars would have been spent anyway. A lot of it is on new equipment merely because the simplest way to resolve a problem which seems to be unsolvable with respect to programs is just rip out the whole business and stick in something new.
And so, it's hard to know which part of this is real lost effort. A good part of it is. How much we don't know. So, there is automatically before we reach the year 2000, an economic loss in the sense of the diversion of resources to non-productive endeavors.
We do not know or cannot really realistically make an evaluation of what the economic impact is as a consequence of the breakdowns that may occur. We do not know the size. We do not know the contagion and interaction within the system, and we do not know how rapidly we can resolve the problem. For example, one of the things that we at the Federal Reserve are very acutely aware of is there is a two-pronged issue here. One, try to prevent the problem for happening. And two, what do you do when it happens?
I mean, for example, we had a very major bank in the City of New York a number of years ago, computer went out and the New York Federal Reserve Bank had to lend them over $20 billion overnight. Now, if we weren't there, I can tell you that the system would have been in very serious difficulty.
So, part of what we are trying to do is figure out what we can do to assuage whatever problems might arise, and that it's a difficult exercise because there is such a huge element of uncertainty in the nature of the problem itself. But we are trying to come to grips with the best we can.
BENNETT: Thank you. Mr. Chairman, if I could be allowed an additional observation. The more I have gotten into this, the more I have realized that the uncertainty that you refer to is the devilish thing here.
And by the way, you have summarized the issue as well as anybody I've ever heard, and I congratulate you for that. Let me give an example to disturb you at night when you are not thinking about anything else, let this come around. The power grid in the United States is completely integrated through the whole country, and if one portion of power goes down someplace, then it can fall elsewhere. We have seen this before and we see horror movies that are created on it and so on.
-- I'm quoting -- "believes that point in the power grid where there's a computer, somebody hasn't found the year 2000 problem that is there and you begin to get major power outages spreading throughout the economy?
BENNETT: You've talked about one bank whose computers went down, and you had to lend them $20 billion. What if there is a major manufacturer that slips delivery schedules because of a power outage? Not only does the bank -- can't crank up all of its computers, but General Motors can't meet an assignment -- and the ripple effect through the suppliers, customers and so on?
We've had testimony before my subcommittee that there is a 40 percent chance there will be a worldwide recession triggered by this.
I don't know whether that's a good percentage or a bad percentage. But if I were the Fed, I'd be really worried about it and paying attention to it. Now the one that I would like a comment on.
You talked about the euro and you made response to Senator Reed where you said that there will be struggles to put it technically into place. The very resources that you described in your statement about the challenges here are being devoted right now to converting computer capacity in Europe and elsewhere to handle the switch to the euro.
Every currency trader who has a computer is having it reprogrammed so that it can handle the euro. And every programmer available to deal with this year 2000 problem is busily dealing with euro conversion.
I know there are a number of people who have raised the issue that the conversion to the euro should be delayed until the Y2K problem has been taken care of. I'm one of them. I think, if I were a CEO of a company that had these kinds of technical challenges, I would be saying to my MIS people: Do not do the euro until you have done the year 2000 problem. The demand for your services and your capability is so great that you can't handle both problems simultaneously.
Could you comment on what would happen if, in fact, policy-makers were to decide to postpone the conversion to the euro simply because of this, as youput it, struggle technically? Or I'll turn it around -- the technical struggle that they have with respect to this challenge?
GREENSPAN: Yes, I think they're now at a point where they've got a very major dilemma of exactly this nature, because if they postpone the January 1st, 1999 date, it creates a lot of technical problems not dissimilar to the year 2000 computer problems in the sense that a lot of their operations are gradually moving step by step to encompass the changes in the system.
GREENSPAN: And I suspect that if those were delayed, there would be some very major consequences in the payment system and within the way the European monetary system is evolving.
I do know that there are an awful lot of people in Europe who have the same concerns that you do for exactly the same reasons, and I'm not sure how to come out of that. I do know that we at the Federal Reserve are aware of the fact that because of the tremendous amount of resources moving toward a single currency implementation, that other resources to confront the computer issues are lacking. We don't know how significant that is, but it's a worrisome issue, and I'm not sure that there is at this point and time a very simple solution to that. I think it's a problem either way.
BENNETT: Thank you, Mr. Chairman. I appreciate your awareness of the issue. That's where we start, and I just close with this comment. As you may know, I've had the GAO checking into the various regulators as to where they are with respect to both their own systems and the systems of the financial institutions that they oversee. We haven't yet heard from the GAO with respect to the Fed.
But the pattern that is developing from the GAO reports that have come in so far is that virtually all of the regulatory agencies are behind schedule in terms of their internal systems -- the assessment and remediation and contingency planning for their in-house computers. And then the external systems for which they have supervisory responsibility -- the banks or credit unions or
whatever -- are also behind schedule with respect to corrective action and contingency planning.
So we will look for the GAO report with respect to the Fed. The good news is that virtually everybody that has reported has reported that as a result of the actions of this committee, through our subcommittee, the level of concern activity and awareness has gone up very dramatically.
BENNETT: And so we're hoping that in the time we have left we can get this solved, but the general trend has been that virtually every regulator is behind the curve in their own computers and they find that the institutions that they regulate are well behind the curve as well.
Thank you, Mr. Chairman.
D'AMATO: I want to thank the senator for not only his line of questioning but for his industriousness in -- in, as you say, increasing the level of awareness. And I think you have contributed substantially to dealing with this problem, and I thank you for your efforts.
You've done an outstanding job, Senator Bennett.
Mr. Chairman, let me thank you for your graciousness, for your incisiveness, for your responsiveness -- not only today, but the manner in which you have continually held yourself and those of your colleagues, made yourselves available to this committee and to its members and staff. We are deeply appreciative, and I am very heartened by your presentation today. I think most of the members are. I think you've touched on those areas of concern that are
important -- Southeast Asia, the economic consequences that may or may not unfold, the question of the quality of loans ......
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Regards, all.
Cathleen |
