[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                          MONETARY POLICY AND


                        THE STATE OF THE ECONOMY

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 15, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-72




                                 _____

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
JOHN CAMPBELL, California

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 15, 2006............................................     1
Appendix:
    February 15, 2006............................................    61

                               WITNESSES
                      Wednesday, February 15, 2006

Bernanke, Hon. Ben S., Chairman, Federal Reserve Board of 
  Governors......................................................     6

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    62
    Gillmor, Hon. Paul E.........................................    64
    Bernanke, Hon. Ben S.........................................    65

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Excerpts from the Monetary Policy Report to Congress, 
      February 15, 2006..........................................    75
Lee, Hon. Barbara:
    The Price Of Credit: Prime and Subprime Lending in California 
      2004.......................................................    76
Bernanke, Hon. Ben S.:
    Monetary Policy Report to Congress, February 15, 2006........    79
    Written responses to questions from Hon. J. Gresham Barrett..   108
    Written responses to questions from Hon. Harold E. Ford, Jr..   111
    Written responses to questions from Hon. Mark R. Kennedy.....   116
    Written responses to questions from Hon. Ron Paul............   118
    Written responses to questions from Hon. Brad Sherman........   119


                          MONETARY POLICY AND



                        THE STATE OF THE ECONOMY

                              ----------                              


                      Wednesday, February 15, 2006

             U.S. House of Representatives,
                   Committee on Financial Services,
                                           Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., at 
2128 Rayburn Building, Hon. Michael G. Oxley [chairman of the 
committee] presiding.
    Present: Representatives Oxley, Leach, Bachus, Castle, 
Royce, Lucas, Kelly, Paul, Gillmor, Jones, Biggert, Shays, 
Kennedy, Garrett, Brown-Waite, Pearce, Price, Fitzpatrick, 
Davis of Kentucky, McHenry, Frank, Kanjorski, Waters, Sanders, 
Maloney, Velazquez, Carson, Sherman, Meeks, Lee, Moore of 
Kansas, Capuano, Ford, Hinojosa, Crowley, Clay, McCarthy, 
Matheson, Miller of North Carolina, Scott, Davis of Alabama, 
Green, Cleaver and Bean.
    Chairman Oxley. The committee will come to order. Pursuant 
to Rule 3(f)(2) of the rules of the Committee on Financial 
Services for the 109th Congress, the chairman announces he will 
limit recognition for opening statements to the Chair and 
ranking minority member of the full committee, and the Chair 
and ranking minority member of the subcommittee on Domestic and 
International Monetary Policy, or their respective designees, 
to a period not to exceed 16 minutes, evenly divided between 
the majority and minority.
    The prepared statements of all members will be included in 
the record, and the Chair now recognizes himself for an opening 
statement.
    Chairman Bernanke, welcome to the House Financial Services 
Committee, and on behalf of the entire committee, 
congratulations on your confirmation as the 14th Chairman of 
the Federal Reserve Board.
    We look forward to getting to know you and gaining a better 
understanding of how you intend to run the Federal Reserve. 
Even though this is your first appearance before this 
committee, we're well familiar with the Fed, your staff, and 
the work of the Fed in setting monetary policy and supervising 
banks and financial holding companies.
    Based on my brief conversation with you and your amazingly 
smooth confirmation hearings, I'm confident that you will be 
successful as your predecessor. I know the setting and this 
testimony can be intimidating. I hope it puts you at ease to 
know that you will have numerous opportunities to testify 
before this committee and the Congress.
    As a matter of fact, you're mandated by law to come over 
here twice each year. I'm sure you're comforted by that.
    This morning, the press and the markets will focus on your 
every word and gesture. This committee will take a long-term 
view and I hope focus more on public policy, not the fleeting 
gyrations of the markets.
    Your predecessor and over time the members of this 
committee have come to view this hearing as an ongoing dialogue 
between an independent Fed and the elected representatives of 
the American public.
    These hearings have become the highlight of our year. I 
hope they will become the highlight of yours and that like 
Chairman Greenspan, you will use them as an opportunity to hear 
a wide range of views and take the temperature of more parts of 
the country than you can visit in a year.
    You are addressing us at a time when there is universal 
agreement that monetary policy is where it should be and that 
the economy is thriving. We can report that the U.S. economic 
growth is steady and strong.
    In fact, we are beginning the fifth full year of the 
current expansion. While we face some uncertainty abroad, and 
we can be assured of the likelihood that there will always be 
uncertainty abroad, our national economic performance is the 
envy of the world.
    Americans are well aware of the economy's steady growth, 
low inflation, and productivity gains. Consumer confidence 
numbers are optimistic, and economic predictions show annual 
growth in the three to four percent range for the short and 
intermediate term.
    Alan Greenspan has handed you the wheel of monetary policy 
at a time of unparalleled growth and prosperity in America. 
While Federal law requires that the Federal Reserve conduct 
monetary policy in a way that ensures maximum employment, 
stable prices, and moderate long-term interest rates, we know 
that monetary policy is only one tool to achieve that goal.
    Another equally important tool is fiscal policy, as set by 
Congress in the annual budget, and tax policy. As you 
contemplate the start of your tenure as Chairman of the Fed, I 
pledge to you to use my influence and the influence of this 
committee, not only to support you in your work, but also to 
see to it that Congress conducts fiscal policy with the same 
acumen as the Fed has shown in monetary policy.
    I'm confident that we can maintain the excellent track 
record of the U.S. economy if we work together and understand 
each other's goals. We will face challenges together in the 
future. Some will be self-inflicted, and some will be inflicted 
upon us.
    Let us use this relatively quiet time to begin our 
dialogue, fine-tune the monetary and fiscal policy, and pledge 
to work together. Mr. Chairman, it's a pleasure to have you 
before the committee, your first appearance before our 
committee on monetary policy, and again congratulations on your 
outstanding career before here and your confirmation by the 
Senate.
    I now yield to the gentleman from Massachusetts for an 
opening statement.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 62 in the appendix.:]
    Mr. Frank. Thank you, Mr. Chairman and Mr. Chairman, thank 
you and thank you for the courtesies you've extended to us. You 
have made yourself very available for the kind of conversations 
that will be helpful in our having to work together and 
including be able to articulate those legitimate policy 
disagreements that are part of a democracy.
    I just want to apologize in advance because the Fund Joint 
bill has been scheduled to come up, and I'm going to go over 
after I do my questioning, I'm sorry to say to you. But I will 
be on the floor and come back again. So I apologize for that.
    But I want to just talk to the Chairman because I think we 
are facing a kind of crisis in our economy. I am glad to see 
that economic growth is steady and solid. I agree with the 
projections that it will good going forward.
    But we face a problem we haven't faced a long time in 
America. I'm not enough of an economic historian to know when, 
if ever, that was. There is a decoupling between growth in the 
gross domestic product and the economic situation of the 
average American.
    The report documents that--the monetary report to Congress. 
On page nine of the report, page eight, ``With profits posting 
further solid gains in 2005,'' et cetera, and on page nine, 
``Corporate profits continue to grow strongly in 2005. The 
ratio of before-tax profits of domestic non-financial 
corporations to that sector's gross value added grows to more 
than 12 percent of its 1997 peak.''
    ``Operating earnings for S&P 500 firms appear to have been 
nearly 14 percent above their level four quarters earlier. 
That's explained in part by the growth in productivity. It was 
not as high last year as it's been, but it will still 
considerably above trend. If you look productivity over the 
last 5 years, as has been noted, it has been very high.''
    Then we get to page 17. ``Increases in hourly labor 
compensation were moderate in 2005.'' In fact, real wages, 
wages paid to people who work for other people, taking into 
account inflation, have not gone up for years. They have been 
flat.
    What we have is an economy in which thanks to increased 
productivity, gross domestic product goes up and a very, very 
large share, an excessive share of the increased wealth has 
gone to a very small number of people who own the capital.
    Now obviously for the system to work, there needs to be 
compensation for those who own capital. No one is, I hope, 
arguing that that shouldn't happen at all. But in recent years, 
that has become disproportionate. Your predecessor had 
acknowledged that on several occasions.
    You have wages flat; you have insecurity caused by pensions 
being underfunded, being abandoned, defined benefits going over 
to 401(k)s; you have medical care costs increasing, the extent 
to which workers have to pay them.
    The consequence is this, and it's something that people 
compare. I will tell you when I was in Davos listening to a 
leader of one our financial institutions lament the fact that 
the American people seem so unimpressed with globalization, so 
resistant to the effort to adapt that very productivity which 
many believe is so important for the economy, and I share that.
    He said, ``Recent studies show that globalization adds a 
trillion dollars a year to the American economy. That's $9,000 
per family. Why are Americans so resistant to something that 
adds $9,000 per family?''
    My answer was, ``Because they don't have the $9,000. Not 
only do they not get the $9,000,'' I said to this individual, 
``but they think you have their $9,000. In fact, you have the 
$9,000 for about 2,000 of them or more.''
    This disparity, this problem is why you now encounter 
increasing resistance to trade to deregulation, to the very 
flexibility that many think are important for the economy.
    So these numbers are right here. Productivity goes up. The 
economy is going to go well. But average Americans collectively 
assert that they are getting little if any of the benefit. And 
then those people tell you, ``Well, you know, some of these 
things, globalization means that tee shirts are a lot cheaper 
now than they used to be at Wal-Mart and elsewhere.''
    But I'm talking about real wages. That factors in the cost 
of living. So when you talk about real wages being flat, you 
can't double-count the low prices. Real wages is obviously 
nominal wages discounted by inflation.
    So if we do not do a better job in this country of not 
getting rid of inequality, which is essential for our society's 
markets to function, but diminish it, you will continue to have 
the resistance to many of the policies that people advocate, 
and that I think is the major test before us.
    We have to end this decoupling of growth of the GDP and the 
economic well-being of the average American.
    Chairman Oxley. The gentleman's time has expired. The 
gentlelady from Illinois, Ms. Biggert.
    Ms. Biggert. Thank you, Mr. Chairman and Chairman Bernanke. 
First, let me associate myself with the chairman's remarks, 
both in welcoming you to the committee, and in recognizing both 
the skills you bring to this new job and the enormity of the 
job.
    We are looking forward to your testimony. We want to get to 
know you and understand the subtle differences, and there will 
be differences in the way that you will do your job, from the 
methods of your predecessor.
    To date, we have mostly been able to only read about your 
views. So today, I hope than you will elaborate a little. For 
example, anyone who had read much about you knows of your 
interest in real world problems, particularly the Great 
Depression.
    We also know of your reputation as a proponent of inflation 
targeting, expressly setting a band in which you think 
inflation should be kept. Naturally, I might like to hear a 
little bit more on that, both because we have read so much 
about it recently, but also because of the spin-up in energy 
prices and the quite welcome drop in unemployment.
    Both of these are well-recognized as potential inflation 
triggers. Most analysts believe that at the first meeting you 
chair late next month, the Open Market Committee will continue 
its measured tightening.
    But many are wondering at what point a new Fed Chair will 
be moved to, as the longest-tenured Chairman, William McChesney 
Martin famously said, ``take away the punch bowl just as the 
party gets going.''
    As well I think many members would like to better 
understand your views on the global saving glut; economists and 
politicians of all stripes and colors have for years wrung 
their hands about the alleged low savings rate in the United 
States.
    Many are also puzzled about both the high balance of 
payments deficit and what your predecessor called the conundrum 
of low, long-term bond rates as the Fed gradually pushed up 
short-term rates.
    Of course, in classic economics, a trade deficit in theory 
can be managed and a rate inversion is a thing to be avoided. 
So I think we'd like to hear if there is a savings glut, what 
are the implications for capital investment here and in 
emerging markets; is there more that we should do unlock 
capital investment? And how much of the current account deficit 
should we imagine may erode if the economies of other developed 
and developing countries picks up?
    Anyway, I hope you will take some time, either at this 
hearing or at your next appearance here in July, to talk to us 
a little bit about the equality of economic data and its impact 
on the Fed's ability to confront monetary policy.
    Doubtless the Fed is awash in data, but it is troublesome 
to think that in our high tech society in the 21st Century that 
Federally-collected economic data is sometimes a month out of 
date and often trails privately-collected data.
    I know, I remember a number of members on the committee are 
interested in this topic, and I hope you'll let us know if and 
when and where you think there is need for improvement, along 
with suggestions. With that, Mr. Chairman, I wish you well in a 
new and very important job. Thank you for your testimony and I 
yield back the balance of my time.
    Chairman Oxley. The gentlelady yields back. The gentlelady 
from New York, Ms. Maloney?
    Mrs. Maloney. Thank you, thank you. Thank you, Mr. Chairman 
and welcome. We on this committee are particularly honored that 
your first appearance before Congress is before this particular 
committee, and I might add that the President's choice to fill 
the shoes of Chairman Greenspan has been greeted with 
consistent bipartisan applause, and this is a true testament to 
your reputation as an economist, scholar, and independent 
thinker.
    First of all, I'd like to be associated with the comments 
of our ranking member, Frank. We are deeply concerned about the 
growing gap between the haves and have-nots. That is a very 
troubling trend for our country and I am particularly concerned 
that the American worker, after inflation in the past 2 years, 
has taken less home in their paychecks. Again, a very troubling 
trend.
    In your job on the President's Council of Economic 
Advisors, you were thoroughly immersed in issues of employment, 
jobs, wages, debts, and deficits, and I hope and expect that 
those issues will continue to influence your decisions now that 
you are on the monetary policy side.
    In my opinion, this Administration has made your new job 
much more difficult through its reckless spending and lack of 
fiscal discipline. On Friday, we learned that once again, this 
Administration has set a new record; only it's the wrong kind 
of record, a record for debts now over eight trillion dollars 
in deficits.
    The trade deficit for 2005 was the highest ever for the 
fourth year in a row, at over $700 billion. The trade deficit 
for this year is 18 percent higher than the year before, even 
though the Administration has been saying all year that it 
plans to do something to address this imbalance, which our 
allies have repeatedly said and warned us is unsustainable.
    Fully one-third of that debt is our trade deficit with 
China, which is exploding, and I don't think it's any secret 
that if China and Japan were to slow its purchases of U.S. 
debt, the Fed would be forced to tighten monetary policy beyond 
what the domestic market would be comfortable with.
    In fact, the widely discussed concern that Asian banks will 
slow their investment in U.S. debt because they seek 
diversification is now a reality. We are now actually seeing 
that happen. According to the Fed, in the last several, months 
Asian foreign central banks have shifted their purchases from 
Treasury debt to Government-sponsored entities and mortgage-
backed bonds to such an extent that this new type of debt is 
now about a third of the U.S. debt held by foreign central 
banks.
    Chairman Greenspan strongly believed that our current 
account deficit is caused by the fact that America is saving 
too little and that our huge Federal budget deficit is Exhibit 
No. 1.
    Recently, the Administration has switched to saying that 
the real problem is that China is saving too much. I don't 
think that Americans particularly care about this sort of blame 
game, but are more concerned about the actual impact of our 
huge Federal budget deficit and our record trade deficit on 
monetary policy.
    American workers have not yet seen the benefits of this 
economic recovery. They haven't seen it in their paychecks. An 
international financial crisis could lead to more inflation and 
higher interest rates that could choke off the recovery before 
American workers have a chance to share in it.
    I hope that you will address these concerns today. We wish 
you well in your new position and congratulate you on your 
appointment.
    Chairman Oxley. The gentlelady yields back, and Mr. 
Chairman, again welcome to the Financial Services Committee, 
and you may begin your testimony. Thank you.
    Mr. Bernanke. Thank you, Mr. Chairman. I've submitted 
written testimony. I'd like to excerpt from that testimony.
    Chairman Oxley. Without objection.

 STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Mr. Chairman and members of the committee, I 
am pleased to be here today to present the Federal Reserve's 
monetary policy report to the Congress. I look forward to 
working closely with the members of this committee on issues of 
monetary policy, as well as on matters regarding the other 
responsibilities with which the Congress has charged the 
Federal Reserve system.
    The U.S. economy performed impressively in 2005. Real gross 
domestic product increased a bit more than three percent, 
building on a sustained expansion that gained traction in the 
middle of 2003.
    Payroll employment rose two million in 2005, and the 
unemployment rate fell below five percent. Productivity 
continued to advance briskly.
    The economy achieved these gains despite some significant 
obstacles. Energy prices rose substantially yet again, in 
response to increasing global demand, hurricane-related 
disruptions to production, and concerns about the adequacy and 
reliability of supply.
    The gulf coast region suffered through severe hurricanes 
that inflicted a terrible loss of life, destroyed homes, 
personal property, businesses and infrastructure on a massive 
scale, and displaced more than a million people.
    The storms also damaged facilities and disrupted production 
in many industries, with substantial effects on the energy and 
petrochemical sectors and on the region's ports. Full recovery 
in the affected areas is likely to be slow.
    The hurricanes left an imprint on aggregate economic 
activity as well, seen in part in the marked deceleration of 
real GDP in the fourth quarter. However, the most recent 
evidence, including indicators of production, the flow of new 
orders to businesses, weekly data on initial claims for 
unemployment insurance, and the payroll employment and retail 
sales figures for January suggests that the economic expansion 
remains on track.
    Inflation pressures increased in 2005. Steeply-rising 
energy prices pushed up overall inflation, raised business 
costs, and squeezed household budgets. Nevertheless, the 
increase in prices for personal consumption expenditures, 
excluding food and energy, at just below two percent, remained 
moderate, and longer-term inflation expectations appeared to 
have been contained.
    With the economy expanding at a solid pace, resource 
utilization rising, cost pressures increasing, and short-term 
interest rates still relatively low, the Federal Open Market 
Committee over the course of 2005 continued the process of 
removing monetary policy accommodation, raising the Federal 
funds rate two percentage points in eight increments of 25 
basis points each.
    At its meeting on January 31st of this year, the FOMC 
raised the Federal funds rate another one quarter percentage 
point, bringing its level to four and a half percent.
    At that meeting, monetary policymakers also discussed the 
economic outlook for the next 2 years. The central tendency of 
the forecasts of members of the Board of Governors and the 
presidents of Federal Reserve Banks is for real GDP to increase 
about three and a half percent in 2006 and three percent to 
three and a half percent in 2007.
    The civilian unemployment rate is expected to finish both 
2006 and 2007 at a level of between four and three quarters 
percent and five percent.
    Inflation, as measured by the price index for personal 
consumption expenditures excluding food and energy, is 
predicted to be about two percent this year and one and three 
quarters percent to two percent next year.
    While considerable uncertainty surrounds any economic 
forecast extending nearly 2 years, I am comfortable with these 
projections.
    In the announcement following the January 31st meeting, the 
Federal Reserve pointed to risks that could add to inflation 
pressures.
    Among those risks is the possibility that to an extent 
greater than we now anticipate, higher energy prices may pass 
through into the prices of non-energy goods and services or 
have a persistent effect on inflation expectations.
    Another factor bearing on the inflation outlook is that the 
economy now appears to be operating at a relatively high level 
of resource utilization. Gauging the economy's sustainable 
potential is difficult, and the Federal Reserve will keep a 
close eye on all of the relevant evidence and be flexible in 
making those judgments.
    Nevertheless, the risk exists that with aggregate demand 
exhibiting considerable momentum, output could overshoot its 
sustainable path, leading ultimately, in the absence of 
countervailing monetary policy action, to further upward 
pressure on inflation.
    In these circumstances, the FOMC judged that some further 
firming of monetary policy may be necessary, an assessment with 
which I concur.
    Not only the risks to the economy concern inflation. For 
example, a number of indicators point to a slowing in the 
housing market. Some cooling of the housing market is to be 
expected and would not be inconsistent with continued solid 
growth of overall economic activity.
    However, given the substantial gains in house prices and 
the high levels of home construction activity over the past 
several years, prices and construction could decelerate more 
rapidly than currently seems likely.
    Slower growth in home equity in turn might lead households 
to boost their saving and trim their spending relative to 
current income by more than is now anticipated.
    The possibility of significant further increases in energy 
prices represents an additional risk to the economy. Besides 
affecting inflation, such increases might also hurt consumer 
confidence and thereby reduce spending on non-energy goods and 
services.
    Although the outlook contains significant uncertainties, it 
is clear that substantial progress has been made in removing 
monetary policy accommodation. As a consequence, in coming 
quarters, the FOMC will have to make ongoing provisional 
judgments about the risks to both inflation and growth, and 
monetary policy actions will be increasingly dependent on 
incoming data.
    As I noted, core inflation has been moderate, despite sharp 
increases in energy prices. A key factor in this regard has 
been confidence on the part of the public and investors in the 
prospects for price stability.
    Maintaining expectations of low and stable inflation is an 
essential element in the Federal Reserve's effort to promote 
price stability. Thus far, the news has been good.
    Measures of longer-term inflation expectations have 
responded only a little to the larger fluctuations in energy 
prices that we have experienced, and for the most part they 
were low and stable last year.
    Inflation prospects are important, not just because price 
stability is in itself desirable and part of the Federal 
Reserve's mandate from the Congress, but also because price 
stability is essential for strong and stable growth of output 
and employment.
    Stable prices promote long-term economic growth by allowing 
households and firms to make economic decisions and undertake 
productive activities with fewer concerns about large or 
unanticipated changes in the price level and their attendant 
financial consequences.
    Experience shows that low and stable inflation and 
inflation expectations are also associated with greater short-
term stability of output and employment, perhaps in part 
because they give the central bank greater latitude to counter 
transitory disturbances to the economy.
    Similarly, the attainment of the statutory goal of moderate 
long-term interest rates requires price stability because only 
then are the inflation premiums that investors demand for 
holding long-term instruments kept to a minimum.
    In sum, achieving price stability is not only important in 
itself; it is also central to attaining the Federal Reserve's 
other mandated objectives of maximum sustainable employment and 
moderate long-term interest rates.
    As always, however, translating the Federal Reserve's 
general economic objectives into operational decisions about 
the stance of monetary policy poses many challenges.
    Over the past few decades, policymakers have learned that 
no single economic or financial indicator, or even a small set 
of such indicators, can provide reliable guidance for the 
setting of monetary policy.
    Rather, the Federal Reserve, together with all modern 
central banks, has found that the successful conduct of 
monetary policy requires painstaking examination of a broad 
range of economic and financial data, careful consideration of 
the implications of those data for the likely path of the 
economy and inflation, and prudent judgment regarding the 
effects of alternative courses of policy action on prospects 
for achieving our macroeconomic objectives.
    In that process, economic models can provide valuable 
guidance to policymakers, and over the years, substantial 
progress has been made in developing formal models and 
forecasting techniques.
    But any model is by necessity a simplification of the real 
world, and sufficient data are seldom available to measure even 
the basic relationships with precision.
    Monetary policymakers must therefore strike a difficult 
balance, conducting rigorous analysis informed by sound, 
economic theory and empirical methods, while keeping an open 
mind about the many factors, including myriad global influences 
at play in a dynamic, modern economy like that of the United 
States.
    Amid significant uncertainty, we must formulate a view of 
the most likely course of the economy under a given policy 
approach, while giving due weight to the potential risks and 
associated costs to the economy should those judgments turn out 
to be wrong.
    During the nearly 3 years that I previously spent as a 
member of the Board of Governors and of the Federal Open Market 
Committee, the approach to policy that I just outlined was 
standard operating procedure under the highly successful 
leadership of Chairman Greenspan.
    As I indicated to the Congress during my confirmation 
hearing, my intention is to maintain continuity with this and 
the other practices of the Federal Reserve in the Greenspan 
era. I believe that with this approach, the Federal Reserve 
will continue to contribute to the sound performance of the 
U.S. economy in the years to come. Thank you, and I'd be happy 
to take your questions.
    [The prepared statement of Hon. Ben. S. Bernanke can be 
found on page 65 in the appendix.:]
    Chairman Oxley. Thank you, Mr. Chairman. Let me begin by 
saying there's been a lot written and a lot discussed about, 
and as a matter of fact your predecessor described it as a 
conundrum, the whole issue of rate inversion, the conundrum 
being that when you raise the short-term rates, long-term rates 
don't respond accordingly.
    I think it was interesting that Chairman Greenspan, at 
least on more than one occasion, I think, described that as a 
conundrum. Is it a conundrum or is it a major problem going 
forward with the economy, or is the economy strong enough to do 
that?
    I know you addressed that in your prepared testimony. I 
wonder if you could expand on that issue.
    Mr. Bernanke. Mr. Chairman, the conundrum is a very 
interesting question. The issue is that, unusually, long-term 
interest rates are lower than short-term interest rates, so we 
have an inverted yield curve.
    There are at least two broad sets of reasons for why that's 
occurring.
    The first is that term premiums, the premiums that 
investors charge for holding long-term debt, have fallen in 
recent years, reflecting a variety of influences including, I 
believe, greater confidence that inflation will be kept low, 
greater stability in the economy more generally, and additional 
influences such as demand for duration, the idea that pension 
funds, for example, are looking for longer-term assets to hold.
    So the term premium has come down. Therefore, the normal 
term structure is going to be flatter now than it was in the 
past.
    The second factor, and one that I've talked about myself in 
some speeches, is that currently there are a lot of savings in 
the global capital market looking for returns.
    That appears to have driven down, to some extent, the real 
return to capital around the world. That factor also has 
contributed to lowering long-term real interest rates. And, as 
we can see, it's a global phenomenon, and we're seeing 
inversion. We're seeing low long-term real interest rates in 
other countries.
    The question arises is whether or not this inversion 
portends a slowdown in the real economy. Historically, there 
has been some association between inversion of the yield curve 
and subsequent slowing of the economy.
    However, I think at this point in time that the inverted 
yield curve is not signaling a slowdown. First, the historical 
relationship has certainly weakened in the last 15 years or so.
    But more importantly, in the past, when the inverted yield 
curve presaged a slowdown in the economy, it was usually in a 
situation where both long-term and short-term interest rates 
were actually quite high in real terms, suggesting a good bit 
of drag on the economy.
    Currently, the short term real interest rate is close to 
its average level, and the long-term real interest rate is 
actually relatively low compared to historical norms.
    So with real interest rates not creating a drag on economic 
activity, I don't anticipate that the term structure is a 
signal of oncoming slowing of the economy.
    Chairman Oxley. Well, what effect, if any, will the return 
of the 30-year bond have on the whole process, in your opinion?
    Mr. Bernanke. Well, the return of the 30-year bond just a 
few days ago was very welcomed by the investor community 
because, in part, as I mentioned, there is a demand for long-
term assets, for pensions and other reasons.
    The arrival of the bond meant that the inversion extends 
even further out into the future, but I don't think it changes 
the basic forces. It just suggests that investors are looking 
for long-term paying assets and that they're willing to accept 
a relatively low real yield in order to get long-term safe 
assets.
    Chairman Oxley. In retrospect, do you think it may have 
been a mistake to suspend the 30-year bond?
    Mr. Bernanke. The suspension of the bond occurred at a time 
when there predictions that the U.S. Government debt was going 
to be declining rather than rising and, therefore, 
considerations of maintaining liquid markets at different 
horizons suggested the idea of reducing the number of issuances 
that the Treasury made.
    Now with the U.S. Government debt rising again, I think it 
actually makes good sense for the Treasury to afford itself of 
the low real interest rates that are available on these long-
term bonds, and I think the Treasury is well-served, the 
American public is well-served, and the investor community is 
well-served by the reissuance of these bonds.
    Chairman Oxley. The initial issuance was relatively small 
in overall terms. Is it contemplated that those sales will go 
on periodically?
    Mr. Bernanke. Those decisions are made by the Treasury, and 
I know they're concerned about making sure that the market is 
liquid, and that means they would want to issue sufficient 
bonds that the secondary market will be deep enough so that 
they'll be sufficient trading and liquidity in that market.
    So my expectation is that they'll continue to issue those 
securities on a regular basis.
    Chairman Oxley. Thank you. My time is expired. The 
gentleman from Massachusetts.
    Mr. Frank. Thank you, Mr. Chairman. I'll start my time and 
give credit where credit is due. As this colloquy about the 30-
year bond has occurred, when President Bush came to office, 
there was some concern, and Mr. Greenspan had it, about how the 
Federal Government would deal with this problem with surpluses 
and a disappearing debt, and the Bush Administration certainly 
solved that problem.
    No one has to worry any more, thanks to our recent fiscal 
policy about the possibility of surplus and not enough debt. So 
I did want to acknowledge that accomplishment.
    On the question that I began with, Mr. Bernanke, I wonder, 
Mr. Greenspan did on several occasions lament the increasing 
inequality that was happening in America. Again, I want to 
stress inequality is a good thing in a capitalist economy. The 
economy doesn't work without it.
    But it can become excessive in ways that I think don't, are 
not necessarily for efficiency and can cause other kinds of 
problems.
    Do you feel his concern about inequality, both in the 
abstract and in terms of how we've been in the last few years?
    Mr. Bernanke. I agree with you, Congressman, that rising 
inequality is a concern in the American economy. It's important 
for a society that everyone feels that they have a chance to 
participate in the opportunities that the economy is creating.
    In a situation where incomes are becoming less equal, there 
will be less support, for example, for free trade, for keeping 
the markets flexible. So the strength of the economy itself 
again requires a certain amount of belief on the part of the 
broad public that they are participants and beneficiaries of 
the strength of the economy.
    Now there's a deep question as to why there have been some 
indications of rising inequality. There are a number of 
factors. I don't want to take all your time. I guess I would 
submit that the most important factor is a long-term trend, 
which has been going on for a quarter of a century or more, 
which is the rising school premium, the increase return to 
education.
    We've seen since about 1980 that people with a high school 
education or lower have seen essentially no increases in their 
real wages, whereas people with a college education or greater 
have seen a significant increase.
    Mr. Barney. Well, and I think that's true. One thing, and 
then I'll just give you a chance to respond. Committed to the 
institution which you now have, not even in indirect quotes, 
but in the financial pages, the saying is attributed to your 
institution that one of the things that troubles you is the 
possibility that wages might rise, and we see that the Fed is 
worried that wages will rise, and this will of course cause 
terrible things.
    We are, of course, delirious when profits rise, but the 
potential that wages might rise causes concern. Are you worried 
that wages might rise, Mr. Chairman?
    Mr. Bernanke. Congressman, there's a bit of a 
misunderstanding there. What would not be desirable would be 
for nominal wages to rise and for nominal prices to rise even 
more, leaving workers worse off than when they started.
    What is desirable is for real wages, wages measured in 
terms of purchasing power, to rise. I believe that will happen 
as the market strengthens, and I have certainly no objection 
to--
    Mr. Frank. Well, I'm glad to hear you say that because it 
is the matter. I am quoting some of the financial pages, and 
that difference you mentioned isn't there.
    In fact, as we've noted, productivity has been outstripping 
wage increases. Real wages have in fact been stagnant, and if 
you throw in what's happening in health and elsewhere, there 
are other problems.
    Now one other thing I just would note, and I know there's a 
debate about the cause of this, but it is true that 
unemployment has dropped, but a significant factor in the drop 
of unemployment has not been growth in jobs above trend--at 
least that's a part of it--but a drop in the participation 
rate.
    You've noted this; the Council of Economics has noted this; 
your report. The participation rate of people in the work 
force. In January 2006, it was 66 percent, well below the high 
of 67 and a quarter percent reached in early 2000.
    Now there's a debate about what extent it's demographic. 
The Council of Economic Advisors does say on page 171, it's at 
least partly cyclical. But in any case, we ought to be clear 
that the drop in unemployment has been greatly helped not by 
job growth above trend, but by demographics.
    Here's a question. I agree with you that the skill premium 
has been increasing. Natural trends in the economy, 
globalization, technological change, productivity; those I 
agree are exacerbating inequality.
    The problem is that I believe public policy has made it 
worse rather than better. It might be the global public policy 
in part ought to be to try to mitigate the inequality, not the 
point where you destroy incentives, but at least mitigate it.
    Frankly, I think that is the difference between the 
approach in the previous Administration and the current one, 
through tax policy. You know, we read today there's a new 
assault being launched by very conservative elements on labor 
unions.
    We see a major funded effort to try and undercut labor 
unions. We see, in my judgment, a budget which cuts back on 
virtually all of the Federal programs that would go to 
diminishing the inequality. So the question is--I know I'm out 
of time, and I'd be glad to take this in writing later--given 
that we agree that inequality is a problem, and I agree that it 
is trends in the economy that cause it.
    But my problem is that public policy has gone from trying 
to mitigate that, it seems to me, to exacerbating it, maybe out 
of the motive that this will promote incentives that lead to 
growth.
    So the question is what do we do about it? What Federal 
policies would make sense, if we all agree that inequality is 
increasing beyond what is healthy? What should we do about it?
    Chairman Oxley. The gentleman's time has expired. The 
Chairman may respond.
    Mr. Bernanke. Well, the discussion we were having a moment 
ago that turns to skills, suggests that one very positive thing 
would be to continue to strengthen education and to continue to 
strength job training and skills acquisition through lifelong 
learning. I think that's a very important dimension of public 
policy.
    Chairman Oxley. The gentlelady from Illinois.
    Ms. Biggert. Thank you, Mr. Chairman. Mr. Chairman, could 
you discuss the role that you see R&D playing in the future 
robustness of our economy, and what sort of incentives you 
believe are necessary in this area?
    I know that the President has talked about research and 
development and how important that is to our country.
    Mr. Bernanke. Congresswoman, thank you. I believe that 
research and development are essential to our growth in a 
technological era. I think there are considerable grounds for 
optimism.
    The United States remains a technological leader. We retain 
a very substantial share of the world's patents and 
publications and innovations. That's a position we want to 
keep.
    How to promote that? First on the public side, I think most 
economists would agree that support by the Government of basic 
research in a variety of areas is productive. Private companies 
can't necessarily capture the benefits of basic research and, 
therefore, Government support in that area is beneficial.
    We also have in this country substantial private sector 
