    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

                         MONETARY POLICY AND THE STATE
                             OF THE ECONOMY, PART I

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 15, 2007

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 110-3

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
    CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
    LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
    NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
    MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
    GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
    JULIA CARSON, Indiana                RON PAUL, Texas
    BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
    GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
    DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
    MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North
    RUBEN HINOJOSA, Texas                    Carolina
    WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
    CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
    JOE BACA, California                 GARY G. MILLER, California
    STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West
    BRAD MILLER, North Carolina              Virginia
    DAVID SCOTT, Georgia                 TOM FEENEY, Florida
    AL GREEN, Texas                      JEB HENSARLING, Texas
    EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
    MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
    GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
    LINCOLN DAVIS, Tennessee             RICK RENZI, Arizona
    ALBIO SIRES, New Jersey              JIM GERLACH, Pennsylvania
    PAUL W. HODES, New Hampshire         STEVAN PEARCE, New Mexico
    KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
    RON KLEIN, Florida                   TOM PRICE, Georgia
    TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
    CHARLES WILSON, Ohio                 PATRICK T. McHENRY, North Carolina
    ED PERLMUTTER, Colorado              JOHN CAMPBELL, California
    CHRISTOPHER S. MURPHY, Connecticut   ADAM PUTNAM, Florida
    JOE DONNELLY, Indiana                MARSHA BLACKBURN, Tennessee
    ROBERT WEXLER, Florida               MICHELE BACHMANN, Minnesota
    JIM MARSHALL, Georgia                PETER J. ROSKAM, Illinois
    DAN BOREN, Oklahoma

            Jeanne M. Roslanowick, Staff Director and Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 15, 2007............................................     1
    Appendix:
        February 15, 2007............................................    61

                                   WITNESSES
                          Thursday, February 15, 2007

    Bernanke, Hon. Ben S., Chairman, Board of Governors of the
      Federal Reserve System.........................................     7

                                    APPENDIX

    Prepared statements:
        Neugebauer, Hon. Randy.......................................    62
        Waters, Hon. Maxine..........................................    64
        Bernanke, Hon. Ben S.........................................    71

                  Additional Material Submitted for the Record

    Hon. Ben S. Bernanke:
        Board of Governors of the Federal Reserve System, Monetary
          Policy Report to the Congress, dated February 14, 2007.....    81
        Responses to questions submitted by Hon. Ruben Hinojosa......   112
        Responses to questions submitted by Hon. Albio Sires.........   115

              MONETARY POLICY AND THE STATE OF THE ECONOMY, PART I

                                  ----------

                          Thursday, February 15, 2007

                 U.S. House of Representatives,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10 a.m., in room
    2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Present: Representatives Frank, Kanjorski, Waters, Maloney,
    Gutierrez, Watt, Ackerman, Sherman, Moore of Kansas, Capuano,
    Hinojosa, Clay, McCarthy, Miller of North Carolina, Green,
    Cleaver, Bean, Moore of Wisconsin, Davis of Tennessee, Sires,
    Hodes, Ellison, Klein, Mahoney, Wilson, Perlmutter, Murphy,
    Donnelly, Wexler, Marshall; Bachus, Baker, Pryce, Castle,
    Royce, Lucas, Paul, Gillmor, Jones, Biggert, Shays, Capito,
    Feeney, Hensarling, Garrett, Pearce, McHenry, Campbell,
    Bachmann, and Roskam.
        The Chairman. Today's hearing of the Committee on Financial
    Services will come to order. This is the semi-annual hearing
    that we have on the Humphrey-Hawkins Act, with testimony by the
    Chairman of the Board of Governors of the Federal Reserve
    System, Hon. Ben S. Bernanke. Chairman Bernanke will be
    testifying on the state of the economy and discussing the
    Federal Reserve's 2007 Monetary Policy Report to the Congress.
    Under the procedures, Chairman Bernanke alternates between the
    House and the Senate. This is done twice a year--once a year,
    the chairman goes to the Senate first, and once a year, he goes
    to the House first. Since, in this rotation, he went to the
    Senate first, one assumes that there will be no opportunities
    to game the stock market today. Those all happened yesterday,
    so people can stay through the whole hearing. Reporters won't
    have to leave to run to report to the wire services so people
    can hysterically overreact to the Chairman's perfectly sensible
    statements, which, of course, is the pattern. Although I know
    people who are in the market explain that they are not
    overreacting themselves--they are, in fact, reacting to other
    people's overreaction--the consequences are the same.
        I say that because, in the interest of being able to have
    rational policy discussions unconstrained by irrelevant
    factors, I just would plead with people not to read excessively
    into what the Chairman says, and not to read excessively into
    what we say. We ought to be able to have rational conversations
    about the important topic of today's hearing without the
    overreactions. And I would say, since that may not be possible,
    as far as I am concerned, people overreact at their own peril.
    And I don't think the Chairman or anybody else should be held
    accountable because people engage in this form of anticipatory
    hysteria.
        As to the subject at hand, and under the rules, there will
    be four opening statements--by myself, the ranking member of
    the full committee, the chairman of the Subcommittee on
    Domestic and International Monetary Policy, and the ranking
    member of the subcommittee--and the Chairman has very
    graciously agreed to stay until 2 p.m. I am deeply appreciative
    of this.
        This is a very large committee. We will take one 15- to 20-
    minute break, and members can gauge appropriately. And we will
    be able to accommodate more of the members if we can. Mr.
    Chairman, again, I appreciate your willingness to do this.
        I will be asking the Chairman about some of the specifics
    of his testimony, and of the areas particularly relevant to
    monetary policy, but I want to begin with an expression of
    disappointment, not in Chairman Bernanke, but in the business
    community and many of my conservative colleagues. I believe
    that we are at a very sensitive point in the making of economic
    policy in this country.
        There is, on the part of the business community and many of
    its supporters, the view that a full embrace of globalization--
    of technological change, essentially of public policies that
    allow capital to be fully mobilized and fully mobile, and able
    to be employed to its best use--is in the best interests of
    society as a whole.
        For some time now, until fairly recently, that was the
    governing policy in the United States, and in much of the rest
    of the world.
        That has now come to an end, I believe temporarily, perhaps
    for a long temporary period, because increasingly, average
    citizens, in America and in other countries, have come to doubt
    that the growth that results from this policy of entirely free
    capital to move to wherever it finds its best return, people
    have come to doubt that this is in their interest. Indeed,
    there are a large number of people throughout the world who
    believe that they are being hurt by this.
        And in consequence, we are at a policy deadlock. I think
    people should understand that the chances of an extension of
    trade promotion authority going through are quite slender at
    this point, unless there is some change in the attitude of many
    who are its advocates.
        My own view is that if they were, in fact, to come to an
    agreement in the Doha Round, that the resulting agreement--if
    they reach it as they currently talk about it--wouldn't pass
    the House of Representatives. There is resistance, in my view
    unfortunately, to the general approach that the President took
    on immigration.
        In almost all of the important areas in which--and let me
    just say, this committee reported out earlier this week on a
    voice vote a bill for foreign investment, and there was a
    paradox. Because if you talk to the people in the business
    community, as the ranking member and I, and the former chairman
    of that subcommittee, and others involved in that, if you
    talked to them, they were, on the whole, pleased with the
    result because it was better than they had expected.
        If you read some of the business press, they were concerned
    that it was too restrictive. Well, that is an example of where
    we are. It is a bill that was more restrictive than some might
    have liked on foreign investment, but better than some people
    expected reflecting this mood.
        So I want to reiterate what I said earlier. Many of us are
    prepared to work towards policies that are pro growth, that do
    take advantage of what you have when capital is allowed to
    reach its best level and find its greatest return, when
    technology can be fully taken advantage of, but only if we put
    in place public policies that make sure that is more fairly
    shared, and in particular, that reverse the tendency which the
    Chairman has acknowledged, and I appreciate that, and which the
    President has acknowledged, that inequality has been growing.
        As I said before, inequality is an essential part of a
    capitalist economy--no one is trying to get rid of it, at least
    no one sensible. But it can also become excessive to the point
    where it is socially harmful and economically beyond what is
    needed for the capitalist system.
        We are at that point. We are at a point where there is an
    excessive amount of inequality in this economy. And it is
    growing, and not just in this economy. I recently read an
    article which said that in the last set of state elections in
    India, every chief minister who was seen as pro foreign was
    defeated in terms of the economy. So there is a worldwide
    concern. We see in Latin America where an anti-democratic left
    is threatening the democratic left in part because of this
    economic unhappiness.
        I don't see any recognition of that. I regret that. But
    people who will continue to resist trying to do something about
    healthcare or trying to do something about the right of
    employees to join unions, even something as minimalist as the
    minimum wage should not be surprised when they run into
    absolute resistance to other things which they will argue are
    good for the economy.
        With that, I call on the ranking member.
        Mr. Bachus. Thank you, Mr. Chairman, and I appreciate you
    holding this hearing. And Chairman Bernanke, thank you for your
    report. As you can see, on this committee, we share the same
    concerns, but we have different views on how to address those
    concerns and different philosophies. And as you come before us
    today, we are interested in your insights regarding not only
    monetary policy but also the state of the economy, and as the
    chairman specifically mentioned, global competitiveness and
    trade and issues of that nature.
        Of course, when we talk about differences of philosophy--as
