[Senate Hearing 109-551]
[From the U.S. Government Publishing Office]
S. Hrg. 109-551
NOMINATION OF BEN S. BERNANKE
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
the nomination of ben s. bernanke, of new jersey, to be a member and
chairman of the board of governors of the federal reserve system
NOVEMBER 15, 2005
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Aaron D. Klein, Democratic Economist
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
C O N T E N T S
TUESDAY, NOVEMBER 15, 2005
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Dodd................................................. 2
Senator Sununu............................................... 4
Prepared statement....................................... 65
Senator Sarbanes............................................. 4
Senator Dole................................................. 6
Senator Johnson.............................................. 7
Senator Martinez............................................. 8
Senator Carper............................................... 9
Senator Bennett.............................................. 10
Senator Reed................................................. 10
Senator Hagel................................................ 11
Senator Stabenow............................................. 12
Senator Allard............................................... 13
Senator Bayh................................................. 34
Senator Schumer.............................................. 41
Senator Menendez............................................. 66
Ben S. Bernanke, of New Jersey, to be a Member and Chairman of
the Board of Governors of the Federal Reserve System........... 14
Biograhpical sketch of the nominee........................... 53
Response to written questions of Senator Bunning............. 67
NOMINATION OF BEN S. BERNANKE
OF NEW JERSEY, TO BE A MEMBER AND
CHAIRMAN OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
TUESDAY, NOVEMBER 15, 2005
Committee on Banking, Housing, and Urban Affairs,
The Committee met at 10 a.m., in room SD-106, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
This morning, we are meeting to consider perhaps the most
important nomination that ever comes before this Committee,
that of the Chairman of the Federal Reserve System. This will
be the first time in nearly 20 years that the Congress has had
a new nominee for its consideration. President Bush has made a
superb appointment in naming Dr. Benjamin S. Bernanke to serve
as a Member and as Chairman of the Board of Governors of the
Federal Reserve System.
The Federal Reserve would have a big enough job to do if it
were tasked with serving only as a central bank for the United
States. However, as the United States continues to lead the
world economy, sound stewardship of the Federal Reserve affects
the global marketplace. The Federal Reserve also shoulders the
responsibility for supervising some of the world's most complex
financial holding companies. In addition, as technology
continues to evolve, the Federal Reserve must adapt and
innovate to provide an effective payment system for our
Chairman Alan Greenspan has been the face and the voice of
the Federal Reserve for over 18 years. During his tenure, the
U.S. economy and the financial system withstood a number of
significant challenges, including the stock market crash of
1987 and the Asian debt crisis. His tenure also includes the
1991-2001 economic expansion, the longest in American history.
These are among the reasons Chairman Greenspan is considered by
some to be the greatest central banker of all time.
Stepping into Mr. Greenspan's shoes will be a tremendous
challenge. While it may seem a daunting task to follow as
distinguished a Chairman as Alan Greenspan, we should be
mindful of two things. In 1987, many observers were concerned
about whether an economist name Alan Greenspan could
successfully follow in the wake of the vaunted Paul Volcker. We
now know how the experiment turned out. Each person who sits in
the Chairman's seat has the opportunity to make that position
his own and to become a leader in his own right.
Second, many have observed that President Bush has selected
the best possible candidate to serve as the next Federal
Reserve Chairman. Dr. Bernanke may well be the finest monetary
economist of his generation. With his distinguished career as
academic, he is eminently qualified and extremely well-versed
in monetary policy issues.
Furthermore, Dr. Bernanke is more than an esteemed
academic. Dr. Bernanke served with distinction as a Member of
the Board of Governors of the Federal Reserve System. This
experience gives him an inside knowledge of the Federal Reserve
and also financial markets. In speaking out on a variety of
important economic issues, he earned tremendous respect and
confidence from policymakers in this country and around the
Dr. Bernanke's other professional experiences are also
significant here. Prior to becoming a Member of the Board of
Governors of the Federal Reserve, Dr. Bernanke served as
Chairman of the Economics Department at Princeton University.
Before arriving at Princeton, Dr. Bernanke had been an
Associate Professor of Economics and an Assistant Professor of
Economics at the Graduate School of Business at Stanford
University. His teaching career also included serving as
Visiting Professor of Economics at New York University and the
Massachusetts Institute of Technology.
Dr. Bernanke also served as the Director of the Monetary
Economics Program of the National Bureau of Economic Research.
He received a B.A. in economics in 1975 from Harvard University
summa cum laude, and a Ph.D. in economics in 1979 from the
Massachusetts Institute of Technology.
Dr. Bernanke, this Committee knows that you have an
important job in front of you. We are also confident you have
the right set of skills to lead the Federal Reserve System.
We look forward to hearing your statement today and the
interesting discussion that will follow.
But I want to say at the outset that we have seven roll
call votes scheduled beginning around 10:45, so we are going to
continue this hearing until probably 10:55 or something like
that, and then recess until 3 o'clock and go forward, if it is
okay with you.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Thank you very much, Mr. Chairman, and, Mr.
Bernanke, welcome to the Committee. We had a chance to chat on
the phone the other day, and this is a challenging opportunity
the President has given to you. I know you must be grateful to
him, and we are looking forward to your testimony here today.
As my custom is, I will withhold, as I am sure most of my
colleagues will, probably, any final judgment on your
nomination until we have completed the process here. But I want
to acknowledge at the outset that the President, in my view,
has made a superb decision in nominating you. Your academic
credentials, as the Chairman has pointed out, are tremendously
impressive, if not unsurpassed.
In fact, I made the comment to the nominee coming in, Mr.
Chairman, that when overlooking the list of the number of
publications the nominee has authored over the years, I suppose
we should be thankful he is not a nominee for the Supreme Court
of the United States. We would spend a year examining his
written credentials from those publications.
The chairmanship of the Federal Reserve, as the Chairman
has pointed out, is not just another Government job, obviously.
It is, arguably, the most important position in our country
with respect to our Nation's economy. The decisions made by the
Chairman and his colleagues on the Board affect every single
citizen in a very profound way. The Federal Reserve is
responsible, as we know, for setting interest rates and
ensuring the safety and soundness of financial institutions. It
represents U.S. interests and negotiations with foreign and
international regulators, and its Chairman bears the
responsibility for protecting consumers from unscrupulous,
illegal, and predatory financial practices.
As we have seen repeatedly over the years, the opinion of
the Federal Reserve Chairman on economic policy matters goes
beyond the institution's official jurisdiction and carries an
enormous amount of weight that can have significant
implications. One need look no further than 2001, when your
predecessor Alan Greenspan's support for the President's tax
cuts, however qualified it may have been, was perceived as a
major cause for their enactment--which has led to deep budget
deficits, I might add, and the widening inequality of wealth in
We know from previous experience that the position of the
Federal Reserve Chairman requires several important qualities,
such as intelligence, experience, and good judgment, most
importantly in the face of a crisis. The markets need to know
they can trust the Chairman of the Federal Reserve, and
developing this trust requires an understanding of the need for
independence from the President and the Administration,
particularly from the one run by the President who has
appointed the Chairman, and especially in your case, Dr.
Bernanke, from an Administration in which you are still
currently employed as a spokesman for a specific economic and
Successful Chairmen have also been able to balance the dual
mission of the Federal Reserve as embodied by the Federal
Reserve Act, ``to promote effectively the goals of maximum
employment, stable prices, and moderate long-term interest
In the 1990's, we had a remarkable period of both price
stability and high employment. Obviously, that was due in part
to technological innovation and the development of the
technological sector. But there is little doubt that the
preconditions for economic growth were laid earlier in the
decade when a newly elected Democratic President joined with
the Republican-appointed Federal Reserve Chairman to pursue a
commitment of fiscal responsibility and effective monetary
policy. The result was a reduction in poverty rates, an
increased standard of living for the middle class, and the
first budget surplus in three decades.
So, Dr. Bernanke, I look forward to discussing with you
today these issues and how we can return to achieving the
results that we had only a few years ago. And, again, I welcome
your nomination. I congratulate you on having received it and
look forward to working with you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Sununu.
STATEMENT OF SENATOR JOHN E. SUNUNU
Senator Sununu. Thank you, Mr. Chairman.
It is a pleasure to have you in front of us, Dr. Bernanke.
I get the sense that you have put on some a charm offensive
over these past weeks, and I imagine you received a number of
awards in your academic career. But you probably were not voted
the most likely to conduct a charm offensive on the U.S.
Senate. Your reviews of the various meetings you have had with
Members I think have been very positive, and it is just a
credit to your professionalism, in part, because it is not an
easy task to come before us and to be prepared to answer all
these questions. People want you to weigh in on all kinds of
policy issues, some of which you are probably qualified to
comment on, some you may not be.
As the Chairman and others have pointed out, you do come
with very impressive credentials, a great academic and
educational background, although I think having been educated
at both Harvard and MIT, it is probably a sign of having a
conflicted personality to a certain degree.
We do not have the facts in front of us to support the
conclusion that you are the most qualified or finest economist
of your generation. But for the purposes of this hearing, I am
willing to assume that and to work from there.
I look forward to hearing from you about your approach to
monetary policy. Price stability is absolutely critical. I
think it is due or it has resulted in large measure to the
great performance of our economy cited by Senator Dodd. And
while everyone expects or hopes for a pretty smooth transition,
there are differences in approach that you will take relative
to Chairman Greenspan.
Your support for greater transparency and your success in
advocating for real changes that result in a more open Fed
deserve great commendation and recognition. I will be
interested to hear more about the progress that can be made
along those lines and more about any changes that might be made
to improve the clarity in the approach that the Fed takes to
So, I certainly wish you well and look forward to your
Thank you, Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. First
of all, I want to thank you for scheduling this hearing in a
very timely manner. I join my colleagues in welcoming Dr. Ben
Bernanke to the Committee. He is no stranger. He has been here
before, both to be a Member of the Federal Reserve Board of
Governors and then to be Chairman of the President's Council of
Of course, he has now been nominated to a 14-year term as a
Member of the Board of Governors and also nominated to be the
Chairman of the Federal Reserve Board of Governors, a 4-year
As I understand it, Mr. Chairman, we are going to
reconvene, because of this series of votes that are scheduled,
again in the afternoon.
Chairman Shelby. Three o'clock.
Senator Sarbanes. Yes. The Federal Reserve Act of 1913,
which established the Federal Reserve System, set the 14-year
terms for the Members of the Board of Governors of the Federal
Reserve. I think that clearly reflected the intention of
Congress at the time in enacting this legislation to place the
Federal Reserve Board and its individual Members beyond the
reach of any given Administration and the political pressures
of the moment.
Actually, the 14-year term is the longest we give to any
official in the Government other than the lifetime appointments
for members of the Federal judiciary.
I think it is fair to say or it certainly has come to be
the case that the credibility of the Federal Reserve rests in
large part on broad confidence in its independence in the
judgments it makes, and obviously, if that confidence were to
be undermined, the stature of the Board would be gravely
diminished, and that in turn would have serious consequences, I
think, not only for our national economy but also, indeed, for
the world economy.
So, obviously, we are looking forward to hearing from Dr.
Bernanke about this important role of the independence of the
Federal Reserve in rendering its judgments.
My colleague Senator Dodd has made reference to the other
major point I wanted to make, and that was the Federal Reserve
Act provides as the goals that the Board of Governors of the
Federal Reserve System and the Federal Open Market Committee
shall maintain long-run growth of the monetary and credit
aggregates commensurate with the economy's long-run potential
to increase production so as to promote effectively the goals
of maximum employment, stable prices, and moderate long-term
interest rates. And this is conveniently referred to as ``the
twin mandates of the Federal Reserve,'' addressing both maximum
employment and stable prices. That is another issue that I look
forward to exploring with Dr. Bernanke in the course of these
Actually, we had to contend for quite a while with this
nonaccelerating inflationary rate of unemployment, something
that Chairman Greenspan, to his credit, never accepted. That
was the theory that if the unemployment rate got down to a
certain level, beyond that you would inflation; and, therefore,
as it approached that unemployment rate, the Fed would have to
start raising interest rates to cool off the economy, even if
we did not see manifested inflationary signs. So it was a
preemptive strike against inflation, but it also, of course,
ended up being a preemptive strike against employment, if it
had been followed.
Fortunately, that was not the case, and we have seen in
recent years that we have been able to go down--and we are now
at 5 percent, but we have been able to go down below that to a
4-percent unemployment rate without an inflationary problem.
And I am anxious to explore that with Dr. Bernanke as well,
since I think jobs is a very important purpose of economic
Let me just add one other dimension which is not often
talked about when we talk about the Fed, and that is, the Board
has responsibility, supervisory and regulatory authorities to
assure the safety and soundness of the Nation's banking and
financial sector and protecting the credit rights of consumers.
In the area of consumer protection, the Board has broad
jurisdiction and authority to implement regulations for a whole
host of consumer laws: The Community Reinvestment Act, Truth in
Lending, Truth in Saving, Home Mortgage Disclosure, Home
Ownership and Equity Protection Act, the Equal Credit
Opportunity Act, and a number of others as well. And while
public attention is focused on the Board's monetary policy
responsibilities, I think it is important to recognize its
jurisdiction and authority with respect to these regulatory
issues. The Board can play a very significant role in improving
consumer rights and enforcing consumer protections.
Finally, Mr. Chairman, I notice that the papers this
morning are already setting out an agenda. I would just quote
one paragraph to give one example of it. ``If confirmed,
Bernanke will take over the Fed at a moment of rising economic
unease. The U.S. trade and budget deficits are soaring. The
once-blistering housing market may be cooling. Rumors continue
to rumble through Wall Street of dangerously overextended hedge
funds ripe for collapse. The next Fed Chairman could face
significant challenges, as Greenspan did, within months of
Welcome to the Committee this morning, Dr. Bernanke.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Dole.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Thank you, Chairman Shelby. I also certainly
want to extend a warm welcome to Dr. Bernanke, to his family,
and his friends this morning.
This is the most significant nomination this Committee will
consider. The role of the Chairman of the Board of Governors
holds great influence over our economy and financial system.
The Federal Reserve is charged with conducting the Nation's
monetary policy with the goals of maximum employment, stable
prices, and moderate long-term interest rates. These goals can
at time conflict, requiring a steady hand at the helm to keep
us on a track toward long-term sustainable growth.
Two weeks ago, the Federal Open Market Committee again
raised its target for the Federal funds rate and the discount
rate by 25 basis points. This was the 12th straight increase in
the Federal funds rate. The release noted robust underlying
growth in productivity and temporarily depressed output in
employment due to elevated energy prices and hurricane-related
disruptions in economic activity. These observations reflect
how hard we were hit this hurricane season, but they also
appear to indicate a positive track for economic expansion in
the coming years.
While the outlook is certainly encouraging, I continue to
be concerned about the slow pace of job creation, particularly
in my State of North Carolina. North Carolina continues to
experience dramatic losses in employment, especially in the
traditional industries of textile and furniture manufacturing.
The national economy may be trending positively, but we must
continue to focus special attention on the areas where people
have lost their jobs with companies that struggle to compete
with the dramatically lower cost structures of foreign
Congress continues to debate the pros and cons of free
trade, and I believe we must work toward trade agreements that
benefit American workers and consumers and support jobs and
growth in our industries.
During my confirmation hearing many years ago to serve as
Secretary of Labor, I spoke about the gap between skilled and
unskilled workers. In the changing economic environment, this
gap has widened, and there are fewer and fewer opportunities
for lower-skilled workers. We must do everything in our power
to make sure that these people do not fall through the cracks.
As we discussed in my office, we must focus greater attention
on educating our less-skilled workers so they can take
advantage of the new jobs that are being created. To this end,
I believe that we should take steps to improve trade adjustment
assistance and continue to make strengthening our community
colleges a very top priority.
I also remain concerned, of course, about high energy
prices, the rising costs of raw materials, and the growing size
of our trade deficit. In spite of these concerns, however, I
have confidence that the very forces that stimulate economic
growth--free but fair trade, ever improving global
communications, higher education, training for our workforce,
and, of course, hard work--these forces indeed will put us on a
course toward great opportunity for North Carolinians and for
Dr. Bernanke, as we have all said, has a keen intellect and
impressive credentials and comes before us, Mr. Chairman, with
an extensive list of accomplishments, a wealth of experience,
and a reputation for consensus building, particularly during
his time on the Board of the Federal Reserve. And I tend to
think that his good Carolina roots are a great strength as
Dr. Bernanke has my strong support, Mr. Chairman, for
Chairman of the Board of Governors of the Federal Reserve.
While I am sure the Committee does have many questions, I hope
he will earn our swift approval.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Johnson.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Chairman Shelby, Ranking Member Sarbanes,
I am pleased to be here this morning. And, Dr. Bernanke,
welcome. I congratulate you on your nomination and thank you
for meeting with me this past week.
Today's hearing is no doubt one of the most important that
this Committee will hold during this Congress. It is not every
day that we consider the nomination for a new Chairman of the
Board of Governors of the Federal Reserve. In fact, the last
such hearing was over 18 years ago. Therefore, it is critical
that we are thorough in our questioning and that we cover a
broad range of relevant issues.
