[Senate Hearing 109-404]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-404

 
                            NOMINATIONS OF:
                BEN S. BERNANKE AND BRIAN D. MONTGOMERY

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

                            nominations of:

           ben s. bernanke, of new jersey, to be chairman of 
                    the council of economic advisers

                               __________

 brian d. montgomery, of texas, to be assistant secretary for housing/
  federal housing commissioner, u.s. department of housing and urban 
                              development

                               __________

                              MAY 25, 2005

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html



                                 ______

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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

                       Mark F. Oesterle, Counsel

           Mark A. Calabria, Senior Professional Staff Member

             Martin J. Gruenberg, Democratic Senior Counsel

             Jonathan Miller, Democratic Professional Staff

               Jennifer Fogel-Bublick, Democratic Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, MAY 25, 2005

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Allard...............................................     3
    Senator Reed.................................................     9
    Senator Sarbanes.............................................    14
    Senator Carper...............................................    24

                                WITNESS

John Cornyn, a U.S. Senator from the State of Texas..............     2

                                NOMINEES

Ben S. Bernanke, of New Jersey, to be Chairman of the Council of 
  Economic Advisers..............................................     4
    Prepared statement...........................................    31
    Biograpical sketch of nominee................................    32
    Response to written questions of Senator Bunning.............    54
Brian D. Montgomery, of Texas, to be Assistant Secretary for 
  Housing/Federal Housing Commissioner, U.S. Department of 
  Housing and Urban Development..................................     5
    Biograpical sketch of nominee................................    44
    Response to written questions of:
        Senator Reed.............................................    55
        Senator Sarbanes.........................................    55

                                 (iii)


                            NOMINATIONS OF:
                    BEN S. BERNANKE, OF NEW JERSEY,
                           TO BE CHAIRMAN OF
                  THE COUNCIL OF ECONOMIC ADVISERS AND
                     BRIAN D. MONTGOMERY, OF TEXAS,
                     TO BE ASSISTANT SECRETARY FOR
                 HOUSING/FEDERAL HOUSING COMMISSIONER,
                       U.S. DEPARTMENT OF HOUSING
                         AND URBAN DEVELOPMENT

                              ----------                              


                        WEDNESDAY, MAY 25, 2005

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    This morning, we will consider the nominations of two very 
distinguished individuals.
    Our first nominee this morning will be Dr. Ben Bernanke, 
nominated to be a Member of the Council of Economic Advisers. 
Upon Senate confirmation, President Bush would designate him to 
serve as Chairman of the Council of Economic Advisers.
    He currently serves on the Board of Governors of the 
Federal Reserve System. He is no stranger to this Committee. 
Before becoming a Member of the Board, Dr. Bernanke served as 
Chair of the Economics Department at Princeton University. 
Before arriving at Princeton, Mr. 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 has published many articles on a wide variety 
of economic issues, including monetary policy and 
macroeconomics. He 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.
    Our second nominee this morning is Mr. Brian Montgomery, 
nominated to be Assistant Secretary for Housing and Federal 
Housing Commissioner at the U.S. Department of Housing and 
Urban Development. This is an extremely important position as 
the Federal Housing Commissioner oversees the Federal Housing 
Administration, FHA. Historically, FHA has acted as a vital 
tool for expanding homeownership, a goal that I strongly share.
    Most recently, Mr. Montgomery served as Deputy Assistant to 
the President and Cabinet Secretary. I believe his experience 
working with the President's Cabinet will help further 
coordinate housing activities across various Cabinet agencies.
    Mr. Montgomery previously served at the Texas Department of 
Housing and Community Affairs and at the Texas Department of 
Commerce. His service at these departments give him a direct 
knowledge of the working of various housing and challenge 
development programs.
    We look forward to hearing your statements this morning and 
to an interesting discussion to follow, and at the proper time, 
I would ask you to stand--not yet--and take the oath of office. 
I want to note Senator Cornyn, our distinguished and friend 
from Texas, is here, I believe, to introduce his fellow Texan. 
Senator Cornyn, you are recognized.

                    STATEMENT OF JOHN CORNYN

             A U.S. SENATOR FROM THE STATE OF TEXAS

    Senator Cornyn. Thank you very much, Mr. Chairman, and I 
appreciate your allowing me to appear today to commend to the 
Committee the nomination of Brian Montgomery to be Assistant 
Secretary of Housing and FHA Commissioner.
    Mr. Chairman, you have already done a great job of talking 
about Mr. Montgomery's record. Let me just add a couple of 
things that you did not cover.
    Brian has a great record of dealing with difficult and 
high-profile issues, whether it is serving as the lead White 
House official dealing with the Shuttle Columbia accident in 
February 2003 as President Bush's Cabinet Secretary, where 
coordination among a number of Federal agencies was critical, 
or working with other key agency officials to establish a more 
coordinated Federal approach to dealing with the aftermath of 
wildfires in California, or three hurricanes hitting several 
States in rapid succession.
    Brian has demonstrated a proven ability to lead and to 
listen when challenges are thrust upon him. In particular, he 
has maintained a longstanding involvement in housing issues, 
from homeownership for the disabled to counseling for 
prospective low-income homebuyers. Serving then-Governor Bush 
at the Texas Department of Housing and Community Affairs, as 
you noted, he was one of only a handful of representatives of 
the Governor working with close to 400 career employees in one 
of the largest and most programmatically diverse State housing 
agencies in the country. And during that service, TDHCA 
expanded homeownership for people with disabilities and 
implemented a nationally recognized homebuyer education 
program.
    Given the chance, I know that Brian will leave no stone 
unturned in his effort to assist low-income families and 
persons, including the elderly and other persons with special 
needs. He will work hard to continue the Department's 
homeownership successes, focusing on preserving affordable 
housing and, as importantly, he will be an open-door leader in 
regular dialogue with you and this Committee.
    I know he has the confidence of the Secretary, Alphonso 
Jackson, another good Texan, and we appreciate your willingness 
to take up this nomination. And I know Senator Hutchison joins 
me in commending this nominee to you and the rest of the 
Committee.
    Thank you very much.
    Chairman Shelby. Thank you, Senator Cornyn.
    Senator Allard, do you have an opening statement?

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, I do have a brief one.
    Chairman Shelby. You are recognized.
    Senator Allard. I would like to thank you, Chairman Shelby, 
for convening today's hearing, and I am keenly interested in 
both of today's nominees both as Chairman of the Subcommittee 
on Housing and Transportation. And I am particularly focused on 
the position of the Federal Housing Commissioner, which is one 
of the key positions at the Department of Housing and Urban 
Development.
    I would also like to take this opportunity to raise a 
serious concern that will impact HUD's ability to operate 
effectively and efficiently. The Department currently faces 
critical staffing vacancies. Eight of the 11 Assistant 
Secretary level positions are currently vacant. This includes a 
number of critical positions such as the General Counsel and 
Chief Financial Officer. Additionally, nearly half of the 
regional director positions are vacant, and this leadership 
vacuum will seriously inhibit HUD's effectiveness, particularly 
in light of the lean budget.
    Right now, more than ever, we need to fill HUD's vacancies. 
This Committee, whether under Republican or Democrat 
leadership, has always made it a point to consider nominees in 
a timely fashion, and Senator Shelby has shown a consistent 
willingness to move promptly. However, we cannot consider 
nominees to fill the many vacancies until we receive 
nominations.
    I am hopeful that the White House will be forthcoming with 
nominees. HUD has a difficult challenge, and its mission is not 
made easier nor is its work more effective when key positions 
remain vacant.
    Finally, I would encourage our nominees to become familiar 
with the Government Performance and Results Act, which has been 
named PART assessment by the Administration. The Results Act is 
a key tool in giving them the focus and vision to carry out 
effective, efficient programs. I would exhort the nominees to 
become familiar with the appropriate strategic plans, annual 
performance plans, annual accountability reports, and financial 
statements that, properly utilized, can help you achieve 
success in meeting your mission.
    Again, Mr. Chairman, thank you for giving the Committee an 
opportunity to review these nominations.
    Chairman Shelby. Will both of you stand and hold up your 
right hand to be sworn? Do you swear or affirm that the 
testimony you are about to give is the truth, the whole truth, 
and nothing but the truth, so help you God?
    Mr. Bernanke. I do.
    Mr. Montgomery. I do.
    Chairman Shelby. Do you agree to appear and testify before 
any duly-constituted committee of the Senate?
    Mr. Bernanke. I do.
    Mr. Montgomery. I do.
    Chairman Shelby. Thank you. We will start with you, Dr. 
Bernanke. If either one of you want to introduce any members of 
your family that are here today, feel free to do it.
    Mr. Bernanke. Thank you, Mr. Chairman. My wife is a teacher 
at the National Cathedral School here in Washington, and she is 
giving an exam to her seventh graders this morning, so she was 
not able to come.
    Chairman Shelby. That is a good place to be.
    Mr. Bernanke. Yes, sir.
    Chairman Shelby. Mr. Montgomery, do you have any family?
    Mr. Montgomery. Yes, Mr. Chairman. I would like to 
introduce my wife, Katy, from California. She is an employee at 
the Department of Homeland Security.
    Chairman Shelby. Good. She needs to be there, too.
    [Laughter.]
    Gentlemen, Dr. Bernanke and Mr. Montgomery, your written 
statements will be made part of the record in their entirety. 
You proceed as you wish. It is your hearing.

          STATEMENT OF BEN S. BERNANKE, OF NEW JERSEY

          TO BE CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS

    Mr. Bernanke. Thank you, Mr. Chairman. I am very honored to 
be here today as the President's nominee to Chair the Council 
of Economic Advisers.
    Created by Congress in 1946, the Council of Economic 
Advisers is a unique institution with a proud history. Its role 
is to provide the President with professional and objective 
advice on the entire range of issues bearing on the economic 
well-being of American citizens. I believe that, over the 
years, the Council has exerted an important positive influence 
on economic policymaking in the United States. The economic 
challenges that are facing the United States today--including 
the needs to address the implications of an aging population, 
to achieve long-term energy security while protecting the 
environment, and to reform our tax system so that it is 
simpler, fairer, and more supportive of economic growth--are as 
great as at any time since the Council was created. If I am 
confirmed, I will do everything in my power to ensure that the 
Council continues its tradition of providing the best possible 
advice and analysis and promoting sound economic policies.
    Mr. Chairman, you were kind enough to give information on 
my background, which includes both academic and policy 
experience, and so I will not repeat that here, sir. But I 
would like to take this opportunity to thank you, Mr. Chairman, 
and the Committee for the prompt consideration of my 
nomination, and I would be very pleased to take any questions 
you might have.
    Thank you.
    Chairman Shelby. Mr. Montgomery.