    the chairman and I have--on how to approach these issues, how
    one perceives the state of the economy greatly depends on one's
    point of view.
        From my perspective, the economy appears strong and
    vibrant, and absent some unforeseen shock, likely to remain so.
    When I look at your report and the supporting economic data, I
    see vigorous 3.4 percent growth. I see low unemployment of 4.6
    percent and inflation of 2.5 percent.
        And in a society where opportunity awaits anyone who uses
    their talents and efforts to improve the standard of living for
    their family--opportunities are there, educational
    opportunities, and work opportunities, that is what I see from
    your report. I see 7\1/2\ million new jobs created since 2003.
        I see a structurally sound economy performing as well as it
    did in the 1990's in what we now know is an artificial economic
    bubble.
        Currently, I see strong 2.2 productivity increases and
    record stock market levels not fueled by unrealistic dot.com
    speculation, but by globally competitive businesses.
        I also see most Americans benefiting from the stock market
    growth through individual stock ownership and retirement funds.
        In this environment, claiming that record corporate profits
    do not benefit most Americans--as some on this committee do--is
    not a valid argument.
        Others have a different perspective. You have heard the
    chairman's perspective. And they see another reality. Some on
    this committee believe that the best way to create jobs and
    promote economic growth is through aggressive trade
    restrictions and barriers.
        While I recognize the need to help those economically
    displaced or as the chairman says, hurt, by global forces
    beyond their control, economic experience does not lead me to
    the conclusion that protectionism or isolationism is an
    appropriate response.
        Some think we need to somehow mandate the elimination of
    income disparities. While I share the exasperation of the
    chairman over some of the outrageous CEO compensation recently
    reported, I believe our corporate governance system works and
    that shareholders will correct these abuses without Government
    interference. I believe education, not government attempts to
    redistribute income, is the proven route to improve wages for
    all workers.
        Chairman Bernanke, the members of this committee,
    Republicans and Democrats alike, respect your experience, your
    judgment and your obvious commitment to keeping America's
    economy strong and competitive. We all share a goal of doing
    that and doing what is best for American workers. We appreciate
    you being here and look forward to hearing your comments.
        The Chairman. The gentleman from Illinois, the chairman of
    the Subcommittee on Domestic and International Monetary Policy
    is recognized.
        Mr. Gutierrez. Thank you, Mr. Chairman. And thank you,
    Chairman Frank. Chairman Bernanke, I think it is safe to say
    that you and I have different backgrounds and that we bring
    disparate perspectives to the table when dealing with economic
    and monetary issues. But after taking over the chairmanship of
    the Monetary Policy Subcommittee, I am getting a sense of the
    significant and daunting task that you face.
        You should rest assured, however, that I will be here over
    the next 2 years, along with 443 Members of the House and 100
    Members of the other body, to second-guess your every move.
        When it comes to economic and monetary policy, we are
    entering a very crucial and complex period, especially for the
    Federal Reserve and its mandate of maximum employment, stable
    prices, and moderate long-term interest rates.
        For example, the housing boom has taken a substantial
    downturn. Energy prices have climbed and we are facing some
    serious issues about our long term energy security. Some
    economists warn the threat of inflation is on the horizon. Yet
    others appear less worried about inflation than the rising
    mortgage delinquencies and foreclosures effecting a wider
    economy.
        The two major Asian currencies are undervalued, and the
    U.S. trade deficit is at record highs, while accusations of
    currency manipulations are frequently leveled against both
    China and Japan. And perhaps most important of all, we face a
    huge Federal deficit at a time when baby boomers are reaching
    retirement age and healthcare costs are at an all time high.
        While I am anxious to hear from you, Mr. Bernanke, what
    concerns me most is retirement insecurity. When it comes to
    kitchen table issues, retirement insecurity is the obstacle for
    many American families. The U.S. economy is now producing over
    $13 trillion a year. But many American families are struggling
    just to maintain their living standards and they are up against
    stagnating wages, diminishing healthcare, and retirement
    benefits that are just disappearing.
        More and more families are living paycheck-to-paycheck with
    very little in their bank accounts or none at all, and paying
    higher interest rates and more fees than they should. And
    hanging over their heads is retirement.
        I know, Chairman Bernanke, that you have publicly addressed
    the related issues of retirement insecurity, the budget
    deficit, and the looming retirement of 78 million baby boomers
    on several occasions. But from what I have heard and read, you
    have approached the problem only in terms of entitlement
    reform. Entitlement reform is needed. No question. But this is
    not just an issue of entitlement reform. The skyrocketing cost
    of healthcare are not just going to disappear if we reduce
    entitlement spending. The costs will just be shifted to already
    strapped family budgets. Many baby boomers are simply not
    financially ready for retirement. If we substantially cut
    healthcare, and Social Security spending for the baby boomer
    generation, many will face healthcare crises that will drive
    them into bankruptcy.
        The correlation between rising healthcare expenses and
    personal bankruptcy filings is well-documented. And merely
    moving these expenses from the public sector to the American
    families, in my opinion, is not good for long-term economic
    growth. We need more than entitlement reform to give Americans
    retirement security. I would like to hear your views on this
    today.
        Clearly, no single political party and no single body, the
    Fed, the Congress, or the Administration, has the answers to
    the problems we face. We must work together. And I look forward
    to an open frank dialogue with the Federal Reserve, my
    subcommittee counterpart, Dr. Paul, and the Treasury Department
    on all these issues. And I yield back the balance of my time.
        The Chairman. The gentleman from Texas, the ranking member
    of the subcommittee.
        Dr. Paul. Thank you, Mr. Chairman, and welcome, Chairman
    Bernanke. I am very pleased to be here today as the ranking
    member. In the midst of a great optimism of monetary policy and
    how the economy is doing, I still have some concerns. And of
    course, one of my long-term goals has always been to emphasize
    maintaining the integrity of the monetary unit, rather than
    looking superficially at some of our statistics. But I also
    share the concern of the chairman of the committee of our
    responsibilities for oversight and your interest as well,
    Chairman Bernanke, on having the transparency that I think we
    all desire.
        Transparency in monetary policy is a goal we should all
    support. I have often wondered why Congress has so willingly
    given up this prerogative over monetary policy.
        Congress, in essence, has ceded total control of the value
    of our money to a secretive central bank. Congress created the
    Federal Reserve, yet it had no constitutional authority to do
    so. We forget that those powers not explicitly granted to the
    Congress by the Constitution are inherently denied to the
    Congress, and thus, the authority to establish a central bank
    was never given.
        Of course, Jefferson and Hamilton had that debate early on
    and the debate seemingly was settled in 1913. But transparency
    and oversight are something else, and they are worth
    considering. Congress--although not by law--essentially has
    given up all its oversight responsibilities over the Fed.
        There are no true audits. Congress knows nothing of the
    conversations, the plans, and the action taken in concert with
    other central banks. We get less and less information regarding
    the money supply each year, especially now that we don't even
    have access to M3 statistics.
        The role the Fed plays in the President's secretive working
    group on financial markets goes essentially unnoticed by
    Congress. The Federal Reserve shows no willingness to inform
    Congress voluntarily about how often the working group meets,
    what action it takes that affects the financial markets, or why
    it takes these actions.
        But all these actions directed by the Federal Reserve alter
    the purchasing power of our money, and that purchasing power is
    always reduced. The dollar today is worth only 4 cents compared
    to the dollar that the Federal Reserve started with in 1913.
    This has significant consequences on our economy and our
    political stability. All paper currencies are vulnerable to
    collapse and history is replete with examples of great
    suffering caused by these collapses, especially to the Nation's
    poor and middle class.
        This can lead to political turmoil as well. Even before a
    currency collapses, the damage done by a fiat system is
    significant. Our monetary system insidiously transfers wealth
    from the poor and the middle class to the privileged rich.
    Wages never keep up with profits on Wall Street and the banks,
    thus sowing the seeds of class and discontent.
        When economic trouble hits, free markets and free trade are
    often blamed, while the harmful effects of a fiat monetary
    system are ignored.
        We deceive ourselves that all is well with the economy and
    ignore the fundamental flaws that are a source of growing
    discontent among the various groups. Few understand that our
    consumption and apparent wealth is dependent on a current
    account deficit running at approximately $800 billion a year.
        This deficit shows that much of our prosperity is based on
    borrowing rather than a true increase in production. Statistics
    show year after year that our productive manufacturing jobs
    continue to go overseas. This phenomenon is not seen as a
    consequence of the international fiat money system where the
    U.S. Government benefits as the issuer of the world reserve
    currency.
        Government officials consistently claim that inflation is
    in check at barely 2 percent, but middle class Americans know
    that their purchasing power--especially when it comes to
    housing, energy, medical care, and school tuition--is shrinking
    much faster than 2 percent per year.
        Even if prices are held in check in spite of our monetary
    inflation, concentrating on the CPI statistics distracts from
    the real issue.
        We must address the important consequences of the Fed
    manipulation of interest rates. When interest rates are
    artificially low, below market rates, insidious malinvestment,
    and excessive indebtedness inevitably brings about the economic
    downturns that everyone dreads.
        We look at GDP figures and reassure ourselves that all is
    well. Yet a growing number of Americans still do not enjoy the
    high standard of living that monetary inflation brings to the
    privileged few. Those who benefit the most are the ones who get
    to use the newly created credit first--
        The Chairman. The gentleman's time has expired. If the
    gentleman will come to a conclusion.
        Dr. Paul. I will yield back.
        The Chairman. I will now turn to the Chairman. And he is
    recognized for his opening statement.
        Thank you.

