[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
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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
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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
February 15, 2006
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