           STATEMENT OF BRIAN D. MONTGOMERY, OF TEXAS

                 TO BE ASSISTANT SECRETARY FOR

             HOUSING/FEDERAL HOUSING COMMISSIONER,

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Montgomery. Thank you, Mr. Chairman. Distinguished 
Members of the Senate Banking, Housing, and Urban Affairs 
Committee, I am honored to appear before you today as the 
President's nominee for Assistant Secretary of Housing and 
Federal Housing Commissioner at the Department of Housing and 
Urban Development. I, too, want to thank the Committee for 
arranging so quickly today's hearing to hear our nominations.
    I also want to thank my fellow Texan, Senator Cornyn, for 
his very kind introductory remarks, and I want to say I am very 
much humbled by the opportunity to appear before you today.
    I would like to say I am very happy my wife, Katy, is here. 
I wish my parents were also here today. They are mostly 
retired, living in Houston, Texas, these days. But even though 
they are retired, they still manage to work 2 to 3 days a week. 
My father serves as an ad litem attorney in a family law court 
in Harris County, and the other judges frequently mention to me 
how much they admire and respect my father. He has practiced 
law since the late 1950's. He is very proud of the work he 
does. All his clients are certainly impoverished. My mom still 
works as a secretary in the same hotel that she has for the 
last 20 years.
    I am certainly, like all of us, very thankful to my parents 
for a number of things, but I am mostly proud of the value 
system that they instilled in myself and my three sisters. I 
would say it is a value system that reflects their very modest 
and very diverse childhoods. My dad was raised in east Texas 
during the Great Depression. His father worked there as a 
roughneck in the oil fields around Kilgore.
    My mom, while she was born in McAllen, Texas, was raised in 
a small village in northern Mexico, living there until she was 
a teenager.
    It was a chance encounter in San Antonio many years ago 
while my Dad was in the Air Force that brought them together. 
After serving his country, my Dad did something that no one 
else in his family had done, and that is, go to college via the 
GI bill, and ultimately to law school.
    I am fortunate to have parents of very modest beginnings 
who taught me the values they learned growing up in their 
respective communities: honesty, hard work, and to always help 
one another.
    Mr. Chairman, I believe these values have helped me make a 
difference in the lives of many citizens in the 12 years I have 
worked in the government sector. While I have been very 
fortunate to work for two Presidents, one Vice President, and 
one Governor, I am most proud of the time I spent at the Texas 
Department of Housing and Community Affairs. Let me say also, 
sir, that I was very honored to work side by side with some of 
the most dedicated and hard-working career staff around. And 
should I be honored by your vote of confidence, I look forward 
to doing so at HUD as well.
    We have enjoyed many successes during my 3\1/2\ years at 
the State housing agency, some of which, Mr. Chairman, you 
touched on earlier.
    To be sure, the need for affordable housing was profound in 
the metropolitan areas of Texas and remains so at present. 
However, the living conditions that existed along certain areas 
of the Texas-Mexico border were, and still are today, 
deplorable. The communities I am referring to are called 
``colonias.''
    There are more than 1,200 colonias along the Texas-Mexico 
border with an estimated 400,000 residents. Most of the 
residents live in Third World conditions, without basic health 
and human services. They must also cope with some of the 
highest unemployment rates in America and incomes far below the 
poverty level.
    I know this description firsthand because our agency spent 
a good bit of our time and resources within the border region. 
In a cruel twist, many of the colonias have names like Sunset 
Acres, Los Fresnos, or River Place--names that do not 
accurately represent the quality-of-life conditions these 
families endure every day.
    While homeownership for all Americans will always be a very 
important goal, so are the most basic needs we take for 
granted, like safe drinking water. Many of our limited State 
funds at the time were spent trying to bring water to these 
communities, improve the roads, or remove the sewage. Some of 
our most memorable moments during my tenure at the State 
housing agency were seeing the faces of the residents the first 
time they had safe drinking water flowing to their 
neighborhood.
    Of course, the profound need for safe and sanitary housing 
and living conditions did not end along the Texas border 
region. A good bit of our efforts were directed toward Texas' 
rural communities as well as inner-city neighborhoods. There we 
directed much-needed low-income housing tax credits, 
rehabilitated homes that were in desperate need of repair, or 
leveraged our funds with a local unit of government or 
nonprofit agency via the low-income housing tax credit program 
as well. Again, it was the faces of the needy citizens that so 
vividly touched all of us.
    Mr. Chairman, I offer this brief narrative since I know 
each of you have similar conditions within your own States. 
Cultures and regional differences aside, these people share one 
immutable fact: They need our help.
    And speaking of people in need, I want to briefly say 
something about our elderly population, which happens to 
include my mom and dad. While the debate over Social Security 
reform continues around us, I hope the debate also gets 
Americans thinking about where these senior citizens are going 
to live, especially those of low incomes. It is difficult to 
imagine that by the year 2030, one-fifth of our population will 
be over 65 years of age.
    Mr. Chairman and Members of the Committee, my pledge to you 
is a simple one: If confirmed, I will never forget that there 
is a human face at the heart of these issues. And in the case 
of elderly housing, the faces I see include my parents. All of 
these groups represent far more than numbers on a spreadsheet. 
They represent the lives of everyday Americans in need.
    Finally, Mr. Chairman, whether it was leading the White 
House effort following the Space Shuttle Columbia disaster that 
ultimately led to the first major shift in America's space 
program in a generation, or working with the President's 
Cabinet on a variety of complex and challenging issues on a 
daily basis, I believe I have proven myself as a very capable 
manager and a steady leader. And if confirmed, I hope to bring 
those skills to the Office of Housing.
    I am very grateful to President Bush and Secretary Jackson 
for their trust and confidence. And should you confirm my 
nomination, I pledge to work closely with you and with your 
staffs as we look for new ways to better assist our fellow 
Americans.
    At this time, Mr. Chairman, I will try to answer any 
questions you or the other Senators may have, and I thank you 
very much for your time.
    Chairman Shelby. Senator Martinez has notified us that as a 
former HUD Secretary, he is very interested in what you are 
doing, both of you, and especially housing. He is tied up in 
the Energy Committee. He hopes to get here.
    Mr. Bernanke, tomorrow morning here, the Secretary of the 
Treasury, John Snow, will testify regarding international 
exchange rates and policies. As you are well aware, many 
Members of Congress, including myself, find the continued 
imbalance of trade with China to be a significant concern. What 
is your assessment as to the desirability of the Chinese 
Government broadening the range in which its currency 
fluctuates or linking it to a basket of currency? If so, how 
would you recommend that the United States bring about such an 
action, if we can? And do you believe sufficient reforms have 
taken place within the Chinese banking and financial system to 
make such a change?
    Mr. Bernanke. Senator, first of all, as a general matter, 
for large economies like China and the United States, it is 
preferable to have a market-determined flexible exchange rate, 
and I do believe that China should move as expeditiously as 
possible toward loosening up its exchange rate regime.
    The Treasury, to my understanding, has been in consultation 
with China helping them in various ways to prepare the ground 
from loosening their exchange rate, discussing the banking 
system, working with them on developing markets of foreign 
exchange. I think that they are perhaps some way from a full 
capital mobility regime. But I do believe that they are now 
ready to go to a more flexible exchange rate regime, and I 
would urge them to do that. That would be part of the solution 
to moving the United States back toward a more balanced trade 
position and a reduced reliance on foreign borrowing.
    Chairman Shelby. Are you concerned with such an imbalance 
of trade with China that we have?
    Mr. Bernanke. Senator, we have an imbalance of trade with 
China, and we have, of course, a large imbalance with the rest 
of the world. I think there are a lot of reasons for that 
imbalance, including the strength of the U.S. economy, and the 
fact that people want to invest here. So it is a very 
complicated phenomenon, but I do think that our trading 
partners, including China, are more oriented toward exporting 
and not sufficiently oriented toward domestic consumption and 
domestic investment. And I think that flexible exchange rates 
in China and the rest of the world would be a step toward 
restoring a better balance in trade as well as in capital 
flows.
    Chairman Shelby. Moving on to GSE regulatory reform, as you 
well know, this Committee has made regulatory reform a high 
priority for the GSE's, that is, Fannie Mae, Freddie Mac, and 
the Federal Home Loan Bank System. I have repeatedly, and 
others on this Committee have, expressed views that a credible 
regulator, a strong regulator must have sufficient and flexible 
authority over capital standards, product approval, and the 
ability to place a troubled GSE into receivership if it came to 
that need.
    In your opinion, what are the most important components in 
any reform measure? And do you share Chairman Greenspan's 
concerns regarding systemic risk in the GSEs' portfolios?
    Mr. Bernanke. Yes, Senator, I agree with the elements that 
you suggested. The GSE's perform a vital service in 
securitizing loans and helping to make the housing market more 
efficient. But the great size and complexity of their 
portfolios poses a risk to both the U.S. financial system and 
to the taxpayer ultimately if the taxpayer is called upon to 
intervene.
    It is in everyone's interest to make sure that the GSE's 
are safe, sound, and able to perform their function. The 
elements you have described, including a strong regulator, the 
ability to invoke receivership if necessary, to set capital 
standards, and to set limits on activities, are all important 
components toward making the GSE's safe and ensuring the 
success of their mission.
    I do agree with Chairman Greenspan that it is very 
important to take action in this area and that it is something 
that this Committee has made excellent progress in, and I 
commend you for your work on it.
    Chairman Shelby. Thank you.
    Mr. Montgomery, FHA's share of the single-family mortgage 
market has fallen over the last 10 years from 11 percent to 
just over 3 percent today. I understand HUD has announced a new 
advertising campaign for FHA to make potential borrowers aware 
of FHA's lower costs compared to many subprime products. How 
much of FHA's declining market share do you believe results 
from borrowers being unaware of FHA as an option? And do you 
believe that FHA's role is to compete with the private market 
or rather to address needs not being met in the marketplace?
    Mr. Montgomery. Thank you, Mr. Chairman. I think a lot of 
us can recall a time not too long ago when we would open the 
Sunday newspaper, look in the home section, and you would see 
homes listed, FHA/VA, FHA/VA. And certainly you do not see that 
much more these days, sir, and you certainly do not see it in 
the housing market up here.
    I think FHA is a very viable option for many low-income 
homebuyers. As you know, sir, we have to depend on a lot of 
lenders and others in the community to help market our product. 
But I think we could do a better job of educating consumers, 
Mr. Chairman. I think in a lot of cases consumers are not even 
thinking about FHA. So, I think we certainly need to raise 
awareness of it.
    As far as competing with the private sector, sir, I think 
it is more of a product that will help more consumers become 
homeowners----
    Chairman Shelby. More complementary perhaps?
    Mr. Montgomery. Yes, sir, I would say so. The subprime 
market, sir, that you brought up, there is certainly nothing 
wrong with that. In fact, the subprime market has grown I 
believe tenfold since 1994 and 2003. But I have to believe in 
some of my discussions with HUD staff that some of those 
homebuyers who are in the subprime market could have fared much 
better under FHA. And if confirmed as FHA Commissioner, sir, I 
would like to work hard with your Committee and other Members 
to see if we could raise the profile of FHA, make it more of an 
option for prospective homebuyers out there.
    Chairman Shelby. Okay. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you, Mr. Chairman, and thank you, 
gentleman.
    First, Mr. Bernanke, you are a distinguished economist with 
a great record, and you are facing some serious challenges in 