research and research within universities. I don't want to get 
into any details, really, on tax policy, but I simply note that 
this Congress will consider extension of the research and 
development tax credit, which will be one mechanism to support 
R&D at the private sector level.
    So I agree. This is a very high priority for the U.S. 
economy, and it's needed to keep us technologically at the 
frontier.
    Ms. Biggert. Thank you.
    We have had a relatively warm winter, a little bit of snow 
lately in various parts of this country. But there hasn't been 
any--I don't think any noticeable slowing in the steady rise in 
the price of energy over the last year or more. But however, 
the economy is going strong. Why has the economy been able to 
shrug off such a significant rise in the cost of energy?
    Mr. Bernanke. That's an excellent question. And the Federal 
Reserve has given a great deal of thought to that question. 
Part of the answer is that the U.S. economy is less dependent 
on energy, on oil, than it was 30 years ago. The increase in 
prices we saw in the '70s did lead to increased efficiency and, 
therefore, less sensitivity to changes in oil prices.
    Secondly, the increase in energy prices, although 
substantial, with the exception of the hurricane period, has 
been generally less rapid than occurred in some episodes during 
the 1970s.
    Third, the economy is very resilient. It showed remarkable 
strength after the hurricanes. It showed remarkable strength 
after 9/11. So our economy does have a lot of staying power, a 
lot of ability to deal with shocks.
    But the final point that I'd like to make, and it relates 
to some comments I made in my testimony, is that a big 
difference between the 1970s and today is that inflation 
expectations are low and stable. The public has a great deal of 
confidence that the Federal Reserve will keep inflation low and 
stable. In the 1970s, that confidence did not exist, and when 
oil prices rose, wages and prices began to spiral upward. The 
Federal Reserve had to raise interest rates quite 
substantially, slowing the economy, in order to keep the 
inflation rate under control.
    Today we see oil prices going up, but we see very little 
response in wages and prices. We see overall inflation 
relatively stable. We don't have to have the same aggressive 
monetary policy response we had in the '70s, and that's a 
direct benefit of the improvement in inflation expectations 
that we've gotten in the last 30, 35 years.
    Mrs. Biggert. Do you have a crystal ball or a view of what 
can be done to move energy prices lower?
    Mr. Bernanke. No. I wish I had such a crystal ball. We're 
in a difficult period because, for the foreseeable future, we 
are operating close to the margins of available global supply 
of oil and natural gas. And as a result, prices are likely to 
stay high, and the risk exists, if there are significant 
disruptions of supply, that we'll get additional spikes or 
movements in energy prices.
    Now in the longer term, energy prices at the current level 
should be sufficient to bring forth a number of alternative 
sources of supply as well as induce significant conservation on 
the part of consumers and firms. So I'm actually fairly 
optimistic about 10, 15, 20 years down the road because these 
high prices will allow the economy to adjust.
    But over the next 5 or 10 years, we are in the zone of 
vulnerability without available alternatives to the extent we 
would like and with a relatively small margin of error in terms 
of global supplies.
    Mrs. Biggert. Thank you very much. I yield back, Mr. 
Chairman.
    Chairman Oxley. The gentlelady yields back. The gentlelady 
from New York, Ms. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman. I'd like to follow 
up on Ranking Member Frank's question. You mentioned that 
education was very important, but the last time we focused on 
educating large segments of our unemployed population, those 
jobs ended up being outsourced.
    And what I hear from many of my constituents, particularly 
women that are middle-aged and possibly older is, "What jobs 
are we going to educate them for?" We live in a changing 
economy, but what policies, including the Federal Reserve's 
policies, have played a role in labor's share of economic gains 
dropping to an unusually low level?
    Mr. Bernanke. Congresswoman, with respect to the Federal 
Reserve's policies, of course our mandate is maximum 
sustainable employment. We will strive for that mandate by 
maintaining a level of employment which is not only high but is 
also sustainable. In that way, we make it possible for better 
jobs to be created because we don't have seasonal and 
fluctuating jobs as we would in a boom/bust kind of cycle. So 
that's the contribution that the Federal Reserve will make.
    With respect to the relationship between productivity and 
real wages, I have some confidence that there will be some 
catch-up. During the late 1990s in the previous episode when 
productivity surged ahead, there was a period where labor's 
share declined below its long-term average and real wages fell 
somewhat behind productivity gains.
    After a couple of years, as the labor market strengthened, 
we saw that those gains translated into overall real wages. And 
I believe that as the market continues to strengthen now that 
we'll see real wages rising as well. That's a statement about 
overall real wages. It doesn't necessarily address the entire 
distribution of wages, and we've already discussed some of 
those issues.
    With respect to your question about education, I think an 
important point to make is that education is much more than K-
12 and university. It involves continuing education. Community 
colleges play an important role. So does job training, on-the-
job training. I think we need to promote those kinds of 
activities, and the Government has some role in assisting on 
that.
    Mrs. Maloney. Many of us are fortunate to represent highly 
educated people that have lost their jobs in a changing 
economy, and particularly in the economy in my state, many of 
our jobs have been outsourced overseas, and there is this 
troubling trend in distribution of income.
    And what policies or change in public policy, including the 
Fed or other policies, may be needed to move the distribution 
of income back to a more normal and healthier distribution of 
income in our country?
    Mr. Bernanke. Well, Congresswoman, I lack a lot of good 
answers, as many of us do. I think there really is only one 
fundamental solution, and that is increasing skills. Now there 
are different ways to increase skills. There's formal 
education.
    Mrs. Maloney. Mr. Chairman, I'm with highly skilled 
workers, and they tell me they can't find a job and they've 
lost their job.
    But I would like to go back to the point that Mr. Oxley 
raised over the great mystery in rates over the past year or so 
and that the Fed tightening has not yet caused long-term 
interest rates to budge. And I'd like to ask you to elaborate. 
And does this disconnect between Fed actions and long-term 
interest rates have implications for the Fed's ability to 
control inflation?
    Mr. Bernanke. Congresswoman, if you break up the term 
structure into short tranches, or term interest rates across 
the length of the term structure, you'll see that what's 
happening is that the far out short-term rates, the ones at far 
maturities, are the ones that have been declining. And this is 
the phenomena we discussed before, the decline in term premiums 
and the expectation of low returns to investment.
    So that's the reason for the phenomenon. I don't think that 
it necessarily affects our ability to affect inflation. Short-
term interest rates, first of all, directly affect a good bit 
of economic activity. And secondly, there's also going to be 
impact on longer-term rates that will feed through into the 
rest of the economy.
    Our strategy is not to pick a magic rate or to pick a magic 
long-term rate. Rather, we consider alternative paths of future 
policy rates, and under each alternative path, we try to make a 
forecast about where the economy is going to go. Based on those 
forecasts, we try to judge what path will give us the best 
outcomes in terms of our mandated objectives.
    Mrs. Maloney. I can see you were a former teacher. You're 
very clear in your responses.
    Mr. Bernanke. Thank you.
    Mrs. Maloney. And finally, this large debt, deficit, and 
trade deficit--what is the implication for growth for our 
economy, and isn't this structure bad for economic growth in 
the long term?
    Mr. Bernanke. Are you referring to the fiscal deficit or to 
the current account?
    Mrs. Maloney. Current account.
    Mr. Bernanke. Current account deficit. The current account 
deficit, I should first say, I was asked about it earlier, is a 
very complicated phenomenon. There are many factors underlying 
it. And perhaps I'll have an opportunity to talk more about 
those factors.
    The immediate implication, though, is that the U.S. economy 
is consuming more than it's producing, and the difference is 
being made up by imports from abroad, which in turn are being 
financed by borrowing from abroad.
    So the concern is that over a period of time, we will be 
building up a foreign debt to other countries which will lower 
national wealth and lower our ability to consume in the future. 
So it is a concern.
    I do believe that the current account deficit can and 
should come down gradually over a period of time. I think it's 
neither possible nor desirable to have it shift radically in a 
short period of time.
    But over a longer period of time, a combination of higher 
national savings in the United States, increased demand by our 
trading partners, and greater exchange rate flexibility, taken 
together, will allow the current account deficit to come down 
in a way that I hope would not be disruptive to our economy.
    Chairman Oxley. The gentlelady's time has expired. The 
gentleman from Iowa, Mr. Leach.
    Mr. Leach. Thank you, Mr. Chairman. Mr. Chairman, as you 
know, there are odd financial entities on the financial 
landscape called industrial loan companies, which have powers 
of banks in many different ways. Because they allow the merging 
of commerce and banking, a number of well known companies have 
established ILCs or are seeking to establish them. And then, 
because of their regulatory arbitrage advantages, a number of 
financial companies have also established ILCs.
    In his last communication to the Congress, the former 
Chairman of the Fed, Mr. Greenspan, endorsed a bill called H.R. 
3882 that would subject industrial loan companies to the same 
laws and principles that apply to financial holding companies.
    In this hearing as your first appearance before the 
Congress, I'm wondering if you would care to present your views 
on the industrial loan company issue.
    Mr. Bernanke. Yes, Congressman. If I understand your bill 
correctly, and you should correct me if I'm mistaken, the bill 
would require any firm acquiring an industrial loan company to 
take financial holding company status, which in turn could 
create restrictions on its activities, require consolidated 
supervision, and indeed would also require that the firm hold 
its subsidiaries to a somewhat higher standard that might 
otherwise be the case.
    Is my understanding correct?
    Mr. Leach. That's correct. It simply puts ILCs under the 
Bank Holding Company Act, which has that effect.
    Mr. Bernanke. Congressman, as you know, the Federal Reserve 
has had concerns about industrial loan companies and the level 
playing field and the separation of banking and commence. In my 
view, the bill that you're describing would solve the problem 
and would relieve our anxieties considerably about this 
particular type of organization.
    Mr. Leach. Thank you, sir.
    Chairman Oxley. The gentleman yields back? Mr. Kanjorski.
    Mr. Kanjorski. Mr. Chairman, welcome to your new role. 
Probably this will be the most entertaining session you'll ever 
have with this committee. So enjoy.
    Ms. Maloney brought up the question of the deficit, and 
your predecessor used to always indicate that deficits matter a 
great deal, but it never seemed that the leadership came from 
the Federal Reserve as to facing the reality of what causes the 
deficit and what limited policies both the Federal Reserve and 
the Congress has with fiscal policy to resolve the problem.
    But two or three things have come to my attention in the 
last several months that are to me very frightening. One, the 
deficit is rising faster than productivity, or what I should 
say is growth of the American economy. If you take a three 
percent growth of the American economy at roughly a $12 
trillion size, that's about $360 billion a year, and our 
deficits are far outstripping that.
    And, too, as a result of that and the policies over the 
last 5 years, the debt owed by the United States to foreign 
entities, it was from 1789 to 2000 it took us that period of 
time to have a combined borrowing of one trillion, .01 
trillion.
    Now since 2000 till today under this Administration, we've 
borrowed 1.05 trillion, which means it exceeds that entire 200-
plus year history, more under this Administration than all 42 
Presidencies prior to it. And with no end in sight, it seems to 
me, although we keep hearing that there's a plan of the 
Administration to reduce the deficit by half at a year beyond 
this Administration's term in office, which is always 
interesting. I think the Congress has a tendency to promise 
action for future Congresses but not to take action in this 
Congress.
    It seems to me we're at a point now that the American 
people really don't understand deficits, the problems attendant 
thereto, and the potential long-term problems, particularly the 
potential since most of this debt is owed to Japan, China, and 
the United Kingdom, how that will affect our foreign policy in 
years to come.
    At what point is the chairman of China going to be able to 
call the President of the United States when he disagrees with 
a policy, foreign policy of the United States, and not threaten 
war, not threaten retaliation of a military way, but just say, 
Mr. President, you won't be able to pay your Social Security 
checks next month if you don't change your policy? I think 
that's rather dire. That actually could occur today. If we 
weren't able to fund this deficit with foreign money, we could 
not meet our Social Security obligations in the next month.
    Where do you see your role as a leader and an educator of 
the American people as to the significance of this and how that 
policy should change or shouldn't it change?
    Mr. Bernanke. Congressman, I think that in my role as 
chairman of the Federal Reserve, it is appropriate for me to 
talk about long-term Government spending, taxes, and deficits. 
I think that bears on economic stability and financial 
stability, and I will speak out on those issues.
    I am concerned about the prospective path of deficits. I 
believe that it does reduce national savings, and, therefore, 
imperils to some extent the future prosperity of our country, 
and increases the burden that will be faced by our children and 
grandchildren.
    Of particular concern to me is that in the very near term, 
the demographic changes in our economy are going to lead to 
increasing promises, increasing entitlement payments associated 
with the large programs of Social Security, Medicare, and the 
Federal contribution to Medicaid. Indeed, according to the best 
estimates we have, the share of GDP going to those three 
programs will go from about 8 percent today to about 16 percent 
when my children, who are now in college, are contemplating 
retirement.
    If that were in fact to happen, given that total revenues 
are now about 18 percent of GDP, that would suggest that either 
we would have to eliminate all other Government spending, raise 
taxes considerably, or else take some action to bring 
entitlement spending under control. I'm not saying which of 
these things. I'm just pointing out that the implications of 
these obligations are quite draconian in the long run.
    We need to be addressing those long-term issues soon. We 
need to give people the time to prepare for whatever changes 
might occur in entitlement programs. And, therefore, I think 
that we do need to think about fiscal deficits and their 
implications for our national saving and our long-run ability 
to meet our obligations to our citizens.
    Chairman Oxley. The gentleman's time has expired. The 
gentleman from Alabama, Mr. Bachus.
    Mr. Bachus. Thank you. Chairman Bernanke, you're known, 
widely known, as a proponent of greater transparency at the 
Fed. Now that you're Chairman, would you give us some idea of 
what specifics you're considering to bring greater transparency 
to the Fed? And in answering that question, at some point, 
could you reach a point where too much transparency and too 
much openness ties your hands in terms of policymaking? And if 
so, what principles will you use in determining what a proper 
balance would be?
    Mr. Bernanke. I do believe that transparency is very 
important for the Federal Reserve for a variety of reasons, 
including democratic accountability. I also believe that a more 
transparent Fed is going to be more effective because the 
public and the markets will have a better understanding of what 
the Fed is trying to do. Expectations will be better anchored, 
and I think policy will just work better if the Fed is more 
transparent.
    I don't want to give the impression that I'm coming in with 
a whole new program. Transparency has been increasing at the 
Fed over the last decade quite significantly. During the time 
that I was Governor there, we increased the informativeness of 
the statements. We moved up the release of the minutes, and 
generally in speeches and testimonies, I think there was a 
definite movement towards trying to be more open about the 
Federal Reserve's strategy and approach.
    I would like to continue that direction of increased 
transparency. Obviously, I'll have to do that in concert with 
my colleagues on the Federal Open Market Committee. But one of 
the possibilities that's already been mentioned is providing 
guidance on the long-term range of inflation which is most 
consistent with our objectives of maximum sustainable 
employment and price stability.
    I will also, individually and personally as I come before 
committees or make speeches, try to be as open and forthcoming 
as I can in providing information about the Fed's strategy and 
how we see the economy.
    Now you quite correctly ask, is it possible for 
transparency to go too far. And I think it is possible. We 
certainly wouldn't want a situation where the transparency is 
such that it inhibits the discussion, that it inhibits the 
policymaking process. I would not, for example, favor TV 
cameras in the FOMC meeting because I think that would not 
allow a full and frank discussion to take place.
    So there are limits, and we have to pay attention to those 
limits. But I think broadly speaking that fresh air is good for 
the Federal Reserve, and I want to keep moving us in that 
direction.
    Mr. Bachus. Thank you. You mentioned today maximum 
sustainable employment, and I want to commend you in your 
statement today; you've spent a considerable time talking about 
energy. One thing that you said because of Hurricane Katrina, 
but I think it's also true today is we have tremendous 
restraints on our economy because of the high price of energy. 
And you go talk to plant owners, you talk to company owners, 
you talk to even union officials, and they used to complain 
about low wage subsidized foreign competition, taxes, and 
regulation, being able to get skilled, educated workforce, 
which is still--those are all still concerns. But today I hear 
time and time again the high cost of natural gas and petroleum.
    Recently the chemical industry has come out and said we're 
uncompetitive with the world. In your testimony and in former 
testimony, the Fed has suggested that the recent energy price 
increases have not been a major negative impact on the economy. 
But today I think maybe you've indicated that they may be.
    You know, China has just announced plans to build 30 
nuclear power plants. We don't even have one in the licensing 
process today. Japan has built 23 LNG terminals while we've 
built four. France has built 58 nuclear power plants. We've 
built none--or one during that time, and that was 1996 or 1997, 
Watts Bar. So going forward, are you--what is the level of your 
concern that if we don't do the things our competition is doing 
that it will affect our sustainable employment? We've lost 
150,000 jobs in forestry and paper just recently because of 
energy.
    Mr. Bernanke. Congressman, when I was responding to the 
question about the effect on the economy, I was talking about 
broad aggregates like GDP growth. You're absolutely correct 
that there are many industries that depend on natural gas, for 
example, which have suffered quite severely in the recent 
episode.
    Natural gas is unusual because, unlike oil, which is traded 
freely on a global market, natural gas is a much more regional 
market because of the difficulties in transportation. And so 
building LNG terminals is one thing that we, I think that we 
can do and we should continue to do to create a more global 
market for natural gas.
    I can only just endorse your sentiment that while I was 
optimistic that in the long run these high prices will call 
forth alternative sources of supply, the Government does have a 
role in supporting that activity.
    I mentioned just two possibilities. One is that the 
Government has been very helpful in basic research to help 
develop new designs to find new methods of conservation.
    And secondly, certainly there are many legitimate reasons 
to regulate, say, new refineries, for example, and there's 
absolutely no reason, you know, to eliminate their regulation. 
But clearly, one should try to make the regulation as clear and 
straightforward as possible so that new refineries can meet the 
appropriate standards and operate.
    So by clarifying regulations, by providing additional 
support for basic research, those are just methods that the 
Government can undertake to help with the energy situation. 
Again, I agree it's a very important issue for us in the next 
10 years or so.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Bachus. Let me make a closing comment. If I can just 
say, yeah, we need alternative energy, conservation, but even 
with all that, we're projected, with all those things, if we do 
those things, we're still going to have about 40 percent more 
need for electricity and energy 20 years from now.
    And I know Mr. Sanders knows Vermont gets about 78 percent 
of their electricity from nuclear power plants, but that's the 
only State in the Union where they are over 50-some.
    Chairman Oxley. The gentleman's time has expired. The 
gentleman from Vermont, the aforementioned Mr. Sanders.
    Mr. Sanders. Thank you, Mr. Chairman. And Chairman 
Bernanke, welcome to the Financial Services Committee and very 