The Fed is not only charged with serving as the Nation's
central bank and lender of last resort, but it also supervises
and regulates banks and, perhaps most importantly, formulates
and executes monetary policy in order to promote stable
economic growth, hopefully with an eye toward both inflation
The Fed Chairman is an influential economic figure. He must
be attuned to the U.S. economy and the world economy. He holds
one of 12 votes and, therefore, must not only build consensus
but also confidence. It is my expectation that the Fed Chair,
even when he is a former White House adviser, refrains from
being a cheerleader for White House policies of either
political party and instead maintains the independence and
credibility of the central bank through greater transparency in
As my colleague Senator Dodd noted, your predecessor,
although properly credited with a great many accomplishments,
has been roundly criticized by some for intervening in a tax
policy debate in Congress that in the end contributed
significantly to a transition from enormous budget surpluses to
today's massive budget deficits. It is increasingly apparent
how important sound and complementary monetary and fiscal
policy is to the U.S. economy as the Federal deficit increases,
national savings falls, pensions and Social Security become
less secure, health care costs skyrocket, and energy prices
In addition to the formulation of monetary policy, the
Board of Governors has a significant bank regulatory and
supervisory responsibility, including promoting the safety and
soundness of the banking system and ensuring compliance with
the Nation's banking laws and regulations. This Committee
continues to hear from our Nation's financial institutions
about the increased and often overwhelming burden of bank
regulations. It is the number one concern raised by both small
and large banks in my home State, and I hope that the Fed will
pay close attention to this issue. And while I am interested in
your views on rising energy prices and the impact on the trade
deficit, I would also like to hear your thoughts on the role of
consolidated supervision and protecting the safety and
soundness of the Nation's banking system and the longstanding
policy of maintaining a separation of banking and commerce.
Dr. Bernanke, your credentials, both academic and
professional, are exemplary. I appreciate having had the
benefit of meeting with you last week in my office, and I look
forward to hearing from you today as we move forward in an
expeditious fashion on the nomination process. Congratulations.
Chairman Shelby. Senator Martinez.
STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Thank you, Mr. Chairman.
Dr. Bernanke, welcome, and it is good to see you back in
the Committee again. I know we have had the privilege of
confirming you on two other occasions, and I want to just
extend my congratulations to you for the confidence the
President has expressed in you by naming you to this very
When we met last week, I expressed my concerns about the
rising interest rate environment and its impact on our Nation's
housing market. Florida's median housing costs have continued
to rise, especially in cities where basic infrastructure is
already overwhelmed by population demands. However, employee
wages have not risen in response to the rapidly increasing cost
of living. Additionally, the October report from the Federal
Reserve Bank of Atlanta shows increases in fuel and building
supply costs, all of which will continue to contribute to the
rising costs of housing.
We are facing a housing crisis in Florida, and I am afraid
it may get worse before it gets any better, and I do not think
that Florida really is unique to the Nation in this regard.
Pockets of Florida are still recovering from the hurricane
season of this year and last, and we are still assessing the
damages from the recent Hurricane Wilma. According the State,
the challenge is always the same: The lack of housing
affordable to working families. Low interest rates over the
past several years have created record homeownership rates on a
national level, but have also encouraged very creative
financing with interest-only loans and short-term ARM's. Both
of these, and others, make monthly mortgage payments
susceptible to increases in the Federal funds rate for
homeowners who choose these options for financing.
During our conversation, you indicated your commitment to
providing more transparency and disclosure to the public to
reduce market uncertainty and encourage investment. You also
talked about increasing financial literacy and how that may
help borrowers and lenders understand the implications and
risks associated with varying mortgage products. This is
something I worked with very intimately when I served during my
time as Secretary of HUD. I do believe that financial literacy
is crucial to today's consumers.
We also discussed the need to legislate fundamental changes
to the regulatory structure of the housing GSE's. While we
agreed that these Enterprises play a crucial role in the
housing market, they have strayed from their original mission,
which is to focus on creating housing opportunity for low- and
moderate-income families. I believe this Committee reported out
a very good piece of legislation in July that would require
fundamental changes in how these Enterprises are regulated.
Before we can move a bill to the floor for full
consideration, we need to also reach some consensus on the
issues of portfolio limitations and the creation of an
affordable housing fund. I would be interested in hearing your
views on both of these two crucial issues.
I look forward to your tenure as Chairman. I do have every
expectation of your confirmation and look forward to working
with you in your new capacity, and I again commend you and
congratulate you for this fine distinction.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thank you, Mr. Chairman, and, Dr. Bernanke,
welcome today. I congratulate you on your nomination. Thank you
for the time that you were good to spend with me earlier this
month when you were visiting in our office.
You are, I think, two for two before this Committee, two
for two before the Senate, and my guess is before we are
finished here, you will be three for three. And given your
experience, your education, your intellect, and, frankly, your
demeanor, I think they all combined to prepare you well for the
challenges that lie ahead. I would not underestimate those
challenges, and I think Senator Sarbanes has alluded to them.
They are considerable.
I want to return to a theme that a couple of my colleagues
have mentioned, and then I will close, and the theme is the
need for independence. You work for the President. You were
chosen by him to head up his Council of Economic Advisers. You
have been nominated by him for this post as well. But when you
are confirmed, as I am sure you will be, it is critically
important that you be independent, and I think you realize
that. And we are counting on you to be that independent person.
I thank you for your service to this country and for your
willingness to serve, and for anyone in your family who is here
to share you with all of us, we express our thanks as well.
Chairman Shelby. Senator Bennett.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Mr. Chairman, I will save my comments for
the question period.
I join my colleagues, Dr. Bernanke, in welcoming you here
and congratulating you on your appointment. I think the
President has made a superb selection and I look forward to not
only voting for you, but also working with you in the years
Chairman Shelby. Senator Reed.
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you very much, Chairman Shelby. This is
an important confirmation hearing because of the tremendous
influence that the Federal Reserve Chairman has on economic
policy in this country and indeed around the world.
I want to welcome the President's nominee, Dr. Bernanke.
Welcome, doctor. We look forward, obviously, to hearing your
views on many issues. Chairman Greenspan will be a hard act to
follow and his successor's job will not be made any easier by
the state of the economy. Yes, GDP has grown as the economy has
been recovering from a recession in a very protracted job
slump, but large structural budget deficits, a record current
account deficit, a record low personal saving rate, rising
consumer prices, and sluggish wage growth, all pose tremendous
challenges to setting monetary policy.
Dr. Bernanke is an economist with strong academic and
policy credentials, who has already pledged to maintain the
Greenspan-era commitment to controlling inflation and providing
market stability. And I hope that also means maintaining
flexibility in pursuing the multiple goals of price stability,
high employment, and sustainable growth, rather than adopting a
rigid adherence to any predetermined policy rule in responding
to changing economic circumstances.
Indeed, a critical question for Dr. Bernanke will be how he
would balance the goals of fighting inflation with allowing
sufficient employment and wage growth. These are difficult
economic times for many Americans who are facing stagnant
incomes and rising costs for health care, home heating, and
education. We need a Fed Chairman who will be committed to
guiding the economy toward creating broadly shared prosperity.
Strong productivity gains have shown up in the bottom lines of
corporations but not in the paychecks of workers. The typical
worker's earnings are not keeping up with their rising living
expenses, and both earnings and income inequality are
increasing in our economy.
Both Chairman Greenspan and Dr. Bernanke have emphasized
the importance of education and training for increasing
opportunity and reducing inequality over the long-run. But
rising inequality has been a problem for a long time and it is
particularly acute now. Monetary policy alone cannot solve this
problem, but I hope the new Fed Chairman will recognize the
critical importance of fostering a high employment economy.
I am also interested in Chairman Bernanke's views on
whether the budget and trade deficits are dangerous imbalances
that pose a risk to the economic outlook. I hope that we would
all agree that raising our future standard of living and
preparing adequately for the retirement of the baby boom
generation require that we have a high level of national
investment and that a high fraction of that investment be
financed by our own national savings, not by foreign borrowing.
We followed such prosperity enhancing policies under
President Clinton, but that legacy of fiscal discipline has
been squandered under President Bush.
Financial markets will surely hang on the new Fed
Chairman's words about monetary policy and interest rates, but
the new Chairman will not automatically inherit Alan
Greenspan's considerable influence over a broad array of
economic policy. While Chairman Greenspan's track record
managing monetary policy is very impressive, his role in
justifying the 2001 tax cut is problematic and now we are
living with the consequences.
Dr. Bernanke was a respected independent economist long
before taking the position as Chairman of the Council of
Economic Advisers with the Administration. He has spent many
years building a reputation as a politically independent
economist, and I hope he will preserve that reputation if
confirmed as Fed Chairman.
One bit of advice, Dr. Bernanke, do not forget what you
learned on the School Committee.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Hagel.
STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Mr. Chairman, thank you. I too welcome Dr.
Bernanke to our hearing, and I look forward to voting for his
nomination, and enthusiastically support the President's wise
Mr. Chairman, thank you for the hearing, and I too will
reserve any further comments to the questions. Thank you.
Chairman Shelby. Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman.
Welcome, Dr. Bernanke. It is a pleasure to have you with
us, and look forward to many opportunities to work with you.
You have heard a lot of important words, transparency,
accountability, financial literacy. As the author of the
provision on financial literacy and the creation of the new
Federal commission, I look forward to working with you on those
important long-term issues of education and financial literacy.
The position of the Federal Reserve Chairman is vital to
the quality of life of every single American. It affects
interest rates on credit cards, home mortgages, and
investments. It impacts the safety and the soundness of our
financial institutions and may lend stability or instability to
global financial markets. It is a very, very critical position.
There is a reason why many say the position of Federal Reserve
Chairman is the second most powerful position in Washington,
although some others may want to disagree with that, but it
certainly in terms of impact affects each and every one of the
people we represent, as well as ourselves and our country, in
While Chairman Greenspan I believe has done an excellent
job, there is no doubt that you bring an academically
impressive record, and eminently qualified to replace him, Dr.
Bernanke. But we have a responsibility to know your views on
growing the economy, as a number of my colleagues have talked
about today, about maintaining an economy that produces good-
paying jobs. All of your intellectual horsepower is going to be
needed to revive what continues to be a struggling economy,
particularly in the Midwest in our manufacturing economy and in
my home State, the great State of Michigan.
Throughout the past 6 months, Michigan has been in an
incredible struggle. The high-profile bankruptcies at Northwest
Airlines and Delphi have served to emphasize the lack of job
security that Americans feel right now, and I believe what is
happening in Michigan is very much a wake-up call for the
entire country. Many who have devoted a career to a company are
being told that their incomes are too high, their health
insurance is too much, or their pensions are too costly.
Essentially their way of life is being threatened, and the
middle class of our country is being threatened.
One by one each of these benefits is being cut back, and if
the employees protest the company threatens bankruptcy and
unveils the specter of using the judicial process to slash
labor costs, and again, the way of life of middle class
A healthy economy needs to be based on more than a race to
the bottom, and I believe that very strongly, and believe the
Fed has an important role in whether or not this is a race up
or a race down. A race down is a lose/lose for our country and
for every American, and we need to change that.
It must produce good-paying jobs. Our economy has to be
dynamic as well to easily assimilate those who are forced from
their old jobs into new jobs. A healthy American economy must
be more than a service economy. We make things and grow things
in this country. We make things and grow things in my home
State. We do it very well. I do not believe we should concede
in a global marketplace that we no longer make things or grow
things. Again, I think we would lose our middle class.
A healthy economy must be rooted in reality as well. Global
competition is here to stay, and we must wake up to the reality
that China, Japan, and others are competitors, and treat them
like competitors. As the President begins his tour of Asia this
week, I want to reemphasize the need for this country, our
country, to insist on fair trade, a level playing field for our
businesses and our workers. Currency manipulation and
counterfeiting are destroying jobs in Michigan and in America.
It can be fixed. We just simply need the political will to make
the changes to do it.
In 2003, Dr. Bernanke, you said the current account deficit
cannot be sustained at its current level. I would agree, and I
believe we have the tools to change that. No matter what the
inflation numbers show, no matter what the job numbers show,
the current approach that we are taking to our economy is
destroying our way of life in Michigan, and I believe is an
incredible threat to our country.
As the current Chair of the Council of Economic Advisers,
Dr. Bernanke, you are the President's point person on
economics. It is important for me to know and for the people of
the State of Michigan to know that as the Federal Reserve Chair
you will be your own man, and capable of separating yourself
from these policies. They are not working. And I welcome you to
come to Michigan, and I can show you, sit you down with the
faces of business people, workers, and families that can show
you that they are not working.
These are difficult times for average Americans. The
position to which you have been nominated impacts all of us in
very real ways. Your views on how we will maintain growth is of
vital importance to our future as a Nation. I look forward to
Chairman Shelby. Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman, for holding this
hearing. You always make it a priority to move nominations
promptly, and I particularly commend you for that policy today.
The position of Federal Reserve Chairman is one of the most
important in the country and possibly the world, and I
appreciate that we are taking up that nomination today. I was
pleased when President Bush announced his intention to nominate
Ben Bernanke to Chair the Federal Reserve Board of Governors.
Dr. Bernanke is widely respected, and will maintain continuity
with the policies and strategies that have allowed our country
to prosper. The reaction of Wall Street and the investment
world would also seem to confirm the positive view of Dr.
Dr. Bernanke brings a uniquely advantageous mix of both
academic and practical experience. After spending 20 years at
Princeton, including as Chairman of the Economic Department,
Dr. Bernanke is well-respected and frequently quoted in
academic circles. He is considered one of the world's leading
experts on the subject of how central banks such as the Fed
should set interest rates and cause the money supply to expand
Rather than limiting himself to purely academic knowledge
and research, Dr. Bernanke also has outstanding real world
credentials that have allowed him a fuller understanding of the
job for which he is nominated. His service as a Fed Governor
can be viewed as an apprenticeship for the chairmanship.
Through his service as a Governor he became aware of the
challenges facing the Fed, as well as the strategies that have
made it successful in meeting past challenges. It will allow
him to ease the transition between Chairmen.
Additionally, Dr. Bernanke has continued his public service
as Chairman of the President's Council of Economic Advisers, a
position for which I was also pleased to support his
confirmation. I am encouraged that Dr. Bernanke has indicated
the importance of fighting inflation and of increasing
transparency at the Fed. I was particularly pleased in my
discussions with him that he is going to stress improved
I also appreciate that Dr. Bernanke has acknowledged that
the final determination on debts and deficits rightfully lies
with the President and Congress.
Dr. Bernanke, thank you for appearing here today before the
Banking Committee. I appreciate this opportunity to once again
discuss your views on a variety of matters. You have always
made yourself accessible to me personally, as well as to this
Committee, and I am pleased to support your nomination and hope
that the Committee will be able to vote promptly.
Chairman Shelby. Dr. Bernanke, will you stand and raise
your right hand and be sworn?
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Bernanke. I do.
Chairman Shelby. Do you agree to appear and testify before
any duly-constituted committee of the Senate?
Mr. Bernanke. I do.
Chairman Shelby. Please sit. Your written testimony will be
made part of the record in its entirety. You can sum up what
you want to say here. Do you have anybody you want to
introduce, any family members or anything here this morning?
You may proceed.
STATEMENT OF BEN S. BERNANKE
OF NEW JERSEY, NOMINEE, TO BE A MEMBER
AND CHAIRMAN OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. No, Chairman. I would like to briefly read
testimony if I may?
Chairman Shelby. Yes.
Mr. Bernanke. Thank you.
Chairman Shelby, Senator Sarbanes and Members of the
Committee, I thank you for the opportunity to appear before you
today and for the expeditious scheduling of this hearing. I
would also like to express my gratitude to President Bush for
nominating me to be a Member and Chairman of the Board of
Governors of the Federal Reserve System. If I am confirmed, I
will work to the utmost of my abilities to fulfill the
important responsibilities of this office.
I recently testified before this Committee in my capacity
as Chairman of the President's Council of Economic Advisers.
Today, however, I appear before this Committee in a different
capacity, as the President's nominee to lead the Federal
Reserve System. In this prospective new role, I would bear the
critical responsibility of preserving the independent and
nonpartisan status of the Federal Reserve, a status that, in my
view, is essential to that institution's ability to function
effectively and achieve its mandated objectives. I assure this
Committee that, if I am confirmed, I will be strictly
independent of all political influences and will be guided
solely by the Federal Reserve's mandate from Congress and by
the public interest.
With respect to monetary policy, I will make continuity
with the policies and policy strategies of the Greenspan Fed a
top priority. Several aspects of the policy strategy that has
evolved under Chairman Greenspan, and under Chairman Volcker
before him, deserve special note.
First, central bankers in the United States and around the
world have come to understand that ensuring long-run price
stability is essential for achieving maximum employment and
overall economic stability. In recent decades, the variability
of output and employment has decreased markedly, and recessions
have become less frequent and less severe. I believe that the
Federal Reserve's success in reducing and stabilizing inflation
and inflation expectations is a major reason for this improved
economic performance. If I am confirmed, I am confident that my
colleagues on the Federal Open Market Committee and I will
maintain our focus on long-term price stability as monetary
policy's greatest contribution to general economic prosperity
and maximum employment.
Second, monetary policy at the Fed has been executed with
both careful judgment and flexibility. To cite one prominent
example, Chairman Greenspan's risk-management policy approach
attempts to take into account the possible consequences of not
only the most likely forecast outcomes, but also of a range of
lower probability outcomes. Implementing this approach requires
sophisticated judgments about possible risks to the economy, as
well as the flexibility to respond quickly to new information
or unexpected developments. Risk analysis of this type is a
necessary component of successful monetary policymaking. To be
sure, the need for flexibility does not imply that a good
policy is undisciplined, as Chairman Greenspan himself has
emphasized. Monetary policy is most effective when it is as
coherent, consistent and predictable as possible, while at all
times leaving full scope for flexibility and the use of
judgment as conditions may require.