the White House. One question I would like to follow up on the 
Chairman's point is that you mentioned in terms of our current 
international situation the attractiveness of individuals 
around the world to invest in the United States. But hasn't 
there been a shift from individual investment to more 
government central banking investment and buying our securities 
and funding our debt? Is that something we should be concerned 
about?
    Mr. Bernanke. Senator, it is true that a number of 
countries have begun to hold large quantities of U.S. 
treasuries as reserves. That includes, of course, China and 
Japan. But I do not think it is the case that it is the 
principal source of demand for U.S. securities. There still is 
very substantial private sector interest in U.S. securities. 
One needs to look not just at the net flows, but at the gross 
flows. What are the total purchases of U.S. securities from 
abroad. And if you look at the gross flows, you find that it is 
often the case that more than three-quarters of those 
securities being sold abroad are going to private sector 
holders.
    I believe considerable interest remains in both the private 
sector and also from governments in holding U.S. securities.
    Senator Reed. But I think, again, correct me, the positions 
which foreign central banks have taken over the last several 
years have grown significantly. Is that accurate?
    Mr. Bernanke. That is correct, principally in China.
    Senator Reed. And that is a new dimension that was not as 
problematic 10 years ago or 20 years ago. Is that fair to say?
    Mr. Bernanke. I think that is fair to say. The U.S. dollar 
remains about 65 percent of world reserves, so it remains the 
principal world reserve currency.
    I think the primary issue, though, Senator Shelby already 
alluded to, is the exchange rate regime. If the exchange rate 
regime were loosened up, it would not be necessary or desirable 
for China to accumulate more reserves. Therefore, I think that 
is the basic issue.
    Concern has been raised as to whether if China were to stop 
purchasing U.S. treasuries, would that have a significant 
impact on interest rates? I think that it might have a 
measurable effect, but I do believe that U.S. financial markets 
and world financial markets are sufficiently deep and liquid 
and there is sufficient private interest in U.S. securities 
that moderate adjustments in these reserve positions are not a 
risk to U.S. interest rates or the economy.
    Senator Reed. But on the other side of the coin, providing 
for a different exchange rate is the possibility that they will 
stop buying U.S. securities to hold. That will affect interest 
rates; most people are concerned now about the housing market. 
How do you see that playing out?
    Mr. Bernanke. Senator, as I said, you are quite correct 
that if China were to sharply change its holdings of U.S. 
treasuries, that might have a measurable impact on our interest 
rates. However, I do not think that it would be a large or 
dangerous change in interest rates. I think it is worth noting 
that our current low rates of interest in the United States are 
not unique, that other countries--France, the United Kingdom, 
and others, and, of course, Japan--have interest rates that are 
lower than ours. So, I do not think it is really the case that 
foreign central bank holdings of U.S. securities are the 
primary reason why our interest rates are as low as they are.
    Senator Reed. Let me just change topics briefly, related to 
the issue of trade, and that is the fact that--and you have 
spoken or written about this--the plight of workers who are 
displaced by the movement of jobs overseas.
    First, could you tell us how serious you think that is? 
And, also, is it a situation that is getting worse or it 
continues to be at a steady level?
    Mr. Bernanke. Senator, first of all, it is certainly a 
problem when any American loses a job, whether it be to 
international trade, whether it be to new technologies, whether 
it be to changes in business or demands. So, I think it is very 
important that we pay attention to that issue, make sure that 
people who lose jobs are assisted in any way we can, whether it 
be through education, through trade adjustment assistance, 
whatever mechanism we have. So that is an ongoing problem, and 
I, in no way, want to diminish that.
    I think, however, that the U.S. labor market, after a 
period of weakness earlier in this decade, has been showing 
improvement. The unemployment rate, of course, is down. 
Unemployment insurance claims are down. The job growth, of 
course, has been rising quickly. Part-time work has been 
reduced and people are more able to find full-time jobs.
    So overall the labor market does seem to me to be improving 
significantly. There is still a ways to go, and in particular, 
I think we need to see some increase in real wages before we 
are really satisfied with what is happening in the labor 
market. But relative to a couple of years ago, I think the 
labor market has improved, and I hope it will continue to do 
so.
    Senator Reed. Mr. Chairman, I have some questions of Mr. 
Montgomery, but I would be happy to wait for a second round.
    Chairman Shelby. Certainly. Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    As you may or may not be aware, Mr. Bernanke, I am strong 
advocate of the Government Results and Performance Act, and as 
you are probably aware, it promotes outcome-based management 
and accountability through measurable results. My question is: 
During your tenure in this appointed position, what key 
performance goals do you want to accomplish and how will the 
Congress know whether you have accomplished it?
    Mr. Bernanke. Senator, I endorse your position. I am aware 
of the Office of Management and Budget's PART program. In 
general, I think Government programs should be set to various 
criteria. Are they appropriate Federal responsibility? Are they 
a high priority? And once they are undertaken, do they have 
measurable effects, do they have measurable outcomes?
    One of the strengths of economics, I think, is we 
understand how to do cost/benefit analysis; we know how to try 
to measure outcomes. And I will certainly do the best I can to 
bring this Council of Economic Advisers into the budget process 
wherever I am able to do so and to insist on accountability and 
measurability in the Government budget.
    The real cost of Government is really not the taxes we 
collect, but really the whole spending, all the resources that 
the Government takes out of the economy. And it is 
extraordinarily important that we make sure that those 
resources are used as effectively as possible. I entirely 
endorse that view.
    Senator Allard. Let me just bring up a little bit on 
balance of trade. I know that the Chairman asked about it. I do 
not view balance of trade as a real problem. In fact, whenever 
our balance of trade numbers have been the highest in the 
negative for us, it has been during good economic times, and 
when they have been lowest is during the Depression and during 
the latter part of the 1970's when we had double-digit--the 
misery index and all that. And so I have always viewed that the 
balance of trade figures, whenever they got high, just 
reflected a great economy in the United States. I wonder if you 
might comment on that view.
    Mr. Bernanke. Senator, you are correct that a balance of 
trade deficit is not an indicator necessarily of a weak 
economy. We have a strong and fast-growing economy; very 
attractive to investment. We have a balance of trade deficit. 
Japan and Germany have large current account surpluses, and 
they are envious, I think, of the rate of growth that we are 
able to achieve in this economy. So there is certainly no 
simple relationship between the two.
    I do think that over a period of time it would be desirable 
for us to achieve a more balanced trade, not necessarily a 
balance but something more in the direction of balance. And in 
part that would be facilitated by exchange rate policies, as 
Chairman Shelby alluded to, and in part it would be associated 
with greater demand on the part of our trading partners.
    One of our concerns here is that China, other East Asian 
countries, Europe, are not buying enough and not providing 
strong enough demand for our exports and our export industries. 
So we continue to be a very strong economy, which is why we 
import so much and why we attract so much capital. But I think 
it would be desirable to have strengthened markets for 
ourselves and other countries as well.
    Senator Allard. Mr. Montgomery, as you are probably well 
aware, I have worked with the Department of HUD on RESPA, and I 
have been rather vocal about HUD working with industry and 
trying to set up some guidelines as far as RESPA is concerned. 
And I continually get rumors that the Department is still on 
the verge of issuing a proposal on RESPA without any 
consultation with industry. Can you please provide assurances 
that HUD intends to stick by its pledge to consult with 
Congress, particularly Secretary Jackson, and produce any 
further reform proposals in a more consensus-based approach?
    Mr. Montgomery. Thank you very much, Senator. To answer 
your question, yes, sir, we absolutely will. The Department is 
doing more of a consultative approach, I would say, this go-
round, I think reaching out to the various stakeholders to 
build a good consensus, to make sure we are not harming small 
businesses who are involved in that industry.
    By the same token, this is the largest investment most 
Americans will make, and I think we would all be in agreement 
that the more transparent we can make the transaction for the 
homebuyer who goes in there, what they were told up front is 
certainly what is presented to them when they sit down to sign 
those many, many documents. But I just want to certainly 
reassure you, Senator, that we will make sure that it is a 
consultative process, certainly with the Members up here, those 
in the industry, small business, and certainly consumer groups 
as well, sir.
    Senator Allard. I support the President's proposal on 
homeownership, and I do think that manufactured housing, 
particularly after the manufactured housing bill we passed here 
a year or two back, maybe three or four, I think has helped to 
establish some national standards. But I do think there is an 
opportunity for affordable homeownership here.
    I would just like to have you say a few words on the role 
of manufactured housing in promoting homeownership.
    Mr. Montgomery. Thank you, Senator. There was a time when I 
was in Texas that there were more new manufactured homes sold 
in that State than there were bricks and mortar homes. That 
happened a good bit in the late 1990's. A manufactured home is 
a very good option for many homebuyers, and certainly FHA can 
provide assistance if it is a manufactured home that is 
installed on a foundation. For many homeowners, that is their 
option, and I think it is something that in working with the 
industry, I think we can certainly continue to promote that as 
an option.
    You had referenced some of the other facets of manufactured 
housing relative to installation. Just as the Federal 
Government helped set some manufacturing standards many years 
ago to bring conformity to the industry, I think at the very 
least a minimum threshold in terms of installation procedures 
is something definitely we should certainly continue to look 
at.
    Recognizing, sir, my own State, when we were in Texas, 
relative to the installation, the process is far different in 
East Texas than it is in South Texas than it is in West Texas. 
So, we realize it is not a one-size-fits-all solution, sir, but 
certainly I think looking at a minimum threshold for 
installation requirements is something worth looking into.
    Senator Allard. Thank you, Mr. Chairman. I see my time has 
expired.
    Chairman Shelby. Thank you.
    Dr. Bernanke, you have served as a Member of the Board of 
Governors of the Federal Reserve since August 2002. You have 
also spoken frequently on various monetary policy issues, such 
as inflation targeting and making the Federal Reserve's 
decisionmaking less mysterious to the public, I believe were 
your words. As the Chairman--and you will be--of the Council of 
Economic Advisers, will you continue to discuss such matters? 
And as the President looks toward naming a replacement for 
Chairman Greenspan, what role would the CEA Chair play if the 
CEA Chair is one who is highly regarded like yourself in 
monetary affairs?
    Mr. Bernanke. Senator, first of all, it is very important 
that the Federal Reserve remain independent of the 
Administration in making monetary policy, and for that reason, 
even though at the moment, I am a Member of the Board of 
Governors, I recused myself from even participating in the 
monetary policy process. So, I would not--in my new position, I 
will not be commenting on----
    Chairman Shelby. The independence of the Federal Reserve is 
paramount, is it not?
    Mr. Bernanke. The independence is paramount, yes, sir, and 
I do not expect to be involved in any of these issues that you 
are referring to, sir.
    Chairman Shelby. Okay. The Social Security system clearly 
faces many challenges, as we all know, in its future financing 
that will prove difficult to resolve the longer we wait. The 
Medicare program also faces a significant financial problem, 
perhaps even more dramatic than that of Social Security.
    As a key adviser to the President, how would you recommend, 
Doctor, that the Administration approach these problems; that 
is, is there a set of basic guiding principles that should be 
kept in mind as the Administration proposes various reform 