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

        Mr. Bernanke. Chairman Frank, Representative Bachus, and
    other members of the committee, I am pleased to present the
    Federal Reserve Monetary Policy Report to the Congress. Real
    activity in the United States expanded at a solid pace in 2006,
    although the pattern of growth was uneven.
        After a first quarter rebound from weakness associated with
    the effects of the hurricanes that ravaged the Gulf Coast in
    the previous summer, output growth moderated somewhat on
    average over the remainder of 2006. Real Gross Domestic Product
    is currently estimated to have increased at an annual rate of
    about 2\3/4\ percent in the second half of the year.
        As we anticipated in our July report, the U.S. economy
    appears to be making a transition from the rapid rate of
    expansion experienced over the preceding several years to a
    more sustainable average pace of growth.
        The principal source of the ongoing moderation has been a
    substantial cooling in the housing market which has led to a
    marked slowdown in the pace of residential construction.
        However, the weakness in housing market activity and the
    slower appreciation of house prices do not seem to have spilled
    over to any significant extent to other sectors of the economy.
        Consumer spending has continued to expand at a solid rate,
    and the demand for labor remains strong. On average, about
    165,000 jobs per month have been added to nonfarm payrolls over
    the past 6 months. And the unemployment rate, at 4.6 percent in
    January, remains low.
        Inflation pressures appear to have abated somewhat
    following a run-up during the first half of 2006. Overall,
    inflation has fallen in large part as a result of declines in
    the price of crude oil. Readings on core inflation--that is
    inflation excluding the prices of food and energy--have
    improved modestly in recent months. Nevertheless, the core
    inflation rate remains somewhat elevated.
        In the five policy meetings since the July report, the
    Federal open market committee, or FOMC, has maintained the
    Federal funds rate at 5\1/4\ percent. So far, the incoming data
    have supported the view that the current stance of policy is
    likely to foster sustainable economic growth and a gradual
    ebbing of core inflation.
        However, in the statement accompanying last month's policy
    decision, the FMOC again indicated that its predominant policy
    concern is the risk that inflation will fail to ease as
    expected, and that it is prepared to take action to address
    inflation risks, if developments warrant.
        Let me now discuss the economic outlook in a little more
    detail beginning with developments in the real economy and then
    turning to inflation. I will conclude with some brief comments
    on monetary policy.
        Consumer spending continues to be the mainstay of the
    current economic expansion. Personal consumption expenditures,
    which account for more than two-thirds of aggregate demand,
    increased at an annual rate of around 3\1/2\ percent in real
    terms during the second half of last year, broadly matching the
    brisk pace of the previous 3 years.
        Consumer outlays were supported by strong gains in personal
    income reflecting both the ongoing increases in payroll
    employment and a pickup in the growth of real wages.
        Real hourly compensation, as measured by compensation per
    hour in the nonfarm business sector deflated by the personal
    consumption expenditures price index, rose at an annual rate of
    about 3 percent in the latter half of 2006.
        The resilience of consumer spending is all the more
    striking, given the backdrop of the substantial correction in
    the housing market that became increasingly evident during the
    spring and summer of last year.
        By the middle of 2006, monthly sales of new and existing
    homes were about 15 percent lower than a year earlier, when the
    previously rapid rate of house price appreciation had slowed
    markedly. The fall in housing demand in turn prompted a sharp
    slowing in the pace of construction of new homes. Even so, the
    backlog of unsold homes rose from about 4\1/2\ months' supply
    in 2005 to nearly 7 months' supply by the third quarter of last
    year.
        Single family housing starts have dropped more than 30
    percent since the beginning of last year. And employment growth
    in the construction sector has slowed substantially.
        Some tentative signs of stabilization have recently
    appeared in the housing market. New and existing home sales
    have flattened out in recent months. Mortgage applications have
    picked up. And some surveys find that homebuyers' sentiment has
    improved.
        However even if housing demand falls no further, weakness
    in residential investment is likely to continue to weigh on
    economic growth over the next few quarters as homebuilders seek
    to reduce their inventory of unsold homes to more comfortable
    levels.
        Despite the ongoing adjustments in the housing sector,
    overall economic prospects for households remain good.
    Household finances appear generally solid. And delinquency
    rates on most types of consumer loans and residential mortgages
    remain low. The exception is subprime mortgages with variable
    interest rates for which delinquency rates have increased
    appreciably.
        The labor market is expected to stay healthy. And real
    incomes should continue to rise, although the pace of
    employment gains may be slower than those to which we have
    become accustomed in recent years.
        In part, slower average job growth may simply reflect a
    moderation in economic activity. Also, the impending retirement
    of the leading edge of the baby boom generation, and an
    apparent leveling out of women's participation in the
    workforce, which had risen for several decades, will likely
    restrain the growth of the labor force in coming years.
        With fewer job seekers entering the labor force, the rate
    of job creation associated with the maintenance of stable
    conditions in the labor market will decline.
        All told, consumer expenditures appear likely to expand
    solidly in coming quarters, albeit a little less rapidly than
    the growth in personal incomes if, as we expect, households
    respond to the slow pace of home equity appreciation by saving
    more out of current income.
        The business sector remains in excellent financial
    condition with strong growth in profits, liquid balance sheets,
    and corporate leverage near historical lows. Last year, those
    factors helped support continued advances in business capital
    expenditures.
        Notably, investment in high tech equipment rose 9 percent
    in 2006. And spending on nonresidential structures such as
    office buildings, factories, and retail space increased rapidly
    through much of the year after several years of weakness.
        Growth in business spending slowed toward the end of last
    year, reflecting mainly a deceleration of spending on business
    structures, a drop in outlays in the transportation sector
    where spending is notably volatile, and some weakness in
    purchases of equipment related to construction and motor
    vehicle manufacturing.
        Over the coming year, capital spending is poised to expand
    at a moderate pace, supported by steady gains in business
    output and favorable financial conditions. Inventory levels in
    some sectors, most notably in motor vehicle dealers and in some
    construction-related manufacturing industries, rose over the
    course of last year leading some firms to cut production to
    better align inventories with sales. Remaining imbalances may
    continue to impose modest restraints on industrial production
    during the early part of this year.
        Outside the United States, economic activity in our major
    trading partners has continued to grow briskly. The strength of
    demand abroad helped spur a robust expansion in U.S. real
    exports, which grew about 9 percent last year. The pattern of
    real U.S. imports was somewhat uneven partly because of
    fluctuations in oil imports over the course of the year. On
    balance, import growth slowed in 2006 to 3 percent.
        Economic growth abroad should further support steady growth
    in U.S. exports this year. Despite the improvements in trade
    performance, the U.S. current account deficit remains large,
    averaging about 6\1/2\ percent of nominal GDP during the first
    three quarters of 2006.
        Overall, the U.S. economy seems likely to expand at a
    moderate pace this year and next with growth strengthening
    somewhat as the drag from housing diminishes.
        Such an outlook is reflected in the projections that the
    members of the Board of Governors and presidents of the Reserve
    Banks made around the time of the FOMC meeting late last month.
    The central tendency of those forecasts--which are based on
    information available at that time and on the assumption of
    appropriate monetary policy--is for real GDP to increase about
    2\1/2\ to 3 percent in 2007, and about two- or three-quarters
    to 3 percent in 2008.
        The projection for GDP growth in 2007 is slightly lower
    than our projection last July. This difference partly reflects
    an expectation of somewhat greater weakness in residential
    construction during the first part of this year than we
    anticipated last summer.
        The civilian unemployment rate is expected to finish both
    2007 and 2008 around 4\1/2\ to 4\3/4\ percent.
        The risks to this outlook are significant. To the downside,
    the ultimate extent of the housing market correction is
    difficult to forecast and may prove greater than we anticipate.
        Similarly, spillover effects from the developments in the
    housing market onto consumer spending and employment and
    housing related industries may be more pronounced than
    expected.
        To the upside, output may expand more quickly than expected
    if consumer spending continues to increase at the brisk pace
    seen in the second half of 2006.
        I turn now to the inflation situation. As I noted earlier,
    there are some indications that inflation pressures are
    beginning to diminish. The monthly data are noisy, however, and
    it will consequently be some time before we can be confident
    that underlying inflation is moderating as anticipated.
        Recent declines in overall inflation have primarily
    reflected lower prices for crude oil, which have fed through to
    the prices of gasoline, heating oil and other energy products
    used by consumers.
        After moving higher in the first half of 2006, core
    consumer price inflation has also edged lower recently
    reflecting a relatively broad-based deceleration in the prices
    of core goods. That deceleration is probably also due, to some
    extent, to lower energy prices, which have reduced costs of
    production, and thereby lessened one source of pressure on the
    prices of final goods and services.
        The ebbing of core inflation has likely been promoted as
    well by the stability of inflation expectations.
        A waning of the temporary factors that boosted inflation in
    recent years will probably help foster a continued edging down
    of core inflation.
        In particular, futures quotes imply that oil prices are
    expected to remain well below last year's peak.
        If actual prices follow the path currently indicated by
    futures prices, inflation pressures would be reduced further as
    the benefits of the decline in oil prices from last year's high
    levels are passed through to a broader range of core goods and
    services.
        Nonfuel import prices may also put less pressure on core
    inflation particularly if price increases for some other
    commodities, such as metals, slow from last year's rapid rates.
    But as we have been reminded only too well in recent years, the
    prices of oil and other commodities are notoriously difficult
    to predict. And they remain a key source of uncertainty in the
    inflation outlook.
        The contribution from rents and shelter costs should also
    fall back following a step up last year. The faster pace of
    rent increases last year may have been attributable in part to
    the reduced affordability of owner-occupied housing which led
    to a greater demand for rental housing. Rents should rise
    somewhat less quickly this year and next reflecting recovering
    demand for owner-occupied housing as well as increases in the
    supply rental units. But the extent and pace that of that
    adjustment is not yet clear.
        Upward pressure on inflation could materialize if final
    demand were to exceed the underlying productive capacity of the
    economy for a sustained period. The rate of resource
    utilization is high, as can be seen in rates of capacity
    utilization above their long term average, and most evidently,
    in the tightness of the labor market.
        Indeed anecdotal reports suggest that businesses are having
    difficulty recruiting well-qualified workers in certain
    occupations. Measures of labor compensation--though still
    growing at a moderate pace--have shown some signs of
    acceleration over the last year, likely, in part, as the result
    of tight labor market conditions.
        The implications for inflation of faster growth in nominal
    labor compensation depend on several factors. Increases in
    compensation might be offset by higher labor productivity or
    absorbed by a narrowing of firm's profit margins rather than
    passed on to consumers in the form of higher prices. In these
    circumstances, gains in nominal compensation would translate
    into gains in real compensation as well. Underlying
    productivity trends appear favorable. And the markup of prices
    over unit labor costs is high by historical standards, so such
    an outcome is certainly possible.
        Moreover, if activity expands over the next year or so at
    the moderate pace anticipated by the FOMC, pressures in both
    labor and product markets should ease modestly. That said, the
    possibility remains that tightness in product markets could
    allow firms to pass higher labor costs through to prices,
    adding to inflation and effectively nullifying the purchasing
    power of at least some portion of the increase in labor
    compensation. Thus, the high level of resource utilization
    remains an important upside risk to continued progress on
    inflation.
        Another significant factor influencing medium term trends
    in inflation is the public's expectations of inflation. These
    expectations have an important bearing on whether transitory
    influences on prices, such as those created by changes in
    energy costs, become embedded in wage and price decisions, and
    so leave a lasting imprint on the rate of inflation.
        It is encouraging that inflation expectations appear to
    have remained contained. The projections of the members of the
    Board of Governors and the presidents of the Federal Reserve
    Banks are for inflation to continue to ebb over this year and
    next. In particular, the central tendency of those forecasts is
    for core inflation--as measured by the price index for personal
    consumption expenditures excluding food and energy--to be 2 to