Finally, under Chairman Greenspan, monetary policy has
become increasingly transparent to the public and the financial
markets, a trend that I strongly support. A more transparent
policy process increases democratic accountability, promotes
constructive dialogue between policymakers and informed
outsiders, reduces uncertainty in financial markets, and helps
to anchor the public's expectations of long-run inflation,
which, as I have argued already, promotes economic growth and
One possible step toward greater transparency would be for
the FOMC to state explicitly the numerical inflation rate or
range of inflation rates it considers to be consistent with the
goal of long-term price stability, a practice currently
employed by many of the world's central banks. I have supported
this idea in my academic writings and in speeches as a Board
Providing quantitative guidance about the meaning of
``long-term price stability'' could have several advantages,
including further reducing public uncertainty about monetary
policy and anchoring long-term inflation expectations even more
I view the explicit statement of a long-run inflation
objective as fully consistent with the Federal Reserve's
current policy approach, including its appropriate emphasis on
the role of judgment and flexibility in policymaking. Most
important, this step would in no way reduce the importance of
maximum employment as a policy goal. Indeed, a key
justification for this action is its potential to contribute to
stronger and more stable employment growth by further
stabilizing inflation and inflation expectations. In any case,
I assure this Committee that if I am confirmed, I will take no
precipitate steps in the direction of quantifying the
definition of long-term price stability. This matter requires
further study at the Federal Reserve, as well as extensive
discussion and consultation. I would propose further action
only if a consensus can be developed that taking such a step
would further enhance the ability of the FOMC to satisfy its
dual mandate of achieving both stable prices and maximum
My comments so far today have focused on monetary policy.
Of course, the Federal Reserve's responsibilities extend well
beyond this area. Since its founding, the Federal Reserve has
been given substantial responsibility for protecting the
stability of the Nation's financial system, which is a
precondition for stability of the broader economy. For example,
the Fed works closely with other regulators to ensure the
safety and soundness of the U.S. banking system, and over the
years it has played a constructive role in managing and
mitigating diverse types of financial crises. If I am
confirmed, I will work to enhance the stability of the
financial system and to ensure that the resources, procedures,
and expertise are in place as needed to respond to any threats
to stability that may emerge.
The Federal Reserve, along with other regulators, is also
engaged in trying to ensure that consumers are treated fairly
in their financial dealings: That their privacy is protected,
that they receive clear and understandable information about
the terms of financial agreements, and that they are not
subject to discriminatory or abusive lending practices. The Fed
also enhances consumer welfare through programs to promote
financial literacy and community economic development. These
are important responsibilities, and if I am confirmed, I will
give them my close attention and support.
I have emphasized this morning the importance of
intellectual continuity in policymaking. A more fundamental
source of continuity, however, is the superb staff and
leadership of the Federal Reserve System. If I am confirmed, I
will have the privilege of drawing on the great strengths of
this institution to ensure a continuity of the policy process
that transcends any single person. I very much look forward to
Let me conclude by offering special thanks to Chairman
Greenspan for his collegiality and support when I served on the
Board of Governors and for his exemplary leadership of the
Federal Reserve System. One may aspire to succeed Chairman
Greenspan, but it will not be possible to replace him.
Thank you. I would be happy to take your questions.
Chairman Shelby. Thank you, Dr. Bernanke. It is well known
that you have been a proponent of inflation targeting, which is
pleasing to this Senator. Have your views on inflation
targeting, Dr. Bernanke, as an academic, been tempered by your
more recent experience as a policymaker, both at the Board of
Governors of the Federal Reserve and in your present job as the
top economic adviser to the President of the United States?
Mr. Bernanke. Chairman Shelby, my views on inflation
targeting now are that it represents continuity with the
existing approach of the Federal Reserve System, which focuses
on maintaining medium- and long-term inflation stability as the
primary contribution that the Fed can make to maintaining
stability of the general economy. We see, for example, in the
last 20 years, that the economy has become more stable, that
employment growth and output growth have been stronger and more
stable, that recessions have been less frequent. I attribute
that to the maintenance of stable inflation and inflation
So, in that respect, the inflation targeting ideas that I
had espoused simply are an attempt to perhaps codify or
strengthen this important commitment of this Federal Reserve to
maintaining low inflation.
I also think of this as a continuation of the Fed's recent
progress toward greater transparency in policymaking. Over the
past 10 years, the Fed has become increasingly more open about
its processes, about its decisionmaking, and I believe this is
just a single step and indeed just an incremental step that
would add to that transparency.
But, in particular, I would like to emphasize to those who
may be concerned that, in no way, do I intend to make any
significant change in the overall approach to monetary policy
that has been developed under Chairman Greenspan.
Chairman Shelby. Dr. Bernanke, do you believe an inflation
targeting regime is consistent with the Federal Reserve's other
goals, that is, of long-term sustainable growth and full
employment, or full as we can get?
Mr. Bernanke. Chairman Shelby, I subscribe entirely and
wholeheartedly to the dual mandate. I believe the Federal
Reserve has an important responsibility to maintain strong and
sustained employment growth. I believe, though, that the best
way that the Fed can do that, or one of the best ways, is to
maintain, in the medium- and long-term, low and stable
inflation and inflation expectations. To the extent that the
inflation targeting approach, which may not be a good name for
the process, but to the extent that naming a long-term
inflation objective can help to stabilize those expectations,
keep inflation under control, I think it actually significantly
advances our ability to meet the dual mandate and to increase
Chairman Shelby. Is it your view that price stability is
very important to all Americans?
Mr. Bernanke. I certainly agree with that, Chairman.
Chairman Shelby. Thank you. When your nomination was
announced by President Bush, you indicated, ``My first priority
will be to maintain continuity with the policies and policy
strategies established during the Greenspan years.'' But when
you are confirmed, as I predict you will be soon as Chairman of
the Federal Reserve, it will be the Bernanke-led Federal
Reserve. Could you elaborate on your statement for the
Committee here today? Specifically, can you discuss your views
on the importance of price stability that I just referenced,
and do you view the pursuit of inflation targeting regime,
which we have been talking about, as being consistent with the
policy strategies of the Greenspan era?
Mr. Bernanke. Yes, Chairman. In my statement, I emphasized
three elements of the Greenspan strategy. They are, first of
all, maintaining low and stable inflation in the medium-term;
second, using flexibility and judgment in making monetary
policy--I do not subscribe to any rigid or mechanical rule in
policymaking--and the third, using transparency to inform the
public and the markets about policy and its intentions. In all
these respects, I intend to be continuous with Chairman
Greenspan. I expect also, though not to be static and to evolve
over time. In the case of Chairman Greenspan, transparency
changed over time, evolving into a greater degree of
transparency. I expect going forward, to look for other
opportunities to increase the transparency of the Federal
Reserve. Naming the long-term inflation objective, which I
again emphasize would be done only if there is a broad
consensus that it is appropriate, would be one potential step
for increasing that transparency.
So good monetary policymaking evolves over time, as we
learned from the experience of other countries and from our own
experience. I intend to be flexible and to learn from
experience, but I believe the right starting point is where we
currently are, that Chairman Greenspan has demonstrated in his
Chairman Shelby. Dr. Bernanke, you have spoken before of
transparency at the Fed and so forth. Do you believe that there
would be a point at which transparency would be or could be
counterproductive to effective implementation of monetary
Mr. Bernanke. Yes, Chairman Shelby, I do. Transparency has
an important role in helping the public understand policy
intentions and policy goals. However, transparency should not
be allowed to interfere with the decisionmaking process itself.
extent that, for example, some have suggested that the FOMC
meetings be televised.
Chairman Shelby. FOMC, tell the public what that is. We
Mr. Bernanke. I do not think that, for example----
Chairman Shelby. Open Market Committee?
Mr. Bernanke. I am sorry. The FOMC, the Federal Open Market
Committee, that is the decisionmaking body that determines
monetary policy. One extreme form of transparency would be
simply to televise the meeting at which the discussion takes
place. My concern about that suggestion is that it would
inhibit discussion, that it would affect the decision process,
that it would create volatility in financial markets. I believe
that is an example of a transparency which might be a step too
far in terms of affecting the decision process itself.
Chairman Shelby. Thank you.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Let me continue on the inflation targeting issue since it
has been put into play here right at the outset.
In 2000, you and several colleagues wrote an opinion piece
in The Wall Street Journal entitled ``What Happens When
Greenspan is Gone?'' You were certainly looking ahead, I must
In that article you stated, ``We think the best bet lies in
a framework known as inflation targeting, which has been
employed with great success in recent years by most of the
world's biggest economies, except for Japan.'' The European
Central Bank uses inflation targeting, and they set the target
at 2 percent. But most observers see their experience has been
one of slower economic growth and higher unemployment, and
usually, actually, although not always, higher inflation.
What we have achieved in the United States without an
inflation target--and I just want to show three charts in that
regard. One is GDP growth in the United States versus Europe.
Our GDP growth as a general proposition has done better. The
next inflation, United States versus Europe. And except for
this period here--and we are on the way back down--we have done
a better job. And then the final chart is the unemployment
rate, United States versus Europe. There, as we see, the United
States has consistently had a substantially lower unemployment
rate than the Europeans have.
So on unemployment rate, inflation, and GDP growth, we are
doing better than the leading practitioner I would guess of
David Wyss, Standard and Poor's Chief Economist, summarized
the lesson of these charts this way: The experience of the
European Central Bank does not give people a lot of confidence
about inflation targeting. That was in a BNA report just a few
If inflation targeting works so poorly in Europe compared
to our performance, why should we go down that path here?
Mr. Bernanke. Senator, just as a preliminary remark, it is
certainly the case the U.S. economy has outperformed the
industrial economies of Europe in the last decade or so, and I
would ascribe that primarily to a set of structural
differences: The flexibility of our labor markets, for example,
compared to European labor markets, regulatory tax policies,
and other policies. So, I do not ascribe the very real
differences that you point to as being primarily related to
Having said that, I think it is important to note that the
European Central Bank itself does not describe its own policy
as inflation targeting, and its policies are very distinct from
the ones I would advocate in one very important sense, that the
mandate of the European Central Bank is for price stability and
price stability only, with other considerations to be taken
account of only insofar as price stability is met.
Senator Sarbanes. And what do you think of that?
Mr. Bernanke. I disagree with it entirely.
Senator Sarbanes. All right. Now, let me ask you the next
follow-on--and I am hurrying along because we get limited in
the time we have to ask questions.
Of course, Chairman Greenspan publicly opposed inflation
targeting. In the book on inflation targeting that you edited
several years ago, some academics recommended that the Federal
Open Market Committee unilaterally establish inflation targets.
Former Fed Governor Ned Gramlich has argued that any move
toward inflation targeting would require the approval of the
Congress, and he made this statement: ``The question of whether
the United States does or does not adopt a formal inflation-
targeting regime is not up to the Federal Reserve. The Federal
Reserve Act now requires the Fed to strive for maximum
employment and balanced growth, along with price stability and
moderate long-term interest rates. Until the Congress changes
these guidelines, the Fed will continue to pursue these
Do you agree with Governor Gramlich?
Mr. Bernanke. I disagree somewhat with his premise,
Senator. Inflation targeting comes in many flavors. Some
countries have taken a more hawkish stance in terms of putting
inflation first among equals or even first among the objectives
of policy. As I said, I subscribe entirely to the Humphrey-
Hawkins mandate, which puts employment growth and output growth
on a fully equal footing with inflation in terms of the Federal
I believe in the types of changes that I am proposing--
which are not major changes--in the way policy is conducted or
any change in objectives; are modest bit of additional
transparency, which I believe would help the Federal Reserve
achieve the stated, mandated objectives the Federal Reserve
Since this is not a change in objectives or a change in
fundamental operating procedure, in my view the kinds of
suggestions I am making would not require a change in the law.
If I thought they did, I would not follow them through because
I am not interested in changing the mandate of the Federal
Senator Sarbanes. Well, you certainly could not do it
unilaterally. You would have to come to the Congress in order
to do that, would you not?
Mr. Bernanke. To change the law, certainly.
Senator Sarbanes. Yes.
Mr. Bernanke. Of course. So, I would not be interested in
pursuing that matter with Congress if I thought that it
involved changing the mandate of the Federal Reserve.
Senator Sarbanes. E.J. Dionne wrote just a few weeks ago,
``A Fed Chairman who beats inflation at the cost of middle-
income living standards will not be regarded as a success.''
What do you think about that observation?
Mr. Bernanke. Senator, I think it is a false dichotomy.
Middle-income living standards, and poverty, for that matter,
are best addressed through strong, stable employment growth. It
is low-income people who suffer most from recessions. It is
low-income people who suffer most from high levels of
inflation. The understanding that central banks currently have
is that by maintaining inflation at a low and stable level,
avoiding a situation where inflation gets out of control--as it
did, for example, in the 1970's--you can create more stable,
more solid, and more substantial growth in employment.
I am entirely in favor of maximum employment. I believe
this is a method to achieve it. If I did not think it was, I
would not pursue it.
Senator Sarbanes. My time has expired. I just want to leave
you with the impression of these two charts again.
This is the unemployment rate in the United States versus
Europe, and, of course, the Europeans Central Bank is the one
that is cited for using inflation targeting. They set a 2-
percent figure. This is the unemployment rate. This is 4
percent here. This is 6 percent there.
In the United States, substantially and consistently below
the unemployment rate in Europe.
Mr. Bernanke. Senator, it was below that rate 20 years ago
before ECB was even created. I believe there are other factors
that contribute to that difference.
Senator Sarbanes. We will have to separate them out, but a
number of people think that the European Central Bank focus on
inflation targeting as its only objective, which is what it has
been given, has led to a loss of economic growth, GDP growth,
and the unemployment situation, without getting a particularly
better performance on the inflation front compared to the
Mr. Bernanke. Senator, I disagree with that objective. I
think the dual objective is the correct one.
Senator Sarbanes. Okay.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Sununu.
Senator Sununu. Thank you, Mr. Chairman.
Let me begin with an observation about your concern with
regard to having cameras in Open Market Committee proceedings.
We have had televised Senate debate for some time now, and I
think you will find political posturing for the benefit of the
cameras is practically unheard of.
Let me engage you in a modest hypothetical. It is the end
of December 2007, and we are into the second year of the
Bernanke Fed. The charm offensive has continued. The titans on
Wall Street are wearing tan socks in deference to the
intelligent but very plain-spoken Chairman of the Fed.
For the past 6 months, the announced target rate has been
1.5- to 2.5-percent inflation as a target for the Fed, but for
the final quarter of 2007, inflation has been running at an
average of 4.2 percent.
What do you say? What do you do? And how do the markets
Mr. Bernanke. Senator, a little bit depends on the
circumstances and where the inflation came from and the like.
The inflation objective is explicitly a long-term or medium-
term objective. It focuses, for example, on core inflation to
avoid getting involved in short-term fluctuations in energy
prices and the like.
My principal concern at that point would not be that
inflation had temporarily risen above its normal range. For
example, currently inflation is above the range that in the
long-run would be desirable. But the concern would be that
expectations about inflation going a year or two in the future
had become unhinged or unanchored so that the public was losing
its confidence in the Federal Reserve to maintain low and
I believe that maintaining that confidence is extremely
important. It is important whether you have an explicit target
or whether you do not have an explicit target. Under Chairman
Greenspan, talk and action were combined to assure the markets
that over a period of time--not necessarily within a quarter or
two quarters, but over a period of time, perhaps lasting
several years--the Fed would stabilize inflation in a region
consistent with the objective of price stability.
So that is the approach I would take. I would certainly not
try to return inflation to a target within a short period of
time. I would simply try to assure the markets that over a long
period of time the Federal Reserve was committed to price
stability as a central part of its monetary strategy.
Senator Sununu. What can you do to provide that long-run,
longer-term assurance? And do you think that markets are
sophisticated enough, rational enough, intelligent enough to
recognize this difference between the longer-term objective
with regard to core inflation and what you might perceive in
your capacity as Fed Chairman as being a shorter-term anomaly?
Mr. Bernanke. I think the markets are quite able to
distinguish. They pay a lot of attention now to core measures
because they understand that the Fed is interested not in
short-term inflation fluctuations but, rather, in the long-term
trend of inflation and making sure that it stays under good
Again, I think the primary means of winning inflation
credibility is by demonstrating, over a long period of time,
that the Fed is committed to maintaining price stability by
doing that. By naming a potential range, which I emphasize is
no fait accompli, is something that is going to be discussed
and will be consulted with Members of Congress, but naming such
a range does not change the
underlying dynamic. It is only an attempt to provide a bit of
additional confidence, a bit of additional assurance, or a bit
of additional certainty to the markets about the Federal
Reserve's long-term objective.
Senator Sununu. Has there been any attempt or any success
at measuring improvements or the beneficial impact on stability
or volatility in those central banks that have used targeting?
Mr. Bernanke. Yes, Senator, there is an extensive
literature. I could talk about it for quite a while.
Senator Sununu. You have 22 seconds.
Mr. Bernanke. It is not quite definitive because, of
course, every country is different. But there is recent
evidence by Board research, for example, from the United
Kingdom and Sweden, which shows greater stability in their
long-term interest rates after they became inflation targeters
because the market has more confidence that inflation and long-
term interest rates will remain stable and less concern about
Senator Sununu. Thank you very much.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you.
Senator Dodd. Thanks, Mr. Chairman, very much, and let me
thank our witness again for his presence here this morning.
Let me not go quite as far in advance as my colleague from
New Hampshire has, going a couple of years, but let me talk
about something that is looming, I think maybe in the next few
weeks or months, and that is an energy shock which we may
witness here. I do not know whether you would agree or not, but
I suspect you might agree that handling an energy shock is one
of the most difficult problems that the Federal Reserve has to
Last year, as a Member of the Board, you gave a speech in
which you said, ``Monetary policy cannot offset the
recessionary and inflationary effects of increased oil prices
at the same time. If the central bank lowers interest rates in
an effort to stimulate growth, it risks adding to inflationary
pressure. But if it raises rates enough to choke off the
inflationary effect of the increase in oil prices, it may
exacerbate the slowdown in economic growth. Whether monetary
policy eases or tightens following an increase in energy prices
ultimately depends on how policymakers balance the risks they
perceive to their employment and price stability objectives.''