options? And I should include Medicaid, too, in that area.
    Mr. Bernanke. Senator, that is quite a large question you 
asked me there. I think there are two primary objectives that 
we need to serve. The first is that these programs which are 
crucial parts of our social safety net continue to serve that 
function, that Social Security continue to provide decent 
retirement income for people when they reach that age, and that 
Medicare provide important support for health costs for our 
public.
    At the same time, we have an aging population. We have a 
longer-living population. We have greatly increased costs 
particularly on the health side. And so a responsible approach 
must be to make sure that resources are there, that the 
Government is able to afford the promises that it makes.
    Senator, I know you are familiar with the broad outlines of 
the President's proposals, and I will not repeat those unless 
you would like me to discuss them. But I think we do have to 
make sure that we are meeting both those goals and, in 
particular, that we have made provision for the resources we 
are going to need to pay for those promises. So, I would look 
in the case of Social Security to think about how we can 
restructure, if necessary, to make sure those promises can be 
kept.
    The Medicare problem, of course, is in some sense more 
complicated because it involves not only a Government transfer 
program, but also the entire health care system of the United 
States. I think there are a number of reforms that would be 
quite useful. I think it is possible, for example, through 
health savings accounts and high-deductible insurance policies 
to provide a bit more market discipline in the health care 
industry. I think there are a number of mechanisms that could 
reduce costs and help control costs without sacrificing the 
essential function of that program.
    So it is a tremendous challenge, Senator, and I look 
forward to trying to meet both of those responsibilities.
    Chairman Shelby. Mr. Montgomery, housing market risk, there 
is always risk. HUD has proposed allowing FHA to insure zero 
downpayment mortgages. In recent years home values, as we all 
know, have increased dramatically. If home values were to 
decline--and if history is a guide, they will--what impact do 
you expect this to have on borrowers with zero or even negative 
equity? And could the growth of low- and zero downpayment 
mortgages put the FHA insurance fund in the risk of insolvency? 
Is that a concern? And how would you manage that?
    Mr. Montgomery. Thank you very much, Mr. Chairman. 
Certainly, the function of FHA is an insurance policy, and 
without risk, we basically certainly would not be using it to 
the degree that we should be using it. I would say that the 
zero downpayment program goes a long way toward solving the 
largest hurdle for many homebuyers, and that is the 
downpayment.
    In my consultations with HUD staff, in my opinion, I 
believe the way they have structured it would be as such that 
the premiums would cover any inherent risk. And certainly the 
underwriting standards I think we should put in place would 
perhaps need to meet another threshold to ensure that we have 
homebuyers who are using the product that are less likely to 
default on the loans.
    Chairman Shelby. Senator Sarbanes, do you want to take a 
round? We are in our second round.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Yes. Thank you very much, Mr. Chairman.
    Mr. Montgomery, I would like to ask you a few questions, 
because the positions you are going to are extremely important 
in addressing the housing needs of our citizens. Secretary 
Jackson has apparently made it a priority for the Department to 
seek to gain back market share for the FHA program. As you 
know, FHA's share of the mortgage market has declined from 
nearly 12 percent in 1994 to just over 3 percent last year.
    To what do you attribute this decline? And what plans do 
you have for addressing this problem?
    Mr. Montgomery. Thank you very much, sir. The FHA has not 
been a very good option for a lot of people as of late, for a 
number of reasons, sir. I would say a lot of consumers are not 
even aware that the program exists anymore. I can remember a 
time not too long ago when you would see FHA/VA homes for sale 
in the Sunday newspaper. You certainly do not see that up here. 
You certainly do not see it in California, where the median 
price of a home has hit almost half a million dollars now.
    But getting back to how we can make consumers aware of it, 
I think we could do a better job of marketing the program. 
Somebody had mentioned to me, well, perhaps a consumer 
education program, and I said I am not even so sure a lot of 
potential homebuyers are even thinking about FHA. There is 
certainly nothing wrong with the subprime market. It is viable 
and has been a very good option for many homebuyers, but I have 
to believe, Senator, that there are some homebuyers who have 
gone to the subprime market that could have probably done a 
better job if they had gone with FHA instead of subprime. So, I 
look forward, if confirmed, to working with this Committee to 
see ways we could better position FHA as an alternative for 
many low-income homebuyers.
    Senator Sarbanes. Well, let me just follow along. In a 
recent nationally syndicated column by Ken Harney, Secretary 
Jackson was said to be urging homebuyers to consider FHA as an 
alternative to subprime loans. And one of the reasons Secretary 
Jackson gave for using FHA, which Harney applauded in his 
column, was the fact that FHA loans carry no prepayment 
penalties. Subprime loans often impose heavy early payoff fees.
    I strongly agree with that analysis, actually. In fact, it 
is through prepayment fees and frequent refinances that many 
subprime lenders strip unsuspecting homeowners of their home 
equity. We have had hearings in this very Committee on that 
subject and have heard really heart-rending stories of people 
who have just lost their homes, in effect, because they were 
subjected to this constant refinancing, talked into by some 
pretty slick people.
    It seems to me particularly unfair that homeowners who take 
out higher-priced loans in order to become homeowners and who 
have a credit problem are penalized by prepayment penalties 
when they try to take advantage of lower rates, which, of 
course, would make them more secure in their home as payments 
would become more affordable.
    What is your view about prepayment penalties in the 
subprime market? Do you have a view about that?
    Mr. Montgomery. Senator, as you know, many homebuyers like 
to use prepayment options, and I think anything we can do to be 
more consumer friendly in that area certainly we should do. 
But, again, Senator, I think it gets back to making potential 
low- to moderate-income homebuyers aware that FHA is out there 
and can help them and has helped tens of millions of people 
since 1934.
    The subprime market has literally exploded in size, 
Senator. From 1994 to 2003, it has increased tenfold. And, 
again, there is certainly nothing inherently wrong with the 
subprime market. I just have to believe in my heart of hearts, 
Senator, that there are more homebuyers out there who are 
unaware of the benefits of FHA, for whatever reason, that could 
have gone that route versus the subprime market. Again, sir, I 
think we could do a much better job of offering that as an 
option to some homebuyers out there.
    Senator Sarbanes. Of course, you are going to be the FHA 
Commissioner. I mean, you can establish a more effective 
competition with the subprime market and use as one of your 
marketing devices actually the fact there are no prepayment 
penalties on FHA loans, presumably. I mean, that seems to me a 
strong argument.
    On occasion, I would almost say traditionally in this 
country, the FHA Commissioners, the strong and effective ones, 
have affected prevailing views or standards in the industry as 
a general proposition, and on that score, it seems to me that 
there is a role for you to play to urge subprime lenders either 
to reduce or eliminate their prepayment penalties.
    What is your view of trying to play that role if you are 
confirmed as the FHA Commissioner?
    Mr. Montgomery. Certainly, Senator, if confirmed, I can 
assure you it will be one of my top priorities to look at ways 
we can do what is good for the consumer and present FHA as a 
better option to them.
    Senator Sarbanes. Mr. Chairman, I see my time is up. Could 
I ask one more question?
    Chairman Shelby. Go ahead, Senator Sarbanes.
    Senator Sarbanes. The default and foreclosure rates for FHA 
are much higher than for the prime market. In fact, even as the 
loans past due in the prime market have declined each year 
since 2001, FHA loans past due increased from 2001 to 2003 and 
have stayed stubbornly high since then. FHA foreclosure rates 
have gone up steadily even while the prime markets have stayed 
steady and, in fact, subprime foreclosures have declined. The 
claim rates for FHA single-family loans increased sharply 
starting in 2000 and have remained high.
    Why is all of this happening?
    Mr. Montgomery. Thank you, Senator. I would agree with you 
that the default rate and the foreclosure rate are much higher 
than you would find in the conventional market. As I recall, 
the default rate for FHA is somewhere around 6, 6.5 percent 
right now. I would also say in defense of HUD, I believe they 
have put in some fairly good loss mitigation programs in 
effect, whereas the foreclosure rate is only around 1.2 to 1.5 
percent.
    I believe there were some products that were perhaps used 
in the late 1990's in an effort to increase homeownership, that 
we perhaps may be paying a price for now. But it gets back to, 
I think, just being very careful on the front end in our zeal 
to make people homebuyers that we are not ultimately paying a 
larger price on the back end. And I can assure you, Senator, 
there is nothing worse than foreclosing on a home. And if 
confirmed, I can assure you we will do everything we can to get 
down the default rate as well as the foreclosure rate.
    Senator Sarbanes. Mr. Chairman, I will defer to the next 
round. Thank you.
    Chairman Shelby. Senator Allard.
    Senator Allard. Mr. Chairman, I would like to follow up on 
the line of questioning of Senator Sarbanes in that I have also 
recognized, you know, the default rate and foreclosure rates 
are higher in FHA. Are you considering any reforms to improve 
FHA's performance in that regard? You have done some now. Are 
you considering any additional ones?
    Mr. Montgomery. If confirmed, Senator, absolutely. That 
would be one of my biggest priorities. As I mentioned, I was 
very impressed with what HUD has put into place to work with 
homebuyers who have defaulted, who are 60 to 90 days past due, 
to work with them, to perhaps restructure the loan or other 
options so it does not go to foreclosure. It then begs the 
question could there be more we could be doing on the front end 
so these people do not find themselves getting into dangerous 
territory and the possibility of losing their home? So, 
certainly, Senator, it would be one of my top priorities to 
look at that program as well.
    Senator Allard. I think you have implied in your answer 
that we need to somehow or other balance the needs of the 
homeowner with safety and soundness concerns. Do you have any 
idea how we reach that balance?
    Mr. Montgomery. Senator, I do not have the exact answer 
today, I can assure you, but I would definitely look forward to 
working with your staff as we find solutions.
    I would say that you do not necessarily, in our zeal to get 
more homebuyers, to have a product that would ultimately--those 
consumers might pay a larger price for 5, 6, or 7 years down 
the road, we need to protect the safety and soundness of the 
Mutual Mortgage Insurance Fund and make sure that we are above 
the Congressionally mandated thresholds in terms of reserves.
    I am trying to look at it more strategically, Senator. If 
confirmed, I would certainly do so, to see that we can put in 
ways to where those homebuyers remain homeowners for 20 or 30 
years.
    Senator Allard. I applaud the President in his promotion of 
affordable housing or homeownership society. I think that is 
the dream of most Americans, to at least be able to own their 
own home. But in the process of doing that sometimes I wonder 
if we get in, we so marginally qualify them that they do not 
have the resources to take care of the roof when it leaks or if 
they have sewer problems or maybe do not maintain the home as 
it should be and can affect the neighborhood if they do not. I 
would like to hear your thoughts on how a family that is in 
some of these marginal loans can face these expensive repairs 
or if you want a family to be prepared to face these 
possibilities, can you comment regarding the importance of 
long-term ownership? These are challenging problems and it is 
something that I think we all struggle with.
    Mr. Montgomery. Certainly the spill-over benefit of 
homeownership, the social benefits if you will, are excellent, 
and we certainly applaud any effort to make people homebuyers. 
But again, sir, I just want to get back to structuring it in a 
way to where we are not paying a price further down the road. I 
just want to ensure, perhaps, through homebuying counseling. I 
know HUD's budget for that has gone up of late. That is 
something we had great success with within Texas. And as I 
mentioned before, this is the single largest investment many of 
us will make. I think the more that we can sit down on the very 