    2\1/4\ percent this year and to edge lower to 1\3/4\ to 2
    percent next year. But as I noted earlier, the FMOC has
    continued to view the risk that inflation will not moderate as
    expected as the predominant policy concern.
        Monetary policy affects spending and inflation with long
    and variable lags. Consequently, policy decisions must be based
    on an assessment of medium term economic prospects. At the same
    time, because economic forecasting is an uncertain enterprise,
    policy makers must be prepared to respond flexibly to
    developments in the economy when those developments lead to a
    reassessment of the outlook.
        The dependence of monetary policy actions on a broad range
    of incoming information complicates the public's attempts to
    understand and anticipate policy decisions. Clear communication
    by the central bank about the economic outlook, the risk to
    that outlook, and its monetary policy strategy, can help the
    public to understand the rationale behind policy decisions and
    to anticipate better the central bank's reaction to new
    information. This understanding should, in turn, enhance the
    effectiveness of policy and lead to improved economic outcomes.
        By reducing uncertainty, central bank transparency may also
    help anchor the public's longer term expectations of inflation.
    Much experience has shown that well-anchored inflation
    expectations help to stabilize inflation and promote maximum
    sustainable economic growth.
        Good communication by the central bank is also vital for
    ensuring appropriate accountability for its policy actions, the
    full effects of which can be observed only after a lengthy
    period.
        A transparent policy process improves accountability by
    clarifying how a central bank expects to attain its policy
    objectives and by ensuring that policies are conducted in a
    manner that can seen to be consistent with achieving those
    objectives.
        Over the past decade or so, the Federal Reserve has
    significantly improved its methods of communication, but
    further progress is possible. As you know, the FOMC last year
    established a subcommittee to help the full committee evaluate
    the next steps in this continuing process. Our discussions are
    directed at examining all aspects of our communications and
    have been deliberate and thorough. These discussions are
    continuing and no decisions have been reached. My colleagues
    and I remain firmly committed to an open and transparent
    monetary policy process that enhances our ability to achieve
    our dual objectives of stable prices and maximum sustainable
    employment.
        I will keep members of this committee apprised of
    developments as our deliberations move forward. I look forward
    to continuing to work closely with the members of this
    committee and your colleagues in the Senate and the House on
    the important issues pertaining to monetary policy and the
    other responsibilities with which the Congress has charged the
    Federal Reserve. Thank you. I would be happy to take questions.
        [The prepared statement of Chairman Bernanke can be found
    on page 71 of the appendix.]
        The Chairman. Thank you, Mr. Chairman. I have to say that
    when you say you would be happy to take questions, you were
    somewhat more persuasive than when your predecessor used to say
    that.
        And I will apologize in advance to the media, because you
    have, I think, over the past months in particular, said some
    very reasonable things from my standpoint, so I have less to
    complain about than they might have hoped, I am sure, in Karl
    Rove's eyes, so they should not lose heart.
        I particularly want to begin by thanking you for the very
    appropriately nuanced discussion of wages. It has troubled me
    for some time, and particularly when I read some of the
    financial pages, that there is a good news, bad news story. The
    good news is that profits are up; the bad news is that wages
    are up. And wages are too often written about as if they were
    simply a constraint on prosperity.
        I particularly appreciate on page 7 of your testimony where
    you note that an increase in wages, certainly to the level of
    productivity, should not be a problem, and that in general,
    there is nothing automatic about a rise in wages leading to
    inflation.
        It depends on the impact on prices. And in that context, I
    especially welcome your noting that not only the underlying
    productivity trends appear favorable--and this is in your
    discussion of wages and inflation. Underlying productivity
    trends appear favorable and the markup of prices over unit
    labor costs is high by historical standards.
        I hope this is widely noted, your statement that, in fact,
    it would not appear to be wage driven pressure to raise prices,
    because as you note, the markup of prices over cost in this
    regard is high by historical standards.
        I would add you did not cover that, it was not in your
    topic, that there has also been a reduction in the tax burden.
    So we ought to be clear that this simplistic notion that if
    wages go up, that is going to cause inflation, is not the case,
    and that, in fact, there is, as you say, and I appreciate this,
    some reason, some room for legitimate wage increases to be
    absorbed without that being inflationary.
        Now, there is, however, some bias still in the way we talk
    about things. And I did note that there was great relief that
    you apparently indicated yesterday that it is unlikely that you
    will be presiding over increases in interest rates in the
    future. But as I read your report, it seems to me that frankly,
    the question ought to be whether or not there are decreases. In
    the Monetary Policy Report, on the first page of your--let me
    read two statements: ``On balance growth of real Gross Domestic
    Product appears likely to run slightly below that of the
    economy's potential over the next few quarters, and then to
    rise to a pace around that of the long run trend.''
        Next paragraph. ``Regarding inflation increases in core
    consumer prices are expected to moderate on balance over the
    next 2 years.'' In other words, the prediction is, economic
    growth below the economy's potential for a while, and then
    reaching potential but not going above it.
        Similarly, ``inflation is going to moderate an economy
    performing somewhat'', not enormously, but ``somewhat below
    potential tending towards potential and inflation that is
    expected to moderate.'' I suppose that would be an argument for
    balance if nothing changes. But I don't see how we get a
    concern of inflation as the major concern here.
        And as you say, well, but you're still worried more about
    inflation and the sense is, stop him before he raises again,
    but no likelihood of a drop.
        I don't understand why this shouldn't make it at least as
    likely as a drop. Again, we have an economy that is running
    below potential and we have moderating inflation. Why is that
    not at least an equal chance for there to be a reduction in the
    time ahead?
        Mr. Bernanke. Mr. Chairman, first of all, policy is going
    to respond to new information. We are going to be continually
    reassessing our outlook and responding appropriately as we see
    the economy evolving. Policy also has to respond to risks.
    There are risks in both directions. On the real side, I talked
    about housing as a downside risk, but there is also some upside
    risk.
        We have seen very strong consumer spending numbers. We have
    seen some strong income growth which suggests that the economy
    may be stronger than we think. It is possible. And in a sense,
    aggregate spending may exceed our capacity and put pressure on
    product markets, and that would be a concern.
        The other issue is on inflation. We have had a period where
    inflation has been above where we would like to see it as far
    as consistency with price stability is concerned.
        In order for this expansion to continue in a sustainable
    way, inflation needs to be well-controlled. If inflation
    becomes higher for some reason, then the Federal Reserve would
    have to respond to that by raising interest rates. That would
    not contribute to the continued--
        The Chairman. I understand that, Mr. Chairman, but you
    know, I am a little puzzled--you tell me that your report says
    production below potential rising to potential. But then you
    say, well, you think it might be more than you think. I mean,
    if you think it might be more than you think, why didn't you
    think it? It does seem to be a little odd for you to say that
    here is what I think, but I also think it might be worse than I
    think.
        That is literally double-think.
        And what particularly concerns me, I read those two
    sentences, production now below potential, and prediction only
    to get to potential not above it, and inflation moderating, and
    I don't see how that computes with, as I noted earlier, the
    FOMC has continued to view the risk that inflation will not be
    moderated as the predominant policy concern.
        I can understand it being a concern. I don't understand
    how, given this, it outweighs the other.
        And let me say in that regard, and I more or less stick to
    time limits, I appreciate your discussion about transparency
    on--and your discussing this. And I do want to--let me point--
    there he is.
        When I came to Congress, in 1981, the open market committee
    was, from the standpoint of publicity, the closed market
    committee because it did not even announce on the day of the
    vote what the vote was. And that gentleman up there, Mr.
    Gonzalez of Texas, crusaded, I think, effectively and
    appropriately, for some transparency. We have much more.
        Here is my concern. When you talk about changing the way
    you communicate uncertainty, here is the problem. It is easier
    for you to be certain about what you want the interest rate to
    be than about what you want employment to be, because you have
    more control of one than the other. I admire the desire for
    more transparency. I express my concern that procedure and
    substance may intermix here and that the argument for greater
    certainty can become--and you say we have the two objectives,
    stable employment--stable prices and employment.
        But one of those might--I appreciate the fact that you have
    two children and you love them both. But I am afraid that one
    of them might get a little bit more for Hanukkah than the other
    if we are not careful. So I do want to ask that we be kept
    involved in this process.
        But I also want to reiterate from the standpoint of what I
    talked about before from the social health of this country--and
    I will close. I know there are people saying that the economy
    is very good. Let me be partisan for a minute. I say to my
    Republican friends, keep telling the American people how good
    the economy is, because the disparity between what you tell
    them is happening and what they feel themselves makes them even
    angrier.
        But if inflation is the predominant concern, given your own
    statements, it seems to me that you have made an argument that
    it ought to be at least balanced; that is troubling to me.
        Mr. Bachus. Thank you. Chairman Bernanke, the chairman
    mentioned the economy and our different perspectives and our
    viewpoints. The chairman and others have said that all these
    7.5 million new jobs that have been created are all low-income
    workers. They are not higher paying jobs. I notice that the
    Bureau of Labor statistics job data that was released just
    yesterday indicates that job creation was roughly distributed
    across the income spectrum.
        Can you tell me why there is a perspective and whether it
    is true that this viewpoint that all these new jobs are low
    income, when I say that the recovery is benefiting the middle
    class and the creating higher paying jobs?
        Mr. Bernanke. Well, in terms of the distribution of jobs,
    as I mentioned in my testimony, there is an enormous demand for
    highly skilled workers and of high-paying jobs. And the
    constraints on the highest paying jobs, for example in
    manufacturing, is not the demand but the supply. Firms can't
    find workers of sufficient qualifications in many different
    areas. So there certainly has been job creation at the high
    level as well as throughout the distribution of wages.
        Mr. Bachus. So the economy is, in fact, creating so many
    highly paid, skilled jobs that there simply is not the
    workforce to fill those jobs?
        Mr. Bernanke. As I have indicated recently, I think one of
    the major constraints in our economy and one of the sources of
    concern about equality and inequality has to do with
    educational differentials. And the more that we can help people
    acquire sufficient skills so that they can be eligible for
    those high-paying jobs, the better off we are going to be.
        Mr. Bachus. Thank you.
        The chairman said he was more pleased with you than he has
    been in the past. And I am sure that he read the same article I
    read in The American Banker, where it was titled that you had
    endorsed the GSE housing fund--that the affordable housing fund
    that the chairman put forward.
        When I saw your testimony I didn't see that in it at all.
    But let me ask you this question. There is a philosophical
    debate going on in this committee about the creation of these
    funds, government control, government mandate, government-
    directed funds. There really are two of them. One that has
    gotten all the publicity is the affordable housing fund, to
    which the GSE's will be required to pay a portion of their
    revenue.
        And members of this committee, at least Republican members,
    we see this as an added cost to low- and middle-income
    homeowners. Now, I think across the--I will call this the
    divide, across the divide, there is an agreement that the GSE's
    could do a better job on their affordable housing mission. But
    we are very skeptical that if you take money that is designated
    to provide liquidity for people to buy homes, you either
    increase the cost of that home, of that home mortgage, or the
    availability of that home mortgage, and we think there is a
    better way than a government-dictated plan. Clearer maybe than
    that is the other proposal that has achieved almost no
    publicity, and we had a spirited debate in this committee 2
    days ago, is that my Democratic colleagues are endorsing an
    insurance company's funding of a community reinvestment fund.
    Massachusetts created such a fund in 1998 where insurance
    companies are directed to pay a part of their income into a
    fund which the, I guess the State of Massachusetts, directs
    into affordable housing or community investment projects.
        And we debated that because we Republicans felt that when
    we pay our premiums to an insurance company, we want that money
    to be invested at the highest possible return so that claims
    can be paid. We feel like the proper role of an insurance
    company is not to take our money, an insured's money, and
    invest it in some community's project, we feel that the proper