I bring up this dilemma because a piece this morning, The
New York Times ran an article about the potential threat of an
energy price shock to our Nation's economy, and the article
reads, ``Unexpectedly warm weather has bathed much of the
United States in recent weeks, but fears persist that a classic
energy shock may be unfolding as the Nation heads into
The article goes on to quote the owner of a business whose
monthly natural gas price--and it is in the natural gas price
here I think we are looking at the major problem here. But they
cite a business that doubled its natural gas bill from $700,000
to $1.4 million as an example of the threat posed by high
energy prices to our larger economy. I might point in my State,
51 percent of my consumers use natural gas, and they are
looking at about a $276 increase, or a 27-percent increase this
After the last major price shock hit our Nation's economy
in the 1970's, it took a painful recession that had deep and
lasting consequences for many people to bring inflation back
under control. Given the soaring prices of oil and gas over the
past few months and the possibility of further supply
disruptions, what type of monetary policy prescription would
you apply? I mean, I appreciate your article in which you cite
the balancing things here, but then you were writing an
article. Now you are going to become the Chairman of the
Federal Reserve. You do not have the luxury of telling us on
the one hand and on the other. We want Harry Truman's economist
here, and that is, a one-armed economist here. What is the
answer of the Chairman of the Federal Reserve if we face this
type of a shock?
Mr. Bernanke. Senator, as I also discussed in that
particular speech, the oil price impacts on the economy and the
monetary policy response is an excellent illustration of the
importance of having low, stable, and well-anchored inflation
expectations. The contrast between the 1970's and now, with an
energy price shock of a similar magnitude, is very instructive.
During the 1970's, inflation expectations were very poorly
anchored. There was very little confidence that the Fed would
keep inflation low and stable. When oil prices rose, those
price increases fed through quickly into other prices and began
to raise the general rate of inflation quite quickly. The Fed
responded in a panicked way, by raising interest rates
enormously, which then contributed to the deep recessions of
1975 and 1981-1982.
In a more recent episode, we have had extensive increases
in energy prices, but outside of the energy sector, if we look
at core inflation, core inflation remains very well-controlled,
and as a result, the Federal Reserve has been able to raise
interest rates from its low accommodative level, but to only 4
percent at this point, and the economy is growing strongly.
So, I think this is an enormously good illustration of why
keeping inflation low, stable, and keeping expectations well-
anchored is of tremendous benefit, not just on the inflation
side but also on the employment and growth side.
Senator Dodd. So you would not anticipate taking any
precipitous action here in light of these price increases?
Mr. Bernanke. I believe that inflation expectations remain
well-anchored. It is important to ensure they remain well-
anchored. But as long as they remain well tied down and low and
stable, I imagine that the economy will be much better able to
absorb any further increases in energy prices than they were 30
Senator Dodd. Any indications you have as a result of your
present employment that the anecdote cited here in The New York
Times article about the business that virtually is doubling its
energy costs as a result of price increases is more than just
Mr. Bernanke. There are real problems in the energy sector;
in natural gas, in particular, there have been substantial
increases in prices, largely because the United States is
somewhat isolated in terms of natural gas. We do not have the
capacity to import large amounts, and, therefore, when we lose
domestic production, as we did following Katrina, the shortage
of supply drives up prices.
Natural gas prices have been rising for some time, and this
has proved a very heavy burden to chemical manufacturers,
Alumina, other manufacturers in the United States. That is a
real problem. I do not want to understate that problem at all.
But, obviously, monetary policy per se can only try to avoid
having those price increases spread into general inflation.
Monetary policy cannot create more energy. It cannot really
solve the energy problem.
Senator Dodd. Let me jump quickly, because time is short
here, to another area of questioning, if I can, although that
is obviously a looming problem here. And if you are confirmed,
we are going to want to talk with you about this potential
Let me address the issue of fiscal responsibility and
deficit-financed tax cuts. You wrote in your macroeconomic
textbook that you co-authored with Andrew Abel, you discussed
the negative effect of budget deficits, and I thought a rather
good paragraph here, you said, ``The tendency of government
budget deficits to reduce investment spending is called
crowding out.'' You have used that line many times in your
book. ``Reduced investment spending implies lower capital
formation and, thus, lower economic growth. The adverse effect
of budget deficits on economic growth is probably the most
important cost of deficits and a major reason why economists
advise governments to minimize their deficits.''
Because of the negative effect of budget deficits, which
you so eloquently describe, is it not possible that the cost of
running a budget deficit could outweigh any benefit to be
gained by a tax cut?
Mr. Bernanke. Senator, I agree that budget deficits are a
problem. I think it is important to continue to reduce budget
deficits. I am going to begin now, I think, a practice of not
making recommendations on specific tax or spending proposals--
Senator Dodd. I did not ask for that here. I am just asking
whether or not the negative implications of a budget deficit
could outweigh any benefits--without getting very specific. We
won't talk about any specific tax cut, just as a general
Mr. Bernanke. As a general proposition, it is possible. It
depends on the scale of spending, the size of the deficit, and
whether or not the debt-to-GDP ratio is thought to be stable or
Senator Dodd. So it could be more damaging to our----
Mr. Bernanke. It is possible.
Senator Dodd. Let me ask you quickly as well, are you
concerned at all about the record levels of debt being held by
foreign creditors? We are now talking numbers that are getting
close to $1 trillion, I think it is. Does that worry you at all
as the potential Chairman of the Federal Reserve?
Mr. Bernanke. Well, Senator, given that we have a large
current account deficit--a complex issue which I am sure I will
be asked to address and will be glad to address and given that
that deficit needs to be financed, we are fortunate that
foreigners, including foreign central banks, seem quite willing
to hold U.S. Treasury debt and other financial instruments. So
it is like asking how it feels to be very old. You consider the
alternative. It is better to have willingness to hold our
financial assets than not, given that we have a large current
Senator Dodd. But certainly better off if we did not have
to have them hold it at all. Better to be young.
Mr. Bernanke. The issue is what to do about the current
account deficit, and I would argue that we need over a period
of time, to reduce the current account deficit. I believe that
is possible to do. Once the current account deficit comes down,
then the need to have foreign financing will, therefore, be
Senator Dodd. So you are not alarmed about this at all.
Mr. Bernanke. I believe that the current account deficit
needs to come down over a period of time.
Senator Dodd. But you are not alarmed about foreign
creditors holding this debt?
Mr. Bernanke. I think that it is an essential implication
of the fact that we have a current account deficit, that it
needs to be financed, that we are better off with willing
lenders than we are with unwilling lenders. If they were not
willing to hold our obligations, interest rates would be higher
the economy would not be as strong.
Senator Dodd. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
Back to your comments to Senator Sununu, Dr. Bernanke, both
of you talk about inflation here or inflation there and you use
numbers. That assumes that we know what inflation is. That
assumes that our measuring device is accurate. And I am not
sure that is true. Do we use CPI? Do we used chained CPI? Do we
use the PCE price index, the CPI-U? Various measures of
Then the Tax Code has provisions that are indexed to CPI-U,
and let me ask you, do you believe that CPI-U is the
appropriate measure or would you rather move to something like
the chained CPI or the PCE price index? Your predecessor always
insisted that the CPI was overstated, and I would like your
reaction to that, because we are talking about pegging to a
number or trying to find a number or trying to hit a goal. But
if the goal is measured improperly, we need X number of
touchdowns, and the touchdown are only worth 4 points, and we
are counting them at 6, why, we end up with the wrong kind of
A very bad analogy. I apologize for it.
Mr. Bernanke. That is a very good question, Senator.
As you know, Senator, there was a commission some years ago
headed by Michael Boskin with a number of other distinguished
academics that reviewed the Consumer Price Index as a
measurement of inflation, and it found for a number of reasons
that it overstated inflation. Quality adjustment bias,
substitution bias, and other technical matters were involved.
For that reason, for purposes of thinking about inflation
and for purposes possibly even of indexing in the Government, I
think consideration should be given to measures of inflation
which adjust for some of these concerns. For example, chain-
weighted measures of inflation tend to reduce the substitution
bias that the Boskin Commission pointed to.
With respect to choosing an inflation objective in the
medium-term, there are many considerations one would want to
take into account--familiarity by the public, for example. I
think that would need to be discussed by the Federal Open
Market Committee and in our general consultations. To the
extent that, say, the CPI overstates inflation by an
approximately known amount, one could simply adjust the range
of inflation rates that define price stability to allow for
So there are many considerations to be taken into account
there, and I do not want to prejudge that issue.
Senator Bennett. Okay. As I said, the Tax Code has
provisions that are tied to CPI. Would you recommend that we
change the Tax Code if we come to the conclusion that it is
overstated--which Chairman Greenspan believes--and, thus,
affect bracket creep and all of the other things that occur
Mr. Bernanke. Senator, of course, this is ultimately
Congress' decision, but from a purely technical perspective, I
believe there are better measures of inflation than the CPI-U,
and in that respect, one might want to consider alternatives.
Senator Bennett. That was at the heart of my proposal with
respect to Social Security, looking at the way the inflation is
Let us go to tax reform. Two versions of tax reform were
forwarded by the President's tax reform commission to the
Department of the Treasury for review. Frankly, I was a little
disappointed. I was hoping for a clean sheet of paper approach,
and I feel that they were nibbling around the edges. I think
the current Tax Code, which has its philosophical basis in the
1930's, is no longer applicable to the 21st century. I have a
novel and radical idea that the purpose of taxes should be to
raise money to run the Government and not to direct economic
activity toward or against any particular bias.
We then run into the question of how much money does the
Government need, and, historically, I have felt comfortable
with 20 percent of GDP as the absolute top ceiling, and we have
regardless of where the Tax Code is. A combination of payroll
taxes and income taxes have produced revenues somewhere in a
band of 18.5 to 19.5 percent of GDP, with the river of revenue
that came in when we changed the capital gains tax rate as part
of the agreement made between Congress and President Clinton
following the 1996 election, where the capital gains
realizations were 5 times as much as CBO had projected that
they would be. The Federal revenue went up to 22, 22.5 percent
of GDP, and that was one of the figures that caused some of us
to feel we could support a reduction in tax burden to come down
to the 20 percent--below 20-percent ceiling.
Then we had September 11, we had the recession, we had the
war, and the economy went into the tank, so that we fell down
to about 16.5 percent of GDP. We are now rising comfortably
back toward the 18.5 to 19.5 percent band where last year tax
revenues were up 14 percent over the previous year, showing
that these policies were working.
Where would you put the ceiling, regardless of what the tax
structure is? Are you comfortable with saying 20 percent of GDP
is all the Federal Government should be taking out of the
economy? Or would you go with some of our friends who say no,
it should be as high as 25 or 28, 29 percent of GDP and then we
can pay for all of the wonderful things Congress wants to
enact? Do you have an opinion as to where that number should
Mr. Bernanke. Senator, I just note that as an empirical
fact, over the last 40 years, the share of GDP collected as
Federal taxes has been pretty stable at about 18.2 percent,
something in that range. And you are right, we are not much
below that at this point.
No, I would not be inclined to pick a specific number other
than to observe that historically we have been stable around
this 18-percent rate. The choices that Congress will face are
really cost-benefit choices. Looking at individual programs, do
they meet the cost-benefit test when you include in the cost
the fact that the higher the share of GDP that you collect in
taxes, the greater are the so-called deadweight losses or
excess burdens associated with the inefficiencies of high
taxes? I do not think that one can necessarily point to a
single number, but I do believe that a rigid, rigorous cost-
benefit analysis should be applied to different programs.
I would point out a concern, which may be what you are
alluding to, that on current plans the three major entitlement
programs--Medicare, Medicaid, and Social Security--are slated
to take up about 16 percent of the GDP as of 2045. Together
with the interest on the national debt, that would be pretty
much the entire share of GDP that we are currently spending on
Senator Bennett. It would be higher than that, according to
the projections I have seen.
Mr. Bernanke. So, in any case, it would involve either
radical increases in taxes, radical cuts in other spending
programs, or some combination. So, I do believe, if that is
what you are alluding to, that certainly is a looming issue
that needs to be addressed sooner rather than later.
Senator Bennett. Thank you.
Chairman Shelby. Senator Bennett, thank you.
We have about 3 minutes left on this series of votes. Dr.
Bernanke, we will recess until 3 o'clock.
The hearing is in recess.
Chairman Shelby. The hearing will come back to order.
The Chair recognizes Senator Carper.
Senator Carper. Thank you, Mr. Chairman. You have a memory
like an elephant, so thanks for letting me lead off here.
Chairman Shelby. It is your time.
Senator Carper. Yes, it is.
Dr. Bernanke, thank you for coming back and for
accommodating our schedule. We apologize for all those votes
and that you had to truncate your day.
Just a couple of press interviews right around our lunch
hour, and people were asking me, like some TV people and radio
people wanted to know how things were going so far, and I
described the hearings; I described a day-night double header
in baseball: We did the day part of the game, and now, we are
about to move into the twilight portion of the game.
I would like to just start by again thanking you for being
here, for your willingness to serve our country. And I am just
going to ask you to take a couple of minutes, if you will, and
just describe what you see when you look at our economy: How we
are doing, where we are strong, where we are not so strong and
any thoughts you might have toward what we can do better. I
would like to say that everything we do, we can do better, and
how do you assess the situation, and how might we do better?
Mr. Bernanke. Thank you, Senator.
That is a large question. I think in the near-term, the
economy is in a strong recovery. The economy has been growing
quickly for the last couple of years. Employment has been
improving. The labor market is improving, and I am looking
forward to that growth continuing next year despite the
obviously serious impacts of the hurricanes.
One good feature of this growth has been the increase in
productivity, which we saw again in the third quarter. The
ability of this economy to continue to improve output per hour
is remarkable and speaks very well for the innovativeness and
the industry of the American people and speaks well for the
future of the economy.
With respect to inflation, I think the main issue has to do
with energy prices. The economy has withstood 3 years of
increasing energy prices. So far, both growth and inflation
have not been very badly affected; in particular, core
inflation remains low, and I think an important consideration
for the Federal Reserve going forward is that should energy
price increases continue, they not feed into second round
effects; they not become part of the baseline inflation rate.
So, I think the near-term situation is strong. There are
certainly risks. We can get into many of them. Housing prices
will probably stabilize. Energy prices are an issue. So there
are some risks in the near-term, but I think the baseline looks
As some of our earlier conversations alluded to, I think
the United States economy faces some very serious long-term
issues, and just to tick them off for future discussion: First,
fiscal, particularly over the next few decades, we have
increasing obligations with respect to entitlements. We will
need to find ways to restructure those entitlement programs or
else pay for them. They represent a very serious challenge to
Second, education will come up in many of our discussions
here, because in our world today--with enormous amounts of
dynamism, openness, international trade, change--people need to
be able to have lifetime learning to change, to be able to
respond to new conditions. Education and training are going to
be a crucial part of that.
Third, I would mention technological leadership. We need to
maintain that leadership here in the United States. There have
been a number of reports here addressing that subject.
And finally, just this laundry list; perhaps more than you
Senator Carper. No, it is a good list.
Mr. Bernanke. We need to address the health care sector.
There are many pockets of excellence, of course, in our health
care system, but the costs are high, and they are rising. They
have fiscal implications--for wages, for competitiveness--and I
would put that along with these other long-term issues at the
very top of the things we need to address.
Senator Carper. Thanks. On the last point you mentioned
with respect to health care, I mentioned to the people back in
Delaware on Veterans Day, we had a number of assemblies around
the State of veterans, and I mentioned that an unlikely model
for us to consider emulating, at least with respect to
harnessing information technology in the provision of health
care actually comes out of the VA, a place which was a
backwater just years ago but today is really setting the model.
You did not mention savings. We are lousy savers, as you
know. In fact, the last couple of months, I think we have
actually seen negative net savings. And I would just ask, is
that a source of concern to you? Should it be for us? What
should we do?
Mr. Bernanke. I think it is an issue, Senator. I think part
of the reason for the low savings rate in the last few years is
that our wealth has risen for a variety of reasons. Our housing
wealth has increased. The stock market has recovered somewhat.
So, with their homes doing their savings for them, for example,
people are less inclined to put aside something from their
That has implications for our current account, for other
issues. I suspect as we go forward that the savings rate will,
of its own accord, begin to rebound somewhat, but it is an
important issue. The fiscal situation contributes to the saving
issue, so I agree that is something we need to look to over the
Senator Carper. Good. My time has expired. I would just say
to my colleagues, Mr. Chairman, and to others, if you look at
homeownership in this country, it is now up close to 70
percent. It is about 75 percent in my State. But there are some
people, low- or middle-income people, who should be homeowners,
would like to be homeowners. They have the ability to make a
mortgage payment, but they just are not able to get there. They
do not think they can get there.
And for a lot of those people, the ability to accumulate
savings has passed them by. And one of the things I hope we can
do is figure out better to help them. Thank you.
Thanks, Dr. Bernanke, and good luck. I look forward to
working with you.
Mr. Bernanke. Thank you.
Chairman Shelby. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman, and once
again, welcome, Dr. Bernanke.
One of the ways we were able to instill fiscal discipline
during the 1990's was adherence to PAYGO rules. And I just
wondered, do you agree that PAYGO rules should apply to taxes
as well as to expenditures?
Mr. Bernanke. Senator, I think it is important for Congress
to have well-developed structures, practices, and procedures
for managing its budget, but I am not going to make a
recommendation on that. I think that is outside of my realm of
authority, and I think I would leave that to the Senate, and to
Congress, to make up their own minds.
Senator Reed. Well, your predecessor was not equally
inhibited. He seemed to suggest that PAYGO was an appropriate
mechanism to deal with fiscal discipline, and frankly,
sometimes, we need a little help on these issues, Dr. Bernanke.
So, I appreciate your ceding us the ground, but this is a very
serious issue, and it seems to me that we will not be able to
restore the discipline here in terms of an orderly budget
process unless we do something like that.
Let me ask the question again. You are an economist; I am a
lawyer, so I keep asking questions. If we do not subject tax
cuts to PAYGO, then, essentially, in this economy, we are
borrowing the money for these tax cuts. Is that accurate?