front end, working with nonprofits on homebuying counseling, I 
think would serve us all better in the long-term, and 
especially serve the family in the long-term.
    Senator Allard. I mean if we look at the poverty levels it 
is many times lower in the rural areas of the country than 
anyplace else, and I think I have maybe the poorest or second 
poorest county in the Nation in the State of Colorado, and 
people do not think of that in those terms, but it is a rural 
area, and their populations are very similar I think to what 
you have seen in Southern Texas in which you have mentioned 
some of your experience in working with those.
    I just hope, Mr. Chairman, that you are able to bring some 
of your experience forward in a way that will help us resolve 
some of these dilemmas that we face, and so I wish you well.
    Mr. Montgomery. Thank you, Senator.
    Chairman Shelby. Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    Before I address questions to Mr. Montgomery, one final 
question to Mr. Bernanke.
    You mentioned in your comments, and I agree with you, is 
that we have to do more to increase the wages of working 
Americans. What specific policies would you be proposing to do 
then?
    Mr. Bernanke. Yes, Senator. Increasing real wages would 
certainly better the lives of our workers.
    I am somewhat optimistic about the near-term. Productivity 
has grown very substantially in the last few years in the U.S. 
economy. Historically, real wages tend to catch up with 
productivity, but often with a lag. During the late 1990's, for 
example, during the first part of the productivity boom, real 
wages did not move very far for a couple of years, and then as 
the labor market strengthened, real wages began to rise. I 
suspect that we are currently in the same situation. 
Productivity has risen at a remarkable pace for the last 2 or 3 
years, but real wages have not yet caught up with that 
productivity.
    As I said in my response to your earlier question, as the 
labor market strengthens, I believe we will see real wages 
rising to match the gains in productivity.
    The one other suggestion or thought I have on this subject 
is that an important reason that real wages are rising slowly 
is the increased cost of benefits to employers, which takes 
away from the money available to pay wages, and of course a 
principal culprit there is health insurance costs. So, as 
Senator Shelby alluded to earlier, I think addressing the cost 
of health insurance, trying to make that more affordable, would 
go a long way in strengthening the labor market and making real 
wages grow more quickly.
    Senator Reed. Thank you, Mr. Bernanke.
    Mr. Montgomery, several of my colleagues have spoken about 
the declining share of the FHA program in the market. One 
reason--and you mentioned it--is the fact that now the price of 
housing is so significantly higher that many times they exceed 
the limits. In my home State of Rhode Island, the FHA loan 
limit is $280,000. The median home price is $283,000, so for 
many people who would qualify based upon their income, they 
cannot find a house that is suitable for purchase with an FHA 
instrument.
    What are your thoughts on increasing loan limits for high-
cost areas like Rhode Island?
    Mr. Montgomery. Thank you very much, Senator. I think 
anything that we can do to work with lenders who are the entity 
that promotes FHA, to be a little more nimble is probably the 
best way to say it, Senator. It is not a one-size-fits-all 
issue. In many ways the ceiling is a concern, and certainly a 
higher-price market such as Rhode Island and parts of the 
Northeast. On the other end, the floor to the conforming loan 
limits is also a problem as well, but given the opportunity, 
Senator, I think we need to look at ways that we can better 
position FHA so we are not marketing it in only areas that 
happen to have affordable homes, which you certainly do not 
find in this part of the country, nor do you find out on the 
West Coast as well.
    Senator Reed. Does that mean you are going to look at the 
possibility of raising, in selected regions, the top line?
    Mr. Montgomery. Senator, I think we need to look at just 
about every option to expand FHA as a viable product for low- 
to moderate-income homebuyers, and I look forward to working 
with the Committee, if confirmed, to ways that we can better 
position FHA.
    Senator Reed. Mr. Montgomery, another topic. The FHA, one 
of its principal functions is to provide insurance for private 
lenders. This is accomplished through the Mutual Mortgage 
Insurance Fund. In 2003, they recorded a $7 billion upward 
reestimate of the credit subsidy in this fund, and it is a 
succession of these increases over a decade or more, which 
suggests that the MMI program, the Mutual Mortgage Insurance 
Fund is becoming less profitable and causing problems for FHA. 
What plans do you have to ensure the long-term viability of 
this fund?
    Mr. Montgomery. Thank you very much, Senator. It is 
critically important that FHA meet the Congressionally mandated 
threshold. I believe it is about 2.3 percent of the reserves. 
The MMI is I believe somewhere around $400 billion right now, 
and the reserves are on the order of about $25 billion. I think 
anything we can--that fund is obviously constantly readjusted. 
This is certainly something we need to work better on, I think. 
Last year I think we were looking at readjustment around $7 
billion, and next year, Senator, it could be a readjustment or 
a plus-up of $3 to $4 billion. In my consultations with the HUD 
staff I think it is something we definitely need to look at, 
how we can better reestimate the sanctity of that fund.
    Senator Reed. Do you have any other proposals with respect 
to the fund and its long-term viability? It is difficult if it 
gets reestimated every year, to maintain that fund as it should 
be.
    Mr. Montgomery. Absolutely, Senator. I do not have those 
for you today, but if confirmed, I certainly would work with 
your office on that.
    Senator Reed. We have had in the past a concerted effort on 
both sides of the aisle to maintain Section 8 contracts that 
were expiring, to prevent what the term was, subsidized units 
to be flipped back in the private market. We gave some tools to 
HUD. One tool, for example, was the ability to set certain 
budget-based rents subject to a cap that could include new debt 
service, would allow a landlord to go out, borrow, include that 
in improvements in the property so that it would be competitive 
and it would be a good place to live. But we are told by some 
people that HUD is not allowing these devices or using these 
tools effectively. Do you have any information about that?
    Mr. Montgomery. Senator, I cannot comment specifically on 
that issue, but I will say as a general matter the preservation 
of affordable housing in this country is a critical issue for 
the Department, and in my meetings with staff it is something 
that we have spent a good bit of time discussing. As properties 
expire, I think the Department has done a fairly good job the 
last 2 years of convincing more owners to not opt out. And I 
think HUD has done a pretty good job of trying to be a better 
steward of the public money to ensure that the properties are 
maintained, to ensure that the credit subsidies are accurate, 
but I can assure you it would be a top priority, Senator, as 
the need continues to grow, that if we preserve and maintain 
our affordable housing stock.
    Senator Reed. Thank you, Mr. Montgomery.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Montgomery, I just have a couple more questions and 
then I want to turn to Mr. Bernanke.
    I was pleased to see that one area you mentioned in your 
testimony is the pressing needs of the growing senior 
population in this country. Current projections show the senior 
population doubling from 35 million to 70 million by the year 
2030. Regrettably, I think we have done little to prepare for 
the needs of seniors, and in particular there is concern that 
seniors are being moved into institutional settings prematurely 
because of the lack of services to help seniors to age in 
place.
    Now, most experts view such premature institutionalization 
as costly in dollars terms, but also harmful to the well-being 
of the seniors, most of whom would prefer to stay in their 
homes and in their communities. Actually, I proposed a 
legislation to establish an interagency council on meeting the 
housing and service needs of seniors, which would give us a 
critical first step in coordinating the Federal effort in 
addressing the needs of the aging population by bringing 
together the Federal agencies and offices which deal with 
seniors, as well as establishing cooperative patterns with 
State, local, and private partners.
    I mention it only in the hope that you will take a careful 
look at that legislation. It would seem to me something the 
Administration might be willing to support, and I think it 
would be first step toward moving us toward developing a 
comprehensive policy for seniors, and particularly one that 
coordinates housing and other needs of the senior community. 
Have you had any chance to think about that issue heretofore?
    Mr. Montgomery. Yes, sir, Senator, I have. And I could add 
my parents to that category.
    Senator Sarbanes. It always helps to have a personal 
example.
    Mr. Montgomery. I could not agree with you more, Senator, 
that the need is growing. And if you look at the statistic of 
that age group over 65 doubling in just 25 years from now, and 
as a subgroup of that, people over age 80 are one of the 
fastest-growing age groups in the country. Certainly, Senate 
Bill 705 that will establish the council, in reading it, it 
seems very similar to a similar effort done to establish the 
Interagency Council on Homelessness, which I played a part in 
in my previous job at the White House. So certainly, Senator 
from what I have read from the bill, I would certainly support 
the establishment of that group.
    Senator Sarbanes. We look forward to interacting with you 
on that issue. I think we might be able to do some good here.
    The final question I want to ask to you, and I have saved 
it to the last because I think it has a carryover to Mr. 
Bernanke. I know he has been paying attention to all the 
questions put to you, but I urge him to pay attention to this 
one since I want to swing over to him about it.
    According to a recent article in The Wall Street Journal, 
the Mortgage Bankers Association data shows that adjustable 
rate and interest rate loans, where the borrowers pay only 
interest for a period of time, typically 5 years before they 
start paying down the principal, accounted for nearly two-
thirds of mortgage originations in the second half of last 
year. The article goes on to say that the surge in ARM's and 
interest-only loans is particularly notable because rates on 
30-year fixed rate mortgages remain below 6 percent, still low 
by historical standards. You are getting apparently a trend in 
this direction, at least off those figures.
    The conclusion that many analysts are drawing from this 
data is that buyers are using these riskier products in order 
to buy homes they could otherwise not afford because these 
products carry lower initial payments.
    However, if interest rates rise or home values stop rising 
at the extraordinary rates that they have been, then these 
homeowners could find themselves in very serious trouble. In 
fact, regulators are also getting nervous about a drop in 
credit quality for both home equity lines of credit and first 
mortgages and have warned banks to tighten up standards.
    In your view first, Mr. Montgomery, and then I would like 
to hear from Mr. Bernanke as well, how much of a concern are 
these trends? What if anything should be done about them? What 
are the potential implications of this looking ahead in terms 
of the potential for significant negative impact on the 
economy, let along on the particular individuals?
    Mr. Montgomery. Senator, I am equally concerned for many 
homebuyers who, through zero interest rate, or interest rate 
only loan, sir, may be paying a price ultimately down the road. 
In fact, this month's Money Magazine has a very detailed 
article about such a problem. Inherently it is certainly not 
bad, but I agree, Senator, that the homebuyer's right on the 
cusp. If a roof leaks, a transmission breaks, and before you 
know it they are right on the cusp of perhaps going to 
foreclosure. At the same time they are not building in any 
equity in their home. The reverse of that certainly are some 
homebuyers who have tapped into their home equity line of 
credit, which is certainly a good product, but again, it gets 
back to something, sir, I think we definitely need to take a 
look at to make sure again that we are not paying a price 
further down the road.
    Senator Sarbanes. Mr. Bernanke.
    Mr. Bernanke. Thank you, Senator. There is nothing 
intrinsically wrong with ARM mortgages or interest-only 
mortgages if they are used properly. For example, ARM mortgages 
typically have a period of fixed rates, before they are 
affected by the current market rate. So people who are, for 
example, planning to live in one location for only a modest 
period of time, for example, may find that a more attractive 
option.
    Similarly, interest-only mortgages can be sensible for 
people who have sufficient equity and otherwise are fairly 
strong financially and do not want to put a lot of their wealth 
into their home. So these instruments are not in themselves 
necessarily a bad thing.
    What is important of course is that they are used properly. 
And I would just make two comments. The first is that the 