best of luck on your new job.
    Mr. Bernanke, there is a great concern in this country that 
our current economic policies are not working for ordinary 
Americans. The middle class continues to shrink. Poverty is 
increasing. The gap between the rich and the poor is now wider 
than it has been in over 7 years. We have a recordbreaking 
national debt as well as a recordbreaking trade deficit. And 
the Bush Administration has the worst record of private job 
creation since Herbert Hoover.
    Meanwhile, while millions of American workers are seeing 
their real wages decline, or they're using their pensions and 
their health care, while they can't afford child care or 
college education, the wealthiest people in this country 
frankly have never had it so good.
    My own view is that the time is long overdue for the Bush 
Administration and Congress to start making fundamental changes 
in our economic policies so the Government works for everybody 
and not just the very wealthy and their lobbyists who descend 
on Capitol Hill every day. And if we don't, what we are going 
to see in my view is that for the first time in the modern 
history of America, our kids are going to have a lower standard 
of living than we do.
    Now I want to just very briefly, because time is limited, 
solicit your remarks, your thoughts on some very important 
economic questions. And my first one is the following. Since 
President Bush has been in office, more than five million 
Americans have slipped into poverty. Childhood poverty has 
increased by over 12 percent. We continue to have by far the 
highest rate of childhood poverty in the industrialized world. 
American house--average America household income has declined 
for the past 4 consecutive years. It's down by more than 
$1,600. Twenty percent of American jobs now pay less than a 
poverty level wage for a family four.
    My question is a very simple one. All over America, States 
like the State of Vermont have raised the minimum wage, which 
now at the Federal level remains $5.15 an hour and in fact has 
the lowest purchasing power that it has had in over 50 years. 
Chairman Bernanke, should the Congress raise the minimum wage 
so that every worker in America who works 40 hours a week 
escapes from poverty? Very simple question, sir.
    Mr. Bernanke. Well, I'm going to be an economist and give 
you the one hand and the other hand. On the minimum wage, it's 
actually a very controversial issue among economists. Clearly, 
if you raise the minimum wage, then those workers who retain 
their jobs will get higher income and that, therefore, it helps 
them.
    The concerns that some economists have raised about the 
minimum wage are first, is it as well targeted as it could be? 
That is, how much of the increase is going to the teenage 
children of suburban families, for example? And secondly, does 
it have an employment effect? That is, do higher wages lower 
employment of low wage workers?
    Mr. Sanders. And your response is?
    Mr. Bernanke. My response is that I think it does lower 
employment, that, however, I note that the literature is fairly 
controversial on this subject, and my colleagues from 
Princeton, Alan Kruger and David Card, have presented results 
saying that--
    Mr. Sanders. Should Congress raise--I'm sorry to be abrupt, 
but we have a limited amount of time. Should Congress raise the 
minimum wage?
    Mr. Bernanke. I'm very reluctant to comment on specific 
measures of this sort. But I will say this, that one might 
consider alternative ways of helping working class Americans, 
for example, the earned income tax credit, which delivers money 
to working families--
    Mr. Sanders. Okay. Thank you.
    Mr. Bernanke.--without necessarily the employment effect.
    Mr. Sanders. I'm sorry to be abrupt, but we have just a 
limited amount of time. This is my second question. Our country 
now has a recordbreaking $720 billion trade deficit, and our 
trade deficit with China, as you know, is over 200 billion. 
Over the past 5 years, the United States has lost almost 3 
million good paying manufacturing jobs--industry after 
industry, good paying jobs, good benefits, hemorrhaging. Many 
of the new jobs that are being created are low wage, minimal 
benefits.
    To my mind, to more and more Members of Congress and to 
more and more Americans, it appears clear that our current 
trade policies--NAFTA, permanent normal trade relations with 
China--are a disaster, leading us to a race to the bottom, 
encouraging American companies to throw workers out on the 
street, move to China, pay people 30 cents an hour.
    Question. Do you think that the time is now to rethink our 
disastrous trade policies which have lost millions of good jobs 
and run up a recordbreaking trade deficit?
    Mr. Bernanke. Well, Congressman, Ambassador Portman has 
just released a report on trade with China, and he's pointed 
out a number of areas where he's concerned about China's 
adherence to international agreements and to free and fair and 
open trade. I know he's going to pursue some of these issues 
and try to make sure that trade with China is on a fair and 
open basis.
    Mr. Sanders. Well, let me ask you this.
    Chairman Oxley. The gentleman's time has expired. The 
gentleman's time has expired.
    Mr. Sanders. Just, you know--
    Chairman Oxley. The gentleman may respond. The Chairman may 
respond.
    Mr. Sanders. Is it a fair--no, you asked--Mr. Bachus was 
able to continue just for a little bit, okay?
    Chairman Oxley. Your time has expired, Bernie.
    Mr. Sanders. So did other people who were continuing their 
questioning.
    Chairman Oxley. Make it quick.
    Mr. Sanders. Is it a level playing field when people in 
China make 30 cents an hour compared to American wages? How can 
that be a level playing field?
    Mr. Bernanke. Well, again, I think we need to have free and 
open trade. I think there are many benefits from that. And I 
don't want to move back from free trade, but I think it's 
important to make sure that the trade that takes place is done 
on a fair and open basis and that, for example, that the 
Chinese respect our intellectual property so that we receive 
the appropriate compensation for that. I favor free trade, 
however.
    Chairman Oxley. The gentleman from the first State, Mr. 
Castle.
    Mr. Castle. Thank you, Mr. Chairman. Chairman Bernanke, the 
House-passed GSE reform bill, which is H.R. 1461, you may be 
familiar with it, consolidates regulations of the three housing 
GSEs, and for the first time fully empowers a new independent 
regulator to--and I'll go through it specifically--set minimum 
and risk-based capital requirements, review and adjust 
portfolio holdings, establish credential management and 
operation standards, approve new business programs through 
public rulemaking, take prompt corrective and enforcement 
actions, put a failing enterprise into receivership, and fund 
the agency outside the Congressional appropriations process.
    I recognize that our bill does not go as far as some would 
prefer, but do think that H.R. 1461 is an improvement over 
current law? Or any other comments you have on that.
    Mr. Bernanke. I think, Congressman, that we have an 
opportunity now to address the important concerns about GSEs 
and their potential effects on financial stability.
    I understand the good intentions underlying the House bill, 
but I feel that it does not solve the problem. And, therefore, 
if we were to go with that bill, we would be missing perhaps 
the last opportunity we're going to have in many years to 
really address these problems.
    In particular, the House bill does not go as far as the 
Senate bill or as bank regulatory bills do in giving the GSE 
regulator power over capital and setting capital. Secondly, it 
is not precise in terms of when receivership would be invoked, 
leaving uncertainty in the market about exactly when that would 
happen and creating an impression of Government backing for the 
GSEs.
    And thirdly, and I think most important, the point that 
Chairman Greenspan made extensively in his numerous testimonies 
on the subject, the portfolios of the GSEs are much larger than 
can be justified in terms of their fundamental housing mission. 
And these large portfolios represent a risk to financial 
stability. And if the taxpayer were to be called upon, also to 
the FISC.
    The House bill does address portfolios, but it doesn't 
provide, in my opinion, sufficiently strong guidance to the 
regulator to mandate that the portfolios be limited to an 
amount needed to serve the true housing mission of those 
organizations.
    Mr. Castle. Thank you for a very specific answer. Let me 
change subjects for a moment, sort of building on some other 
questions that have been answered here.
    But I think we're all becoming increasingly concerned, and 
maybe it's the baby boomers' fate that we should be concerned 
about what's happening in the economy. That is, defined benefit 
pensions going out the window. The borrowing rate, particularly 
because the borrowing rate seems to be shifting from general 
borrowing to added mortgages based on the value of housing. The 
cost of medical care, the medical insurance if not the medical 
care. All the various aspects that seem to be eroding the 
assets that people are going to have as they come closer to the 
end of their lives with the exception of, say Social Security.
    Is there anything that we in Congress should be doing? I 
mean, should we be consolidating the various tax-created 
savings type plans that we have done, most of which, frankly, 
are hard to understand? There's a whole lot of them. Are there 
other things that we should be doing to somehow spur the 
savings? I mean, every economist you talk to says with both of 
their hands that we need to have additional savings in the 
United States of America, but there seems to be a creeping 
problem where people are not going to have the old standbys, 
their pensions, their savings accounts, et cetera, that they 
had in the past.
    Do you have any thoughts about anything that we can be 
doing other than using the bully pulpit to encourage people to 
save more and to be more careful?
    Mr. Bernanke. Congressman, it's a very tough problem. As I 
already indicated, one way to address saving at a national 
level is through fiscal responsibility and in reducing over a 
period of time the deficit, which adds to national saving.
    Mr. Castle. Right. But I was trying to go to the 
individual's level.
    Mr. Bernanke. At the individual level, again, I want to be 
careful not to endorse specific programs, but there are various 
ways of providing tax benefits for saving. The evidence on 
their effects is somewhat mixed. We really haven't found a 
magic bullet for increasing saving.
    There is some view among economists that more consumption-
based taxation would be helpful in that regard. That is a 
pretty broadly held view, but is one that has not been firmly 
demonstrated.
    I think financial literacy has got to play a role here. 
People need to understand, first of all, the importance of 
saving, the importance of planning, and also understand how to 
utilize the financial markets to accumulate wealth.
    You mentioned defined benefit pensions. There really is a 
problem in that we have seen companies that have promised their 
workers pensions and now essentially are reneging on those 
promises. Going forward, I know Congress is considering various 
pension reform bills. We need to make sure that when companies 
promise pensions that they fully fund those obligations and 
that they are sufficiently transparent so that workers can 
understand that their pensions will be there when they retire.
    So, again, I think there are some policies that may help 
with saving in terms of providing incentives for saving, 
allowing people to combine savings in a limited number of 
accounts and the like. But the truth is that there is still 
some controversy about how effective these incentives will be, 
and education has got to be part of the effort.
    Mr. Castle. Thank you, Mr. Chairman, and good luck to you, 
sir. I yield back.
    Chairman Oxley. The gentleman yields back. The gentlelady 
from Indiana, Ms. Carson.
    Ms. Carson. Thank you very much, Mr. Chairman, and thank 
you, Mr. Chairman, for being here today. I have a quick 
question concerning the housing market. At one point it was 
just skyrocketing and booming, and now it seems to be on the 
decline. Could you anticipate what kind of effect, impact 
that's going to have on the domestic economic growth?
    Mr. Bernanke. Yes, Congresswoman. We discuss it in our 
report. The housing market has been very strong for the past 
few years. Housing prices have been up quite a bit. Residential 
investment has been very strong.
    It seems to be the case, there are some straws in the wind, 
that housing markets are cooling a bit. Our expectation is that 
the decline in activity or the slowing in activity will be 
moderate, that house prices will probably continue to rise, but 
not at the pace that they had been rising.
    So we expect the housing market to cool, but not to change 
very sharply. If the housing market does cool more or less as 
expected, that would still be consistent with a strong economy 
in 2006 and 2007. In particular, capital investment and other 
forms of demand would take up the slack left by residential 
investment.
    Ms. Carson. Thank you very much, Mr. Chairman.
    Mr. Bernanke. Thank you.
    Chairman Oxley. The gentlelady yields back. The gentleman 
from Texas, Mr. Paul.
    Dr. Paul. Thank you, Mr. Chairman. Thank you, and welcome, 
Chairman. Mr. Chairman, I was very pleased with what you said 
about your support for transparency, and I want to ask a 
question dealing with that.
    Also, at the bottom of page 8, you said something that I 
thought was very important, where you said that the Federal 
Reserve, together with all other central bankers, has found 
that successful policy depends on painstaking examination of a 
broad range of economic and financial data, and I also think 
that's very important.
    There is a famous quote by an economist, which I'm sure 
you're familiar with, that inflation is always and everywhere a 
monetary phenomenon. And likewise, another famous economist 
from the 20th Century, and I'll paraphrase this, said that 
monetary authorities deliberately confuse the issue of 
inflation by talking only about price increases. Yet it's the 
price increases which are merely the inevitable consequence of 
inflation. This is done on purpose to distract from the real 
cause, which is the increase in the quantity of money and 
credit.
    And I notice in your report to the Congress, you do report 
M2, and it went up last year at four percent. And M3 was not 
mentioned, other than the fact that it won't be reported any 
more. M3, interestingly enough, went up twice as fast, and M3 
is going up probably more than two times as fast as the GDP.
    And this is information that I consider important and I 
know a lot of other economists consider important. And I find 
it rather interesting and ironic that one of the reasons that 
the Federal Reserve has given--of course, this was before you 
were the chairman--for this change is the fact that it costs 
money; it costs too much money.
    Now that is really something in this day and age, 
especially since the Federal Reserve creates their own money 
and their own budget and they have essentially no oversight, 
and all of a sudden it costs too much money to give us a little 
bit of information.
    So that to me is a bit ironic that this information will 
not be available to us. And my question to you is, would you 
ever reconsider this policy of denying this information to the 
Congress just so that we have another tool to analyze what's 
going on with monetary policy? It seems like with your support 
for transparency, this should be something that you would 
heartily support.
    Mr. Bernanke. Congressman, first, you're absolutely right. 
We do look at a wide variety of indicators, and money 
aggregates are among those indicators. In particular, M2 has 
proven to have some forecasting value in the past, and I think 
the slowdown this year is consistent with the removal of 
accommodation that's been going on.
    In regard to your references to M3, a still broader measure 
of money, we have done, and I'm now speaking about the Federal 
Reserve before my arrival, but we have done periodic analyses 
of the various data series that we collect to see how useful 
they are. And our research department's conclusion was that M3 
was not being used by the academic community, nor were we 
finding it very useful ourselves in our internal deliberations.
    Now it's not just a question of our own cost; although, of 
course, we do want to be fiscally responsible on our own 
budget, but it's also I think important for us to recognize the 
burden that's placed on banks that have to report this 
information.
    And so when we can reduce that burden, we would like to do 
so. And that was one of the considerations in the decision that 
was made about M3.
    Would we reconsider it? If there were evidence that this 
was an informative series and that it was useful to the public 
and to the Federal Reserve in forecasting the economy, 
naturally we would look at it again. There's nothing dogmatic 
going on here.
    Dr. Paul. If the Congress expressed an interest in 
receiving this information, would you take that into 
consideration?
    Mr. Bernanke. If there was broad interest in the Congress 
in receiving this information, we would look at it. But, again, 
Congressman, remember, it's a burden on the reporting banks to 
provide the information, and we are trying to reduce that 
burden as much as we can.
    Dr. Paul. But, of course, this has been available to the 
financial community for a lot of years, and for some people 
it's very important to measure what you're doing. If the money 
supply is important, which a lot of people believe it is, and 
it causes the inflation, this to me seems like we're taking 
information about the money supply and literally hiding it from 
the people.
    And I yield back.
    Chairman Oxley. The gentleman's time has expired. The 
gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you. Chairman Bernanke, I'm the only 
member of this committee to actively work to thwart your 
appointment. Nothing personal. I simply authored legislation to 
extend your predecessor's term limits. You owe your office to 
that bill's sole and very powerful opponent, Andrea Mitchell.
    Speaking of how you get appointed, you are as insulated 
from politics as anyone in Government. The natural tendency of 
Congress year in and year out, the pressures on us are to spend 
more, tax less. It's caused many to wonder whether the U.S. is 
ready for self-government.
    Now can we count on you, being so insulated, to make the 
tough decisions? I'm going to ask a whole bunch of questions 
and allow you to respond at the end. And I realize I may be 
asking too many for you to respond to all of them, and I hope 
that you'll respond for the record. I also ask unanimous 
consent that we all be given 5 days to submit additional 
questions for the record.
    Chairman Oxley. Without objection, that's the standard.
    Mr. Sherman. But I hope that you would, in your written 
response, comment on whether we can count on you to urge both 
spending restraint and restraint on tax cuts and push for 
adequate revenues. And I'll also be asking you whether you 
agree with your predecessor and his comments before this 
committee in response to my question in 2003, that tax cuts do 
not pay for themselves, that they do reduce revenue; unless 
through some mysterious legislative process that I've been 
unable to observe, a tax cut bill leads to spending reductions.
    The next series of questions I hope you can respond to is 
the fact that we have this enormous trade deficit. Several have 
commented on it.
    An adjustment in currency values is inevitable, and I would 
like you to set forth how we can work with other countries to 
make sure that any realignment of the value of the dollar 
compared to other currencies is smooth and does not result in a 
sudden crash of the dollar where circuit breaker agreements are 
necessary, et cetera, but after running trade deficit after 
trade deficit that are the most enormous of history, we ought 
to be expecting an eventual decline in the value of the dollar, 
and we hope it is not sudden. How is the Fed preparing for such 
a possibility?
    Finally, there is the controversy about mixing commerce in 
banking. We have seen in Japan how that leads to the 
misdirection of capital and how it can impair the banking 
system.
    More important, just as importantly, we know that mixing 
banking and commerce is wrong because it's illegal, as we 
established in the bill that came through this committee.
    Yet, I'm troubled that this prohibition, logical as it is, 
between mixing commerce and finance, is being evaded in part 
through the device of saying well, any commercial activity is 
financial if the buyer needs financing.
    We are told that sellling homes or cars is a financial 
activity. I would say I've been paying the bank for this suit 
ever since, well, it's been let out and let in again. I'm still 
paying for it on that credit card.
    We can argue that my tailor is engaged in a financial as 
well as a frustrating activity.
    In December, the Office of the Controller of the Currency 
issued several legal opinions. Many think that existing law 
allows banks to own real estate to accommodate their banking 
business, and now that seems to be interpreted to allow them to 
build luxury hotels, to develop residential condominiums for 
sale.
    This sounds like speculative real estate investment of the 
very type that brought down the savings and loans.
    Do you think the OCC is giving the banks too much freedom 
so as to create a risk to the deposit insurance system?
    I'm particularly concerned about a recent opinion that 
allows a national bank to own a 70 percent ownership stake in a 
wind mill farm, and that means that the deposit insurance fund 
is dependent upon which way the wind blows.
    I know that others have already asked you about the ILC 
loop hole, so I hope that you will be able to address the 
mixing of banking and commerce and what steps the Fed should 
take to protect our financial system from both a violation of 
the spirit of Gramm/Leach/Bliley and also from what has 
imperiled and really held back the growth of the Japanese 
economy as well as imperiling its financial system.
    Chairman Oxley. The gentleman's time has expired. The 
gentleman from California, Mr. Royce.
    Mr. Royce. Chairman Bernanke, congratulations to you on 
your new position.
    In April of 2005, Chairman Greenspan delivered testimony at 
that time to the Senate Banking Committee outlining the Federal 
Reserve's view on reforming regulation of the Nation's three 
housing GSEs, and as I recall at that time, you were a member 
of the Federal Reserve Board.
    I'd like to know if there are any notable differences 