Mr. Bernanke. It depends on both the spending side and the
tax side. To respond to your question in just a general
economic way, I think there are several things to look at when
you are examining a fiscal policy. One of them is deficits.
Deficits are important, because they represent debt which is
being accumulated and being passed on to future generations.
But the share of the economy being devoted to Government
spending is another important criterion. In particular, a
balanced budget with Government spending at 25 percent of GDP
is a very different proposition than a balanced budget with
Government spending at 15 percent of GDP.
So, I am a little bit reluctant--both for the reasons I
mentioned in terms of my prerogatives but also in terms of the
economics--to put specific rules like that. I think that the
Congress has to make judgments about the overall arc of the
budget and make tradeoffs.
Senator Reed. Well, then, let me ask this a final way.
Assuming you are consistent in your viewpoint, you would not
render an opinion if we increased expenditures without
Mr. Bernanke. I believe that it is within my purview to
discuss broad issues of the share of Government spending and
GDP, the share of taxes and GDP, deficits, fiscal stability,
those issues. What I would like to do is refrain from making
recommendations on specific matters of taxes and spending or
specific approaches to pay-go and the similar methods.
Senator Reed. And we can assume that is going to be a
policy after you are confirmed as Chairman?
Mr. Bernanke. That is my intention.
Senator Reed. Thank you, Doctor.
Let me ask another question: Chairman Greenspan has
explained as recently as last fall that it is, in his words,
``Very rare and very few economists believe that you can cut
taxes, and you will get the same amount of revenues. When you
cut taxes, you gain some revenue back. We do not know exactly
this is, but it is not small. But it is also not 70 percent or
anything like that.'' You do not subscribe to the view that tax
cuts pay for themselves, do you?
Mr. Bernanke. Senator, the revenue cost of a tax cut
depends on the structure of the tax cut, whether it is one that
improves economic growth or not, and so on. I think that
generally, tax cuts, if they are well-designed, do increase
growth and therefore do partially offset the revenue loss. But
I think it is unusual for a tax cut to completely offset the
Senator Reed. Thank you, Dr. Bernanke.
One other area of concern, and that is although interest
rates have not gone--excuse me, we have had, over the last
several quarters, increases by the Federal Reserve with respect
to interest rates, but the long-term interest rates have hardly
moved at all, and that is, I think, an issue that is beginning
to draw a lot of professional attention as to why that might
Although these long-term interest rates have not gone up,
the large Federal budget deficits we have seen recently have
substantially reduced our national savings. I think that is
correct, also, and the increase in national savings, I would
assume, and I hope you do also, does harm our future prosperity
and economy; is that accurate?
Mr. Bernanke. It does increase the debt that we pass on to
our children; that is correct.
Senator Reed. Now, just recently, I think Chairman
Greenspan has talked about the potential for foreign lenders to
become disenchanted. Will interest rates not have to rise
substantially in our current posture if foreign lenders are not
forthcoming? Is that almost axiomatic?
Mr. Bernanke. I do not expect to see foreign lenders change
their holdings very significantly. The foreign holders are not
doing us a favor. What they are doing is choosing a set of
assets which they consider to be highly liquid, highly safe,
from a country with a safe, strong legal system. So it is for
that reason that American assets make up the bulk of
I do not expect to see major changes in that. Moreover,
there is broad interest in holding U.S. assets both by
Americans, of course, but also by foreign, nonofficial sources
as well, so I do not expect to see any such shift in demand for
Senator Reed. Thank you, Dr. Bernanke.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman and welcome.
Mr. Bernanke. Thank you.
Senator Stabenow. Dr. Bernanke, I wanted to talk a little
bit more about this whole question of our U.S. assets,
financial assets and other assets being held by foreign
investors. We are told that about $9 trillion in all, if you
look at financial assets, large portions of which are easily
sold and highly susceptible to shifts in the market sentiment,
to interest rates, to other variables, even a modest slowdown
in the net new inflows from private and official foreign
sources could have a negative impact on an economy where
foreign investment is about 25 percent of our gross national
product, very alarming. And I would argue that since a large
part of that is China and Japan, that it unduly impacts our
ability to enforce trade laws and to address other issues with
them, whether we want to acknowledge that or not. I have a hard
time believing it does not have some impact there.
But it would appear to many of us that our trade deficits
are leading us down an incredibly alarming path as well as our
budget deficits. When you are looking back, do you see any
instances where alternative monetary policy choices by the Fed
could have moderated the buildup of these imbalances or had an
impact on what is happening in terms of deficits?
Mr. Bernanke. No, I do not think that the Federal Reserve,
whose mandate, after all, is domestic price stability and
employment, has much role in terms of the current account
deficit. The current account deficit is a very complex
phenomenon. I believe it arises from essentially a global
imbalance of saving and investment. Countries outside the
United States have a lot of savings that they want to put into
international capital markets and insufficient investment to
make use of those savings.
The United States has been the recipient of those savings,
and that is, in some sense, a good thing, because the United
States is a very attractive destination for foreign capital
flows. But it has also created this imbalance that we call the
current account deficit.
I do believe the current account deficit needs to come down
over a period of time. I think there are a number of elements
needed to do that. Part of it would be to increase U.S.
national savings through both private savings and public
savings. It would also be useful for our trading partners to do
a number of things, including allowing their exchange rates to
float freely and be determined by the market and relying less
on exports as a source of demand for their economies.
So we need to rebalance the global international system. I
believe that can be done over a period of time, but it will not
happen overnight. And I think the Federal Reserve's main
objective should be to maintain domestic employment and price
stability and to allow other factors to be predominant in
curing the current account situation.
Senator Stabenow. Let us talk for a moment; you mentioned
floating currencies. Currency manipulation is of great concern
to me and many of my colleagues. We had a very strong vote; I
believe it was 67 Members of the Senate, both parties, a year
ago that sent a very strong message about how we want that to
stop, particularly with China; China, and Japan is also a
concern, whether it be as aggressive or an open process in
We have a process where the Treasury Secretary comes in
every 6 months, gives us a report. This past summer, he issued
his semiannual report and was not able to bring himself to
recognize that China is, in fact, manipulating their currency.
We all know it is happening. Everybody in my State knows; any
businessperson knows that is happening.
But once again, we have in November, now, this month, we
will have access to another report. I fear that it will be the
same as other reports, technically indicating that currency
manipulation is not happening. Do you believe the Federal
Reserve has a role to play in ensuring that economies around
the world allow market forces to determine the value of their
Mr. Bernanke. Senator, let me begin by saying that I think
it is very much in China's own interest to allow their currency
to float freely and be determined by the market. They are a
very large country. They need to have independent monetary
policy. It is difficult for them to continue sterilizing their
interventions the way they have been doing, so I believe that
they will come to the recognition, and I hope they do, that it
is in their interest to allow their currency to be determined
by market forces.
With respect to the Federal Reserve's role, the Treasury
usually takes the lead in matters of currency negotiation and
the like, but the Federal Reserve is active in providing advice
and assisting in whatever way possible, and I would certainly
Senator Stabenow. I would just comment that when you are
talking about China's best interests, I would just note that we
have lost over 1.5 million manufacturing jobs in America, which
is where my focus is, and our focus is on America, American
businesses, and American jobs. We have lost over 1.5 million
jobs because of currency manipulation.
And while I appreciate that we can hope that someday, China
will get there, because it is in their interests, it has been
long in our interests to have stopped this along with
counterfeiting and a number of other issues that have created
an unlevel playing field for our businesses and our workers.
So, I realize that is not directly under your purview, but
I would hope that your knowledge and leadership would be used
as we talk about the broad economic factors that allow us to
create those good paying jobs that we desperately need to keep
and expand upon in this country, and certainly, what we are
doing to enforce, or in this case, not enforce trade laws has a
tremendous impact on that, and certainly, currency manipulation
is one of those things.
Thank you very much, Mr. Chairman.
Chairman Shelby. Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Welcome, Doctor, and I want to thank you for
the visit you were kind enough to pay on me a week ago. I
enjoyed our discussion. As I told you at the time, I look
forward to supporting your nomination and was impressed by your
combination of both theoretical and practical concerns, which
is the combination that I think we need in a Fed Chairman.
Doctor, let me begin by asking a stylistic question, if I
might. And I would like to quote from an article in today's New
York Times, which concludes by saying, ``As an academic
economist and as a Fed Governor, Mr. Bernanke prided himself on
speaking clearly and sometimes even bluntly.'' It then goes on
to say that perhaps to satisfy the concerns of Members of
Congress but also the bond market said to satisfy both
constituencies, he may have to sacrifice his plain speaking.
Is that true? I, for one, am hoping that you can continue
to speak your mind in a language the American people can
Mr. Bernanke. I will certainly try to speak clearly on all
Senator Bayh. Good. I guess we will have to be the judge of
that as we go forward, but I hope you will endeavor to do that.
Clarity and transparency, I think, are normally better than the
alternatives, so I hope you will stick to your stylistic guns.
Mr. Bernanke. Thank you.
Senator Bayh. Let me ask you about current account
balances, if I might. And let me follow up on something that I
think both Senators Reed and Stabenow were asking and also
quote from today's New York Times. It says of the more than $30
trillion in foreign investment tracked by the Bank of
International Settlements in the first 3 months of 2005, 42.5
percent were in dollars, 39.3 percent were in euros. The dollar
share was down 4 percentage points from around 3 years earlier,
while the euro share was up by 5 percentage points.
The reason these statistics were cited by Chairman
Greenspan was in furtherance of the notion that perhaps in
accordance with portfolio theory, some countries had reached
the tipping point in terms of their level of dollar-denominated
assets. What is your take on that?
Mr. Bernanke. Senator, it is an open question. There is
still what Chairman Greenspan calls the home bias, the fact
that most countries still own a smaller share of dollar-
denominated assets than the U.S. share in the world economy.
And so, it is a question of judgment about how much more dollar
assets foreign investors will want to hold. My sense is that
there is still a broad appetite for dollar assets, both
domestically and abroad, and as I indicated, I do not expect to
see any major shifts in that appetite. Clearly, we will need to
monitor the situation. We will need to watch the behavior of
interest rates, the dollar, and other financial variables, but
I see no indication of any major shift in these flows in the
Senator Bayh. Let me ask a question that I posed to you in
our meeting in my office, and that is the most likely course of
events is that there may be an orderly readjustment of the
imbalances that currently exist, but from time to time, events
happen that lead to disorderly movements. What should the
appropriate policy response of our Government be if there were
to be a precipitous decline in our currency, and what do we do
about the conundrum where, if you raise interest rates in the
short-run to defend our currency, it could have a stifling
effect on the economy which, then, in the longer-term, could
have a depressing effect on our currency? How do you strike the
right balance there?
Mr. Bernanke. Senator, in answering the question, first, we
are talking hypothetically.
Senator Bayh. I understand that.
Mr. Bernanke. So, I want to be sure everyone understands
Senator Bayh. And by the way, forgive me for interrupting,
but as a Member of this body and admonishing you to speak
bluntly and clearly, perhaps we should look in the mirror. I
want to just put that on the record, too.
Mr. Bernanke. Thank you, Senator.
The Federal Reserve has important responsibilities for
maintaining financial stability that involves ensuring ex ante
that banks, for example, are managing their portfolios safely;
that the clearing and settlement systems are well-designed and
secure; that there are good arrangements in place for dealing
with some kind of financial crisis no matter what its source
should be; and ex post, should there be a problem that there be
plenty of liquidity provided to the banking system and that the
Fed would make sure that whatever problems arise be brought to
some venue where they can be unwound, discussed, and assistance
So broadly speaking, the Federal Reserve must deal with
financial crises of all different kinds. There have been a
variety of them. Should an untoward movement in dollars and
interest rates cause financial stress, the same approach that
the Federal Reserve has taken in other circumstances would be
applied in this case.
With respect to the macroeconomic implications, it would
depend on the overall impact on the economy. Again, the Federal
Reserve's responsibility is maximum employment and price
stability. So the impact of the change in the dollar, interest
rates, asset prices, however those things would occur, there
would have to be an evaluation about what the net change would
have to be in order to make sure that the domestic economy is
stabilized and is insulated from the impact of these changes.
Senator Bayh. I have exceeded my time, but it would be a
sticky problem, would it not?
Mr. Bernanke. Surely, it would be a sticky problem, and
that is why it is good to have an experienced staff and lots of
experience in the institution for dealing with these crises.
Senator Bayh. I am going to defer to my colleagues and
stick around for a few moments, but my concern in this regard
is that if, in fact, other countries have reached the point at
which they are not seeking to increase the percentage of
dollar-denominated assets, then perhaps that increases the risk
of an exogenous event of some kind leading to a precipitous
readjustment of the currency, thereby presenting you with this
Mr. Bernanke. Senator, if I may, there is demand for dollar
assets not simply by foreigners but by Americans as well. And
American household wealth, for example, is about $50 trillion.
There is an enormous demand for dollar-denominated assets, and
so, I do not expect that that demand would drop precipitously.
Senator Bayh. Let us hope.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Senator Bayh.
Dr. Bernanke, last week, the Banking Committee, as you
probably knew, heard from the banking regulators, including the
Federal Reserve, and several industry experts regarding the
proposed Basel II capital standards. While the regulators
basically supported moving forward, some with a little caution
in the wind, the outside experts, a lot of them former
regulators, advised caution, raising concerns about lower
capital ratios and failure to factor in all risks faced by
What is your assessment of the Basel II proposal? I know
you have been on the Fed as a Member. And if you are confirmed
as Chairman, which I hope you will shortly, what will the
Federal Reserve do to address the unanswered questions? And
there are a lot of unanswered questions and concerns raised
regarding Basel II.
Mr. Bernanke. Well, Chairman Shelby, Basel II or something
like it appears necessary. The banking system has become
extraordinarily sophisticated financially. Basel I is no longer
sufficient as a means of determining adequate regulatory
capital for the banking system. The Federal Reserve, the other
banking regulators, and international counterparties have
worked for a number of years trying to determine an appropriate
system that would appropriately account for the complexity of
the banking system.
Basel II tries to embody the notion that the amount of
regulatory capital should be based on modern risk management
techniques, which try to evaluate the risks associated with
different kinds of investments. It is true that there have been
various concerns and disagreements along the way. My sense is
that the banking regulators are proceeding in a very cautious
and slow way. In particular, as you know, they have delayed the
implementation following the QIS-IV results, and moreover,
there is going to be a series of safeguards, including, for
example, a slow transition parallel run where both Basel I and
Basel II capital standards will be calculated, and there will
be a floor based on the Basel I standards. There will be a
continual process of evaluation, of feedback, and of comment.
There are various other safeguards as well, including the
Pillar II, which allows regulators to make additional
assessments of capital, depending on their evaluation. And
finally, I should just mention, among many other elements, both
prompt corrective action and the leverage ratio, which are two
other ``belts and suspenders'' provisions, will remain in place
to ensure that banks have sufficient capital.
So while I am not involved personally in all of the details
at this point, I expect I will be if I am confirmed. My sense
is that regulators are moving very cautiously and very slowly
to make sure that the regulatory capital is going to be
sufficient to make the banking system safe and sound.
Chairman Shelby. Thank you.
I want to touch on the Fed's role in crisis management, and
I hope you will not be confronted with crisis management, but I
know you will be. Over the past 20 years, the United States and
world economies have benefitted when the Federal Reserve took
swift and appropriate action to respond to various financial
disturbances. Some now question whether the Federal Reserve
will have a more difficult time in the event of a future crisis
because of the large trade deficit and the large foreign
official holdings of U.S. Treasury debt we have been talking
Do you agree or disagree with the assessment that the Fed
may not have, may not have the same flexibility as it had in
the past? And what measures, if any, would you, as Fed
Chairman, lead the Federal Reserve in taking to prepare for its
role in crisis management, which will come sooner or later?
Mr. Bernanke. Chairman Shelby, it is certainly true that
the economy has become much more open, that capital flows are
much more important, that the current account is a much bigger
issue, and that certainly makes more complicated the Federal
Reserve's objectives, both macro objectives and financial
Nevertheless, I do not believe that the ability of the
Federal Reserve to respond, to meet its objectives has been
substantially compromised by this opening. It just makes the
problem more complicated, requiring more expertise. I think, in
fact, that the financial system has benefitted over the years
from the meeting of a variety of financial crises, including,
for example, September 11, which has led to hardening and
providing additional backup facilities.
The depth, liquidity, and flexibility of the financial
markets have increased greatly. The strength of the clearing
systems of the major financial centers has been improved. So
certainly, I agree that we can never be complacent about
financial crisis, and I will certainly make every effort to be
prepared for whatever may come my way. But I do believe that
progress has been made in strengthening the system to be more
resilient in the face of shocks.
Chairman Shelby. Senator Sarbanes, would you like to ask
Senator Sarbanes. Yes, I do indeed. Thank you very much,
Dr. Bernanke, I have a number of questions I want to run
through as quickly as I can. Before I do that, though, I do
want to observe that--let me start, and then, I will come back
On Basel II, which you just responded to the Chairman
about, it seems to me you are being much too sanguine. They did
the quantitative impact study. They found that more than half
of the participating institutions would show a capital
reduction of 25 percent or more; in some instances, up to 50
percent, which, of course raised a lot of red flags about the
safety and soundness of the system and the adequate capital. Do
you think that prompt corrective action and the leverage
capital requirements could be maintained if risk-based capital
levels fell significantly below the leverage ratio?
Mr. Bernanke. Senator, I guess the good news about QIS-IV
is that it led the regulators to stop, take stock, and to try
to understand the results.
Senator Sarbanes. Which only raises the question, how did
we get so far down this path that when they ran it through the
models, it brought this absolutely show-stopping result? How
did that happen? I mean, we keep holding these hearings;
Chairman Shelby, to his credit, has really exercised a lot of
oversight over this repeatedly. Everyone says, well, we are
working it all out. It is going to be good, you know; and then,
all of a sudden, they do a quantitative run on the thing, and
everyone says wow, how did we get to this posture?