underwriting standards need to be strong, and I hope that banks 
and others who make loans will pay due care to the ability of 
borrowers to repay, even should interest rates begin to rise. 
And second, I would also urge those who are looking to buy a 
home to buy a home that you can afford to live in and not buy a 
home just because you think the price is going to go up.
    So, I think with sensible behavior that these instruments 
are not necessarily a threat, but I do agree that care is 
needed on parts of both lenders and borrowers.
    Senator Sarbanes. I guess a thing of concern is when you 
get a surge in the figures it gives you pause and worry because 
I think it is difficult to make the assumption that it is all 
being done very carefully. It is not as though you get 
incremental steps that people are thinking this through very 
carefully. I think we need to be very careful about that.
    Let me ask you, in your macroeconomic textbook, the 1991 
edition, you had a section on the minimum wage, and you gave 
the pros and cons. At the end of the debate the textbook 
concludes, ``Therefore, the total labor income of unskilled 
workers does increase when the minimum wage rises. overall, 
taking these various effects into account, a recent study finds 
that raising the minimum wage from $3.35 per hour to $4.25 per 
hour''--those are the figures that were under discussion at 
that time--``could reduce the number of families by poverty by 
about 6 percent, on balance a reasonably substantial effect.'' 
And the textbook goes on to say, ``Thus, the inflationary 
effects of an increase in the minimum wage are relatively 
small. As a result an increase in the minimum wage has 
negligible effects on aggregate employment and output.''
    Now, today's minimum wage in real terms, if you took the 
$4.25 we were talking about in 1991, it should be $5.89. It is 
$5.15. I am interested whether you continue to see increasing 
the minimum wage as an effective to reduce poverty and increase 
the income of lower-wage workers while negligible effects on 
employment and inflation?
    Mr. Bernanke. Senator, the study you refer to by my 
colleagues, Allan Krueger and David Card, has been a very 
controversial one, and debate still continues about their 
estimates.
    I think the minimum wage has a place and I think the 
Congress should consider its policies in minimum wage. It has 
some drawbacks. While it does raise the wages of most skilled 
workers, it also perhaps reduces employment among the low-
skilled group. The other issue with the minimum wage is that it 
is not a very well-targeted instrument. Many of the people who 
benefit from the minimum wage might be teenagers from affluent 
families, for example, working during the summer. There are 
also concerns that a minimum wage may prevent young people from 
getting access to labor markets and therefore gaining the 
experience they need to be more productive and earning a higher 
wage later.
    I think there are pros and cons to minimum wage policy, and 
I think you need to look at that very carefully.
    Another suggestion I would make is perhaps to consider 
alternative means of helping low-income workers. For example, 
the earned income tax credit has proven to be an effective way 
to provide income to working families, and may be a better 
targeted approach relative to the minimum wage. But to 
summarize, I think it is an issue that Congress needs to look 
at, and there are points on both sides to be made.
    Senator Sarbanes. I take it that means you have departed 
from your 1991 view in your textbook?
    Mr. Bernanke. No, Senator. I have just become more 
uncertain.
    Senator Sarbanes. Let me ask you about China real quick. I 
see Senator Carper is here now.
    Chairman Shelby. Go ahead.
    Senator Sarbanes. In confirmation hearings before this very 
Committee in 2003, you were asked about the issue of China 
manipulating its currency and about how that might be 
corrected. And you said, ``I do think that a purely floating 
exchange rate would provide some dangers in the current 
financial system in China.'' You then went on to suggest that 
rather than forcing the Chinese to move directly to a float, 
part of an alternative approach would be to discuss and 
consider the possibility of a revaluation, which means to keep 
the exchange rate fixed but at a different parity, that is, at 
a different value.
    Is it still your view that a revaluation would be the 
preferable course in terms of addressing this currency 
valuation issue with China?
    Mr. Bernanke. Senator, since my last testimony, China has 
made significant progress on the institutional side to prepare 
for a more flexible exchange rate. For example, they just 
recently introduced a market for trading eight currency pairs, 
giving them the capacity to trade foreign exchange in a free 
market. So they have made progress I think institutionally 
toward preparing themselves for a more flexible exchange rate 
regime.
    I think the key here is not whether it is floating or not. 
I think the key is that they move to a more flexible exchange 
rate which can better reflect the actual value of the currency 
and contribute to a more balanced trade between the United 
States and China and between the rest of the world and China.
    I do not have a strong view on whether they should choose a 
basket, whether they should revalue, whether they should try 
some other mechanism, and I think that is something that needs 
to be discussed, but I do think they need to move from their 
current fixed exchange rate to a more flexible system.
    Senator Sarbanes. You know, they said President Truman, at 
one point in his Administration asked his adviser to get him a 
one-armed economist. And they said, ``Well, why do you want a 
one-armed economist, Mr. President?'' And he says, ``Well, I am 
tired of this advice on the one hand and on the other hand.''
    [Laughter.]
    I am reminded of that story by the answer to the two 
questions I put to you. I yield to Senator Carper.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks, Mr. Chairman. To our witnesses, 
welcome this morning.
    Mr. Montgomery, if I could, I would just like to address a 
couple of questions to you today. I was provided a short 
briefing paper about you and your background, and the purpose 
of my question is just to give you a chance to defend yourself, 
all right?
    Mr. Montgomery. Thank you.
    Senator Carper. The briefing paper--and I will paraphrase 
this--it says Mr. Montgomery has worked in public relations and 
as advance person in his professional career since 1990. His 
only professional connection to housing was as the 
Communications Director of the Texas Department of Housing and 
Community Affairs. His time at the Texas Department of Housing 
was marked by scandal, and although Mr. Montgomery was not 
implicated, there were accusations of favoritism and corrupt 
practices including bribery. The executive director and a board 
member apparently were convicted.
    My briefing sheet goes on to say Mr. Montgomery came to 
meet me as a courtesy. He seemed very nice and genuinely 
interested in housing issues. However, his lack of housing 
experience is troubling. This position requires expertise.
    Now, the three previous men who have held this position in 
the Clinton Administration and in President Bush's first 4 
years had extensive experience in housing, development, 
finance, or policy, and that is all I know about you walking 
into here, and I just want to give you a chance to like defend 
yourself as to why you should be the person who we should 
confirm as the Assistant Secretary for Housing and for the FHA 
Commission.
    Mr. Montgomery. Thank you for that question, Senator.
    Senator Carper. I am sure you appreciate it.
    [Laughter.]
    Mr. Montgomery. Starting with my experience in housing, the 
title of Communications Director----
    Senator Carper. I will say this, if I can interrupt, my 
colleagues, we have all known people who serve as drivers in 
our campaigns who just went on to do extraordinary things in 
their lives, and you probably can think of some people. I have 
seen people who were like political drivers and they went on to 
amazing things in their lives. So, I would not question you, 
probably you were the guy who worked in advance for a long time 
for a couple of fellows--I do not consider that a demerit or 
anything. I say that as a precursor.
    Mr. Montgomery. I appreciate that comment, Senator, because 
I too started as a driver.
    Senator Carper. See, what did I tell you? History repeats 
itself.
    Chairman Shelby. History has done pretty well with Senator 
Carper, Congressman, Governor, U.S. Senator.
    Senator Carper. I was never a driver. I did not have that 
on my resume.
    Mr. Montgomery. Senator, starting with my experience in 
Texas as Communications Director, which was my title, and 
certainly you cannot read a lot into titles these days. I, 
should say, had a very large role in all facets of the agency. 
I had a legislative role, the marketing role, the programmatic, 
the policy side. The Texas Department of Housing and Community 
Affairs at the time, and still is one of the largest if not the 
largest State housing agencies in the country. It was certainly 
one of the most programmatically diverse. We administered an 
amalgam of housing-related programs, first-time homebuyer 
program through mortgage revenue bonds, housing tax credits, 
CDBG, Community Service Block Grants, LIHEAP, emergency shelter 
grants program. The need was very profound in Texas, certainly, 
Senator. I would also agree Texas's housing agency is not on 
the scale of HUD, but I think many of the same concerns and our 
ability to adapt to the needs of the State. Hopefully, if 
confirmed, I would like to do so as well in this capacity.
    Relative to my experience, Senator, I think if you ask a 
lot of my colleagues in my life, that I am a very capable 
leader, a very good consensus builder. Whether it was heading 
up the White House effort following the Shuttle Columbia 
accident, which was put on my shoulders barely two hours after 
it happened. It was about my first week on the job as Cabinet 
Secretary as well.
    Looking at the same issues, the ability to look at not just 
the causes of the accident and dealing with the Columbia 
accident investigation board, the ability to bring the groups 
together, the industry, the stakeholders, and to play a big 
role in doing what had not been done, Senator, in a generation, 
and that is essentially play a big role in helping revamp 
America's space program.
    Certainly, being White House Cabinet Secretary, I dealt 
with an amalgam of issues on a daily basis, Senator, dealing 
with Cabinet Secretaries, deputy secretaries, chiefs of staff, 
whether it was Department of the Interior or Department of 
Labor, interacting with the White House staff, senior staff, 
which I was a member of as well, on a daily basis, I think 
definitely allowed me to have very good experience, what I 
would hope to be able to use if confirmed to my capacity as 
Assistant Secretary for Housing.
    Senator Carper. One last question if I could, Mr. Chairman.
    Chairman Shelby. Go ahead.
    Senator Carper. That is, just take a minute or two and just 
share with us your vision of the future for FHA.
    Mr. Montgomery. I would say, sir, in one word, that FHA 
needs to be more nimble, needs to be better adapting to the 
needs of low- to moderate-income homebuyers. We have talked 
earlier about FHA's market share shrinking. Mostly families who 
could have used FHA have gone to the subprime market, which has 
exploded exponentially almost in the last 10 years. There is 
nothing inherently wrong with that market.
    Somebody previously mentioned to me in my meetings at HUD 
that we need to do a consumer education program, and I said, I 
think you need to do a consumer awareness program. I am not so 
sure people are even thinking about FHA. There was a time in 
all of our lives, probably 10 or 15 years ago, where you would 
look in the Sunday paper and you would actually FHA/VA homes, 
FHA/VA homes. You just do not see that any more, especially in 
California where the median sales price is now half a million 
dollars, certainly in this part of the country as well. And I 
think anything we can do to show consumers that FHA is a very 
good alternative for them for any number of reasons, I think we 
would be well-serving those homebuyers, Senator.
    Senator Carper. Thanks very much.
    Mr. Montgomery. Thank you, sir.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Mr. Bernanke, I was at the first Congressional hearing on 
remittances 3 years ago. Since that time the size of the 
remittance flows continues to grow, how they are marketing. The 
Inter-American Development Bank estimates that remittance flows 
from the United States last year to Latin America alone totaled 
more than $30 billion, and they estimate that by 2010 total 
remittances to Latin America from the United States for the 
decade 2001 to 2010 will be more than half a trillion dollars. 
So there is a very significant movement of funds. Despite this, 
the exploitation of those doing the remittances still remains a 
problem, at least of concern to many of us.
    You recently gave a speech on the U.S. remittance market in 
which you identified the exchange rate fee as one mechanism for 
this abuse. You 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. One problem in practice is that users of 
remittance services often do not appear to be aware that some 
services exchange dollars for foreign currencies at rates less 
than favorable to the consumer than the market-determined 
exchange rate.