between your views on GSE reform and the views presented by 
Chairman Greenspan in April of 2005 in that Senate speech that 
he gave.
    Mr. Bernanke. Congressman, as you point out, I was a member 
of the Board, and the testimony that Chairman Greenspan gave I 
believe was an official Board position.
    I was there during the evolution of these issues, during 
the staff presentations, during discussions. I had discussions 
myself with Chairman Greenspan.
    I find his economic arguments persuasive, in particular, 
the concerns about the portfolio, the risks they present to 
financial stability and potentially to the taxpayer.
    I want to just also reiterate that I agree with Chairman 
Greenspan that the GSEs do perform a very important service in 
securitizing mortgages and providing/creating a secondary 
market, a liquid secondary market for those mortgages.
    I have no vendetta against the GSEs by any means. I think 
they are very positive institutions and they do some very 
important things for housing in the United States.
    I am concerned, as Chairman Greenspan was, about the size 
of the portfolios and the risks that are inherent in trying to 
hedge them in a dynamic market with rapidly moving financial 
conditions.
    Mr. Royce. I agree totally with your assessment. Do you 
generally agree with the Treasury Department's GSE regulatory 
reform recommendation that we have seen that calls on Congress 
to limit the GSE's portfolio assets to those necessary for the 
GSEs to fulfill their statutory housing mission?
    Mr. Bernanke. I do agree. The question is why they are 
allowing the portfolios to exist when they have as much 
inherent risk as they do.
    The question is how much of the portfolio is necessary to 
fulfill the mission. That is something that may require some 
judgment and analysis, but it seems clear it's a much smaller 
number than currently being held by the large GSEs.
    Mr. Royce. Thank you. May it be that the rise in home 
ownership and the rise in housing wealth that went along with 
it over the past several years has enabled many consumers to 
dip into savings from current income, and thus, maintain 
spending even in the face of these high energy prices, as there 
are some signs that housing demand is slow, which you mentioned 
in your testimony, and the rise in home prices clearly are 
leveling off or starting to dip, in your view, how big of a 
risk to consumer spending from what might occur, a rapid 
downward adjustment in home prices, and are there possible 
offsetting factors in terms of how this will play out in the 
economy?
    Mr. Bernanke. Our expectation is that if and when the 
housing market slows, that savings rates will tend to rise.
    We have built into the forecast, so to speak, some increase 
in personal savings.
    As home values grow more slowly, then consumers can rely 
less on the increase in equity as a source of wealth building 
and, therefore, must save more out of their current income. 
Again, that's to be expected.
    As I've indicated, our current expectation is that process 
will be gradual and is consistent with continued strong growth 
in the economy.
    However, as I also indicated, the housing market and the 
consumer response to any changes in the housing market is one 
of the risks to the forecasts and one we will be monitoring 
closely as we try to assess the state of the economy in the 
coming year.
    Mr. Royce. Mr. Chairman, I yield back.
    Chairman Oxley. The gentleman yields back. The gentle lady 
from California, Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman. I'm pleased 
to be here with you, Mr. Bernanke. I welcome you to this 
committee. We are going to miss Mr. Greenspan. No one talks 
like him, and we don't want you to.
    I had a great relationship with him. He's been to my 
district. I'm going to invite you.
    I want to continue this discussion this morning about 
rising inequality in two ways. I'm going to talk about housing 
a little bit more.
    It's been alluded to any number of ways this morning. I 
want to talk about the fact that many Americans are priced out 
of the market. They are not able to buy homes because of the 
rising cost. I am going to talk about this in relationship to 
affordable housing and what the Government can or cannot do.
    Some of the policies of this Administration are such that 
we don't have support for low- or moderate-income housing that 
we thought we had, and the cuts that are being made will 
eliminate the opportunities for first time home buyers and 
others to get into the housing market.
    We are concerned about this iddur. I'm also concerned about 
the bubble. The fact is that some people are stretched to buy a 
house. It cost too much. They got the special product loans, 
interest only loans, et cetera. And what is that going to mean 
to the economy if in fact this bubble does burst?
    I'd like you to give us a little discussion about housing 
and housing affordability in relationship to some of the things 
to which I've alluded and the rising interest rates.
    Secondly, I want to talk about investment in poor and 
minority communities. I used to have this conversation with Mr. 
Greenspan all the time. When I invited him to my district, it 
was to engage entrepreneurs and business persons and the 
financial services community in conversation about investment 
in poor communities.
    We know we have things like the new markets initiative 
that's been very helpful and could be even more helpful if in 
fact we could do more of that.
    What do you envision? What advice could you give us about 
how we could spur investment in these poorer communities, where 
investment can be the only possibility for growing these 
communities and expanding opportunities for jobs, et cetera?
    Do you have any ideas about this issue? What can you advise 
us? What can you work on that would help to expand the idea of 
the new market tax credit initiative in order to grow these 
poor communities?
    Mr. Bernanke. Congresswoman, I'm very much in favor of home 
ownership. I think it's a positive thing that we now have close 
to 70 percent home ownership rates in this country.
    I think when people have their own home, it makes them more 
involved in their communities. It makes them more interested in 
participating in the democratic process. I'm very much in favor 
of supporting that.
    Over the recent years, financial markets have opened up to 
the extent that there now is a much more extensive housing 
credit market. There is more access than there was before. 
There still remain problems.
    As you may know, the Federal Reserve's analysis of Home 
Mortgage Disclosure Act data suggests there are still 
differences in access and pricing between minorities and others 
in the housing market.
    It is still important for us to continue to make sure that 
there is fair treatment in those markets.
    There is always a tradeoff between giving people access and 
making sure they don't take on more debt than they can sustain.
    If the housing market does slow down, we want to see how 
strong the mortgage market is and whether or not we will see 
any problems in that market. That's an issue.
    I'd like to say my very first trip as a Governor of the 
Federal Reserve was to Brownsville, Texas, to see how a set of 
non-profit organizations were using funds provided under the 
Community Reinvestment Act from banking institutions to re-
develop or develop housing for immigrants to that area.
    It was a very interesting experience. It suggested to me 
that the financial institutions themselves also become more 
informed about low- and moderate-income communities, about 
immigrant communities. They can find new opportunities there.
    In fact, those investments that the banks were making under 
the CRA through the non-profits in Brownsville were quite 
profitable. They were good for the banks. They were good for 
the immigrants who were buying homes, and good, I think, for 
our economy.
    I don't want to comment specifically on fiscal programs to 
support housing. Again, I think that's something that really is 
up to Congress.
    From my perspective at the Federal Reserve, I'm certainly 
going to maintain an ongoing interest in the financial markets 
for low- and-moderate income people, making sure they are fair 
and open.
    Chairman Oxley. The gentle lady's time has expired. The 
gentleman from Connecticut, Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman, for being here and for 
responding so thoughtfully to our questions.
    I want to know if you believe that we have primarily a 
revenue problem or a spending problem as it relates to the 
Federal budget.
    Mr. Bernanke. The key problem is that the Congress at some 
point needs to decide what the appropriate size of the Federal 
Government is. That is really the first essential question, and 
it's a question based on values. Therefore, it is really the 
elected representatives that have to make that decision.
    Those Members of Congress who are in favor of low tax rates 
and continuing tax cuts have to accept also that in order for 
those low tax rates to be sustained, ultimately, they have to 
find savings on the spending side to avoid exploding deficits.
    Likewise, those who would like to see a more expansive role 
of the Government need to understand and accept that 
commensurate tax revenues are going to be necessary to support 
those activities.
    It's not up to me to decide what the size of Government 
is--
    Mr. Shays. Do you think our tax rates are low?
    Mr. Bernanke. They are relatively low compared to other 
industrial countries. They are not at a historical low. The 
current tax rate of 35 percent is higher than, for example, the 
28 percent rate that was agreed upon--
    Mr. Shays. You are talking about rates. Are we not getting 
enough revenue?
    Mr. Bernanke. The question is, compared to what? It's a 
question of how big the Government is going to be. There is a 
deficit. I'd like to see it lowered, but it's up to the 
Congress to decide whether that should be done by higher taxes, 
lower spending, or some combination.
    Mr. Shays. When the Congress lowered the dividends and 
capital gains tax, did we get more revenue from it or less?
    Mr. Bernanke. I think most economists would agree that a 
well constructed tax cut does not lose as much revenue as a 
purely static analysis would suggest. In particular, the 
dividend and capital gains tax cut led to some increased 
realizations and, therefore, more revenue, or less revenue 
loss, at least, than a purely arithmetic analysis would 
suggest.
    Mr. Shays. When we talk about the size of the Government, I 
think of our Government in two ways. I think of the way 
Government spends money on entitlements. Do you call that the 
size of Government or do you call the size of Government how 
many employees we have and so on?
    Mr. Bernanke. I'm thinking of Federal outlays, which 
includes entitlements, because it's the entire amount of 
outlays that has to be financed by tax revenues.
    Mr. Shays. We could have large entitlements, but that 
doesn't increase the size of Government. That increases the 
budget of the Government. Correct?
    Mr. Bernanke. If you like, I could say it's the budget of 
the Government that ultimately the Congress has to choose the 
size.
    Mr. Shays. In regard to inflation, what is the impact of 
dollars held overseas? Is there any impact?
    Mr. Bernanke. I think the effect on inflation of dollars 
held overseas is modest to negligible. Clearly, in determining 
the domestic money supply, the Federal Reserve has to take into 
account the share of currency and other forms of money that are 
held abroad, but we do that, and we essentially offset those 
overseas holdings in order to achieve the domestic inflation 
objective that we are trying to reach.
    Mr. Shays. I'm not clear about that. How do you control the 
supply of money overseas?
    Mr. Bernanke. We don't. We can't directly control how much 
money is held overseas, but we can estimate how much is held 
overseas, compare that to the amount of money which has been 
issued, and, therefore, determine how much money is being held 
domestically.
    Mr. Shays. Are you concerned about counterfeiting overseas? 
Do you think it is a serious problem, a relatively serious 
problem, not all that serious?
    Mr. Bernanke. I believe there is a joint report coming out 
soon by the Federal Reserve and some other agencies, which has 
found at least in a few cases, some fairly serious issues of 
counterfeiting. I'm not sufficiently familiar with that report 
or its contents to be very helpful at this point.
    Mr. Shays. Let me conclude by just making this comment. I'm 
very concerned about data security. I've been notified by my 
own bank that tens of thousands of records have been misplaced. 
I'm hoping that your office will be paying a tremendous amount 
of attention to this issue.
    Finally, I just want to thank you for your short answers, 
which gives us more time to ask questions. It is very 
appreciated.
    Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman's time has expired. The 
gentleman from New York, Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman. Both Mr. Chairmans.
    Let me just ask you real quickly as a follow up to some of 
the questions that Mr. Royce was indicating, talking about the 
lack of individuals with savings now and a possible cool down 
of the housing market.
    My question to you is what effects will this have with the 
money that's available for investment, and most importantly, in 
the short term, the short term interest rates?
    Mr. Bernanke. Congressman, I would say in terms of capital 
investment, there is currently plenty of funding available. 
Corporations have retained a lot of these profits they have 
earned in recent years, and they have very liquid balance 
sheets.
    There have been actually relatively low rates of bank 
borrowing by corporations because they have sufficient internal 
funds to finance their investment spending.
    Moreover, the general credit conditions still appear to be 
quite positive. Spreads are low. That is, bankruptcy risk 
appears to be relatively low.
    My sense is that we will continue to see strong growth in 
capital investment in the U.S. economy, and that is going to be 
beneficial both in terms of generating demand in the short run, 
but also in terms of expanding our capacity to produce and our 
productivity in the longer term.
    Mr. Meeks. Short term interest rates?
    Mr. Bernanke. I can't comment directly on short term 
interest rates. Obviously, we are still 6 weeks away from the 
next meeting, and I will have to discuss the state of monetary 
policy with my colleagues at that meeting.
    Mr. Meeks. I want to ask you two quick questions both 
related somewhat to trade. One of the major concerns of the 
Federal Reserve Board is to keep inflation under control, and 
according to the Bureau of Labor Statistics, the average annual 
rate of growth of import prices has been only 0.6 percent 
versus 2.2 percent for overall consumer prices.
    My first question is what is the perspective on the role of 
free trade agreements in controlling inflation? My second 
question is there has been growing concern about our trade 
deficit and current account deficit and its long term effects 
on our economy.
    However, as we say in the Financial Services Committee, 
financial services has become increasingly a greater share of 
the U.S. GDP, with almost five percent experiencing a trade 
surplus of approximately 2.5 to 1.
    Some like myself are concerned that trade agreements being 
negotiated don't focus enough on trade in services, 
particularly financial services.
    My second question to you is are we coming up short in the 
liberalization of trade in financial services?
    Mr. Bernanke. With respect to your first question, I think 
free trade has moderated inflation to some extent because of 
the additional competition, because, as you point out, with a 
stronger dollar, import prices have been moderate. It has been 
a positive factor.
    With respect to trade, I think there is enormous 
opportunity to improve trade or increase trade in services. The 
DOHA round, which is still ongoing, has been working somewhat 
sequentially. It's been focused initially on agriculture trade, 
access, terrorists and the like, then on manufacturing, and 
trade in services has brought up the rear to some extent.
    In the United States' case, we are net exporters of 
services. We are the primary producer of internationally traded 
services in the world. It's very much in our interest, both 
bilaterally and multilaterally, to try to increase trade in 
services and to work towards freer trade in financial services 
and other types of services as well.
    I endorse that sentiment.
    Chairman Oxley. The gentleman's time has expired. Ms. 
Kelly.
    Ms. Kelly. Thank you, Mr. Chairman. Chairman Bernanke, I 
welcome you here today, and you have been very patient with us.
    I'd like to bring up a topic. I unfortunately had to go to 
another meeting. I don't know if it has been brought up yet. 
I'd like to ask you about something that your predecessor 
stated, and that is that markets can only work when 
participants in the market are not subject to attack and that 
in his view the market for terrorism insurance should not exist 
without Government assistance because of the risk of a 
terrorist attack.
    I noticed in your testimony here today you don't discuss 
unexpected events that could affect the Treasury.
    The Treasury study last year confirmed that for high risk 
cities, they have lowered premiums and improved rates for 
terrorism insurance.
    Since you did not address the question of high risk cities 
directly in your 2005 testimony on the subject, do you agree 
with Chairman Greenspan that for these high risk areas, 
Government provisions for the terrorism insurance market will 
be necessary for the foreseeable future?
    Mr. Bernanke. Congresswoman, I think it's important to 
begin by noting that the Terrorism Risk Insurance Act does not 
contemplate any attacks with costs exceeding $100 billion.
    Clearly, there are enormous events that could occur and we 
hope will never occur, but they could occur, in which there 
would be no plausible possibility that private insurance could 
cover that cost, and, therefore, Congress and the Government 
would have to try to address the aftermath of that attack as 
best as possible.
    The more difficult question is what about attacks, still 
large, but nevertheless, more moderate in size, perhaps of 
similar size to the Katrina event, for example. Again, 
enormous, but still within the range of historical experience.
    My view is that the country is best served by as much as 
possible developing private sector insurance capability, to the 
extent that we can, develop capacity in terms of ability to 
risk rate, to write insurance and to provide reimbursement in 
the case of an attack. Should an attack occur, we would be 
better off in that we would have both the private sector 
insurance and Government resources to fall back on.
    Therefore, my view is that we should be working, as the 
last bill has done, to try over time to increase private sector 
participation in terrorism risk insurance.
    I leave open for now to what extent or how long Government 
participation will be necessary. I agree that beyond a certain 
point, there will be no alternative to having Government 
involvement.
    I do think we are moving in the right direction in trying 
to build private sector participation in this market by 
increasing the co-pays and deductibles and the like.
    Ms. Kelly. If I understand you correctly, by implication, 
you are saying that the presence of TRIA as sort of a carrot to 
the market would allow the market to further pick up some of 
the risk that otherwise would be borne by the Federal 
Government in the event of a terrorism attack.
    Do I understand that correctly?
    Mr. Bernanke. My objective here is to continue to increase 
the capacity of the private sector to contribute to terrorist 
risk insurance and to create resources that will be available 
in case a major attack were to occur.
    I agree that the existing law is moving in the right 
direction in increasing private sector participation and, on 
the other hand, I'm comfortable with the fact that Government 
support still remains at this juncture.
    Ms. Kelly. If I understand you correctly, what you are 
saying is that having TRIA available so that the Federal 
Government is not the insurer of first resort is an important 
factor in allowing the private market to cover as much as 
possible prior to the Federal Government stepping in, in the 
event of a terrorism attack.
    Mr. Bernanke. I think I agree with what you are saying, the 
point being that we want to have cooperation between the 
private and public sectors, with an increasing role for the 
private sector over time.
    Ms. Kelly. Chairman Bernanke, this committee has taken an 
active role in fighting terrorist use of our financial system. 
Working with Federal regulators, we have exposed Riggs Bank, 
the Arab Bank, violations of the law, and we have worked with 
other agencies to improve the effectiveness of examinations.
    Unfortunately, we have seen several cases of banks subject 
to Federal Reserve supervision who have been violating the law 
for years without being discovered, particularly, in the more 
recent case of ABM.
    I'd like you to explain to the committee, if you will, how 
you would strengthen the Federal Reserve's ability to defend 
our financial system against terrorists who want to use it for 
their advantage.
    I want to know if you think the Federal Reserve has enough 
staff resources and puts them into the enforcement of the BSA 
versus its other activities. I'm concerned especially about ABM 
deliberately violating U.S. laws by trading with Iran for 7 
years.
    I wonder if you would be willing to address that.
    Chairman Oxley. The gentle lady's time has expired. The 
Chairman may respond.
    Mr. Bernanke. I just agree it's a very important issue and 
we are going to work harder and we are going to be particularly 
focused on the banks' internal mechanisms for making sure that 
their counterparties are legitimate.
    Chairman Oxley. The gentle lady from California, Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman. Welcome, Mr. Chairman. 
Congratulations to you.
    Let me say a couple of things. First, I'm glad to hear you 
say that you recognize that a rise in inequality is a concern 
and a problem, but you also indicated that part of this had to 
do with the fact that lower wage workers haven't received a 
higher level of income, those at least who have no more 
education than a high school education.
    I think I heard you correctly, you don't support an 
increase in the minimum wage. You indicated your policies would 
be very consistent to Chairman Greenspan. I believe that's 
probably about where he was. I'm quite frankly very 
disappointed.
    I know you do support the tax cuts and making those tax 
cuts permanent, and it seems to me if you are really concerned 