How did that happen?
Mr. Bernanke. Senator, various issues have been identified
that will help explain the results. I do not have to go through
all of them; to give one example, some of the results were
based on relatively good times and did not include some weak
periods of the economy that give a higher loss rate. But what
it does emphasize--and here, I agree with you, Senator--is that
it is very important that this be done right, and we need to
learn from these exercises. If they were purely mechanical,
they would not be worth doing.
So we need to go slowly and cautiously and learn from these
exercises and make sure that capital is adequate, and I agree
with that 100 percent.
Senator Sarbanes. Well, I want to commend to you--I will
not pursue this question, because there are a number of others
to ask, that there was a panel after we heard from the
regulators, including former FDIC Chairman William Isaac and
former FDIC Chairman William Seidman, and Isaac said a number
of things, but I quote him: He says ``Basel II will be used to
reduce large bank capital ratios and either place small banks
at a competitive disadvantage or force regulators to lower bank
capital ratios.'' Neither option is acceptable public policy.
And Seidman, and these are two experienced people, said the
original intent of Basel II was to more closely align minimum
regulatory capital with actual risk, not to materially reduce
overall capital levels within the banking system. And I
strongly commend the testimony of that second panel to you as
you move ahead to examine this question.
Let me ask you about remittances. I know this is an issue
you have been interested in. A recent study by the Inter-
American Development Bank said Latin American immigrants will
send over $50 billion in remittances to their family and
friends in their countries of origin, the vast majority of
which is from the United States.
We have been concerned about the state of the remittance
market, especially that individuals are using methods of
transmitting remittances that are outside the financial
mainstream and therefore often subject to high fees and often
to hidden charges in the form of unfavorable exchange rates.
You have studied this issue. You have said typical nonbank
fees for remittances remain high on an absolute basis, and
consumers who deal with the less scrupulous providers of
remittance services may bear a significant financial cost. I
think we have an opportunity here to get immigrants into the
financial mainstream, using the remittance issue in order to do
Would it be your intention to work on this issue as
Chairman of the Fed, and do you think there is a role that the
Fed can play in helping to achieve this goal of greater
fairness for the immigrants who are doing the remittances and
their inclusion in the financial system?
Mr. Bernanke. Senator, yes, I do. As my same speech that
you are alluding to discussed, I think this is an excellent
opportunity for mainstream financial institutions to bring
immigrant communities into their organizations, to give them
not only remittance services but also other services, savings,
borrowing, and the like. And it is an opportunity that many of
these organizations are already undertaking.
The Federal Reserve is involved in this in numerous ways,
through bank supervision and regulation but also through, for
example, the Fed ACH system, which has been set up with Mexico
to permit easier remittance payments, through financial
education and in managing the risks that are involved in these
So, I think it is an important issue. It is very important,
obviously, for the immigrants themselves and for the countries
that are receiving the remittances, and I will continue to be
interested in that.
Senator Sarbanes. Mr. Chairman, I see my time is up. I have
a few more.
Chairman Shelby. You go ahead.
Senator Sarbanes. Well, you have people who have not had
their first round. And Bob Bennett is here, too.
Chairman Shelby. Senator Bennett.
Senator Sarbanes. And Senator Schumer is here.
Senator Bennett. Thank you, Mr. Chairman, Senator Sarbanes,
and I listened to this conversation about the current account
and foreign ownership, and I have a fundamental question: Where
else are they going to go?
Mr. Bernanke. Senator, that was part of my response.
Senator Bennett. Yes.
Mr. Bernanke. American assets are very attractive assets,
and they will be an important part of any international
portfolio and, of course, of Americans' portfolios as well.
Senator Bennett. Sure; I mean, I would not want to invest a
lot of my retirement money anyplace else but in the American
economy, and it is a logical place. Where else are they going
I would like to pursue a little bit another question. We
talked about inflation. We talked about price stability and
price stability being the target and the old idea that
inflation and employment are tied together, and you cannot have
high employment without overheating the economy. And so you
have to make a choice, and I think we have broken that link and
decided you can have price stability and tight labor markets at
the same time, because we have seen some of that before the
What causes inflation? That becomes the fundamental
question here, and there are some who would suggest that
inflation is caused by too much growth, and the way to control
inflation is to control growth. But we have had low inflation,
and we have had growth in excess of 3 percent of GDP, sometimes
up to 4 percent of GDP without the sense that the economy was
Could you just explain that in your best professorial
manner to a graduate student here who wants to know how you are
feeling about this whole question of whether or not inflation
is caused by too much growth, and if not, by what?
Mr. Bernanke. Senator, growth itself and growth capacity
are ultimately determined by productivity, which again, depends
on issues like regulation, taxation, innovation, technology,
and the like, and also by employment growth--the number of
workers available and the increase in their labor supply. So
those are the fundamental factors that determine growth.
The amount of available growth varies over time according
to economic conditions. It can be high. The United States has
had good economic policies and good technologies that have
promoted growth in recent years. So, in that sense, strong
growth does not create inflation.
If financial conditions are such, though, that aggregate
demand, aggregate spending is greater than even the growth that
underlying conditions can permit, then, there can be increased
pricing power, excess demand, and pricing pressures can
increase. In that case, you can get some inflation.
I agree with your original statement, though, that in the
long-run, the most important relationship is between low
inflation and high growth. That is, when inflation is kept low
and stable, and expectations are kept low and stable, then the
economy will be more stable, and more growth will be possible.
So, I think that is the most fundamental relationship between
the two variables.
Senator Bennett. Well, I have always said wealth is created
by two things: One is accumulated capital, and the other is
risk taking and that we need policies, both fiscal policy and
monetary policy, that encourage both the accumulation of
capital and the willingness to take risks. I realize tax policy
comes into that, because if you tax accumulated capital and
thereby make it less attractive, or if you tax the rewards so
that I take a risk, but I am not going to get that much of a
reward out of it; but taking those two, the role of accumulated
capital and risk taking in creating growth, talk about the
Fed's role with respect to that, because you do not control
Mr. Bernanke. No, the Fed's role is to keep inflation low
and stable, and that makes markets work better. It reduces
risks in the market, causes people to spend less time worrying
about the value of money and more time about businesses and
innovations and changes that will make the economy better. So
that is, I think, the main contribution the Fed can make is to
ensure long-run price stability. In the short-run, the Fed can
respond to various shocks to the economy and try and keep
things on an even keel, but all that works best when inflation
is kept low and stable.
Senator Bennett. Thank you, Mr. Chairman.
Chairman Shelby. Senator Schumer. This will be your first
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman, and thank you for
holding these hearings. I want to thank you, Mr. Bernanke, for
being here. I apologize I could not be here earlier. I was over
on the House side.
And we have had some extensive discussions, and you have
answered most of my questions satisfactorily; a few I would
like to go over even though we talked about them when we met:
China; now, in May of this year, you told this Committee, I am
quoting you, ``For large economies like China and the United
States, it is preferable to have a market-determined, flexible
exchange rate. And China should move as expeditiously as
possible toward loosening up its exchange rate. They are now
ready to go to a more flexible rate regime, and I would
encourage them to do that.''
That states your views correctly and without any
Mr. Bernanke. Yes, Senator.
Senator Schumer. Okay; let me ask you a couple of questions
about that. First, do you believe that our current account
deficit is sustainable?
Mr. Bernanke. I believe we need to bring it down over a
period of time, yes.
Senator Schumer. Okay; do you think that China and its
particular inability or unwillingness to let the currency float
is contributing to that current account deficit?
Mr. Bernanke. It is a contribution, but there are many
other factors as well.
Senator Schumer. Right.
Mr. Bernanke. Including the very high savings rate around
the world and the export-led strategies of some other
Senator Schumer. Right; do you believe the Chinese engage
in mercantilist policies? You had said you did when we talked.
Could you just elaborate a little bit?
Mr. Bernanke. They have adopted a development strategy,
which other countries have also adopted which focuses on
export-led growth; that is, that they are looking to export in
order to help their economy grow. They see advantages in being
able to sell to a global market, one that is more
technologically sophisticated, and it has been proved a method
that has helped them in their rapid growth process.
Senator Schumer. But they try to maximize imports and
minimize imports; would that be fair to say?
Mr. Bernanke. I am not sure about imports. In some cases,
the imports are quite important; for example, China is a
platform, and they bring in goods and services, bring in goods
from other parts of Asia and reproduce them.
Senator Schumer. Right. But their goal is to increase their
overall wealth. That is what a mercantilist policy would be.
Mr. Bernanke. They have focused on exports as a way of
trying to increase their growth, yes.
Senator Schumer. Now, second question is China did promise
to allow market forces to affect the value of the yuan, and
yet, the currency has moved as much in nearly 4 months as they
said they would allow it to move in a day; in other words, the
total amount of movement. Is it your view that China has kept
its promise to allow the yuan to move with market forces?
Mr. Bernanke. I think they need to do more to allow their
exchange rate to become more flexible and more market-driven.
Senator Schumer. Obviously, it would not move so little if
they were not intervening, and it would be better if they did
not or at least gradually moved away from it; I assume you
assume that is correct.
Mr. Bernanke. Yes.
Senator Schumer. Okay; could you just talk a little bit
about a reasonable timetable for China to allow its currency to
float freely? Are they ready to do it immediately? That would
be one extreme. Should it take 10 years? That might be another
extreme. Could you talk a little bit about what you think is a
reasonable timetable for them? I am not going to pin you down
to 2 years, 6 months, but just talk to us a little about that.
Mr. Bernanke. Senator, I think that they will go somewhat
slowly. They want to make sure that their economy is ready for
the flexible exchange rate. They are looking at the
institutional factors involved in trading, the exchange rate,
and the like. I would be very reluctant to give a timetable.
Senator Schumer. Are they moving too slowly now?
Mr. Bernanke. I would like to see them make further
progress on this issue.
Senator Schumer. Okay; thank you, Mr. Chairman. Time is up.
Chairman Shelby. I believe it comes back--no, it comes back
to you, does it not?
Senator Bayh. I would be on my second round.
Chairman Shelby. Yes, sir.
Senator Bayh. Doctor, I would just observe I am a little
concerned about a cavalier attitude with regard--not on your
part, just in general--about the current account imbalance and
the attitude of, well, where else are they going to go? I can
see the Chancellor of the Exchequer having made a comment like
that in the 1930's or the 1940's, and in fact, history evolved
in a way that there was an alternative, and that is where the
global currency flows went.
It is also possible that other countries might choose to
make decisions that we would view as suboptimal in terms of the
return on their investments for other reasons of state; for
example, to pressure us on national security issues of some
kind involving, just to pick at random, the issue of Taiwan,
for example. There are occasionally nationalist issues that
trump economic interests. And that is one of the reasons that I
am somewhat concerned about just saying, well, the current
account deficit can run forever at, what, 6 percent now and
maybe larger. Eventually, this has to unwind in some way or
other, and it had best be orderly rather than disorderly, so
that is the nature of my questioning.
I would like to shift and ask about the budget imbalances,
the different imbalances that we are running. I think in our
conversation, we both agreed that there was some level at which
an internal momentum begins to take hold when a deficit gets to
a certain size and the interest payments begin to build and the
snowball effect, for lack of a better term, and as I recall,
that was around 2 percent or thereabouts; is that correct in
Mr. Bernanke. Not precisely. A 2 percent deficit is about
consistent with a stable ratio of debt-to-GDP. So maintaining a
deficit at that level, while not optimal, it would be better to
get it lower, at least does not have the property of raising
the debt-to-GDP ratio. There can be periods of higher deficits.
I expect we will see one with the costs of Katrina, for
Senator Bayh. Well, indeed, we are already in one. I think
our current deficit-to-GDP is about 2.7 percent, excluding
Mr. Bernanke. So as long as the deficit returns to a
sustainable level over a period of time, then the debt-to-GDP
ratio also will stabilize. But I am not disagreeing in the
sense that I think it is very important, and here, my main
concern is the long-run entitlement issues, which I have
already alluded to, which are going to put very heavy burdens
on the fisc. In order to prepare for those heavy burdens, I
think we do need to begin to try to reduce the deficit, try to
reduce spending, try to bring the budget closer to balance so
that we will be prepared to deal with those long-term
Senator Bayh. Here is the reason for my question: If we are
already at 2.7, then, we agree that we are above the rate at
which the debt level-to-GDP begins to increase. Therefore, any
decision, be it spending or on the tax side that increases the
deficit only exacerbates that situation; I think by definition,
that is correct, is it not?
Mr. Bernanke. If you take as a baseline the midsummer,
midsession review earlier this year----
Senator Bayh. Remember my admonition from the Times about
Mr. Bernanke. I will speak bluntly.
Senator Bayh. I am teasing.
Mr. Bernanke. That baseline had a declining deficit-to-GDP
ratio over the next few years.
Senator Bayh. Which timeline was that, Doctor?
Mr. Bernanke. Over the next 5 years, the midsession review
shows the deficit as a share of GDP declining over time.
However, there are important risks to that projection.
Obviously, since the summer, we have had Katrina, which will
have a near-term impact. Another concern I would raise for you
is the reliance for revenue on the alternative minimum tax,
which the Congress is not willing to allow to actually take
So it is, I think, important for Congress to consider
whether either to allow the alternative minimum tax to actually
take effect or alternatively to undertake a tax reform or other
measures that replace that revenue with some other form of
Senator Bayh. Let me ask you one final question: I am
occasionally asked this, and it is always a little hard for me.
But I find that a certain amount of reflection and
introspection sometimes is--I can learn more sometimes from
things that maybe did not go quite as I expected as much as I
can from things that went as I expected.
Looking back in the different public policy pronouncements
that you have made and situations that you thought you had
analyzed correctly at the time, can you point to anything that
just did not turn out quite the way you expected and what you
learned from that instance?
Mr. Bernanke. Well, in 2003, there was an episode where
there was clearly a miscommunication between the Federal
Reserve and the bond markets, and it caused a significant
fluctuation in the bond markets. This was over the issue of
whether there was some risk of deflation going forward. And
clearly, there was a misunderstanding about that risk. It
impressed on me the importance of speaking clearly and
communicating clearly and making sure that there is
understanding on both sides about what the Fed is saying and
what the Fed is intending to do.
Senator Bayh. Thank you very much, Doctor. I wish you the
Mr. Bernanke. Thank you.
Chairman Shelby. I believe it is back to me, Dr. Bernanke.
In your previous tenure, Dr. Bernanke, when you were a Member
of the Board of Governors of the Federal Reserve, you spoke
regarding, ``a global savings glut.'' Others have, too. Would
you elaborate just for the record further on the potential
causes of this behavior and whether our Nation's economy has
ever experienced similar circumstances? And should this
situation persist, how would this affect the Federal Reserve's
economic projections if it would? We realize that there is
capital in the world, which is money, I guess, savings.
Mr. Bernanke. The global savings glut idea attempts to
point out that the current account deficit of the United States
is not simply or entirely a product of U.S. economic policies.
It is a global phenomenon created by global forces; in
particular, I argued in the speech that over the last 10 years
or so, the amount of savings around the world has exceeded
desired investment in those same countries, for various
reasons, including the aging of some industrial economies, the
oil revenues of crude producers, and most importantly, the fact
that emerging market economies over the last 10 years have gone
from being significant borrowers in international capital
markets to large lenders, to having large current account
As a result, there have been enormous amounts of capital
dumped into international capital markets, which helps to
account for the fact that global interest rates are at record
lows or, at least, at very low levels. The inflows of that
capital into the United States, which is an attractive
destination for this capital, and the resulting impact on asset
pricing in the United States is, in my view, part of the reason
why Americans have increased their consumption and reduced
their savings, which has resulted in this current account
Now, as I have argued already today, I do not view the
current account deficit as desirable. I think there are a
number of reasons to try to end it, but in order to end it or
at least to wind it down over a period of time, it is going to
require action both within the United States and also within
our trading partners. On the part of the United States, we need
to increase our own savings relative to investment.
With respect to our trading partners, there needs to be,
first, increased reliance on flexible exchange rates, as we
already discussed, and also, more willingness on the part of
our trading partners to rely on domestic spending--domestic
government purchases or consumption--to drive their economies
as opposed purely to an export-led strategy.
Chairman Shelby. Is it basically true that in a global
economy where you have market forces working that capital would
know no boundaries? It would look for its best investment,
would it not?
Mr. Bernanke. That is correct, but at this point, some of
the savings which is coming to the United States might well be
served by going, say, to emerging market economies, which are,
because they have perhaps inadequate infrastructures or
insufficient transparency, are not receiving as much capital
as, in some sense, would be ideal. I think a more balanced
global situation will be one where there is a closer balance
between saving and investment both in the United States and
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Just to follow up on the Chairman's point
quickly, is some of that capital not coming from emerging
market countries or developing economies?
Mr. Bernanke. Yes, Senator, a great deal of it.
Senator Sarbanes. And what is the rationale for that? Why
should they be sending capital into the world's most advanced
economy? Is not something--at least what economics I learned,
that is the wrong way for the flows to be going in terms of
building up worldwide prosperity.
Mr. Bernanke. Senator, your basic point is right. Normally,
you would expect to see capital flowing into emerging market
economies rather than out of emerging market economies. The
proximate cause of this switch, I would argue, were the
financial crises of the late 1990's, which occurred in a
variety of emerging market economies in East Asia, Latin
America, and elsewhere and led them to be much more cautious
about accepting capital inflows and to focus more on building
up their reserves, building up their current accounts and
looking more to an export-oriented strategy.
So, I think it is the effects of the financial crises,
which, over a period of time, I expect will wane, but that was
the main impetus, I believe, for this shift in strategy on the
part of the emerging market countries.