    And you go on and conclude your speech by saying:

    The challenge is to ensure the remitters can send funds to 
their home countries conveniently, safely, and at reasonable 
cost. The opportunity is to find ways to leverage immigrants' 
needs for remittance services into a broader relationship, one 
that will be both profitable for the bank and will also provide 
immigrants and their families with greater financial access.

    Actually, legislation has been introduced to address some 
of these concerns, and Chairman Shelby and I have actually 
asked the GAO to study the U.S. remittance market, and we 
expect their report later this year.
    Is this an issue that you plan to pursue at the Council and 
is it an issue that the Council and the Committee could work on 
together to try to address? It seems to me an issue that needs 
to be addressed. I think that there is a range of 
reasonableness in which a solution can be found that would help 
those sending the remittances, that would have the support at 
least of some of the industry, the ones who hold to higher 
standards. It would obviously impact those who are prepared to 
exploit people, not fully disclose, not deal with them in a 
straightforward and fair way, but it seems to me we might be 
able to do something here that would benefit everyone who 
should be benefited, including the responsible elements in the 
industry and those sending the remittances.
    Mr. Bernanke. Senator, I developed an interest in 
remittances at the Federal Reserve, and I would like to 
continue thinking about that and working with you on those 
issues.
    The bottom line of my speech was that it is a positive 
development, that more competition is developing in this 
market, in particular that credit unions and banks are becoming 
more involved in remittances. The Federal Reserve has provided 
some additional support for sending money across the border. 
There is a general concern that--among immigrant populations--
the share of people who are so-called ``banked,'' that is who 
are involved in banking and involved in the financial system, 
is much lower than the general population, and this provides a 
very interesting possibility for banks to reach into these 
communities and say, ``We can provide remittance services at a 
lower price and in a more reliable way,'' and at the same time, 
you know, help immigrants avail themselves of the range of 
financial services, including credit, savings accounts, and the 
like. So, I think that is a very positive development, and it 
interacts with all these other aspects of financial literacy 
that I think we are all interested in promoting.
    Senator Sarbanes. Yes, very good. The credit unions have 
actually taken a major initiative in this area. It is a 
priority item for them, and they have taken some very positive 
steps and we have tried to be very encouraging of them. We look 
forward to working with you on this.
    Mr. Bernanke. Thank you, Senator.
    Senator Sarbanes. I wanted to ask about the long-term 
unemployed in particular. The BLS tells us that there are 7.7 
million unemployed workers today who are actively seeking work. 
There are another just over 5 million who are not in the labor 
force but say they want a job. If you factor them in, the 
unemployment rate is substantially higher than the one we use 
when we report the figures.
    But a problem seems especially severe among the long-term 
unemployed, those who have been unemployed for over 26 weeks, 
which is the period for which the traditional unemployment 
benefits run unless we extend it. We have extended it, but now 
no longer. That is not applicable at the moment. But the 
problem is that the long-term unemployment has not subsided as 
growth has resumed, which was generally the pattern in previous 
downturns. Its share of the total joblessness actually 
continues to rise. The long-term unemployed now constitute 21.2 
percent of all unemployed workers and the figure has been above 
20 percent for 31 consecutive months. In other words, of the 
unemployed more than 20 percent of them are long-term 
unemployed. That is the longest duration of elevated long-term 
unemployment since the Bureau of Labor Statistics began 
tracking such figures about 50 years ago. So if you look at the 
patterns and everything, it moves out on you or leaps out on 
you in terms of a disturbing departure from past trends.
    First of all, how serious do you regard this as being? And 
second, what can we do about it, and particularly what can we 
do about it in the short-run since by definition these are 
people and families who have exhausted their unemployment 
benefits? So they are not getting any support to meet their 
family needs. And the traditional view, that the economy will 
pick back up again, jobs will be more available, you will able 
to move out of this situation, does not seem to be working.
    Mr. Bernanke. Senator, your characterization is correct. As 
I replied earlier to another question, the labor market in 
general was slow to recover after the 2001 recession, but has, 
generally speaking, made a very good recovery in the last year 
and a half.
    One area though that has not been as strong--and you are 
quite correct in pointing it out--is long-term unemployment. 
Evidently there are people who have not yet been able to find 
new work.
    I agree this is a serious issue. I think as a Member of the 
CEA I will certainly want to look at the range of policies and 
the range of options we have to address it.
    Just a couple of directions one might want to think about. 
One way to help is to provide assistance in retraining, 
education, opportunities to get on the job training, to help 
people adjust to the changes in the economy and to find new 
work.
    Another thought has to do with unemployment insurance. One 
suggestion, which I at least find worth entertaining is the 
idea that beyond a certain point that individuals receive a 
grant which they could use to get more education, for example, 
and that whatever--when they found work, they would not be 
forced necessarily to give back what remained, that is, they 
would have an incentive to find work so that they could not use 
up the grant in living expenses.
    I think there are some mechanisms, but I do not pretend to 
have the answer. I think it is a very difficult problem and one 
we need to look at.
    Senator Sarbanes. Maybe some thought should be given maybe 
of some task force within the Executive Branch to focus 
specifically on the long-term unemployed which would include 
the Council or the Labor Department, maybe the Department of 
Education. I do not know. You could go through the various 
agencies and put together a program.
    One final question. The CEA has been moved out of the 
Executive Office Building next door to the White House. Now, 
there are some who think that if you do not have proximity to 
the White House that that means you are losing influence, and 
there is reason to think that. Mr. Montgomery has had a lot of 
proximity, so presumably has a lot of influence.
    [Laughter.]
    Is the CEA going to get back into the Executive Office 
Building, and if so, when, and you as its Chairman, are you 
going to make--what kind of effort are you going to make to 
bring that about, or are you going to allow them to relegate 
you out of the immediate Executive compound there?
    Mr. Bernanke. Senator, the CEA staff was moved a block away 
because of the need to renovate the Old Executive Office 
Building, and my understanding is that renovation is still 
proceeding so there is no immediate prospect of change in that 
situation.
    Senator Sarbanes. Is the plan that when the renovation is 
completed, the CEA will come back in or is something else going 
to happen to----
    Mr. Bernanke. Senator, I believe that is the case. I would 
like to add that the CEA has retained the Chairman's office, 
which is a large office immediately across from the West Wing, 
which provides access and a place to work and prepare for 
meetings. My sense has been, in my very small exposure I have 
had so far, that the CEA has ready access to the decisionmakers 
in the West Wing.
    Senator Sarbanes. I think you need to focus on that 
question.
    Finally, let me just say we look forward to continuing to 
interact with you. I might say to you, we do some of our 
nightly reading, we go back and read Macroeconomics by Abel and 
Bernanke.
    Mr. Bernanke. I will send you the latest edition, Senator.
    Senator Sarbanes. As these issues come along, we may refer 
back to your previous positions to see how consistent they 
remain.
    Mr. Bernanke. Thank you, Senator.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Chairman Shelby. Dr. Bernanke, how many people are employed 
in the United States, roughly? Say, using Senator Sarbanes 
numbers, which I do not doubt, there are 7.7 million people in 
seeking jobs, unemployed, and there are about 5 million 
unemployed that are not seeking jobs. But how many people out 
of nearly 300 million people are currently working just in your 
judgment?
    Mr. Bernanke. Senator, according to the Bureau of Labor 
Statistics there are 150 million or so in the labor force, of 
which 141 million currently have jobs.
    Chairman Shelby. And what is the national average of 
unemployment roughly now?
    Mr. Bernanke. Today, 5.2 percent, sir.
    Chairman Shelby. And what was it 3 years ago?
    Mr. Bernanke. It peaked 2 years ago at 6.3 percent.
    Chairman Shelby. It is 5 point what now?
    Mr. Bernanke. Currently, 5.2 percent, sir.
    Chairman Shelby. Is some of the unemployment nationally--I 
can use my own State, Alabama. We have pockets of high 
unemployment, and in other areas of the State we have 3 percent 
unemployment, full employment so to speak. Is that true around 
the country, is it pockets of unemployment?
    Mr. Bernanke. Senator, there is certainly a great bit of 
variety across States across occupations and the like. As I 
have indicated, the general labor market is much stronger than 
it is been in the last couple of years, but there are always 
occupations, areas where the labor market is not as strong, and 
those represent a challenge for policy.
    Chairman Shelby. As we seek ways to address the chronic 
unemployed people who remain unemployed, I guess there are many 
reasons, and probably a lot of them unknown to me, but I hope 
you would consider, rather than just unemployment 
compensation--or somebody would--some type of cash grant or 
something to give people once, then maybe they will start a 
small business or have a little risk capital or something, 
because I am concerned and have been for a number of years, 
that--which we want to do, we want to help people that are down 
and out. But to continue to help them--and they are treading 
water, so to speak, they are not getting anywhere--I do not 
think helps them and does not help the economy either, whereas 
some kind of incentive to give them a little capital to start a 
little risk in the marketplace, some of them will. Now I 
understand some of them will not.
    I wonder if there have been any studies in that regard that 
you know about?
    Mr. Bernanke. Senator, we do not have many examples of that 
particular approach, but I do think it is a very interesting 
approach. It has much better incentives and gives people a 
chance to get a fresh start, go back to school, or start a 
business.
    Chairman Shelby. Given them confidence.
    Mr. Bernanke. I think it is a very interesting approach.
    Chairman Shelby. Senator, do you have another comment?
    Senator Sarbanes. Yes. I want to pursue these unemployment 
figures because I want to be sure we are clear on them. My 
understanding is that the labor force participation now is near 
historically low levels. In other words, there are a number of 
people--and the 5.1 million figure I cited would bear that 
out--that actually are not in the labor force and are not 
currently seeking because they have, in many instances, been 
discouraged. Is that correct?
    Mr. Bernanke. Senator, the labor force participation rate 
reached an all-time high of about 66.8 a few years ago and it 
has declined a bit since then.
    Senator Sarbanes. Right.
    Mr. Bernanke. But it remains high relative to historical 
levels.
    Senator Sarbanes. In addition to the 7.7 million who are 
unemployed, who are looking for jobs, unemployed, and that is 
the figure we use when we calculate the 5.2 percent 
unemployment rate. There are then the over 5 million the White 
House says are not in the labor force but indicate that they 
want a job. I mean they have not, in a sense, retired, correct?
    Mr. Bernanke. Yes.
    Senator Sarbanes. And in addition I understand there are 
about over 4 million people who are working part time for 
economic reasons. They would like a full-time job, but they 
cannot find or have a full-time job. So in effect they are 
working part time for economic reasons. So if you factor all of 
that in, you end up moving the unemployment rate up toward 10 
percent. Is that correct?
    Mr. Bernanke. Senator, these are alternative measures of 
labor market slack.
    Senator Sarbanes. Right.
    Mr. Bernanke. If you look at some of those measures they 
actually have improved recently. For example, the part-time 
work measure you mentioned has actually come down quite a bit 
in the last year. I do believe though--I am not really 
disagreeing with you--in the following sense that the decline 
in the participation rate that we saw since 2000 may be 
partially reversible as the economy gets stronger.
    So as I have indicated, the labor market has improved quite 
a bit but I think we have some ways to go before we are at full 
employment, so I do not dispute that we are not there yet.
    Senator Sarbanes. Thank you.
    Chairman Shelby. I thank both of you for your appearance 
today. We will try to move your nominations as quickly as 
possible.
    The hearing is adjourned.
    [Whereupon, at 11:44 a.m., the hearing was adjourned.]
    [Prepared statements, biographical sketches of nominees, 
response to written questions, and additional material supplied 
for the record follow:]
                 PREPARED STATEMENT OF BEN S. BERNANKE

          Chairman-Designate, the Council Of Economic Advisers

                              May 25, 2005

    Mr. Chairman, Senator Sarbanes, and members of the 
Committee, I am honored to appear before you today as the 
President's nominee to Chair the Council of Economic Advisers.
    Created by Congress in 1946, the Council of Economic 
Advisers is a unique institution with a proud history. Its role 
is to provide the President with professional and objective 
advice on the entire range of issues bearing on the economic 
well-being of American citizens. I believe that, over the 
years, the Council has exerted an important, positive influence 
on economic policymaking in the United States. The economic 
challenges facing the United States today--including the needs 
to address the implications of an aging population, to achieve 
long-term energy security while protecting the environment, and 
to reform our tax system so that it is simpler, fairer, and 
more supportive of economic growth--are as great as at any time 
since the Council was created. If I am confirmed, I will do 
everything in my power to ensure that the Council continues its 
tradition of providing the best possible advice and analysis 
and promoting sound economic policies.
    My background includes both academic and policy experience. 
I have held a professorship at Princeton University since 1985, 
where I also served as the chair of the economics department 
from 1996 until 2002. Before coming to Princeton I taught for 6 
years at the Stanford Graduate School of Business. I have 
served as the Director of the Monetary Economics program of the 
National Bureau of Economic Research, as a member of that 
organization's business cycle dating committee, and as the 
editor of the American Economic Review, a leading research 
journal. I have been selected a Fellow of the Econometric 
Society and a member of the American Academy of Arts and 
Sciences. During my time as an academic, I visited or advised a 
number of policymaking institutions, including the Bureau of 
the Census, the State Department, and several Federal Reserve 
Banks. Since August 2002 I have served as a member of the Board 
of Governors of the Federal Reserve System, a position that has 
exposed me to a diverse set of policy issues and given me 
first-hand experience of the policymaking process.
    In closing, I would like to take this opportunity to thank 
you, Mr. Chairman, and the Committee for the prompt 
consideration of my nomination. I would be pleased to take any 
questions you may have.




       RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 
                      FROM BEN S. BERNANKE

Q.1. Will you stand up to the President when you believe he is 
wrong?

A.1. Consistent with the traditions of the Council of Economic 
Advisers, I will provide the Administration with objective, 
professional advice on matters of economic policy, even if that 
advice is politically unpopular or conflicts with the views of 
the President or other members of the Administration. If I 
become aware of policy proposals that I believe to be 
inconsistent with sound economics, I will make my views known 
to the President and other appropriate officials, and I will 
encourage other Council Members to do the same.

Q.2. Did you stand up to Chairman Greenspan when you believed 
he was wrong?

A.2. In my view, Members of the Board of Governors best serve 
the country and the Federal Reserve itself by making 
independent judgments on all matters coming before the Board. 
During my time on the Board, I always endeavored to base my 
analyses and policy recommendations on the facts and on my own 
understanding of the issues at hand, without concern about 
whether others would necessarily agree with me. When I 
disagreed with Chairman Greenspan, other Board Members, or with 
other Members of the Federal Open Market Committee, I made my 
views known and tried to make the case for my position in terms 
of sound economic analysis.

Q.3. Can you cite any public disagreements between yourself and 
Chairman Greenspan?

A.3. During my time at the Federal Reserve, I often publicly 
advanced my own independent views on policy issues, through 
public speeches for example. One substantive policy issue on 
which I have publicly disagreed with the Chairman, and on which 
I have spoken on a number of occasions, is the question of 
whether the Federal Reserve should adopt a medium-term, 
quantitative objective for inflation, as has been done by many 
other central banks. Chairman Greenspan has indicated that he 
does not think that adopting an inflation objective is 
appropriate for the Federal Reserve. In my view, providing 
quantitative information to the markets about the Fed's medium-
term objective for inflation would serve to reduce uncertainty, 
improve the clarity of Fed communication, and help to further 
anchor the public's long-run inflation expectations. Greater 
clarity and better-anchored inflation expectations would in 
turn promote the Federal Reserve's ultimate objectives of 
maximum sustainable employment, price stability, and low, long-
term interest rates.

Q.4. How many times did you vote against Chairman Greenspan?

A.4. By custom and tradition, the Federal Open Market Committee 
operates by consensus, and formal dissents are rare. In that 
tradition, during my time on the Committee I focused on trying 
to influence the Committee's decisions by presenting persuasive 
economic arguments in the meetings. I believe that this 
approach allowed me to be an effective Member of the Committee. 
At the conclusion of each meeting in which I participated, I 
found that I was comfortable with the consensus that emerged. 
For that reason, during my tenure, I did not dissent from any 
monetary policy decision of the FOMC. On every occasion, I 
voted for what I believed to be the best policy alternative at 
that particular time.

        RESPONSE TO A WRITTEN QUESTION OF SENATOR REED 
                    FROM BRIAN D. MONTGOMERY

Q.1. On numerous occasions (most recently in the House 
Appropriations Committee's fiscal year 2005 VA-HUD Report 
(H.Rpt. 108-674, page 67)), HUD was directed to come forward 
with programmatic guidance for the Section 811 ``mainstream'' 
tenant-based assistance program. This guidance was to include: 
(a) Targeting of rental assistance consistent with longstanding 
811 targeting criteria, that is targeting to individuals with 
the most severe disabilities; (b) Maintenance of these vouchers 
upon turnover; and (c) Retention of a meaningful role for 
nonprofit disability groups in the program; (d) In addition, 
Congress has acknowledged concerns regarding the diversion of 
Section 811 Tenant-Based Assistance to the Section 8 Voucher 
program. If confirmed, will you commit to moving forward in 
developing this long-overdue, programmatic guidance for the 811 
Tenant-Based program?

A.1. The Department has addressed points (a), (b), and (c) 
through its publication on February 1, 2005 of Notice PIH 2005-
5 (HA). Paragraph 6 of this Notice specifies that vouchers 
funded with 5-year budget authority under the Section 811 
program must be issued to elderly and non-elderly disabled 
families initially and upon turnover. The Notice indicates this 
requirement is applicable during the initial 5-year funding 
increment, as well as upon renewal of that funding. Paragraph 6 
of Notice PIH 2005-5 (HA), encourages PHA's to utilize ``local 
supportive service or disability organizations'' to assist 
families in locating accessible housing units, and for 
counseling and assistance with security deposits, moving 
expenses, etc. The Notice indicates that ``these organization 
should include State protection and advocacy agencies, Centers 
for Independent Living, State Medicaid agencies, and disability 
advocacy groups that represent individuals with a variety of 
disabilities. You should also note that on August 8, 2004, the 
Department issued Notice PIH 2004-13 (HA) that requires public 
housing agencies, (PHA) to report to HUD on their issuance of 
Section 811 funded vouchers to disabled families, thereby 
allowing HUD to track the usage of these vouchers.
    Finally, I am committed to work within the Department to 
provide additional guidance for the Section 811 Tenant-Based 
program, if necessary.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES 
                    FROM BRIAN D. MONTGOMERY

Q.1. I want to ask you some questions about FHA and its 
commitment to support cooperative homeownership. As background, 
let me lay some groundwork:
    As you may know, cooperatives are a form of multifamily 
homeownership. In that way, they are similar to condominiums, 
although they are less widely known. Cooperatives are eligible 
users of all of the FHA multifamily insurance programs open to 
rental properties, as well as the Section 213 Multifamily 
Insurance program, which is limited to cooperative use.
    Limited equity cooperatives (which limit the resale prices 
of individual units to keep them affordable to successive 
generations of owners) provide many of the same advantages 
provided by homeownership generally:

 They offer co-op owners control of a critical element 
    of their lives--their housing;
 They demonstrate a lower default rate compared to 
    rental housing;
 They develop greater affordability over time than 
    rental properties, with monthly charges on the order of 15 
    percent lower;
 They attract residents with a greater mix of income 
    levels;
 Residents tend to have longer tenure in limited equity 
    cooperatives than comparable rental properties, increasing 
    community stability; and,
 Cooperatives develop higher levels of community 
    participation.

    Affordable market rate cooperatives, whose prices are 
determined by the marketplace and where resale prices are not 
limited, also provide substantial advantages:

 Economies of scale lower per unit costs;
 Risk spreading across the entire membership cushions 
    the financial shock of major repairs;
 Cooperatives can use blanket loans (loans secured by 
    the entire cooperative development) to finance major 
    rehabilitation projects;
 Cooperatives have effective tools to ensure owner 
    occupancy (unlike affordable condominiums, which often end 
    up with high levels of absentee ownership).

    The Section 213 program, which exists to provide insurance 
for cooperative blanket loans, is a very successful program 
within FHA. Importantly, the program requires no credit 
subsidy.
    Unfortunately, HUD has failed to support adequately the FHA 
program for cooperative homeownership.
    What is your view of this program? Do you agree that 
cooperative housing is a good vehicle to achieve homeownership 
for many people?

A.1. I agree that cooperative housing is a good vehicle for 
prospective homebuyers in that they provide some of the tax and 
equity benefits of single-family homes. If confirmed, I would 
fully support using all of the programmatic tools the 
Department has to promote affordable housing. However, I think 
any commitment to devote additional resources to mortgage 
insurance for cooperatives must be viewed in the overall 
context of needs and available resources.

Q.2. Specifically, would you make the FHA Section 213 (co-op 
blanket lending) program a part of the Multifamily Accelerated 
Processing (MAP) Program on a timely basis? This has not been 
done, despite what I understand is a commitment to do so by 
former Commissioner Weicher.

A.2. In my current capacity, I have been unable to confirm any 
such commitment. However, if confirmed, I will look into the 
matter and get a status report.

Q.3. Further, FHA recently commissioned a study of housing co-
ops by the Hollister Group that has not yet been released. 
Would you release this study?

A.3. If confirmed, and given the opportunity to review the 
study in an official capacity, I would commit to discussing 
with staff the potential release of the report to the public.

Q.4. In addition, I understand that some HUD area offices have 
refused Multifamily Accelerated Processing under any FHA 
programs when the borrower seeks to form a co-op, even though 
co-ops are clearly eligible users. Would you also make MAP 
available to co-op borrowers in all FHA programs?

A.4. I have not been made aware of any across-the-board policy 
to exclude cooperatives but, if confirmed, I would further look 
into the matter and ensure that our field offices are 
processing co-op applications in accordance with the 
Department's program guidelines.
    In regard to making MAP available to co-op borrowers in all 
FHA programs, it is my understanding that the description of 
eligible borrowers is per statute and currently, the only 
program available to cooperatives is Section 213.

Q.5. The FHA Section 203(n) program is intended to provide FHA-
insured share loans to individuals seeking to purchase an 
interest in a co-op. Despite clear statutory authority, the 
regulations for this program are very old and make it nearly 
impossible to use this program. Would you be willing to update 
the 203(n) regulations to make co-op share loans readily 
available through FHA?

A.5. HUD acknowledges co-op homeownership has not received full 
support by the Department. The Department is analyzing the 
regulations to create a more effective utilization of its 
cooperative homeownership program. FHA will update the 
regulations to permit 
insurance on co-ops to comply with the statute regarding the 
blanket mortgage.

Q.6. As we discussed at your hearing, I have a particular 
interest in senior housing. Your statement made it clear that 
you share this interest. I think it is particularly important 
to enable seniors to age in place as long as possible. So-
called ``reverse mortgages'' are a very good way for seniors to 
do this, as it allows them to tap their home equity for living 
expenses, within carefully crafted limits. Unfortunately, FHA 
has not yet issued regulations to enable the use of insured 
Home Equity Conversion Mortgages (HECM's) to allow seniors to 
tap their home equity while remaining in cooperative 
apartments. Would you be willing to issue regulations that will 
make HECM's available for seniors residing in co-ops?

A.6. I am aware there are legal obstacles with the first lien 
requirement as it relates to the cooperative blanket mortgage 
and the National Housing Act requirement of FHA to be in first 
lien position. If confirmed, I am committed to working with the 
Department's Office of General Counsel to overcome this barrier 
and 
pursue implementing regulatory authority for insuring 
cooperatives for HECM's.

Q.7. A number of for- and not-for-profit developers have come 
forward with some creative ideas about how to redevelop and 
preserve multifamily FHA-insured Section 8 project-based 
developments. In some cases, these ideas involve reducing the 
density of the assisted housing and bringing market rate 
housing into the development. This may require building on 
adjacent or nearby parcels of land where such property is 
included in the larger development. Unfortunately, HUD 
currently argues that no subsidy, either FHA Upfront Grants or 
Section 8, may be used in a development in which the new 
project goes beyond the ``footprint'' of the original FHA-
insured property. This makes it very difficult to preserve all 
the 
assisted units and achieve the mixed-income communities that 
developers now seek to create. Will you commit to looking into 
this issue and trying to have FHA show additional flexibility 
in these cases, where possible?

A.7. I am firmly committed to preserving the FHA affordable 
rental housing stock and, if confirmed, would make this one of 
my top priorities. I understand the challenges in attempting to 
preserve all the assisted units while trying to achieve mixed-
income communities and would certainly look into the issues you 
raise and give them every consideration. I believe that we 
should do all that is practical and fair to all within the 
statutory authorities of HUD and provide the utmost flexibility 
within those authorities. If confirmed, I would also look 
forward to working with Congress and our industry partners to 
develop creative solutions to achieve the successful 
preservation and/or redevelopment of these housing units.
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