about this rise in inequality, somehow you as our new Federal 
Reserve Chair would say something about increasing the minimum 
wage for very low wage workers.
    Secondly, part of this rise in inequality has to do with 
discrimination in mortgage lending. If you look at the home 
ownership rates, you have approximately 70 percent nationwide 
with regard to the Caucasian population, yet you have 46 
percent African American, 46/47 percent Latino.
    There is a huge disparity there. With Mr. Greenspan, we 
were trying to talk with him about how to make sure that 
financial institutions provided more mortgage lending to 
African Americans and Latino's.
    Right now, conventional loans, I believe probably most 
banks provide maybe one to two percent of their conventional 
loans to African Americans. That is just down right shameful.
    Yet, on the other hand again, going back to Mr. Greenspan 
and if you are going to be consistent with much of his policies 
and his work, I have to raise these issues with you.
    CRA, for example. Many of these banks that receive an A or 
B on their CRA ratings probably lend one to three percent of 
their mortgages to African Americans and Latino's. I don't know 
for the life of me how they can get an outstanding and 
satisfactory CRA rating, when again, they are not in good faith 
lending to minority communities.
    Finally, just with regard to prime loans and sub-prime 
loans, the data that came out in October of last year, we have 
a report, and Mr. Chairman, I'd like to put this in the record.
    Chairman Oxley. Without objection.
    Ms. Lee. Thank you, Mr. Chairman. It indicated first of 
all, taken together, sub-prime loans make up about six percent 
of all loans to African Americans and Latino's as opposed to 
two percent to all white borrowers.
    We looked at this and decided that FICO scores should be 
revised and possibly take into account rent, utilities, 
telephone service as a sign of creditworthiness.
    I'm wondering if you would work with us to help improve the 
scoring process so we can improve this inequality in mortgage 
lending to minorities in our country.
    As you know, and you said earlier, home ownership is really 
the key to the accumulation of wealth. It's the only way people 
can send their kids to college, start a small business, and yet 
you have huge, I mean massive discrimination in mortgage 
lending to people of color and to minorities in our country. 
Yet, these financial institutions get off the hook each and 
every time.
    Chairman Greenspan wasn't able to help us figure out a way 
to rectify this and close this gap. Maybe you can.
    Could you respond and tell us what you think we can do?
    Mr. Bernanke. I will comment. Part of the discrepancy 
relates to the underlying discrepancies in wealth and income, 
which I agree are a serious problem.
    That affects people's ability to afford homes. In some 
sense, part of the issue goes back to our earlier discussion 
about helping people build wealth and build income through 
training and through other methods.
    Ms. Lee. An increase in the minimum wage.
    Mr. Bernanke. The minimum wage affects a very small number 
of workers actually. I don't think it would affect a great 
majority of people that you are concerned about.
    Be that as it may, I just want to say that I do support 
very strongly fair lending. I will be actively involved in 
making sure that our fair lending policies are actively 
prosecuted.
    I would also agree with you on the inappropriateness in 
some circumstances of using FICO scores for evaluating 
creditworthiness. I know some banks are experimenting with non-
standard approaches that take into account people's relatively 
short credit histories, for example, or alternative 
backgrounds.
    I think that is good banking. I think it is good for the 
society and the Federal Reserve will work with banks to look at 
those kinds of alternative approaches.
    Chairman Oxley. The gentle lady's time has expired. The 
gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman, and thank you, Mr. 
Chairman. I appreciate your being with us on your maiden voyage 
before this committee. I echo Mr. Shays' comments about the 
conciseness of your answers in a manner that we can actually 
understand.
    I will be interested as others will be just to see after we 
are all done in here, as we check the markets, to see how they 
will respond to all your answers as well.
    On that note, I don't know if you saw the article in USA 
Today, I think it was earlier this week, regarding your 
predecessor and the impact that your predecessor continues as 
he goes out and speaks publicly and privately, and then I guess 
when he speaks privately, rumors swirl around as to exactly 
what he said privately, and I guess in some cases, allegations 
are that the dollar actually rose or failed because of his 
comments.
    I just wondered if you had a comment on that as to how the 
markets are impacted by your comments and by your predecessor's 
comments still to this day.
    Mr. Bernanke. My only comment on Chairman Greenspan is that 
according to Government ethics rules and to FOMC rules, it's 
permissible for a retired Governor to speak in public about the 
economy, so long as he or she does not divulge confidential 
information.
    I have no indication that he has violated that rule. I have 
no further comment on that.
    Mr. Garrett. Getting to the questions on the GSEs, just a 
couple more points, I appreciate your comments as to the 
importance of them.
    I'm just curious, in your mind, whether you think that 
Fannie and Freddie are really the soundest and the best way 
that we have to assist homeowners in financing, or is there 
something else that Congress can do, as we always like to say, 
to level the proverbial playing field, to provide methods for 
S&Ls and banks and other financial institutions to get into the 
market on the same level field as Fannie and Freddie are right 
now to address the issues that have been already raised as far 
as increasing the housing market and to provide liquidity.
    Is there something else we could be doing aside from Fannie 
and Freddie?
    Mr. Bernanke. I'd have to hear your specific suggestions. 
As I indicated before, Fannie and Freddie did a very important 
service to us, to the economy, to the country, by creating the 
secondary mortgage markets. They are no longer the only 
participants. Obviously, there are now large financial 
institutions which are also involved in creating and servicing 
these markets.
    I think what they do is very valuable. I have no desire 
to--
    Mr. Garrett. I'll follow up with some of the other models 
that are out there. I would appreciate your comments as to 
whether Congress can explore some of these other avenues as 
well to either supplement or eventually go down the road to a 
different direction.
    Another thing that the House did, it passed this committee, 
and the House passed the GSE reform legislation. As you know, 
one of the aspects was what I will call the five percent tax or 
five percent diversion, always with the laudable goal of trying 
to provide revenue to those most in need in the housing market.
    The question on the other side of that equation comes, and 
this involves your concerns and mine as well, with regard to 
portfolio size and limitations. I think we are on the same 
page. I was fighting for that when your predecessor was here, 
to try to put those stronger limitations in place.
    What is your comment on what the House has done in that 
area by diverting revenue from the normal revenue stream? Does 
this put an additional burden on the GSEs to basically go in 
the other direction that we would want them to into, and that 
is to increase the portfolio to make up for the lost income?
    Mr. Bernanke. I'm afraid, Congressman, that is out of my 
purview. It's really up to Congress to decide how they want to 
manage these kinds of funds.
    My main concerns are about financial stability and, 
therefore, about the fact that we have such a large portfolio 
which has to be hedged in a complicated dynamic fashion.
    Mr. Garrett. Does it affect their financial stability if 
there is a pressure on them to increase their portfolio size?
    Mr. Bernanke. I honestly don't know the magnitude of the 
effect.
    Mr. Garrett. Changing subjects a little bit but keeping the 
whole area as far as your earlier comments with your concern, 
also mine, as far as whether it's the size of the Government 
question, as you were saying, it's actually the size of the 
budget that we have.
    I will be going down to Louisiana in a couple of days again 
to see what the situation is there now, 7 months or longer 
after the fact.
    Congress has already passed some legislation, 
appropriations for that measure. As you know, the 
Administration is talking about additional legislation. There 
are some proposals out there to go even broader, providing a 
framework for substantial additional monies for that area.
    Can you address if we go in those areas whether that acts 
as a positive or a negative drag on the economy as the 
additional size increases for expenditures of the Government 
for those recovery efforts?
    Chairman Oxley. The gentleman's time has expired. The 
Chairman may respond.
    Mr. Bernanke. Mechanically, and I'm not endorsing any 
particular program for Katrina recovery, but building and 
reconstruction do add to economic activity, and it's one of the 
reasons why 2006 may be a bit stronger than we otherwise 
thought.
    Chairman Oxley. The gentleman from Kansas, Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    Mr. Chairman, welcome to the committee. In a speech you 
gave last March of 2005 before the Virginia Association of 
Economists, you stated that reducing the Federal budget deficit 
is still a good idea. You said that reducing the deficit would 
reduce ``debt obligations that will have to be serviced by 
taxpayers in the future.''
    I have six grandchildren. A lot of us here have children 
and grandchildren whom I believe would be affected, as you have 
indicated, by what we do as a country in the future.
    I believe Congress should be doing what we can to relieve 
our children and grandchildren of the burdens we are imposing 
on them today. One way I think we can do that is to address the 
deficit/debt issue, to reinstate a rule called pay/go.
    In 2002, the pay/go rule in Congress was allowed to expire. 
It has not been renewed. In fact, former Chairman Greenspan and 
a group in Congress called the Blue Dog Coalition, which 
believes in fiscal responsibility, has advocated reinstatement 
of pay as you go, pay/go rules, that would require Congress to 
pay for spending increases and revenue reductions.
    Should pay/go in your estimation be reinstated? Should it 
apply to new spending as well as new revenue reductions or tax 
cuts?
    Mr. Bernanke. First, Congressman, I stand by my statement 
from my speech from last year. I think reducing the fiscal 
deficit is very important.
    Mr. Moore. Good.
    Mr. Bernanke. Doing so increases national saving and 
reduces the burden on our grandchildren.
    I'm sorry that I don't feel it is appropriate for me to 
make recommendations to Congress about their procedures. I do 
hope Congress will be thinking about the long-term implications 
of spending and tax programs so that we are looking not just at 
the very near term, but the very long term implications.
    I think that is very sensible. I think in my role as head 
of the central bank, I should not be involved in making 
specific recommendations about your internal decision making 
process.
    Mr. Moore. Are you aware of a pending request for an 
increase in the debt limit?
    Mr. Bernanke. Yes, I am.
    Mr. Moore. How much is that, sir, if you know?
    Mr. Bernanke. Eight trillion plus.
    Mr. Moore. It would take us up to eight trillion plus. It 
was at about $900 billion, the request for the debt increase is 
supposed to come by February of next year. Is that correct?
    Mr. Bernanke. I don't recollect exactly.
    Mr. Moore. I believe about 4 years ago, our Federal debt in 
this country stood at about $5.7 trillion. Is that your 
recollection?
    Mr. Bernanke. I don't recollect exactly.
    Mr. Moore. It is now, as you understand, $8.2 trillion. Is 
that correct?
    Mr. Bernanke. Yes.
    Mr. Moore. We are just digging ourselves a deeper and 
deeper hole. Is that correct?
    Mr. Bernanke. The deficit is certainly adding to the 
national debt. The total debt includes a lot of debt which is 
held by trust funds and the like, so that the so-called debt 
held by the public is more in the vicinity of $4.5 to $5 
trillion. Some of this debt is accounting money held within 
Government trust funds.
    Mr. Moore. At some point in the future, taxpayers in this 
country are going to have to make good on this. Isn't that 
correct, sir?
    Mr. Bernanke. That's correct. I agree with you that we have 
a very serious long term fiscal problem and we need to begin to 
address that.
    Mr. Moore. One way to address that would be to reduce 
substantially the amount of deficit that we incur each year. 
Isn't that correct?
    Mr. Bernanke. That's correct.
    Mr. Moore. Would it be helpful in your estimation, Mr. 
Chairman, if we were to go back to the way things were 20 plus 
years ago before Congress passed a law that allowed the unified 
budget to include not only tax revenues but Social Security 
revenues?
    Mr. Bernanke. I think it's important to make the 
distinction, which is not made so clearly now, between the 
current budget and the payroll contributions to social 
insurance.
    Mr. Moore. I have a bill that in fact would do that and 
take Social Security revenues out of the unified budget. I 
approached one of my colleagues on the other side of the aisle, 
and I said I know you believe in fiscal responsibility, and I 
said you should be on my bill, and he said, Dennis, there's one 
problem with your bill.
    I said what is that. He said it would make our deficits 
look even larger. I call that telling the truth to the American 
people, and I think we need to start doing that again.
    Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman's time has expired. The 
gentleman from Ohio, Mr. Gillmor.
    Mr. Gillmor. Thank you, Mr. Chairman.
    Let me ask you, in terms of what has been happening in 
housing, and some people think we have a housing bubble, some 
don't. I think the Fed position is we don't.
    One of the things that has been happening is a great 
proliferation in zero percent down loans, adjustment of rate 
mortgages, and that was happening in a time of very low short 
term rates. Now, those are going up.
    Do you see any dangers to the system and what impact is 
this going to have on those borrowers?
    Mr. Bernanke. Congressman, you are correct that the 
incidence of these so-called non-traditional mortgage products 
has been increasing. There are some customers for whom these 
products are appropriate, but there are also some customers for 
whom they are probably not appropriate.
    The Federal Reserve and the other banking agencies have 
issued guidance for comment to the banks, asking them first to 
re-think their underwriting standards, to make sure that when 
they make a loan of this type, the recipient is able to finance 
not only their first payment but also the payments that may 
come later if interest rates adjust, for example.
    Secondly, the guidance asks banks to be sure their 
disclosure to consumers is adequate so the consumers fully 
understand these complex financial instruments and understand 
what they are getting into.
    Third, that the banks themselves are adequately managing 
the risks inherent in making these kinds of loans.
    We are addressing these issues. These loans are quite 
popular in terms of new credit extensions. They remain a fairly 
modest portion of the outstanding mortgages.
    This goes back to a question that was asked earlier. I 
think the one area where they may pose some risks if the 
housing market slows down might be in the sub-prime area where 
they have been popular and it's more likely in those cases that 
they are inappropriate for the borrower.
    Mr. Gillmor. Let me ask you. We have had a pretty good 
economy for a couple of years after we came out of a recession, 
a fairly mild one, at the beginning of the decade.
    Since the tax relief package of 2003, growth in the GDP has 
gone up from about 1.3 percent before that to over four percent 
since then. I think a logical person would conclude that tax 
relief probably had something to do with it.
    The tax relief was temporary. My question is if the tax 
relief expires, which would amount to basically a tax increase 
at that point, what if any impact do you think that would have 
on the economy, jobs, and growth?
    Mr. Bernanke. Congressman, I do agree, and I think most 
economists would agree that the tax relief earlier this decade 
was helpful in helping the economy recover from the recession 
in 2001.
    I am going to try to stick to the principle of not directly 
or indirectly endorsing specific tax or spending programs. I 
hope you will forgive me for that.
    Mr. Gillmor. You're forgiven.
    Mr. Bernanke. Thank you.
    Mr. Gillmor. I heard what I wanted to hear.
    One other question. We have talked a lot about the global 
savings glut. I guess the question is, is this really a glut or 
is there a lack of investment demand? Certainly, that glut, the 
United States is not contributing to the savings glut. If you 
could comment on that, I would appreciate it.
    Mr. Bernanke. Yes, Congressman. Perhaps the terminology 
"savings glut" was unfortunate. The issue is the amount of 
global savings relative to the amount of global investment 
opportunities.
    The most striking change in the past 10 or 12 years has 
been in emerging markets, particularly East Asia, which 10 to 
12 years ago were large net borrowers on international capital 
markets, and now are even much larger net lenders.
    If you try to take apart the reasons for that change, it's 
partly their very high rate of savings, but the change itself 
is due more to declines in investment outside of China.
    Part of the cause of this so-called global savings glut, I 
believe, is the financial crisis of the late 1990s which 
reduced in-flows of investment capital expenditure in some of 
these emerging market economies.
    The oil producers also are playing a role here because they 
are receiving all this oil money. They don't have sufficient 
opportunities at home for investment. Therefore, they, too, are 
recycling these funds into the global capital markets.
    Mr. Gillmor. Has my time expired?
    Chairman Oxley. Mr. Ford.
    Mr. Ford. Chairman Oxley, thank you.
    I know you indicated, Chairman Bernanke, and 
congratulations. I know they trained you well and you come 
highly regarded from just about everybody.
    I'm from Memphis, and we have a small banking center there. 
We like to think of it as a big banking center. And all of my 
supporters and friends and even opponents think very highly of 
you, so I congratulate you today.
    I guess you have indicated you're not going to endorse 
particular tax packages or not, but if they did do one, would 
it be in the interest to look at some kind of AMT reform 
outside of--let me step back.
    Is AMT reform something that you think will allow you and 
the board, as you all make determinations about tightening or 
loosening a policy, would the AMT relief help as you move 
forward, or would it hinder, or is it hard to say?
    Mr. Bernanke. Well, AMT reform is reducing revenues.
    Looking forward, we would factor that into our projections 
of Government spending and revenues.
    Relevant to some of the issues we were talking about 
before, with no other change being made, and I'm speaking here 
arithmetically, AMT reform is going to increase the deficit 
because it's going to lower tax revenues. So that's an issue.
    I'm not commenting on the AMT as a tax. I understand that 
many Congresspeople have considerable concerns about the AMT as 
a tax, and so it's really your choice as to how you proceed 
with that tax.
    Mr. Ford. Let me ask you this.
    You've mentioned the deficit, then, and so forth, so in 
light of what Mr. Moore said, would that mean--I don't want to 
put words in your mouth, but we're going to probably have a 
vote here soon on raising the debt ceiling. Is that something 
Congress should do?
    Mr. Bernanke. When Congress passes a spending act or a tax 
act, that has implications for the amount of debt.
    Arithmetically, that has implications for the amount of 
debt the Government is going to take on. And therefore, I think 
that the debt ceiling doesn't really provide much additional 
value.
    The Congress ought to be contemplating the effects of its 
spending and tax actions on the debt and the deficit as it goes 
along, with each determination, both in the short run and in 
the long run.
    Mr. Ford. In our most recent budget, or the budget that 
Congress is considering now, and Mr. Moore and I serve on the 
Budget Committee, in the President's numbers, there was no 
inclusion of any monies for the war in Iraq and Afghanistan.
    If we do a budget, when Congress puts its budget together, 
would you recommend that at a minimum we put everything in 
there, so at least you're working with either X deficit or X-
plus deficit, at least you know what you're working with, 
before your colleagues and you convene here in the near future? 
Would you recommend we include those numbers in the budget?
    Mr. Bernanke. At the Federal Reserve, when we make 
forecasts of budgets, we try to make the most realistic 
forecasts we can, and we try to take into account all features 
of what Congress is likely to do, both on the tax side, say 
AMT, and on the spending side.
    So yes, clearly, good planning requires you to think hard 
about what you believe actual spending needs are going to be.
    Mr. Ford. Thank you.
    Let me ask you one or two other quick questions, Mr. 
Chairman, just as relates to some of the concerns that those in 
my district have about a variety of things.
    Despite an unemployment rate of 4.7 percent, both the 
employment cost index and average hourly earnings suggest that 
labor costs remain quite well behaved due to the strong 
productivity growth.
    Corporate profit margins remain robust, giving firms a 
cushion against price shocks and competition, sustaining a 
strong bias toward cost control that has short-circuited the 
field inflationary spiral.
    Is it simply fear of rising inflationary expectations 
rather than actual inflation that will drive further Fed 
tightening or other factors?
    Mr. Bernanke. Congressman, when we make policy, we have to 
take into account the fact that monetary policy works with a 
lag. It doesn't affect the economy in a day or a week or a 
month. It has its effects over 6 months, a year, or 18 months.
    And so we have to think about the forecast. We have to 
think about how the economy is likely to evolve over the next 
year or two.
    In addition, inflation expectations are important as an 