Senator Sarbanes. Yes, but I take it you regard it as
undesirable; I know in a speech, you said in the longer-term,
however, the current pattern of international capital flows,
should it persist, could prove counterproductive. Most
important, for the developing world to be lending large sums on
net to the mature industrial economies is quite undesirable as
a long-run proposition.
Mr. Bernanke. That is correct.
Senator Sarbanes. You still agree with that statement, do
Mr. Bernanke. In the short-run, and I agree with Senator
Bennett, given that these countries have high savings, and they
are unable to make full use of those savings domestically, it
is understandable that they would send capital to the United
States, which has very deep, liquid, and strong capital
markets. Over a period of time--not immediately but over a long
period of time--a greater balance, which would involve more of
these funds going into emerging markets, I think, would be
Senator Sarbanes. You are on record as opposing the use of
monetary policy to control asset bubbles, as I understand it,
whether in the stock market or the housing market. Instead, you
have stated a far better approach is to use micro-level
policies to reduce the incidence of bubbles, to protect the
financial system against their effects.
The Wall Street Journal ran an article recently entitled
``Concerns Mount About Mortgage Risks,'' which reported, ``In
the latest sign of how frothy the housing market has become,
new data show the degree to which people are stretching to buy
homes in a hot housing market. The data from the Mortgage
Bankers Association show that adjustable rate and interest only
mortgages accounted for nearly two-thirds of mortgage
originations in the second half of last year.''
Alan Fishbein, the Director of Housing and Credit Policy at
the Consumer Federation of America, called it a game of musical
chairs. Somebody is going to have the chair pulled out from
under them when they find prices have leveled out and then try
to sell, only to find they cannot sell for what they paid for
Are you concerned about the potential for a bubble in the
housing market? And specifically, does the drastic increase in
the use of risky financing schemes, including interest only and
even negative amortization mortgages, concern you?
Mr. Bernanke. Senator, as I understand, the Federal Reserve
is reviewing these practices with the idea of issuing guidance
about so-called ``nontraditional mortgages.'' I think it is
important to make sure that mortgages of the nontraditional
type--whether they are interest only, option ARM's, or other
similar types of mortgages--that first, they are consistent
with safety and soundness on the part of the lenders, and
second, that consumers who are using these mortgages fully
understand the implications of holding these mortgages should,
for example, housing prices decline or interest rates rise.
I think it is very important to look at these instruments,
and I believe that doing so would have, on the margin, some
beneficial effects in reducing speculative activity in some
local markets. However, overall, I think the main reason to
look at these instruments is to make sure that banks are
protected and that the consumers are protected against the
potential risks of these instruments.
Senator Sarbanes. Chairman Shelby and this Committee, and I
have joined with him on it in expressing our concern that the
Federal banking agencies are not taking a sufficiently
aggressive and sophisticated attitude toward examining
institutions with respect to money laundering. There have been
some very bad examples.
What will you do to evaluate and improve the strength of
the Fed's consolidated supervisory activity in this area? I am
getting into the dimension of your responsibilities that
involve your regulatory function, which does not always draw, I
think, the attention that it warrants or requires.
Mr. Bernanke. Senator, the Bank Secrecy Act and the
antimoney laundering rules are very important. Obviously, they
bear on terrorist finance and money laundering by criminal
organizations, and the Congress has passed a set of rules which
require banks to be very careful to try to prevent such
activities from occurring.
It is an important responsibility of the Federal Reserve to
enforce those laws. I will certainly be interested in those
activities. As I understand, the Federal Reserve's approach to
enforcing so-called ``BSA/AML provisions'' is a risk-focused
approach, which means that the Federal Reserve attempts to
evaluate whether the banks' or other financial institutions'
procedures and processes are sufficiently good to ensure
compliance with the law rather than trying to evaluate every
I think that is a good approach. It is one that allows the
Federal Reserve to evaluate the overall ability of the
institution to meet the law without incurring the heavy costs
and the heavy regulatory burden of checking each and every
Senator Sarbanes. Well, I know I am intruding on Senator
Bennett's time. If I could just close out this question.
I have this concern: In some instances, the money
laundering violation, which, of course, have an antiterrorism
financing important dimension to them as well, have been, as it
were, found and corrective action taken by the Federal Reserve
System or State banking systems. But in other situations, and a
number of large banks are involved in that, the violations have
reached such a level of seriousness that they warranted
criminal investigation by the Department of Justice, which, of
course raises a question of how do you explain situations in
which senior officials of major financial institutions are
found to have come sufficiently close to the line that criminal
investigations of their conduct, and of their institution, are
In other words, where were the gatekeepers or the watchmen,
which are the banking regulatory agencies, where were they at
an earlier stage in this process instead of it having gone to
the level or deteriorated to the level that criminal action by
the Department of Justice was called for? It seems to me that
is a fairly clear call for the financial institution regulators
to be more active in meeting their responsibilities.
Mr. Bernanke. I agree with that, Senator.
Senator Sarbanes. Okay; thank you.
Chairman Shelby. Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
One last area I would like to explore with you, Dr.
Bernanke, is your attitude toward commodity prices as an
indicator of inflation. I remember many years ago the standard
position was well, when the stock market is going up, you buy
stocks. When the stock market is going down, you buy gold. And
it is just very simple. You take the cyclical nature of things,
and your hedge against everything going to pot is gold. And
then, once the bottom has been reached, you sell your gold, and
you start with stocks.
I do not know that anybody is that simplistic anymore
except maybe on the advertising pages of some magazines where
the people are trying to sell gold. But what about other
commodities? I know an economist whom you know very well and
whom I respect very tremendously, Wayne Angel, is always
looking at a basket of commodities, not necessarily gold by
itself but commodities generally, foreign exchange rates,
indicators of where we should be in policy; you get an
individual commodity like natural gas that is an anomaly
because of the tremendous demand that has been created by
natural gas. So maybe you take that out of the basket.
But just talk to us about your attitude toward commodities
in general, some of these other basket issues, gold, foreign
exchange rates, and so on in terms of what you see as their
value as indicators of where the economy is really going.
Mr. Bernanke. Senator, there is no perfect forecaster, no
perfect indicator of inflation. Each of the variables you
mention has an inflation component, so to speak. It reflects
inflationary pressures. It may reflect other things as well. As
you mentioned, natural gas or other energy commodities reflect
supply and demand conditions arising from international
pressures in international markets, for example. Exchange rates
reflect inflation pressures. They may also reflect the balance
of trade and other factors.
So there is no single, optimal indicator of inflation. My
personal strategy, therefore, is to be very eclectic and to
look at a wide range of indicators, and among those is
commodities, gold, exchange rates, the whole list. I think
interest rates, real side indicators, surveys, expectations--
there is a whole list of variables which can be useful in
forecasting inflation--and I think one has to be very open-
minded about using whatever information one has.
Senator Bennett. Let us talk about productivity in the same
way. Bob Woodward's book about Chairman Greenspan indicates a
situation where he challenged existing data points on
productivity and ended up forcing the Fed to restructure the
way they monitored it. And he proved by saying, and I have
heard him say this, and I am sure you have, too, well, this
violates the laws of arithmetic. By taking an equation and
putting in various pieces of the equation, he said the
remaining piece, productivity, has to be higher than your
measurement of productivity.
Obviously, an understanding of productivity fits into this
whole discussion that we are having. Do you have any view as to
the various measures of productivity and how it should be
Mr. Bernanke. I draw two lessons from that late 1990's
experience that Bob Woodward was referring to. The first is
that you do not just look at the conventional measures. You
look at the data quite deeply and try to understand how the
data are constructed and how they relate to each other, because
there may be anomalies that will be instructive, and that was
the case in the late 1990's.
The other is that published Government data is not the only
source of information. It is also important to talk to people
in the marketplace, to talk to businesspeople. I think in the
case of Chairman Greenspan, he had indications from
businesspeople that they were making extraordinary gains in
productivity based on new information and communications
So by putting together those clues, I think one tries to
make an inference about the general state of the economy and
productivity being one of the major variables to look at.
Senator Bennett. I have the sense that our failure to
understand the impact of productivity in the information age is
one of the reasons why we feel as confused as we do in some
areas. We have industrial age mentality in the information age
reality. And that can be a problem. Just one last quick
comment: You do not need to answer this. This is just an
One of my major focuses in the Senate has to do with cyber
security. And I have raised this with Chairman Greenspan in the
past. If I were someone who wished this country ill, I would be
more anxious to find a way to hack into the computer system and
shut down the Fed wire than I would to try to find a way to get
a suitcase nuclear device into lower Manhattan, because the
damage to the economy of shutting down the Fed wire would be
greater than the damage by a nuclear explosion from a suitcase
bomb virtually anywhere, whether it was lower Manhattan or
Pennsylvania Avenue or whatever it might be.
I hope in your stewardship as the Chairman of the Fed, you
pay attention to cyber terrorism and the vulnerability that we
have to those who might break in, and hack in. The more time I
spend on this, the more concerned I become, and I know the
financial community generally with its various firewalls and
ways of trying to hang onto the data is moving ahead, but every
time I look at it, the next generation of attackers is
substantially more sophisticated than the one that was there
just 18 months ago, and our ability to private security must
always be working ahead on that. So among the other things you
have to do, do not neglect that particular morsel as it gets
put on your plate.
Mr. Bernanke. Thank you, Senator.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. I want to follow up Senator Bennett's
point, but I want to not go as--because he is dealing with
people who are very calculatingly trying to do this thing, but
this year, several financial institutions as well as private
companies, government agencies, universities, and other
entities have reported breaches of Social Security numbers,
credit and debit numbers, security codes, bank account
information, and other sensitive information. In fact, The
Washington Post had a story; they said, ``American corporations
that eat your personal information for breakfast have suffered
troubling data breaches over the past year or so, making the
data on more than 50 million consumers vulnerable.''
Now, there is a coalition of 12 consumer groups concerned
about privacy who have expressed very deep concerns about this.
As Chairman of the Fed, would you work with the financial
institutions that you regulate to reduce the likelihood of
future data breaches? And further, would you be prepared to
meet with these interested groups, this coalition of consumer
groups concerned about financial privacy to review with them
and to discuss this important issue?
Mr. Bernanke. Senator, I believe the banking regulators
have already at least issued guidance, or perhaps a regulation,
about data breaches that applies to financial institutions,
which is the group that they regulate. And I believe the
Congress is considering similar legislation for other entities.
It is a very important issue. I think the Federal Reserve and
the other banking regulators have already taken some steps in
this direction about providing rules about how to protect data
and how to react to data breaches.
To answer the second part of your question, I hope to meet
broadly with a large number of people, including the groups
that you referred to. I think it is important for the Federal
Reserve Chairman not to confine himself to Wall Street analysts
but to speak to a wide range of people in the economy with
different interests and different viewpoints, and I intend to
Senator Sarbanes. Warren Buffett has warned us that
derivatives are time bombs, both for the parties that deal in
them and the economic system. The Financial Times has said so
far, there has been no explosion, but the risks of this fast
growing market remain real. How do you respond to these
Mr. Bernanke. I am more sanguine about derivatives than the
position you have just suggested. I think, generally speaking,
they are very valuable. They provide methods by which risks can
be shared, sliced, and diced, and given to those most willing
to bear them. They add, I believe, to the flexibility of the
financial system in many different ways.
With respect to their safety, derivatives, for the most
part, are traded among very sophisticated financial
institutions and individuals who have considerable incentive to
understand them and to use them properly. The Federal Reserve's
responsibility is to make sure that the institutions it
regulates have good systems and good procedures for ensuring
that their derivatives portfolios are well-managed and do not
create excessive risk in their institutions.
Senator Sarbanes. In a recent article in The New York
Times, they stated, ``Seven years ago, Wall Street's top
bankers were caught off guard by the near collapse of the Long
Term Capital hedge fund. Since then, the number and influence
of hedge funds have ballooned. The hedge fund explosion has
prompted concerns that if a big bet goes wrong, regulators and
banks will again be caught up in a collapse.'' My recollection
is that the Federal Reserve Bank of New York was convening all
night, all weekend meetings at the time of Long Term Capital
Management, putting enormous pressure on financial institutions
to pick up on it in order to prevent the very collapse that is
mentioned here. How do you respond to this concern? Equally
Mr. Bernanke. I think it is important not to be complacent.
Senator Sarbanes. Not----
Mr. Bernanke. Not to be complacent. It is important for the
Federal Reserve to be aware of what is going on in the market,
particularly working through the banks, which are the
counterparties of a lot of hedge funds, to understand their
strategies and their positions.
Nevertheless, broadly speaking, my understanding is that
the hedge fund industry has become more sophisticated, more
diverse, less leveraged, and more flexible in the years since
LTCM. So again, while it is very important to understand that
industry, and particularly to make sure that the banks, are
dealing in appropriate ways with hedge funds, my sense on that
is that they are a positive force in the American financial
Senator Sarbanes. Do you think these issues contain a
sufficient danger in them that it would warrant the Fed
undertaking a special examination of these questions if you
were to become the Chairman? Because if this went bad on your
watch, I mean, there could be tremendous consequences,
Mr. Bernanke. I think it is useful to have informal
contacts to try to understand what is going on in the market,
and the Federal Reserve has various mechanisms for learning
about this market; in particular, working through the various
counterparties that deal with hedge funds.
Senator Sarbanes. Well, I commend this area to you as one
that should have some focus of your attention. Otherwise, it
may well come back to haunt you.
Could I ask you about HMDA and the Home Mortgage Disclosure
Act? The data released in September showed that African-
Americans and Hispanics pay more for home loans and face higher
denial rates than similarly situated White Americans. I
understand the Board has reviewed the HMDA data and flagged
approximately 200 lenders for further scrutiny. And in fact,
Governor Olson at the Fed says anytime a lender differentiates,
the burden of proof shifts to the lender to demonstrate that
the pricing differentials are based on empirical analysis.
Would you agree with that, and how important do you think
this issue is that is revealed by the HMDA data?
Mr. Bernanke. Senator, the facts you point out are correct.
They were revealed because the Federal Reserve asked for
disclosures of pricing information, as well as quantity and
denial information. I think fair lending is extremely
important. The Federal Reserve is going to follow up on these
results. It is going to share the results, or has already
shared the results, with other bank regulators, and the
intention is to find out why these discrepancies exist.
Senator Sarbanes. Mr. Chairman, I just want to close with a
couple of observations.
Chairman Shelby. Go ahead. You take your time.
Senator Sarbanes. We discussed this morning the inflation
targeting, and I do not want to close out without referring
back to it. And I want to commend to you for your own thinking
the danger that if you had a numerical figure for inflation but
not for unemployment, that there would be a shift in focus of
policymaking and debate toward whether the Fed was achieving
its inflation target and away from whether the Fed was
achieving maximum employment through stabilizing output,
whether you intended that to happen or not. I think it is easy
enough to assert that it is not your intention, that you are
keeping the dual mandate in mind and so forth.
But I think in the real world of the dynamics and
particularly in the way the media would cover such a question,
the constant focus is going to be have you hit the numbers
target on your inflation goal and that it would, in effect,
draw attention away from the dual mandate and the emphasis we
are placing on trying to balance the two.
I take some encouragement from your statement that if
confirmed, you will take no precipitous steps in the direction
of quantifying the definition of long-run price stability; that
the matter requires further study at the Fed as well as
extensive discussion and consultation. I would propose further
action only if a consensus can be developed and that taking
such a step would further enhance the ability of the FOMC to
satisfy its dual mandate of achieving both stable prices and
maximum sustainable employment.
I do not think this is fully consistent with the Fed's
current policy approach, which is an assertion you make in your
statement, and obviously, there have been fellow Members of the
Board who have resisted inflation targeting for this very
reason amongst other reasons. So, I mean, you make that
assertion, but there are a number of very thoughtful people who
disagree with it very strongly.
Further, I refer back to earlier. I do not think you can
change the Fed's mandate except by statute from the Congress,
and I know you are laying out a rationale where you interpret
it in such a way that it is encompassed within the mandate, but
I think you have to be extremely careful, and I particularly
think, as I just said, that if you have a figure for inflation
and not for unemployment, the public focus is going to be drawn
to the inflation figure, and that is going to become the
Finally, Mr. Chairman, I do welcome in Dr. Bernanke's
statement right at the outset where he talks about this
prospective new role and says, and I want to quote this,
because I think it is very important to underline it and again
put it on the record: ``I would bear the critical
responsibility of preserving the independent and nonpartisan
status of the Federal Reserve, a status that in my view is
essential to that institution's ability to function effectively
and achieve its mandated objectives, in the plural, I might
add. I assure this Committee that if confirmed, I will be
strictly independent of all political influences and will be
guided solely by the Federal Reserve's mandate from Congress
and by the public interest.''
Thank you very much, Mr. Chairman.
Chairman Shelby. Dr. Bernanke, we appreciate your
appearance here today at your hearing and especially when we
had a bifurcated hearing with the votes in the Senate. We
appreciate your candor and your ability. I do not know of a
Federal Reserve nominee, Chairman, that has as many
publications under their belt as you do. And I am not going to
tell you that I have read all of them, but they are interesting
to go with.
But we will try to move your nomination as soon as
possible. I think it is a good nomination. I have said this
from the beginning. And I will be consulting with Senator
Sarbanes and see what we can do. Thank you for your time today.
Mr. Bernanke. Thank you.
Chairman Shelby. The hearing is adjourned.
[Whereupon, at 4:28 p.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of nominee,
response to written questions, and additional material supplied
for the record follow:]
PREPARED STATEMENT OF SENATOR JOHN E. SUNUNU
I join my colleagues in welcoming Dr. Ben Bernanke to the
Committee. He is no stranger. He has been here before, both to be a
Member of the Federal Reserve Board of Governors and then to be
Chairman of the President's Council of Economic Advisers.
Of course, he has now been nominated to a 14-year term as a Member
of the Board of Governors and also nominated to be the Chairman of the
Federal Reserve Board of Governors, a 4-year term.