    role for them is to pay claims.
        So I just ask you, first of all, would you clarify your
    remarks over in the Senate, or is there any clarification
    needed, and do you have any unease over the creation of more
    government funds of this nature, and the cost on American
    homeowners or any of us who pay premiums to insurance
    companies?
        Mr. Bernanke. Congressman, the story was misreported, and
    you misunderstand my position. I did not address the affordable
    housing fund, either pro or con. The concern that the Federal
    Reserve has had for a long time about GSE's is the potential
    for their portfolios to create systemic risk in our financial
    system. I should say that we very much support the GSE's
    housing mission, and we believe, in particular, that the
    securitization function contributes to liquidity in the
    mortgage market. Again, our concern is about the portfolios and
    their enormous size and the complex derivative exercises that
    are needed to maintain the balance of those portfolios.
        My comment was one that built on suggestions that Chairman
    Greenspan had made in previous testimonies, which was that one
    way to limit the growth of the portfolios, but also to achieve
    the stated public purpose of the GSE's was, in some way, to
    anchor the portfolios in the public purpose, which is
    affordable housing.
        According to OFHEO, only about 30 percent of the portfolios
    are related in any way to affordable housing. So I think what I
    would like to see would be the portfolios to be more directly
    connected to a public purpose, perhaps holding affordable
    housing mortgages or another way, more directly promoting
    affordable housing rather than acquiring all different kinds of
    assets that are not related to affordable housing.
        Mr. Bachus. Thank you.
        The Chairman. The gentleman from Pennsylvania.
        Mr. Kanjorski. Mr. Chairman, welcome to the committee. It
    is fascinating to listen to the discussion, and obviously long-
    ranging, but I have a few questions in regard to the emphasis
    in the public press over the last several months on executive
    salaries and what the appropriate response would be to them.
        First of all, I would like your opinion as to how they rate
    on that scale of fair or unfair--whether or not they should be
    subjected to oversight, and if subjected to oversight, should
    they be subjected to some curative action by the Congress? In
    particular, we are looking at the U.K.'s shareholders' rights
    approach and their ability to give advisory opinions on
    executive packages.
        If you can summarize, in some way, your views and what the
    effect of that would be, positively or negatively on the market
    and the economy, it would be most appreciated.
        Mr. Bernanke. Thank you. I think it is very important for
    shareholders to be aware of compensation packages that CEO's
    are receiving. So if they are displeased, they can register
    that displeasure through the directors or through selling
    stock. So I strongly support disclosure efforts. The Securities
    and Exchange Commission recently built on the efforts of the
    exchanges, the NYSE, for example, in requiring more extensive
    disclosure of compensation packages on details. I think that is
    a very important step in the direction of making sure that
    shareholders have full information so they can make appropriate
    decisions about whether these packages are in the interest of
    the company or not.
        Mr. Kanjorski. Do you have any opinion as to the United
    Kingdom's approach of actually enacting advisory opinions
    expressed by shareholders and whether or not that has had any
    positive effect on the reduction of some of these packages and/
    or other shareholders rights, litigation, and other things that
    may have been modified? When you look at the numbers, the U.K.
    is significantly lower than the American market. We are
    wondering whether that is something that has been reviewed by
    the Federal Reserve?
        Mr. Bernanke. In general, the CEO salaries are lower in
    Europe than the United States, and, to some extent, it is a
    puzzle why that is the case. I think there are a lot of reasons
    for it. But certainly, one thing we want to be sure we are
    doing is ensuring good disclosure and good oversight.
        I don't really have an opinion on the advisory council. I
    think we should be sure that the compensation decisions are
    being made in a disinterested independent way, and that the
    directors who are involved in compensation are independent, and
    not subject to the influence of the management.
        Mr. Kanjorski. Very good. If you rate on a scale of what is
    economically fearful in our society today, particularly the
    domestic economy, what would be the greatest fear that you
    have?
        Mr. Bernanke. There is a set of issues that are
    interconnected, having to do with savings and deficits and
    current account and so on. We are a low-saving society in
    general, and we are facing a demographic transition which will
    mean that a much larger share of our population is of
    retirement age or outside the workforce. That is going to pose
    enormous challenges to our fiscal budget. It is also going to
    pose enormous challenges to our economy as a whole, because
    with fewer workers, we need to have more capital, more savings,
    and more preparation for the economy to be able to absorb a
    larger number of retired workers. Related to that, of course,
    is the increase in medical care costs which also puts pressure
    on fiscal policy.
        So the fiscal issues in the low savings rates, which also
    contribute to the current account deficit, I think are at the
    center of the issues we should be concerned about. We really
    need to address our savings issues and the implications of the
    demographic transition that we are seeing not very far in the
    future.
        Mr. Kanjorski. What role should Congress or the government
    play in that?
        Mr. Bernanke. The government needs to address both the
    fiscal implications of aging--certainly a part of that is the
    cost of medical care, which is a big part of the economic cost
    of aging--and also of the fiscal burden. And to the extent that
    outside of the fiscal arena we can find ways to encourage
    savings more broadly, and asset-building, I think that would be
    very constructive.
        Mr. Kanjorski. So you see a very positive role for
    government to play?
        Mr. Bernanke. Good policies would certainly be helpful,
    yes.
        The Chairman. The Chair wants to announce, in recognizing
    members, that the two parties follow different patterns, and
    the Chair is accepting the ranking member's suggestions. So you
    may notice some disparity. We go by seniority; they go by, I
    guess, when members arrive.
        I want to explain that part because a recent analysis of
    what I am thinking made a great deal of the fact that a certain
    witness will be testifying tomorrow, and the witness is the
    choice of the gentleman from Texas. So I realize that people
    may not be fully aware of what we are doing.
        Next on the list is the gentleman from Louisiana.
        Mr. Baker. I thank the chairman.
        Chairman Bernanke, following up in some measure on the
    course relative to problems of significance going forward,
    there are undoubtedly negative effects of the inversion in the
    workforce, where we have more people retired, and less people
    working.
        At the same time, though, there has been an offsetting
    growth that has been, frankly, surprising to me at the number
    of investors in equities over the last 2 decades. I was
    particularly struck by the fact, according to the mutual fund
    industry, that in households with aggregate annual incomes of
    less than $35,000, 31 percent hold mutual fund holdings. What
    it triggers for me is an understanding by working families that
    for their long-term financial security, they need to be
    invested in the markets.
        Now, we can debate whether it is index investing, whether
    or not actively managed is good or not. The bottom line is, if
    you are going to do something beyond your earnings from salary,
    investing in overall economic growth is a very sound policy,
    particularly for the younger and newer entries into the
    workforce.
        There are now issues, I believe, in international
    competitiveness that are overhangs that cause concern, whether
    it be potential for class action litigation, whether it is the
    wage--excuse me, the tax rates here as contrasted with those in
    Europe, and there seems to be certainly an outflow of
    manufacturing-type employment to other countries, leaving us
    with a more technology-based economy going forward.
        Having said all of that, it seems that with the percentage
    of Federal spending in 1956 at--20 percent of Federal spending
    was on Social Security and related entitlements; today we see
    that crossing over 60 percent. Given your comment and concern
    as to the biggest problem facing us, how do we provide for
    retirement security for working families?
        It seems most Americans have figured that out; they need to
    be in the markets. Isn't it time for this Congress to really
    seriously consider voluntary, not saying mandated requirement,
    but voluntary flexibility and directing your Social Security or
    retirement savings into market-invested, market-based
    investments? It would seem to me that the sooner we get out or
    away from these enormous entitlement obligations with the
    inversion in the workforce and the expectations of most people
    to retire at age 65, that there isn't a way out of this morass
    without allowing people to share in the overall economic
    prosperity of this Nation through some sort of equities
    investment.
        If we don't do that, what is the solution to the retirement
    problem we face?
        Mr. Bernanke. I think it is very valuable for people to
    have the opportunity to own an account, to have some exposure
    to investment even if it is in index funds which you point out,
    so that people have the pride of knowing that they are
    providing for their own retirement. So I think it is a very
    good idea to encourage people to begin to build wealth, and to
    begin to hold assets.
        As you know, the Social Security aspect of this is a very
    complex debate. The diverting of funds the way you describe has
    some of the benefits of giving people the opportunity to have
    control over their own accounts, but it also doesn't really
    directly address the long-term imbalance on the fiscal side of
    the spending and revenues of the Social Security system.
        Another approach, which is related and might work better
    without addressing the Social Security concern directly would
    be to have add-on accounts where people would have the option
    to put in additional moneys that could be invested in--
        Mr. Baker. If I may before my time expires, just as a quick
    follow-up, the rate of return, though, on the Social Security
    investment is currently so low that if you were to divert any
    portion of that into an active investment account, the yield
    would be so much greater than what you currently earn--and I
    know of your concern that current earnings are paying current
    retirees' benefits. I believe with the proper managed
    investment account over time, you could pay those current
    retirees' benefits and still have a yield sufficient left as a
    net margin that would beat the current rate of return for a
    Social Security recipient. In essence, we can accomplish both
    goals with a very carefully managed investment.
        Mr. Bernanke. I understand that position has been espoused.
    I think just one concern is that the historical outperformance
    of equities relative to bonds may reflect to some extent the
    higher riskiness of stocks. To some extent it is a risk
    premium, and you know--
        Mr. Baker. But there has never been a 10-year period when
    the market didn't beat Social Security.
        The Chairman. It is a very deep issue about why equities
    have performed better than bonds. But if you look at stock
    markets in czarist Russia, they wouldn't look so good today.
    The United States has been very successful. We have had a
    growing economy. We have succeeded in escaping the Depression
    and World War II and so on. So in that respect our stock market
    may not be representative of the world's equities in some
    sense.
        It is a very difficult question. I would only make the
    point that you cannot assume that equities will pay the high
    rate of return in the future that they have in the past. There
    certainly is some risk to that.
        The gentlewoman from California.
        Ms. Waters. Thank you very much, Mr. Chairman. I would like
    to thank Chairman Bernanke for being here this morning.
        It is always good to have you before this committee
    discussing the important economic issues of the day. I worked
    to prepare a statement last evening, but I have decided not to
    read that statement because my staff just gave me this morning,
    remarks by Chairman Ben S. Bernanke on the level and
    distribution of economic well-being.
        I just read it. I am extremely moved by your remarks, and I
    do think that you have taken a rather complicated issue and
    helped to remove it from simply a discussion of you either have
    education or you don't, you either are going to make it, pull
    yourself up by your bootstraps, kind of the government has no
    responsibility for that.
        It is not that simple. And you talk about opportunity and
    ensuring a fairness and opportunity, but not guaranteeing any
    outcomes, and you talk about the responsibility of the
    individual, but in this discussion it was quite expansive.
        I watched the closing of a Goodyear plant in Los Angeles
    when I first ran for office, and I saw people who had worked at
    that plant for 20, or 25 years who paid taxes, sent their kids
    to school, and had mortgages, suddenly out of a job, and I
    watched men go to the bar across the street from the plant for
    the next 5 or 6 years and just drink themselves into oblivion--
    not being retrained, unable to get jobs because of their age,
    etc. You kind of allude to that.
        You also talk about the importance not only of formal
    education, K through 12, but also the other opportunities in
    our society for job training, the community colleges. You even
    allude to and talk a little bit about preschool, and of course,
    I am from Head Start. Having taught and worked in Head Start, I
    think that is extremely important, building self-esteem and
    certain kinds of values at an early age.
        But I would like to hear you talk a little bit more about
    policy implications. Aside from that which you alluded to, you
    know, education through job training, etc., do you think there
    is room for perhaps tax incentives to corporations and
    businesses that do on-the-job training to make sure that people
    are trained for real jobs that are sustainable?
        I would like to hear a little bit more about what you think
    we could do with public policy to close this growing income and
    wage gap. You discussed the superstars and CEO's and