independent factor because, as I was indicating earlier, when 
inflation expectations themselves, as measured by surveys, for 
example, are low and stable, the economy itself will be more 
stable when it's hit by other kinds of shocks.
    So we do care about both inflation and inflation 
expectations.
    Mr. Ford. And finally, as Congress considers a variety of 
not only tax reform packages but even reform packages as 
relates to how we spend on pork spending here in the Congress 
or earmarks, as we like to call them, but the public calls them 
pork spending, you would recommend that as we look at spending 
and tax policies that we try our hardest--now let me say, I 
hate to put you on the record, Mr. Chairman, but I think it's 
important for all of us here who like to spend and who like to 
cut taxes to understand that they have real implications as the 
debt continues to rise.
    Is that fair to say? If our policies cause the debt to 
rise, that has real implications on what you do and what you 
don't do?
    Mr. Bernanke. Increased deficits are a negative for the 
economy, certainly.
    Mr. Ford. Huge deficits are a negative for the economy?
    Mr. Bernanke. Yes.
    Mr. Ford. So those who continue to cite the debt as a small 
percentage of, or they cite it as 2.5 or 3.5, only 4.5 percent 
of all that we spend, you think the number itself, so 8 
trillion versus this number compared to the economy, is as 
important as the percentage of our overall spending?
    Mr. Bernanke. Well, I think it is important to look at the 
percentage of the deficit as a share of GDP because that gives 
some indication of how big it is relative to the size of the 
economy.
    The point I tried to make earlier is that my particular 
concern is about the long run obligations of the Federal 
Government on the entitlements side, in particular, which are 
going to be putting a lot of pressure on the Federal deficit 
and the Federal budget in the long run.
    In the short run, we need to begin to plan ahead for those 
contingencies, and that means trying to be as efficient as 
possible in our spending and tax policies in the near term, as 
well.
    Mr. Ford. Thank you, Mr. Chairman, for the indulgence.
    Chairman Oxley. The gentleman from Georgia, Dr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    And I welcome you, Mr. Chairman and wish you the very best 
in your new role, and I want to echo some others and thank you 
for the responsiveness that you have given this morning to your 
questions.
    There are some benefits to coming late in the questioning, 
and one of them is that oftentimes we have an opportunity to 
clarify the record.
    There have been some things said that I'd like to just get 
your comment on.
    It's been said that the economic policies that we currently 
have are, quote, ``not working for the average American,'' 
unquote.
    Would you say that our economic policies are not working 
for the average American?
    Mr. Bernanke. The economy as a whole has recovered very 
strongly from the slow period earlier this decade, and I think 
that's very positive.
    We have strong GDP growth. We have low inflation. We have 
strong productivity growth.
    Compare our economy to many other industrial economies. We 
see that we've had a very good run.
    Mr. Price. All those things are positive for the average 
American?
    Mr. Bernanke. All those things are quite positive.
    The issue, the specific issue which we've been discussing 
is the fact that there has been some indication of increased 
inequality in wages and incomes, and a point I tried to make is 
that this is a relatively long-term--
    Mr. Price. Correct.
    Mr. Bernanke.--feature of the economy that goes back 
probably at least to about 1980, when we began to see the 
increased return to skills and education leading to a greater--
    Mr. Price. I would agree. I would agree.
    It's also been stated that we have as a Nation, quote, 
``disastrous trade policies,'' unquote.
    Would you say that we had disastrous trade policies in 
place?
    Mr. Bernanke. No, I wouldn't say that.
    Mr. Price. Thank you.
    Mr. Bernanke. I think we--
    Mr. Price. I want to go on because I've got some other 
questions. I appreciate that response.
    Regarding home ownership, it's been stated by some folks on 
the other side that, quote, ``There is massive 
discrimination,'' unquote, in the provision of mortgages.
    It's my understanding that home ownership for our Nation is 
at an all-time high, and that for comparable levels of wealth 
and income, do you believe that there's, quote, ``massive 
discrimination,'' unquote, in the provision of home mortgages 
for those comparable levels of wealth and income?
    Mr. Bernanke. I tried to make the point in my answer to 
that question that I thought a large part of the difference had 
to do with the differences in income and wealth between 
different groups in the population, which in itself is an issue 
that, you know, we hope to address over time.
    Mr. Price. Indeed.
    Mr. Bernanke. I don't think that there is massive 
discrimination, but I think that it does exist, and I think 
it's important for the Federal Reserve and other agencies to 
look carefully and make sure that banks and other lenders obey 
the law in their mortgage extension.
    Mr. Price. Okay. Thank you.
    I want to switch gears, if I may, because I think it's 
appropriate and important that you brought up the demographic 
changes that we have occurring in our Nation.
    And I think you said that those things needed to be 
addressed soon, and I would agree with that.
    Some have suggested in the area of Social Security that 
everything is fine, that we don't need to do anything right 
now, that, in fact, we may not need to do anything until 2042 
or 2052.
    What's your view on the speed at which Congress should 
address the issue of Social Security reform?
    Mr. Bernanke. I would just raise the point that people who 
are 35 years old today will not be retiring until 30 years from 
now, and the sooner we can address these issues and make 
whatever changes we are going to make, if we do make changes, 
the fairer it is to those people, because then they can better 
make their own plans, change their savings behavior, for 
example, so the sooner we can address these issues, the better.
    Moreover, from the point of view of financial markets and 
the like, the more confidence they have that Government is 
going to address these long-term deficits, probably the better 
the terms that we'll be able to borrow on and the more 
confidence there will be in those markets.
    Mr. Price. Thank you.
    There are some proposals that we ought to price index 
Social Security payments.
    Do you have any view as to that?
    Mr. Bernanke. I don't think I'll go into that issue.
    Mr. Price. I want to switch to the savings rate. I have, as 
I know that you do, real concerns about our level of individual 
personal savings.
    Do you have a sense as to what the appropriate level is for 
personal savings in terms of retirement security for an 
individual?
    Mr. Bernanke. It depends very much on the person's 
expectations in retirement, when they expect to retire, will 
they continue to work, and the like.
    I mean, one of the things which makes all this so difficult 
to forecast is that lifestyles are changing.
    We no longer have people retiring to Florida 100 percent of 
the time necessarily. Many people continue to work part-time, 
or work longer. My predecessor worked a bit beyond age 65, for 
example.
    So the amount of savings that people, individuals, have to 
do depends a lot on their plans and expectations.
    I think that it's arguable that a large share of the 
population is not saving enough to significantly augment Social 
Security and, therefore, to guarantee a comfortable retirement.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Price. Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for coming before our 
committee to testify.
    I realize that many have discussed the issue of China's 
yaun, the currency exchange rate, with you and that you're 
likely more familiar with all the models and mechanics that go 
into it than I am.
    Some have likely expressed concern about the decision of 
the Chinese to create a controlled float of their currency 
based on a basket of certain foreign currency exchange rates, 
including the dollar, the Euro, and other currencies.
    Other Members may have expressed support for China's 
decision, especially in light of what some have said to be its 
arguably unstable banking system.
    I understand further that many U.S. institutions are taking 
certain actions, such as making investments in China's 
financial services sector, to bolster the Chinese banking 
system and its economy.
    However, in economics, there truly is no black and white, 
but only shades of gray.
    In light of that perspective, how do you think the 
economies of the U.S. and China will fare in the future?
    Are they as interdependent as many claim? If so, do you 
foresee any potential conflicts arising between these two 
countries in the near or distant future in light of China's 
amazingly fast growth and its ever-increasing economic demand 
for raw materials, including iron, steel, and petrol?
    Chairman Oxley. Congressman, as we've seen in earlier 
episodes, such as the emergence of the Asian tigers or the 
emergence of Japan, when a new economic power comes into the 
global scene, it can produce lots of stresses and strains, and 
we have observed some of those stresses and strains.
    I think, though, that one of the stresses and strains that 
you already alluded to is the competition for global resources.
    Certainly one of the reasons that oil prices have gone up 
as much as they have is the increased demand for petroleum 
products by China.
    I do believe that there's an enormous amount of opportunity 
for cooperation between the United States and China in terms of 
trade, in terms of foreign investment, and I hope that will 
proceed positively, although I think I can safely predict there 
are going to be bumps in the road as these stresses and strains 
manifest themselves.
    I hope we'll continue to work positively with China and 
that when we have disagreements, that we'll work through 
international agencies like the World Trade Organization or 
others to try to resolve them as effectively as possible.
    Mr. Hinojosa. Since 9/11, we have reduced the number of 
student visas from China and many other foreign countries, and 
yet when you combine China, India, and Taiwan, they're 
producing about 700,000 engineers and technicians, and we're 
only producing about 70,000.
    So this worries me because we don't seem to have the 
mindset here in Congress to really invest heavily to be able to 
get more students into that pipeline in early years--third, 
fourth, fifth, sixth grade--so that they can get into those 
stem careers--science, technology, engineering, math.
    And it worries me that we just continue to increase the 
amount that we're importing from China and we're falling behind 
in producing those engineers.
    What do you recommend to those of us who have a 
responsibility to correct the acute shortage of scientists and 
engineers that I've mentioned to you?
    Mr. Bernanke. Congressman, a theme that's come up a few 
times in this hearing is education, and I agree a lot could be 
done for American K-12 education and for universities, as well, 
and Congress has a role to play there, and I hope that you'll 
continue to play a positive role in that area.
    On the number of engineers being produced, sometimes it's a 
question of apples and oranges. I'm not sure that an engineer 
is an engineer is an engineer. There are obviously different 
levels of qualifications and skills.
    And I think the United States, while we have to always be 
careful and look to our position in the world, remains a 
technological leader in terms of our skills, in terms of our 
technology and our research and development, so that's 
positive.
    I'd make one suggestion, or give one thought on the issue 
of engineers and scientists, which is that simply producing 
more engineers and scientists may not be the answer because the 
labor market for those workers will simply reflect lower wages 
or perhaps greater unemployment for those workers.
    Currently, there's not an obvious shortage of scientists 
and engineers in terms of the labor market indicators. That is, 
wages for engineers are not rising more rapidly than other 
professionals.
    So I think one way to address this issue is to ask, are 
there ways in which the Government can support basic research 
and in some sense produce a demand side that strengthens the 
market, that therefore brings people into science and 
engineering because there are opportunities there, not simply 
creating a bigger supply, which will then compete and drive 
down the wages in that category.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Price. Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman from New Mexico, Mr. Pearce.
    Mr. Pearce. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you very much.
    In the responses to inflationary pressures of energy, the 
idea of a supply increase, current supply increase of oil and 
gas, did not come up. Isn't that the easiest way to stem the 
price?
    Mr. Bernanke. Certainly. It is a way, certainly, to 
respond. And high prices in themselves of course provide an 
incentive to produce more supply.
    Unfortunately, a very large part of the world's oil 
reserves are located in areas--
    Mr. Pearce. In the U.S., we're artificially restricting 
through regulation and through restriction of access to the 
outer continental shelf and the--
    Mr. Bernanke. I argued earlier for regulation that 
accomplishes its purposes, that's sensible and predictable so 
that people will meet the standards being set but will not be 
arbitrarily delayed by ongoing port challenges, for example.
    Mr. Pearce. You had mentioned the appropriate size of the 
Federal Government was the function of Congress.
    Looking at Germany and the stagnation that they've had 
because it appears that there's a relationship between the high 
percent of Government spending to GDP. What is the target range 
where an economy will stay vital and growing versus stagnant?
    Mr. Bernanke. I don't have a target range to give you. If 
you have a higher share of Government spending in the economy, 
I think a lot depends on how well the money is spent. Is it 
being spent in ways that promote growth, for example, by 
creating skills or supporting research?
    If it's being spent in wasteful ways, obviously, that's a 
heavy burden on the economy, not only because of the resources 
being directly used, but because higher taxes in themselves 
will distort economic decisions and make the economy less 
efficient.
    Mr. Pearce. Looking 10 years into the future, when we're in 
the depth of the baby boom retirement and the number of skilled 
workers available, and again setting aside skilled versus 
unskilled on immigration, do you see enough reason that we'd 
need workers to come into the country, or do you think we can 
solve our internal problems with the people who are available 
in the next generations?
    Mr. Bernanke. Well, I think first of all that immigrants 
are an important source of energy, vitality, and work ethic, so 
I think immigrants are very positive for the economy, and I 
wouldn't make it an either/or proposition.
    I think we should allow legal immigrants, but I think we 
should also make sure that our own citizens are well educated, 
well prepared, and able to--
    Mr. Pearce. But as far as the quantity of workers, you 
don't have an opinion?
    Mr. Bernanke. No. The economy grows along with the quantity 
of workers available, so if there are more workers, the economy 
will just be correspondingly bigger.
    Mr. Pearce. There is speculation, Mr. Chairman, that you 
would encourage a transition from the dual mission of price 
stability and full employment mission of the Fed to a single 
mission of inflation targeting.
    Do you intend to lobby for that change or to encourage that 
change to occur?
    Mr. Bernanke. Absolutely not, Congressman. I completely 
subscribe to the dual mandate of price stability and maximum 
sustainable employment.
    The modest and incremental changes which I have discussed 
and which I will continue to discuss with my colleagues are 
intended solely to allow the Federal Reserve to meet both parts 
of its mandate more effectively and more efficiently.
    Mr. Pearce. The idea of surpluses as far as the eye could 
see back at the end of the Clinton time, was that a real 
phenomenon or was that a fictitious phenomenon?
    In other words, what we've heard testimony as the dotcom 
ramp-up and the associated capital gains off those stocks that 
were valued at zero and went very high, that the entire 
increase of revenues and projection of revenues was simply 
those imaginary increases which then deflated back down, and 
actually the revenues, when they sank, sank back to where they 
were consistent with the increase before--was that a fictitious 
thing or were those--should we have increased the size of our 
budget based on those surpluses?
    Mr. Bernanke. The share of GDP that took the form of 
revenues in 2000 was about 21 percent, which was the post-war 
high, and certainly in retrospect, we can say that a good bit 
of that was due to the unsustainably high level of the stock 
market, in particular, capital gains, bonuses, and stock 
options, and the fact that firms did not have to contribute so 
much to their pension plans because their valuations were 
rising with the stock market and, therefore, they reported 
higher profits.
    So a significant portion of the tax collection clearly was 
related to the stock market boom of that period.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from New York, Mr. Crowley.
    Mr. Crowley. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman, and welcome to the committee on 
the first of many, many visits to this room and before this 
committee.
    I have a question dealing with some of the legislative 
proposals being recommended by the President and Republican 
Congress with respect to the health insurance that's provided 
to American workers and to their families.
    And I'd like to begin by pointing out some what I believe 
are very scary facts about the Bush administration and this 
Congress with respect to the care of American workers.
    The fact is that between 2000 and 2004, the number of 
Americans lacking health insurance grew by 6 million to almost 
46 million Americans, and that number is growing; it is not 
shrinking.
    Another fact is that in 2004, the percentage of people with 
employer-provided health insurance declined for the fourth year 
in a row; 3.7 fewer people had it in 2004 than had it in 2000.
    Now as a so-called remedy, the President, in the 2000 
budget, is calling for the expansion of health savings 
accounts.
    The Administration's budget would give greater tax breaks 
to people who shift health insurance plans with a high annual 
deductible from $1,050 or more, compared to the $300 to $400 of 
deductible found commonly among employer-sponsored insurance 
plans.
    At least 3 million people have high deductible health 
insurance, but this still represents a small segment of the 
about 195 million Americans with private health coverage.
    I believe the HSA plan would encourage employers to opt out 
of traditional health insurance plans they offer to workers and 
their families and place them with these HSAs, allowing workers 
to save under these plans for their own health care choices, 
albeit paying far, far more than they would in the annual 
deductibles that they have in their present plans, three or 
four times more.
    The Administration touts studies showing that HSAs would 
appeal to higher-income workers, as it allows individuals to 
accumulate money tax free in accounts that they can take with 
them from job to job, but studies also show that low-income and 
middle-income people have little if any leeway in their own 
budgets to accumulate or save money in HSAs. We can't get them 
to save in bank accounts.
    And this is something that was reinforced in this year's 
Economic Report of the President drafted by the Council of 
Economic Advisors, which you chaired until you assumed this new 
position.
    This report shows the U.S.A. has a negative savings rate, 
something we haven't seen since the Great Depression.
    So seeing the President's plan for HSAs, which are based on 
workers saving money for their own health care, and your own 
council's report that workers have a negative savings rate in 
our country, and that other tax incentives for savings have 
could you tell me how can workers, especially middle-income and 
lower-income workers, actually save the funds to create so-
called health savings accounts when they haven't taken 
advantage of IRAs and other savings mechanisms? Can you give us 
an example?
    Mr. Bernanke. Congressman, first of all, let me just 
acknowledge the very important problem of the rising cost of 
health care.
    I mean, that is the underlying reason that the price of 
insurance remains high, why employers are either dropping plans 
or increasing the share that they require their employees to 
pay.
    So that is the underlying problem, and I urge Congress to 
make this a very high priority because it's something that 
bears not only on the efficiency and competitiveness of our 
economy today, but obviously, through Medicare and Medicaid, it 
has an important implication for our long-term fiscal 
stability.
    Unfortunately, as you've mentioned before, I had a 
different hat. I've changed hats. I'm now at the central bank.
    And I think again, as I've mentioned, in my current role, 
I'd like to stay away from endorsing, either directly or 
indirectly, specific plans.
    I guess a question I'm not really even sure of the answer 
to is exactly what the 3 million HSAs have been taking up.
    I don't know precisely, but I don't think that it's been 
entirely upper-income people who have taken those up. I don't 
know that--
    Mr. Crowley. I'm not asking you for an endorsement, Mr. 
Chairman, for this plan or for any plan at this point in time.
    But what I'm asking for I guess is do you think it's 
realistic if lower-income Americans and middle-income Americans 
are not taking advantage of tax incentives to save right now, 
or fully taking advantage of them, how can we expect them to 
then now save for health care when they don't have the 
resources to save for themselves, for health care and a higher 
deductible than they are right now?
    I mean, where's the incentive for them to do that?
    Mr. Bernanke. My understanding of the President's budget is 
that it includes tax credits and other assistance to lower-
income people who--
    Mr. Crowley. If they're not using those right now for other 
forms of savings, how are we to believe they're going to use 
them for their own health?
    I mean, it just goes to show they live paycheck to 
paycheck. How can they then therefore afford to pay for their 