The Federal Reserve Act of 1913, which established the Federal
Reserve System, set the 14-year terms for the Members of the Board of
Governors of the Federal Reserve. I think that clearly reflected the
intention of Congress, at the time, in enacting this legislation to
place the Federal Reserve Board and its individual Members beyond the
reach of any given Administration and the political pressures of the
moment. Actually, the 14-year term is the longest we give to any
official in the Government other than the lifetime appointments for
members of the Federal judiciary.
I think it is fair to say, or certainly it has come to be the case,
that the credibility of the Federal Reserve rests in large part on
broad confidence in its independence in the judgments it makes. And,
obviously, if that confidence were to be undermined, the stature of the
Board would be gravely diminished. And that, in turn, would have
serious consequences, I think, not only for our National economy but
also, indeed, for the world economy.
So we are looking forward to hearing from Dr. Bernanke about this
important role of the independence of the Federal Reserve in rendering
And my colleague, Senator Dodd, has made reference to the other
major point I wanted to make. And that was that the Federal Reserve Act
provides as its goals that, ``The Board of Governors of the Federal
Reserve system and the Federal Open Market Committee shall maintain
long-run growth of the monetary and credit aggregates commensurate with
the economy's long-run potential to increase production so as to
promote effectively the goals of maximum employment, stable prices, and
moderate long-term interest rates.''
And this is conveniently referred to as the twin mandates of the
Federal Reserve, addressing both maximum employment and stable prices.
That is another issue that I look forward to exploring with Dr.
Bernanke in the course of these hearings.
Actually, we had to contend for quite a while with this non-
accelerating inflationary rate of unemployment, something that Chairman
Greenspan, to his credit, never accepted. That was the theory that if
the unemployment rate got down to a certain level, beyond that you
would have inflation. And therefore, as it approached that unemployment
rate, the Fed would have to start raising interest rates to cool off
the economy, even if we did not see manifested inflationary signs.
So it was a preemptive strike against inflation, but it also, of
course, ended up being a preemptive strike against employment, if it
had been followed.
Fortunately, that was not the case. And we have seen in recent
years that we have been able to go down--and we are now at 5 percent,
but we have been able to go down below that to a 4 percent unemployment
rate without an inflationary problem.
And I am anxious to explore that with Dr. Bernanke as well, since I
think jobs is a very important purpose of economic policy.
Let me just add one other dimension, which is not often talked
about when we talk about the Fed, and that is that the Board has
responsibility, supervisory and regulatory authorities to assure the
safety and soundness of the Nation's banking and financial systems and
protecting the credit rights of consumers.
In the area of consumer protection, the board has broad
jurisdiction and authority to implement regulations for a whole host of
consumer laws: The Community Reinvestment Act, Truth in Lending Act,
Truth in Saving Act, Home Mortgage Disclosure, the Home Owners Equity
Protection Act, the Equal Credit Opportunity Act, and a number of
others as well.
And while public attention is focused on the Board's monetary
policy responsibilities, I think it is important to recognize its
jurisdiction and authority with respect to these regulatory issues. The
Board can play a very significant role in improving consumer rights and
enforcing consumer protections.
Finally, Mr. Chairman, I noticed that the papers this morning are
already setting out an agenda. I just quote one paragraph to give one
example of it:
If confirmed, Bernanke will take over the Fed at a moment of
rising economic unease. The U.S. trade and budget deficits are
soaring. The once-blistering housing market may be cooling.
Rumors continue to rumble through Wall Street of dangerously
overextended hedge funds ripe for collapse. The next Fed
Chairman could face significant challenge, as Greenspan did,
within months of taking office.
Welcome to the committee this morning, Dr. Bernanke.
PREPARED STATEMENT OF SENATOR ROBERT MENENDEZ
Mr. Chairman, thank you for holding this hearing. I am very pleased
to again welcome my fellow New Jerseyan, Dr. Bernanke, before the
Committee, and to support his nomination to be the next Chairman of the
Dr. Bernanke has a remarkable record of service and scholarship at
the Council of Economic Advisers, the Federal Reserve, and before that,
Princeton University. He has served in these roles with distinction as
one of our Nation's preeminent economists, both in policymaking and in
academia. Moreover, Dr. Bernanke has earned great respect among
lawmakers and economists from all points on the political spectrum who
recognize the quality of his work regardless of whether they agree with
him on specific economic questions.
I have been concerned throughout the last few years that too many
of this Administration's high profile economic officials seem to be
salesmen for predetermined, ideologically-driven policies. Dr.
Bernanke, however, has defied this stereotype during his time with the
Council of Economic Advisors, and I trust he will continue this pattern
of basing his decisions on sound economics, rather than ideology and
Needless to say, Dr. Bernanke has large shoes to fill as Chairman.
Alan Greenspan has been one of the most active and significant Chairmen
in the history of the Federal Reserve System. While I have not always
seen eye-to-eye with Chairman Greenspan on economic issues, I thank and
salute him for his economic stewardship through difficult times, and
for more than 18 years of distinguished service to our country.
I look forward to working with Dr. Bernanke in the future to
strengthen our financial markets and to ensure economic opportunity for
Thank you, Mr. Chairman.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM BEN S. BERNANKE
Q.1. As you know, I feel that Chairman Greenspan too often
talked publicly about things that had nothing to do with
monetary policy. Do you believe a Fed Chairman should discuss
things outside the Fed's jurisdiction?
A.1. I believe that it is essential to maintain the
independence and nonpartisan status of the Federal Reserve. As
I discussed in my testimony, if confirmed, I will be strictly
independent of all political influences and will be guided
solely by the Federal Reserve's mandate from Congress and the
The scope of the Federal Reserve's mandate is broad and
includes matters related to the implementation of monetary
policy, general financial stability, supervision of financial
institutions, administration of the payments system and
consumer issues, among other areas. In addressing these
matters, I pledge always to give Congress my best advice from
the perspective of an independent and nonpartisan Federal
Reserve. I also intend to decline to address issues that are
not related to the Federal Reserve's broad mandate.
Let me address specifically the area of fiscal policy.
Because of the Federal Reserve's responsibilities for
macroeconomic and financial stability, I believe it would be
appropriate at times for me to comment on broad fiscal issues
such as the sustainability of Government spending or deficits.
However, as I indicated during my testimony, I will not
advocate for or against specific tax or spending proposals that
come before the Congress.
Q.2. As I am sure you read last week, The Wall Street Journal
asked a number of economists what questions they would like to
be able to ask you. I am going to steal a few from them. What
is the principal reason for the existence of the Federal
A.2. The Federal Reserve System was created by the Congress in
1913 to provide the Nation with a safer, more flexible, and
more stable monetary and financial system. Today, the main
duties of the Nation's central bank fall into four general
Conducting the Nation's monetary policy by influencing
the monetary and credit conditions in the economy in
pursuit of the statutory objectives of maximum employment,
stable prices, and moderate long-term interest rates;
Supervising and regulating banking institutions to
promote the safety and soundness of the Nation's banking
and financial system and helping to protect the rights of
consumers in credit markets;
Fostering the stability of the financial system and
containing systemic risk that may arise in financial
Providing financial services to depository
institutions, the U.S. Government, and foreign official
institutions, including playing a major role in operating
the Nation's payments system.
Each of these areas of responsibility reflects specific
authority granted by the Congress; and each, in my view, is
essential for the economic health of the country.
Q.3. What is currently the most significant threat to our
A.3. The U.S. economy is currently enjoying a strong and stable
expansion. Over the past four quarters, real gross domestic
product (GDP) has grown more than 3\1/2\ percent, extending the
economic upturn that began in late 2001. And the current
consensus among economists is that the expansion will be
sustained next year.
However, this favorable outlook is ringed with a number of
risks. Energy prices have risen steeply in the past 3 years,
and although the economy has accommodated these rises
remarkably well thus far, continuing increases in the price of
energy would pose difficult challenges for households and
businesses. The proximate cause of the energy price increases
is a rapidly growing global demand for energy, coupled with
insufficient investment in new energy supplies to meet this
growth. In the long-run, high prices will curb energy demand
and call forth new energy supplies. In the near-term, however,
energy price increases have the potential to spill over into
general inflation, sap consumer spending power, and damp
overall activity. A further jump in energy prices or a more
pronounced reaction to those increases in prices that have
already occurred could test the strength of the expansion. With
respect to inflation, the Fed, thus far, has been largely
successful in limiting the effects of higher energy prices on
the broader rate of price inflation. But further energy price
increases would also pose upside risks to the outlook for
Developments in housing markets also bear close monitoring.
Housing prices have risen rapidly in recent years, and concerns
have been expressed in many quarters about whether the current
high level of prices will be sustained. It is intrinsically
very difficult to assess whether the value the market assigns
to any asset is fundamentally justified, and housing is no
exception to this rule. Certainly, some powerful fundamental
forces have contributed to the run-up in housing prices,
including growth in jobs and incomes, demographic trends, low
mortgage rates, and limited supplies of buildable land in some
areas. However, it is also true that exceptionally rapid price
appreciation and what appears to be speculative buying have
been observed in some local markets, suggesting that prices may
exceed fundamental values in some areas. Whatever the sources,
house price increases will surely moderate at some point, if
they have not begun to do so already. If that moderation is not
too sharp, then the slowing of consumption and residential
investment that might result should be consistent with the
modest cooling of growth that many forecasters expect over the
next year or so. A sharper slowdown, less likely but possible,
would have a larger effect on the growth of real output,
particularly if it were to occur in the context of continued
adverse developments in energy markets.
Q.4. Are you concerned that the Basel II QIS-4 study showed
there would be a decline in capital standards for U.S. banks?
Given the fact that Congress has recently voted (to) increase
FDIC coverage, are you concerned about the safety and soundness
of the banking system with coverage increasing and capital
A.4. The Federal Reserve and the other Federal banking agencies
were certainly concerned about the large drop in minimum
regulatory capital observed in the QIS-4 study for some banks.
Also, the average decline in minimum regulatory capital for the
participating banks collectively was larger than observed in
the previous QIS. Both the decline and the wider-than-expected
dispersion among the banks participating in QIS-4 caused the
agencies in April to take additional time to understand the
QIS-4 results. After conducting extensive additional analysis,
the agencies announced on September 30 that they would be
taking additional prudential measures, including an extended
timeline for Basel II implementation and the addition of an
extra year of capital floors beyond those already in the
I am sure that the Federal Reserve and the other agencies
will not countenance declines in capital of the amount that
QIS-4 found for some banks. Indeed, the motivation for
conducting this and other quantitative impact studies was to
assess the potential effects of the framework in advance, so
problems (such as an excessive decline in regulatory capital in
some banks) could be identified and mitigated. In addition,
before any banks are permitted to operate under Basel II, they
will go through a rigorous process of review and analysis by
the supervisors to ensure that their internal processes meet
high standards. Importantly, there was no supervisory
validation of the methods used by the banks in the QIS-4
exercise; the banks in the study participated on a best-efforts
basis without any supervisory oversight. Thus, some of the QIS-
4 results likely arose from the fact that banks were not fully
prepared to operate under the Basel II framework and (in good
faith) may have used methods that would not be approved by
regulators under a ``live'' application of the framework.
Besides the measures announced on September 30, supervisors
have a suite of regulatory tools to prevent excessive drops in
regulatory capital, including the leverage ratio, prudential
measures under Pillar II of the Basel II framework, and the
ongoing requirement of prompt corrective action. It is
important to move to a more sophisticated system that better
links regulatory capital to the actual risks of banks' lending
books, trading books, and operations; that is the purpose of
Basel II. However, the transition needs to be accomplished in a
deliberate and careful manner, with many checks and feedback
mechanisms, in order to ensure that capital is adequate and
safety and soundness are ensured at all times.
The increase in FDIC deposit coverage would affect the
entire banking system, of course, not just the banks included
in the QIS-4 or that will ultimately adopt the Basel II
framework. Most banks covered by the FDIC will be subject to
the agencies' proposed amended Basel I minimum regulatory
capital framework, for which an Advance Notice of Proposed
Rulemaking (ANPR) has only recently been released. I assure
you, as the process of rulemaking proceeds, the capital impacts
of these proposed amendments will also be carefully analyzed to
ensure that they are consistent with a high level of safety and
soundness and the protection of the deposit insurance fund.
Q.5. Are you concerned about the amount of U.S. debt the
People's Republic of China holds?
A.5. The United States is running a current account deficit,
which of necessity must be financed by net capital inflows from
the rest of the world. These inflows have allowed the United
States to increase its capital stock at a rate faster than
would have been possible had we relied solely on domestic
savings, and the resulting larger capital stock has increased
the competitiveness of the U.S. economy. Accordingly, the
willingness of foreign investors, including China, to hold U.S.
liabilities has conferred important benefits on our economy.
Concerns have been raised that the quantities of U.S.
Treasury securities held by China and other foreign investors,
both private and official, have become so large as to increase
the vulnerability of the U.S. economy to changes in the
portfolio allocations of those investors. However, many of the
reasons that investors hold these securities--their
unparalleled safety and liquidity, together with the dollar's
traditional role as a reserve currency--are unlikely to
disappear any time soon. Moreover, markets for dollar-
denominated financial assets are extraordinarily deep; for
example, foreign official holdings of U.S. Treasuries, of which
holdings by China represent only a part, collectively account
for only 3 percent of total U.S. credit market debt
outstanding. Accordingly, U.S. financial markets would likely
be able to absorb a significant shift in foreign official
demands for U.S. debt, including by China.
Q.6. In November 2002, you gave a speech on deflation. After
the speech, many in the pundit class started referring to you
as ``helicopter Ben.'' Would you like to elaborate on your
comments on deflation?
A.6. My November 2002 speech (``Deflation: Making Sure `It'
Doesn't Happen Here'') was a discussion of the causes and
effects of deflation, as well as of some possible policy tools
to address deflation. In that speech, I noted that one possible
tool for combating deflation, a money-financed tax cut, was
essentially equivalent to a theoretical construct used by
Professor Milton Friedman, a ``helicopter drop'' of money. Of
course, the ``helicopter drop'' metaphor is purely a pedagogic
device to help explain money's role in the economy, not a
practical policy tool. A key message of my speech was that,
contrary to some views that were being expressed at the time,
the central bank still has tools to address deflation even if
the short-term interest rate reaches zero. I believe the speech
made that point effectively and helped to relieve concerns
about the potential effectiveness of monetary policy against
I would add that I believe that ``stable prices'' means
avoiding both deflation and inflation. My November 2002 speech
stressed the importance of avoiding deflation, at a time when
inflation had reached an historically low level. I am equally
committed to avoiding inflation; as I noted in my testimony, I
believe that keeping inflation low and stable is a critical
contribution that monetary policy can make to enhancing
prosperity and growth.
Q.7. It is my understanding that the Federal Reserve has
decided to halt disclosure to the public of its M3 findings and
report. The findings of the M3 report provide pertinent
information to the public--from economists to investors and to
industries which all use M3 report findings for economic
forecasting, investing, and business decisions. You have
advocated a ``more open'' Federal Reserve under your command.
Will you work to reverse this policy and commit to keeping the
M3 report and its findings available and open to the public?
What is the rationale and reasoning by the Federal Reserve to
keep the M3's information from the public?
A.7. My understanding is that the Federal Reserve decided to
discontinue publication of the monetary aggregate M3 because
the costs of collecting and processing the underlying data were
judged to exceed the benefits. The Federal Reserve will not
withhold the M3 data from the public; rather, it will no longer
collect and assemble that information. The Federal Reserve will
continue to collect data for and publish the monetary
aggregates M1 and M2 and their components.
The benefits of continuing to publish M3 appear to be
minimal, because M3 has not been actively used in the
formulation of U.S. monetary policy and, at least within the
Federal Reserve, has not been found to have much value for
economic forecasting. Discontinuing publication of M3 will
allow the Federal Reserve to terminate certain reporting forms
that currently must be filled out by depository institutions,
lowering the costs of such institutions. Costs at the Federal
Reserve Banks and the Board will similarly be reduced as these
particular reports will no longer need to be processed and
I view the periodic reappraisal of the costs and benefits
of reports as a useful discipline to ensure that the reporting
burden on financial institutions is kept to a minimum.
Q.8. The Fed has been on the record with their fears of Fannie
Mae and Freddie Mac being systemic risks to our financial
system. Are you worried about other large financial
institutions with portfolios similar to the GSE's being
A.8. Market discipline is typically the governing mechanism
that constrains leverage and ensures that firms do not
undertake excessive risks. The market system generally relies
on the vigilance of creditors and investors in financial
transactions to assure themselves of their counterparties'
current condition and the soundness of their risk management
Because of the availability of deposit insurance, market
discipline is not by itself sufficient to control risk-taking
in the banking system; for this reason, the Federal Reserve and
the other banking agencies supervise and regulate banks. I
believe that the tools available to the banking agencies,
including the ability to require adequate capital and an
effective bank receivership process are sufficient to allow the
agencies to minimize the systemic risks associated with large
banks. Moreover, the agencies have made clear that no bank is
too-big-too-fail, so that bank management, shareholders, and
uninsured debtholders understand that they will not escape the
consequences of excessive risk-taking. In short, although
vigilance is necessary, I believe the systemic risk inherent in
the banking system is well-managed and well-controlled.
In the case of the GSE's, market discipline is problematic.
Market participants recognize that the GSE's are closely tied
to the Federal Government and such ties create a view among
market participants that the GSE's are implicitly backed by the
Federal Government, thereby weakening market discipline.
Consequently, strong regulatory authority and controls on GSE
risk-taking are needed to ensure that they do not create
systemic risks. Unfortunately, the GSE regulator's constrained
capital authority, the ineffective receivership process, and
other limitations weaken regulatory oversight of GSE's. Capping
the size of GSE portfolios, which beyond a certain size do not
contribute to the GSEs' housing mission, is also important for
controlling potential systemic risk.