    globalization and trade and all of that, and the bottom line
    is, there is this growing wage and income gap. What other
    policy possibilities can you share with us for helping to close
    this gap?
        Mr. Bernanke. Thank you for taking the time to read my
    speech. I know it wasn't a short set of remarks.
        The broad point I am trying to make in those remarks is
    that I believe that technology and trade, which are
    tremendously important forces for American economic growth,
    unfortunately have the side effect that they sometimes cause
    dislocations, like the one you were just describing, and I
    think it is very important that we not respond to those
    dislocations by saying, ``Well, we are going to stop trade, we
    are going to stop technological improvement.'' That is really
    doing more harm than good, I think.
        So then the logical consequence is, if we want to protect
    people and help them deal with these dislocations, and we don't
    want to stop the processes that generate growth in our economy,
    we have to find other ways to help people adjust and adapt. And
    I talked about a number of general approaches in my remarks.
        I do sincerely believe that what you know and what you can
    do is critical, that training--not just K-12 education, but all
    kinds of training--community colleges, junior colleges, online
    courses, training on the job--all those things are critical to
    getting people the skills they need so they will be in demand
    and be able to find good work when changes in the global
    economy mean that their Goodyear plant has shut down.
        I also indicated in my remarks that we could perhaps reduce
    some of the anxiety about job loss if we didn't tie all
    benefits so directly to employment. So, for example, I think it
    is an issue that healthcare is so directly tied to employment.
        Ms. Waters. Portability of healthcare?
        Mr. Bernanke. Portability of health insurance would be, I
    think, a positive development. It would reduce the anxiety that
    people face when they worry about their jobs, and indeed, some
    of the anxiety which I hear a great deal about may be less what
    has actually happened than what people fear may happen. It is
    the insecurity rather than the actual outcome so far that
    people are worried about. So I think there are, you know, a
    number of general things we should try to do.
        Now, one thing I also said in my remarks is that solving
    this problem is very, very difficult. How exactly we can make
    sure that training programs work effectively instead of just
    wasting money is very difficult. Finding the best way to make
    health insurance portable; there are lots of ways to approach
    it, but it is difficult.
        So I turn it back to you, unfortunately. I think the
    Congress is going to have to think hard about the best ways to
    address these things, but they need to think about them.
        Ms. Waters. Mr. Chairman, I would like to ask unanimous
    consent to submit these remarks for the record.
        The Chairman. Without objection.
        The gentleman from Texas, Mr. Paul.
        Dr. Paul. Thank you, Mr. Chairman.
        I would like to pursue the issue of the current account
    deficit. It seems like almost all economists express concern,
    some worry about it, but I can't find anybody who tells us that
    we should totally ignore it. And we do now borrow approximately
    $800 billion every year. We have a foreign debt of several
    trillions of dollars, and to me it represents an imbalance
    which is the consequence of the monetary system and presents a
    potential problem for us. Likewise, I see that potential
    problem in the number of derivatives out there. There is one
    figure that says there are $236 trillion of derivatives, and it
    seems like very few people understand exactly what that means,
    and it certainly is so huge and diverse. I don't even think the
    Congress that we have that is always anxious to regulate
    everything has offered a scheme for regulating derivatives
    because, quite frankly, I don't think they are capable of doing
    that.
        Foreigners now own 43 percent of our debt, approximately
    twice as much as the Fed has been required to borrow. And one
    of the questions I have is how much pressure would it put on
    you if--I guess in even a theoretical sense, what if they
    didn't buy any of our debt, and all of a sudden you had to deal
    with that problem? Right now, there is a sign that maybe they
    are buying less. We have heard rumors and innuendos in the
    media and hints from China that, yes, they are not going to be
    buying as much, and yet there hasn't been really a crisis.
    There has been no panic, and we know there is self-interest on
    their part to maintain the dollar because they hold so many.
        But in many ways I think we get a free ride. We get to
    export our dollars. We don't have to monetize them here. We get
    to export our inflation, but it potentially has a problem for
    us if all of a sudden they buy less, and these dollars come
    home or these dollars go into goods and services.
        Also the other concern that I have that I would like you to
    address is the subject of the revaluation of the yuan. I
    understand you and Secretary Paulson went over to China to put
    pressure--at least the media presented it that way--put
    pressure on them to increase the value of the yuan and decrease
    the value of the dollar in relationship, which in reality, it
    seems to me, would put pressure on our interest rates and push
    our interest rates up and raise our prices. And some people
    have reported that couldn't possibly be our policy where we
    would deliberately want to do that. And then again, it would
    put more pressure on--I know it is an artificial arrangement
    right now.
        But in some ways what the Chinese have done is they have
    revived the old Bretton Woods standard of fixing their currency
    to our dollar, and some people look longingly to the Bretton
    Woods days where we worked with fixed exchange rates. Of
    course, there were different conditions then.
        But if you would, if you would address both what our
    position is with the Chinese yuan as well as what happens if
    they significantly--if the foreigners, especially Japan and
    China, start to buy a lot fewer dollars and how that would
    affect your policy.
        Mr. Bernanke. Thank you. You are correct that we are to
    some extent dependent on capital inflows to support the trade
    and current account deficits we currently have. The current
    demand for U.S. assets from abroad both from public and private
    sources remains strong, so there doesn't seem to be any
    immediate concern that will not continue. However, there is a
    risk sometime in the future that there would be less demand for
    dollar assets, and that could cause some movements in currency
    and bond markets that might be disruptive. And for that reason
    I have advocated, as many others in Congress have, that we have
    tried gradually to move our current account deficit down to a
    more sustainable level.
        The way to do that essentially, it is a very complex
    subject, but essentially the current account deficit arises
    because of asymmetries in the saving investment balance here
    and abroad. In the United States we have a decent rate of
    investment, including construction of new homes, but relatively
    low saving rates, and that difference we have to borrow abroad,
    whereas in many other countries in East Asia, and among oil
    producers and the like, they have an excess of saving over
    investment, and they are lending us that difference, and that
    is why the capital flows are moving from abroad to the United
    States.
        The way to adjust that, over time, is to create a better
    balance of savings and investment both in the United States,
    which would be through primarily greater saving, but also
    abroad by creating more reliance on domestic demand for growth.
    So, for example, in China there is a long-term plan, which we
    support, to try to reduce the reliance of the economy on
    exports and increase its reliance on domestic consumption,
    thereby reducing their savings rate to a more appropriate
    level, which also increases the living standard of their
    people. So I think with that process we can move gradually
    toward a greater balance.
        With respect to the yuan, I think there are several reasons
    to move towards greater flexibility in the yuan, and I
    described them in a speech I gave in China. First, China is a
    very large country, and it should at some point have an
    independent monetary policy of its own rather than being tied
    to the United States. In order to do that, they have to have a
    flexible currency.
        Secondly, the flexibility of the yuan is needed to
    accomplish this rebalancing from export orientation to domestic
    demand that I was referring to earlier.
        And thirdly, yuan appreciation and flexibility makes some
    contribution to helping us to rebalance the current account
    deficit we currently have, although I think the larger force
    quantitively would be the rebalancing of demand from exports
    towards domestic demand in China.
        The Chairman. The gentlewoman from New York.
        Mrs. Maloney. Thank you, Mr. Chairman.
        And welcome back, Chairman Bernanke. Many of my colleagues
    have been quoting ``American Banker.'' I would like to show you
    ``The Hill.'' There you are on the cover. It says your
    testimony sparked a stock price rally, and the Dow is up 87
    percent, and there is great optimism for our economy, and I
    hope you are right. I hope the stock market is right.
        But regrettably, some of my constituents are not feeling
    optimistic. They feel that the economic expansion has not ended
    up in their take-home pay, and some are very concerned about
    losing their homes, and I share that concern. They are
    concerned about the rising rate of mortgage defaults and home
    foreclosures. In my district employment is high and stable, yet
    I am being told that foreclosures are at rates that are up by
    an order of magnitude--they have jumped up dramatically from
    what they were last year. Some of my colleagues tell me that
    they are experiencing the same thing in their districts around
    the country, and they are being told that homeowners are losing
    their homes in very stable neighborhoods, and some say that
    this is due to various causes such as unemployment. Yet in my
    district and others where employment is high, and in some other
    areas, it is due to the decline in the housing market.
        But many also ask whether certain mortgage products,
    particularly in the subprime market, have contributed to this
    foreclosure crisis or challenge. In particular, many point to
    the so-called 2/28 ARM's, and some have described them--and I
    quote--as an inherent predatory product. And as you have told
    me and others, these 2/28 ARM's are 80 percent of the subprime
    market.
        Recently the Fed wrote back to Senator Dodd, taking the
    position that in its recent guidance on nontraditional
    mortgages, they did not extend to 2/28 for similar projects.
    And since these are what many people think is the problem, my
    question is why is the Fed not addressing the 2/28's and
    issuing guidance for what many people feel is the main problem
    in the foreclosure rates and the loss of homes of many people?
        You eloquently have said many times that homeownership
    leads to participation in our economy and increased wealth for
    Americans, yet if you are losing your home, it is leading you
    to a personal crisis, and if it continues, we will be facing a
    tremendous crisis in our economy and in our districts. And now
    for your comments on whether or not the Fed plans to extend
    guidance to the 2/28 subprime project, products.
        Mr. Bernanke. You are correct, Congresswoman. There has
    been a surge in delinquencies and foreclosures, particularly--
    as I mentioned in my testimony--in subprime lending with
    variable rates, rates that adjust with short-term interest
    rates, and that is a concern to us. We certainly have been
    following it carefully. It is obviously very bad for those who
    borrow under those circumstances, and it is not good for the
    lenders either, who are taking losses.
        We have tried, together with the other banking agencies, to
    address some of these concerns. We recently issued a guidance
    on nontraditional mortgages, which had three major themes. The
    first was that lenders should underwrite properly, that is,
    they should make sure that borrowers had the financial capacity
    to pay even when rates go up, and not simply underwrite based
    on the initial rate but also deal with the possible payment
    shock. Secondly, that lenders should give full disclosure and
    make sure that people understand the terms of the mortgages
    they are getting into. And I would add that the Federal Reserve
    provides a number of documents, booklets, and descriptions that
    are required to be included along with mortgage applications
    for adjustable rate mortgages. And thirdly, and this is more on
    the issue of the lenders rather than the borrowers, that
    lenders should make sure they appropriately risk manage these
    exotic mortgages, which we don't have much experience with, so
    some caution is needed in managing them, as we are now seeing.
    So those, I think, are very good principles, and I think we
    would stand by those principles.
        Now the question has arisen whether the 2/28's, 3/27's are
    covered by this guidance, and I think the answer is yes and no.
    The guidance as written refers to specific types of mortgages,
    including those that have negative amortization, that is, the
    amount owed can actually go up for a period, which is not
    usually the case with 2/28's and 3/27's. So in that respect,
    those types of mortgages were not, you know, literally included
    in that initial guidance.
        We, the Federal Reserve, along with the other banking
    agencies, are currently preparing a clarification to the
    initial guidance which will say that these same principles
    apply also to mortgages of this type that have variable rates,
    and particularly those that are of a subprime nature. But I
    would just say now that I hope that in our guidance, in our
    supervision, that we have conveyed to lenders that those three
    principles, good underwriting, good disclosure, and good risk
    management, are broad, good business principles, and they
    should be applying those to all mortgages they make.
        Mrs. Maloney. My time is up, but, Mr. Chairman, can I just
    ask when will this guidance be up? Because it is very
    important. What is the time frame for my constituents?
        Mr. Bernanke. Very soon, very soon.
        The Chairman. The gentlewoman from Ohio.
        Ms. Pryce. Well, thank you, Mr. Chairman.
        Welcome, Mr. Bernanke. It is great to have you here. I
    would like to actually discuss for a moment the cost of
    healthcare in this country, it is definitely one of the major
    concerns when I talk to business and industry in my district.
    It certainly drives up the cost of doing business in our
    country. Certainly not the only thing, regulation, litigation