health if they're not even paying for their future?
    Chairman Oxley. The gentleman's time has expired.
    Mr. Crowley. I thank the chairman.
    Chairman Oxley. The gentleman from Pennsylvania, Mr. 
Fitzpatrick.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Good afternoon, Chairman Bernanke, and welcome.
    I represent Southeastern Pennsylvania, including Bucks 
County, which is near to your old neighborhood, and we 
appreciate your service in this way.
    We also value education very highly. A number of questions 
today about education.
    I'm proud to see that, especially in the area of science, 
the nations of China and India are investing very heavily now, 
we've had that discussion, in science and technology and 
engineering.
    The New York Times journalist, Thomas Friedman, wrote a 
book called, ``The World is Flat'' which stands for the 
proposition that as we lose this race in education--science, 
technology, engineering, and math--this is not only bad for the 
economy, but it also may rise to the level of a national 
security threat.
    I was wondering if you shared that opinion.
    Mr. Bernanke. I think it's somewhat overstated at this 
point in time.
    The United States is still a far richer country than China, 
for example, and we still have a very substantial world 
leadership in technology and in high-tech skills and high-tech 
industries.
    Having said that, I agree absolutely that it's important 
that we work hard to maintain that leadership, and that should 
take place through continued support of research and 
development, education, and all the things that you mentioned.
    Mr. Fitzpatrick. I appreciated your comments earlier that 
it's important not just to train in these areas of science and 
technology but also to make sure that there are jobs available 
and there's opportunity and opportunity for wage increases in 
those areas.
    The President recently has made quite a number of comments 
about the need to invest in alternative fuels.
    Do you feel as though this new area, this new area of 
investment, this area that we need to go to as a Nation, will 
provide opportunity for scientists and engineers in the future 
here in America?
    Mr. Bernanke. There is a case, I think, for the Government 
to be involved in basic research, that is, research that 
private companies would not find it in their interest to 
undertake because they would not feel able to capture the 
financial benefits of that research.
    Energy has been an area where the Government has played a 
very important role in developing new technologies, so my 
general answer is yes, but I would say that the Government's 
role should be more at the upstream end, ant more basic levels, 
because more downstream, the corporations will have sufficient 
incentive from the market to implement these new technologies 
and to develop them.
    Mr. Fitzpatrick. Yes, sir, and I want to associate--I 
appreciate your comments earlier regarding technical education 
and community colleges.
    This is a town with a lot of programs, a lot of programs 
about education create at different times, and disparate kind 
of treatment of these programs.
    Do you have any--would you have any public policy 
suggestions on ways to better coordinate the way we here in the 
Nation's capital deal with funding education?
    Mr. Bernanke. I can make one suggestion, which is that what 
we think about funding the student rather than the school, that 
is, that we provide individuals with the choice where they want 
to go and how they want to use money, rather than necessarily 
funding the institution.
    So in that respect, we utilize the market and choice as a 
way of creating competition among different schools and 
institutions.
    So that's one strategy, a general strategy that one might 
consider.
    Mr. Fitzpatrick. Thank you, I appreciate that. I yield 
back.
    Chairman Oxley. The gentleman yields back.
    The gentleman from Utah, Mr. Matheson. Congratulations to 
your constituent on a gold medal.
    Mr. Matheson. We appreciate your acknowledging that, Mr. 
Chairman. Winter sports capital, you know.
    Chairman Oxley. Yeah, we don't have too many skiers in 
Ohio.
    Mr. Matheson. You're welcome to come and spend all the 
money in skiing in Utah that you want.
    Mr. Chairman, thank you and welcome to your first hearing 
before the committee.
    I do want to reiterate what a couple of my colleagues said 
about the importance of getting our fiscal house in order, and 
I appreciate your comments on stating the case for why, over a 
prolonged period, continued deficit spending creates some 
concerns, and I encourage you to be forceful on that.
    And while I don't expect you to come up with a specific 
spending cut or tax issue or whatnot on that, I would suggest 
that Congress had budget enforcement rules in place they 
enacted in 1990; they expired at the end of 2001; they were an 
important structural component of what allowed us to get our 
arms--Congress to get its arms around what I thought was an 
out-of-control deficit and actually move to a surplus, and I 
think that that would be something that I would suggest you 
might want to advocate for going forward, as putting in some of 
those structural components that help move us to more of a 
reasonable fiscal policy at the Congressional level.
    I think that would be real helpful if you would do that, 
and I want to associate myself with the comments of Mr. Moore, 
who raised those issues.
    A question I wanted to ask you is, I know the Federal 
Reserve has expressed, and some folks on this committee for 
that matter, have expressed concerns about the mixing of 
banking and commerce, when the commercial entity is owned by a 
corporation.
    And I wanted to ask you about that issue in the context of 
many independent banks that are owned by businesspeople who 
also own other local businesses, commercial businesses, for 
example.
    Does the Federal Reserve's concern about mixing banking and 
commerce extend to the common individual or family ownership of 
banks and non-financial commercial businesses?
    Mr. Bernanke. I don't believe so, as long as the businesses 
are legally separate. I may be mistaken, but that's my 
understanding.
    Mr. Matheson. But I am talking about common ownership in 
terms of a local bank and--so you're not concerned about the 
mixing of banking and commerce with the same ownership?
    Mr. Bernanke. I don't think so, but I would like to think 
about it a bit more.
    Mr. Matheson. Okay. I would encourage that, as we hear 
these discussions about banking and commerce, and obviously 
you've heard from other colleagues on the committee related to 
the industrial loan companies there may be a broader issue out 
there in other constituencies that, you know, those same 
discussions maybe should be looking at.
    And in terms of the industrial loan company discussions, 
you know, the state I'm from is the State of Utah.
    What I would suggest is that we have an even-handed 
approach in looking at this issue, in trying to make sure that 
when it comes to the information that is put out about the 
issue that it is accurate, and we can tone down some of the 
rhetoric.
    I think an even-handed approach of looking at this serves 
everybody, both this committee and the Federal Reserve and 
everybody in the best way possible, and I encourage the tone of 
that discussion to take on that.
    That would be my other suggestion for you, as you take your 
role as chairman.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    Chairman Oxley. The gentleman yields back.
    The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you.
    Thank you, Mr. Chairman.
    Mr. Chairman, I certainly want to welcome you to your new 
position, and you come with such great credentials from 
Harvard, MIT, Princeton.
    It seems like the only one you're missing is the Wharton 
School of Finance at the University of Pennsylvania.
    Of course, that's where I graduated from, but I won't hold 
that against you, because you have the one sterling criterion, 
which is you're a native of my home state of Georgia, so as a 
fellow Georgian, I welcome you.
    Let me start out by first of all reading something you 
said, which I think is very interesting, concerning your 
independence. You made a very, very good statement.
    You said in your hearings, you stated, ``I will be strictly 
independent of all political influences and will be guided 
solely by my mandate from Congress and the public interest''--
which is very good.
    I want to give you this opportunity to begin that process.
    This deals with our tax relief package, the tax cuts, the 
permanency of tax cuts at a time of great uncertainty and great 
demands.
    You're looking at one here who supported the tax cuts, the 
earlier tax cut relief because I thought they did well in 
stimulating the economy, and they did so.
    But permanency at a time when our fiscal health is in dire 
straits, at a time of great uncertainty--we don't know what 
energy costs are going to be; we don't understand and fully 
grasp the meaning of what the war on terror is going to be; 
we've not been able to adequately even respond to natural 
disasters like Katrina at a time when global warming says there 
are going to be more of these. In order to offset these tax 
cuts, we're going to have to cut dire programs of the American 
people--Medicare, Medicaid, 45 million Americans have no health 
insurance at all; on top of that, we are borrowing 45 percent 
of our debt from foreign countries, over half of it from China, 
India, and Japan, at extraordinary interest rates in and of 
themselves, and that debt has gone, just to our foreigners, 
from 1 to 20 trillion dollars in just the last 2 years.
    My point is, if you're going to really respond to the 
mandate of Congress and the public interest, I urge you to 
speak independently.
    When the President asks you, ``Is this the time,'' not 
whether tax cuts are good, not whether making them permanent is 
good, but given the crisis, the situation that our financial 
health is in, ``This is not the time to make them permanent, 
Mr. President.''
    Would you do that?
    Mr. Bernanke. I stand by my earlier statement that I'm 
going to be independent and nonpartisan, and I think making a 
specific recommendation as to a specific tax--
    Mr. Scott. Well, would you make the recommendations? Would 
you make the case?
    You are our number one economist. You are the person that 
we all look to for that advice.
    You can't just sit there and say, ``I'm not going to.'' I 
mean, you're not there to just sit on the middle of the fence 
and not do anything.
    Mr. Bernanke. No, but--
    Mr. Scott. These are serious issues, and I believe that 
given your background and your interest--and I've read your 
background very thoroughly--I'm just urging you--and I'll take 
back; I'm not going to put you on the spot, and I understand 
where you're coming from on that.
    But I just urge you to use your position to speak to the 
critical nature of the financial health we're in, that it would 
be foolhardy to make a permanent tax cut on issues at times 
when this Nation is in such a perilous state with our financial 
health and our debt and all the other things that I had 
mentioned.
    Now, before my time is up, I do want to go to another point 
that you talked earlier about, the dual mission of fighting 
inflation and growing employment. Those are the two dual 
missions of your mission.
    And you spoke earlier about your affection for targeting 
inflation, or targeted inflation, and you said that that would 
not take away from the other side of the mission of employment.
    What I'd like to urge you to do is to target employment. If 
you're going to have a targeting of inflation as a part of your 
portfolio as you come in, which is good, I urge you to have a 
targeting of employment, because again, let me just tell you or 
show you just a few of the statistics here, and I'll be very 
brief--
    Chairman Oxley. The gentleman's time has expired. Will you 
wrap up?
    Mr. Scott. Yes, I will--that there are 37 million people 
who are classified as poor now that were not in 2000, and over 
that same period, there was a 24 percent increase in the number 
of families considered desperately poor, and that there is 
another burgeoning class of folks who have just given up, who 
are discouraged, and are not even seeking employment.
    We have a terrible problem in unemployment in this country. 
It is not a rosy picture.
    And what I urge to you would be, just as you target 
inflation, let's have some targeting of employment.
    Chairman Oxley. The gentleman from Alabama, Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Chairman Bernanke, welcome to the committee and thank you 
for being indulgent enough to stay past your allotted and 
appointed time.
    Let me come at Mr. Scott's first question from a slightly 
different angle.
    As you've, I think, already figured out about Washington, 
D.C., most of our policy arguments tend to get reduced to very 
stark either/or propositions.
    People on my side of the aisle tend to be very skeptical of 
the tax cuts and tend to say that, all things being equal, we'd 
just as soon repeal them.
    People on the other side of the aisle say that the tax cuts 
in their entirety are indispensable to the health of the 
economy.
    There obviously is a middle ground in which a significant 
portion of the tax cuts would be retained, but there would be 
some adjustment in the marginal rates.
    For example, if my numbers are right, the average person 
earning over $1 million gets roughly $103-105,000 in tax relief 
a year.
    You could shave that number down slightly by making a few 
adjustments to the marginal rate go down to say 85 to 90. That 
person will still get a substantial tax cut.
    The budget would recoup enough money to altogether pay for 
the cost of some of the budget cuts that have been debated the 
last few years.
    I fully understand that your function is not to weigh into 
given disputes about policy choices, but let me ask you a 
broader question.
    Can we make marginal readjustments to the tax rate without 
doing violence to the economic recovery?
    Mr. Bernanke. Again, if I may address the former question 
as well, I do think it's very important for me to talk about 
the broad issues here, and I think again the fundamental issue 
is the size of the Government budget.
    Now, you asked me if you could make marginal changes to the 
tax.
    You can make marginal changes probably to anything. You 
could also make marginal changes to spending, of course, you 
know.
    And my point only is that while it's up to me, I think, to 
point out the necessity of maintaining fiscal discipline over 
the long period, I just don't want to be injecting myself into 
the specifics of how to do that. I think that's Congress's 
prerogative.
    Mr. Davis. And I fully agree with you and understand that, 
but I just want to isolate that point and don't want to stretch 
out things by asking you to repeat it.
    But it seems you agree that of course, as with anything, 
you can make marginal changes without doing violence.
    That is not a minor observation in the context of these 
debates because, as you know, people on one side of the debate 
tend to say, ``No, we need every single dime from these 
Medicaid cuts; we need every dime from these Medicare cuts; and 
we can't forego one inch of the tax cuts because it would slow 
down the economy.'' That's the way the argument plays out.
    Let me ask you a secondary question.
    Mr. Frank asked you a number of questions earlier about the 
phenomenon of income and equality, and I understood you to 
endorse Chairman Greenspan's observations that we have a 
problem in that area.
    Once again, we put it in context. There's an interesting 
phenomenon that we see in our budget debates.
    It's the phenomenon of cuts that are inconsequential as far 
as the deficit goes, but are enormously significant to the 
affected individuals.
    Classic example: the Congress, by a very narrow margin a 
few weeks ago, approved a budget reconciliation package that 
saves about $3.5 billion worth of Medicaid, as you know, a 
fractional amount in a $2.9 trillion discretionary budget.
    At the same time, even that small amount it's estimated 
will raise costs and premiums for 13 million Medicaid 
recipients. CBO estimates that the effect of that will be 
60,000 people losing their Medicaid coverage.
    So the question that I would pose to you is, should we be 
concerned, or what's your reaction to this phenomenon of budget 
cuts that are frankly inconsequential as far as the deficit 
goes but that could widen the economic inequality which you 
decry?
    Mr. Bernanke. Well, every cut is going to be painful to 
somebody.
    I mean, it's really, you know--
    Mr. Davis. But some could widen the inequality, couldn't 
they?
    Mr. Bernanke. I think that, again, without being too 
specific, I think the question is what is the best way to use 
the money, and there may be different programs that are more 
effective than others.
    Mr. Davis. But the last point, as my time runs out, you 
would acknowledge that some policy choices by the Congress 
could have the effect of actually exacerbating the income 
inequality which you were concerned about?
    Obviously, making poor people pay more for health care 
takes more of their discretionary income away and that could 
tend to widen the gulf between rich and poor. You would agree 
with that, I assume?
    Mr. Bernanke. There may be different ways of paying for a 
cut, though.
    There could be ways you could transfer from some other 
program, so--
    Mr. Davis. Right, but there are ways of paying for it that 
widen inequality.
    Mr. Bernanke. This is why these are value judgments, and 
there's no scientific way to answer your question.
    It's up to the Congress to decide what are the priorities 
that we want to address, be it on the tax side or on the 
spending side.
    This is what the people have elected you to do, and clearly 
it's your responsibility.
    Mr. Davis. Thank you--
    Chairman Oxley. The gentleman's time has expired.
    And batting cleanup, the gentleman from Missouri, Mr. 
Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Bernanke, Mr. Chairman, do you support the seniority 
system in Congress that made me the last person to have the 
chance to discuss with you, and do you believe that it 
contributes to, let's say, inflation of the bladder if--
    Go ahead, Mr. Chairman.
    Mr. Bernanke. I'm very interested in hearing your question, 
sir.
    Mr. Cleaver. I am extremely concerned about the debt, as I 
think many of my colleagues have expressed, with China, Japan, 
and the U.K. holding $1.3 trillion of that debt.
    What impact on the U.S. economy would take place if China 
made the decision that they would invest internally or in 
Europe rather than the U.S.? If they called in their debt, what 
happens to the U.S. economy?
    The Chinese hold like $255 billion of our debt. What 
happens if they call it in?
    Mr. Bernanke. Congressman, China is not holding our debt 
because they want to be nice to us.
    They're holding it because they value the fact that this 
debt is being traded in deep, liquid, and safe financial 
markets, and so their own interest is in holding this debt.
    And despite occasional rumors of diversification and the 
like, generally speaking, there's not been, as far as I know, 
any significant changes in the amount of debt, U.S. debt or 
U.S. dollar-denominated assets being held by China, and any 
sharp change really would not be in their interest to 
undertake.
    I think that the financial markets are really very deep and 
liquid for U.S. dollar assets.
    If you include not only U.S. Government debt, GSE debt, but 
also highly rated corporate debt, for example, the size of the 
market for high-rated U.S. dollar credit instruments is perhaps 
$40 trillion, something along those lines, which means that 
China is only holding a few percentage points of that debt.
    So I'm not deeply concerned about this issue. I think that 
realistic changes in China's portfolio are not going to have 
major impacts on U.S. asset prices or interest rates.
    The issue is not so much the change in China's portfolio. 
The issue really is the fact that we are consuming more than we 
are producing domestically.
    That means that foreign debt is increasing, and there may 
come a period or a time when foreigners are not willing to 
continue to add to their holdings of U.S. dollar assets, and 
that will in turn lead to perhaps an uncomfortable adjustment 
in the current account.
    Mr. Cleaver. That's where I'm going.
    Mr. Bernanke. Right. It has not so much to do with the 
portfolio choices in the short run.
    It's really whether over the long period, are foreigners 
willing to keep financing our consumption, our imports. So I 
think it's important, and we're probably in agreement, I think, 
it's important over a period of time for us to begin to bring 
down that current account deficit, and I think that a 
combination of increased U.S. national savings, greater demand 
in other countries, and more flexibility in exchange rates, put 
all together, will allow us over a period of time to bring the 
current account deficit down to a somewhat lower level.
    Mr. Cleaver. This is my final point here.
    So if OPEC and China and whomever else made a decision that 
they would in fact discontinue buying U.S. paper, you're saying 
that it would have little consequence on the U.S. economy right 
now, today?
    Mr. Bernanke. You envision them selling everything they 
currently own?
    You've got to sell to somebody.
    Mr. Cleaver. Yes.
    Mr. Bernanke. Somebody else has to hold those assets.
    No, I think it's less to do with the dollar portfolio than 
it has to do with the fact that over a period of time, we have 
to rely on foreign financing for the current account deficit. I 
don't think that foreigners will in some sense refuse to 
finance it, but they may charge a higher price, and that higher 
price in turn would feed back on the U.S. economy in ways that 
might be uncomfortable.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Cleaver. Thank you.
    Chairman Oxley. Before dismissing our distinguished 
witness, the Chair notes that some members may have additional 
questions for the Chairman which they may wish to submit in 
writing.
    Without objection, the hearing record will remain open for 
30 days for members to submit written questions to the witness 
and to place his response in the record.
    Mr. Chairman, we have been most appreciative of your time 
and the quality of the responses that you gave to our 
committee.
    You can tell by the variety of questions from the members 
from all over the country that this is a worthwhile exercise 
and your participation is most appreciated.
    The committee stands adjourned.
    [Whereupon, at 1:18 p.m., the committee was adjourned.]
                            A P P E N D I X



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