    and other factors, but it is more important because it affects
    families everywhere.
        The greatest problem is that people just can't find health
    insurance that they can afford; therefore, they don't get the
    medical treatment that they need. And it occured to me, and
    many others that one of the reasons for this is because there
    is really no consumer factor in healthcare in this country. We
    don't shop for our benefits. We take what our insurance
    companies provide for us.
        Market forces seem to work very well in all other aspects
    of our society. Is this what is wrong with our healthcare
    delivery system, this lack of market force, so to speak? And as
    I am sure you are aware, the President has proposed a very
    ambitious healthcare plan designed to provide enhanced tax
    benefits to individual purchasers, and I assume that is so that
    more people will purchase insurance, more people will shop for
    insurance, and therefore they will pay more attention to their
    healthcare needs, and it would bring healthcare more in line
    with how we make other purchases in this country.
        I just would like to know if you think that would be a good
    way to go, how it might affect international competitiveness,
    and then, of course, your thoughts on portability. I assume you
    made mention in response to Mrs. Maloney, or I guess it was Ms.
    Waters, that pensions and healthcare should be portable, and if
    you have time on my time, would you further your response?
    Thank you.
        Mr. Bernanke. Congresswoman, you are correct in pointing
    out a very serious, serious problem, and I think you are also
    correct that one of the main reasons why healthcare is so
    expensive in the United States has to do with the fact that we
    are always buying it with somebody else's money and not with
    our own money. We have a system where technology is advancing
    rapidly, where our ability to do new and sophisticated tests,
    and provide new and sophisticated drugs, and new procedures is
    advancing rapidly. In most industries, new technologies save
    costs, but not in medicine because of third-party payment, and
    the doctor and the patient are not making a cost-based
    decision. The cost efficiency is not perhaps what it should be.
        Now, one approach to this is to increase market forces in
    the determination of what test to order and what costs and how
    much to shop and so on. There are ways to do that. The health
    saving accounts, for example, create a catastrophic coverage,
    ask for a catastrophic coverage, and ask people to save money
    within this account to buy coverage for medical care below the
    catastrophic level. Some people may be uncomfortable with
    having to make those kinds of decisions, so an alternative is
    to have competition between, say, HSA catastrophic plans and
    other types of medical management, HMO's, PPO's, traditional
    insurance and the like. By creating more competition, I think
    there would be some benefits.
        But, again, it is a complex subject. There are a lot of
    other things we could do. I think we could increase
    transparency in terms of hospitals and doctors letting us know
    what they charge, what their quality is, and improving
    information technology in healthcare, which I think would
    reduce errors and create more consistency across the country.
    We currently have very big differences in the cost of managing
    a certain kind of condition in different parts of the country.
    More uniformity and more best practice would help reduce costs
    as well. So I think markets could have a useful role to help
    reduce, or at least control, the cost.
        Portability is a difficult question. One approach to
    portability is to have insurance companies insure workers
    rather than insure employers, so to speak. That would require
    somehow creating different kinds of pools rather than employer-
    based pools. You need pools in order to share risk, and there
    are some issues associated with that.
        The main alternative would be to give people the ability to
    take their policy from their current employer and then move
    over to another employer with the same policy. These are all
    things we should be looking at, but none of them is a really
    simple problem because in each case we want to make sure that
    people are buying as part of the pool, a risk pool, rather than
    buying on an individual basis where, if they are ill or have a
    preexisting condition, they won't be able to afford insurance.
        Ms. Pryce. Thank you very much.
        The Chairman. The gentleman from North Carolina.
        Mr. Watt. Thank you, Mr. Chairman.
        Welcome, Chairman Bernanke. I am over here. I happen to
    like your predecessor. The problem is I didn't understand a
    thing he ever said. So you are a breath of fresh air in the
    sense that, whether I agree with you or not, at least you are
    speaking in English, and I can understand what you are saying.
    And I especially want to thank you for your response to Ms.
    Waters' question.
        Let me follow up quickly on Mrs. Maloney's question,
    because I am not clear, and I hope you can answer this question
    just with a yes or a no answer. Does the guidance that the
    underwriting--the guidance that you are issuing regarding 2/28
    and 3/27 mortgages require that those mortgages be underwritten
    to the fully indexed rate just like you do with traditional
    mortgages, or does it not?
        Mr. Bernanke. This is a joint guidance. We are still
    working on it with the other banking agencies. We have not yet
    determined that.
        Mr. Watt. But the one that you put out previously, did it
    require--
        Mr. Bernanke. Yes.
        Mr. Watt. So if it were the same, it would require--
        Mr. Bernanke. Same principle, yes.
        Mr. Watt. Okay. The increase in foreclosures is a serious
    problem, and one of the concerns we have is that the Fed has
    never adopted a final rule under its authority under the truth
    and lending act to prohibit practices or acts that it found to
    be unfair or deceptive or designed to evade the purposes of
    HOPA over the entire class of mortgage loans. There has never
    been a real rule on these things, and I think that is one of
    the things that is putting pressure on us to be more aggressive
    in having a Federal predatory lending standard, or at least a
    Federal predatory lending floor.
        I am wondering whether you view that as a problem, and
    maybe I could just get you to discuss with me why the Fed has
    never used that more aggressive, unfair, deceptive trade
    practices language to be more aggressive in this area in
    light--and especially in light of the increasing number of
    foreclosure that we are experiencing.
        Mr. Bernanke. Congressman, we have found that it is very
    difficult to write rules in advance that strike out entire
    practices under all circumstances. We find it is more effective
    to be flexible and work on a case-by-case basis. It is one of
    these things like, ``You know it when you see it.''
        And so what we have done rather than write specific rules,
    is to work with the FDIC to develop a set of principles, and
    there has been much talk lately about principles-based
    regulation. One of the principles on which we are making these
    decisions provides guidance to the banking agencies for
    implementing to take action against unfair and deceptive acts
    and practices, and we believe that set of principles provides
    full authority for not only us, but also the OCC and other
    agencies to take actions to prevent unfair and deceptive acts
    or practices. So, for example, the OCC has recently taken
    substantial action, I think it was a credit card case, based on
    this, and they were not inhibited from taking those actions
    because of any lack of rulemaking. Again, whether an act is
    unfair and deceptive depends often frequently on the context
    and circumstances.
        Mr. Watt. Can I just interrupt you long enough to ask you
    to comment on whether you think we need a Federal predatory
    lending statute?
        Mr. Bernanke. I think good progress has been made in trying
    to understand how to distinguish predatory lending from
    legitimate subprime lending. That is always the challenge. How
    do you define the rules in a way to address predatory lending
    without driving out legitimate subprime lending? And what we
    have seen lately is that a number of States, and your own
    State, North Carolina, has been one of the pioneers there, have
    introduced legislation which have moved the ball forward in
    terms of achieving that objective. And I was very pleased to
    see that because I think the States are good laboratories. They
    can really try out different things, and we can see what works
    and what doesn't work.
        At some point when we understand well enough how to
    distinguish between predatory and legitimate lending, probably
    a Federal standard would be a good idea because it would
    eliminate the many differences across States and make it more
    costly for lenders to lend on a national basis. I don't really
    have a good judgment as to whether the States have reached a
    point where we feel, you know, we are ready to do that, but at
    some point we should really consider--
        Mr. Watt. In the meantime should we be talking about a
    Federal floor as opposed to a preemptive stand?
        Mr. Bernanke. I have no objection at all to your discussing
    those issues. I think the question is making sure that you are
    making a clear distinction between predatory--
        The Chairman. I would ask the gentleman to yield. I just
    want to say, first of all, the question he raises is a very
    important one that is widely--is of great concern to the civil
    rights community. I will say a couple of things, if I could,
    because this is really essential.
        First, the State versus Federal has been complicated by the
    very strong preemptions of State law issued by both the Office
    of the Comptroller of the Currency and the Office of Thrift
    Supervision. So part of the problem we face is that some of
    those State laws that we agree are good ideas don't reach, for
    instance, operating subsidiaries of national banks. So the
    argument for me being at the State level would have been
    stronger if it hadn't been for those preemptions.
        Secondly, with regard to the rule--and the gentleman's
    question is one many feel strongly about. I understand your
    argument that you can still reach these after the fact, but
    some people feel, and I am inclined to agree with them, that
    there might be a greater deterrent effect if there was to be
    some rulemaking. It is one thing to go to people's rescue after
    the fact, but it does seem to be a proliferation here, and that
    is why we think we may need more. But we will be continuing
    this discussion.
        Mr. Watt. I yield back, Mr. Chairman.
        The Chairman. The gentleman from California.
        Mr. Royce. Thank you, Mr. Chairman, and thank you, Chairman
    Bernanke.
        This committee has been debating GSE reform now for some
    time, I think for about 4 years now. Surprisingly, while
    debating reform with Fannie Mae and Freddie Mac, we have not
    heard testimony from the Federal Reserve on this topic, and we
    are going to re-engage in this debate next month, and I was
    wondering if you would be willing to come up and to testify as
    to the Federal Reserve's view on GSE reform. I think it would
    be very helpful for all of us.
        Mr. Bernanke. The Federal Reserve has testified in the
    past, I believe. I believe Chairman Greenspan has testified,
    but if that is not the case--
        Mr. Royce. He has testified as to the subject, but I am
    thinking about the hearings we are going to hold specifically
    on GSE reform. And that was my question as to whether you might
    testify on that.
        Mr. Bernanke. We would be very interested in having our
    perspective heard on this issue.
        Mr. Royce. I hope the committee leadership can accommodate
    you on that.
        I also wanted to say that it is not just New York that has
    grown quite concerned about the disadvantage competitively that
    our capital markets face and the flight of capital. I think all
    over the United States, people are getting worried. We saw the
    Bloomberg-Schumer report, and then the Committee on Capital
    Markets Regulation report that came out, and they have really
    stressed this issue.
        And I also noticed last November, the late Dr. Milton
    Friedman said this, and I would just like to read it quickly.
    He said, ``Sarbanes-Oxley is very unfortunate. It tells every
    entrepreneur in America, don't take risks, that is not what we
    want. The function of the entrepreneur is to take risks, and if
    he is forced not to take risks and spend on accountants rather
    than products, the economy is not going to expand or grow.''
        And then also the same month, Alan Greenspan said that most
    of Sarbanes-Oxley is, ``a cost creator with no benefit I am
    aware.'' And he went on to say that regulatory and statutory,
    statutory changes need to be made as well if we are going to
    move forward. And he concluded with something that I thought
    was rather forceful. He said, ``I hope it happens before the
    whole financial system walks off to London.''
        It seems to me that Dr. Greenspan and others were concerned
    that the regulatory climate will not only deter investment in
    the country, but that it is also going to suppress future
    entrepreneurship and suppress innovation. And I was going to
    ask you because, you know, if they are correct, that could have
    a very harmful effect not only on future U.S. productivity, but
    as a result of that will reduce the potential standard of
    living gains in this country.
        And so, Chairman Bernanke, do you share the concerns of Dr.
    Greenspan and Dr. Friedman on this issue?
        Mr. Bernanke. Let me say this: I think it is very important
    that as we try to achieve the objectives of greater clarity and
    transparency in corporate governance and internal controls and
    so on that we do it at the lowest cost we can, and I think that
    it is a good development that the Public Company Accounting
    Oversight Board along with the SEC has recently promulgated for
    a comment a new audit standard which would be less ``checking
    of the box'' and more focused on the major concerns of the
    company, and also that would take into account the size and
    complexity of the company, so we wouldn't be putting these
    costs on the smaller companies. I think that is an important
    step in the right direction. I would be curious to see how that
    goes.
        More generally, you know, as a regulator, I think it is
    very important that we have to achieve the objectives that
    Congress gives us, and there are some very important ones, but
    we also need to do the best we can to minimize the cost and
    unnecessary burden created by those regulations.
        Mr. Royce. But going back to my question, and quoting
    former Chairman Greenspan again, he spoke to the regulatory
    changes that you spoke to, but he also spoke to statutory
    changes that he thought were necessary. And that very much
    concerns us going forward in terms of whether or not we
    addressed these recommendations made by the Bloomberg-Schumer
    report or made by the Committee on Capital Markets Regulation
    report.
        Mr. Bernanke. We are continuing to monitor the application
    and effectiveness of Sarbanes-Oxley. I am not prepared at this
    point to call for any specific legislation changes. I would
    like to see how the audit standard works.
        Mr. Royce. Well, in the meantime, to paraphrase Dr.
    Greenspan, hopefully it will happen before the financial system
    walks off to London, because as I read the papers every week,
    that egress, that exit, is becoming more and more pronounced,
    and we have an arithmetical increase not just of capital
    flight, but also a resistance of companies coming into the
    public market in the United States. Capital is basically
    avoiding our capital markets with very dire consequences, I
    think, in the long term, to the standard of living here in the
    United States and our competitive position.
        Mr. Chairman, thank you.
        The Chairman. Thank you.
        The gentleman from California.
        Mr. Sherman. I would like to comment first on the
    gentleman--the other gentleman from California, and that is
    that we have in our capital markets kind of a one-size-fits-all
    approach. You are either a private company, or you are so
    public that your statements are so good that if widows and
    orphans want to put 100 percent of their net worth into your
    stock, it is entirely legal to do so. We might want to explore
    some intermediary category where the amount of disclosure does
    not meet full-blown Sarbanes-Oxley on the one hand, and
    investment, while publicly traded, is only among highly
    accredited investors who are investing less than 1 percent of
    their net worth. I think as long as--to be a public company,
    you have to be a company that I want my mother to, legally at
    least, be able to put 100 percent of her net worth in means
    that you are going to have to meet a very high standard.
        I have a number of questions for you. One is to respond to
    that, and I will lay out a few others, and you will probably
    have to respond for the record, Mr. Bernanke. But if I talk
    fast, maybe you will be able to comment orally.
        The first is, you have talked about the problem of income
    inquality. Do you know of any systematic economywide approach
    with a near-term effect to deal with such income inequality
    other than making our tax system more progressive?
        Second, we have a lot of smart, educated young people. They
    go and get college educations, but they only have the slightest
    information about which careers will be in demand by our
    economy. Should we publish an official guide that is forward-
    looking, that uses our best economic resources to project for
    the guidance of young people what careers will be in demand in
    the decades to come?
        Third, over in the Senate you talked about your concern
    that the ILC loophole could be used to mix banking and
    commerce. I wonder if you have an equal concern--I hope you
    have an equal concern--about the exploitation of other
    loopholes that combine real estate brokerage with banking, or
    auto sales with banking, or any kind of sales with banking on
    just on the pretext that the sale--that the consumer needs
    financing. And I hope that you are as strong at preventing
    bankers from getting into commerce as you are in preventing
    commercial firms like Wal-Mart from getting into banking.
        Last year we talked about the need for certain--my
    perceived need for an emergency plan to be available to deal
    with a precipitous decline of the dollar. You responded to me
    in the letter of April 25, 2006, noting that from 1985 to 1988,
    we had a roughly 40 percent decline in the value of the dollar,
    and the sky did not fall. But do you think that the risk of a
    40 percent decline in the U.S. dollar in 4 weeks, rather than 4
    years, is so remote that we shouldn't think about it, or are
    you just confident that our society and the world trading
    system could adjust to it? Or should we be doing some planning,
    given that we have had another year since we have talked last
    of record trade deficits?
        Finally, the New York Fed processes dollar transactions. We
    recently stopped two Iranian banks from having access to that
    through U-turn transactions. What would be the effect if we
    prevented all Iranian banks from having such access? I ask for
    you to comment from a technical monetary policy, you know,
    banking regulatory policy. Obviously we have other venues to
    talk about, whether that would be a good approach in
    negotiating with Iran. Or could we cause significant concern in
    Tehran if we didn't stop at the two banks, but went with all
    Iranian banks in banning their access to transactions through
    the Fed? Do you have any other comments?
        Mr. Bernanke. I can respond quickly to a few. Multiple
    standards for Sarbanes Oxley is an interesting idea, but I
    would note that the audit standard that allows size and
    complexity to be a consideration does to some extent do that.
        On income inequality, this is a very long-term trend. At
    least since the 1970's, and according to some measures from the
    1950's, we have been seeing this trend, and I don't think there
    is any really good way to reverse it overnight. I think it is
    going to be a slow progress.
        Mr. Sherman. Although a more progressive income tax system
    would do a lot to change the ultimate flows of income, or do
    you disagree?
        Mr. Bernanke. It would not do so without some cost to
    incentives and the like.
        On official guides to future skills, I think the best thing
    we can do for young people is to make sure they have good
    general analytical skills, and that they are not--it has turned
    out well for us that we don't necessarily put kids in the
    eighth grade--
        Mr. Sherman. So if we had lots of people with good analytic
    skills--
        The Chairman. I'm sorry. We don't have time for further
    questioning. I will give the gentleman 30 seconds.
        Mr. Sherman. Please continue.
        Mr. Bernanke. I would focus on general problem-solving
    skills that are most flexible.
        On real estate brokerage, the Federal Reserve and the
    Treasury have never had an opportunity to make a determination
    about whether this fits under the Gramm-Leach-Bliley law.
    Congress has not permitted us to go ahead with that, and so we
    have had an opportunity to look at it.
        With respect to financial crises, I would just say that the
    Federal Reserve takes financial crisis management extremely
    seriously, and we have made a number of efforts to improve our
    monitoring of the financial markets to study and assess
    vulnerabilities, and to strengthen our own crisis management
    procedures and our business continuity plans. And, I hope we
    never have another financial crisis, but should one ever occur,
    we want to be well prepared for that.
        I would have to get back to you on the Iranian question.
        The Chairman. Thank you.
        The gentleman from Connecticut. And the Chair will announce
    that the Chairman has been very gracious to agree to give us
    until 2 p.m.--we will take a break for about 15 minutes at
    noon. So the gentleman from Connecticuit will--after his
    questioning and answers, we will take a 15-minute break.
        Mr. Shays. Thank you for being here.
        I want to kind of agree with Congressman Watt. I thought
    the responsibility of the Fed Chair was to speak in tongues, so
    I have been a little shocked that I can actually understand
    you. The only other person I have trouble understanding is
    sometimes the chairman when he gets excited.
        I want to ask you, I think of ourselves as a consuming
    Nation that drives our economy, and yet I wrestle with the fact
    that we talk about how we should save. Now, I am a consumer.
    The only savings I have is my house and my Thrift Savings Plan.
    Should I feel guilty?
        Mr. Bernanke. It is not a question of feeling guilty. The
    question you want to ask yourself is, are you well prepared for
    retirement?
        Mr. Shays. Well, really what I am trying to say is if I
    want my country to be stable, are we asking Americans to stop
    consuming and to save? What are we asking them to do?
        Mr. Bernanke. Well, I think the issue is at the national
    level. Your question is at the individual household level. At
    the national level, low rates of savings create the need to
    borrow from abroad, and it does have some risks involved. The
    most direct way to address savings is to try to improve the
    saving of the government sector.
        Mr. Shays. What confuses me is that we are trying to get
    consumers to consume so that our economy moves forward. So I
    just wonder how you would wrestle with that, and how do you
    wrestle with it?
        Mr. Bernanke. There is no inconsistency. In short-term
    business cycle dynamics, consumer spending can drive growth.
    But over a longer period, if people save more, then that can be
    replaced by higher, stronger investment spending, for example,
    and that would be a desirable way to go.
        Mr. Shays. Okay. With regard to tax cuts, I believe that
    dividends and capital gains in particular have had a huge
    impact in getting us to have constant growth since we have
    lowered these rates. I am concerned that my Democratic
    colleagues are going to allow these tax rates to go up. I am
    interested to know your opinion.
        Mr. Bernanke. I think most economists would say that lower
    dividend and capital gains tax rates have efficiency gains.
    They are providing centers for saving. They reduce distortions
    in capital structure. They allow retained earnings to be
    circulated back into the capital markets, and there are many
    other areas where I think they contribute to efficiency in the
    economy.
        As always, with any tax measure, there are competing
    considerations of revenue and progressivity and so on. And as
    you know, given my position as the head of a nonpartisan
    central bank, I can't really take positions on specific
    measures.
        Mr. Shays. Well, okay. It just seems to me that you can
    give us advice as to whether or not you believe that continuing
    these low rates will contribute to a stronger economy. And if
    you don't think that, then you should tell us. If you think
    that letting them go up will not impact our economy, you should
    tell us that. I think that is a fair question.
        Mr. Bernanke. Well, let me say this, which is that there
    needs to be a balance between spending and taxes. So I think
    that well-designed lower taxes can contribute to a stronger
    economy. But there is also a responsibility to make sure that
    the spending is commensurate with that.
        Mr. Shays. Right.
        Let me get to the next one. When I am encouraged to
    refinance my house and pay 2 percent to 3 percent, you know,
    and then you look at the fine print, and you are paying 7
    percent or more. So I see this, and think that--well, I am not
    following them. I think a lot of people are. What is the role
    of the Fed to try to address that issue, if any?
        Mr. Bernanke. The size of the cost to refinancing?
        Mr. Shays. The incredible amount of effort to get consumers
    to basically use their homes, thinking that they are only going
    to pay a 2 percent or 3 percent rate, when in actual effect
    they are going to pay 7 percent or 8 percent. They have to pay
    it. They just don't have to pay it each year.
        Mr. Bernanke. Adjustable-rate mortgages and the like.
        Mr. Shays. Adjustable rates, but where they actually pay
    less each year, less than the rate they are being charged.
        Mr. Bernanke. Those are option ARM's and so on. Those have
    negative amortization.
        Mr. Shays. I shouldn't have said it that way. But the
    bottom line is that I am scared many people are just going to
    fall into that trap.
        Mr. Bernanke. I share your concern. As I was discussing
    earlier, our nontraditional mortgage guidance is very clear
    that lenders should, first of all, make sure people understand
    what it is they are signing, what they are getting involved in,
    and secondly should underwrite in such a way that if the
    borrower stays in that mortgage and rates go up, then the
    borrower will be able to make the payments and not be
    foreclosed.
        Mr. Shays. Thank you. I yield back.
        The Chairman. We will now take a 15-minute recess.
        [Brief recess]
        The Chairman. We are going to convene a minute early, but
    the next person on our list here is from Kansas, Mr. Moore.
    Would someone please close the doors--thank you--and Mr.
    Chairman, we appreciate, again, your giving us all this time.
        The gentleman from Kansas is recognized for 5 minutes.
        Mr. Moore of Kansas. Thank you.
        Mr. Chairman, thank you and welcome to the committee, and I
    appreciate your coming here and taking our questions.
        I want to follow up on kind of an area at least that the
    gentleman from Texas asked you about, and that was our debt as
    a Nation and what that is going to do to future generations in
    our country.
        I have seven grandchildren, and I am very concerned that we
    are accumulating a debt in this country that presently stands
    at $8.7 trillion. I understand it has gone up approximately $3
    trillion in the past 6 years, and I was at the White House
    about 6 weeks ago, and I had a chance to talk with the
    President. I said, Mr. President, I am not pointing a finger at
    your Administration, and saying it is your fault, because this
    goes back 25 years, 30 years, but through a process of
    borrowing and accumulating debt, interest on our national debt
    now stands at $8.7 trillion, and as I think Mr. Paul pointed
    out, over 40 percent of our debt is held by foreign nations.
        Should we, as a Nation, be concerned about that much debt?
    Should we, as a Nation, be concerned about the fact that more
    than 40 percent of our debt is held by foreign nations? If for
    any reason, whatever reason, foreign nations decide to sell off
    our debt, what impact, if any, would that have on interest
    rates in our country?
        Mr. Bernanke. The Federal debt that I am most concerned
    about is sort of the implicit debt, the debt associated with
    our promises to future retirees for Social Security and
    Medicare. If we were to stop here in some sense, it would not
    be quite so bad. The amount of government debt held by the
    public currently is about 37 percent of the GDP, which is
    fairly normal across industrial countries, lower than some in
    fact, but the situation is going to get a lot worse as we have
    retirements of the baby boomers and so on and medical care
    costs go up.
        According to the Congressional Budget Office, in the
    immediate scenario, by 2030, the debt, instead of being 37
    percent of GDP, will be 100 percent of GDP, and the deficit
    will be 9 percent of GDP instead of being a little under 2
    percent as it is this year. So, if we allow things to continue,
    the debt interest cycle will continue to build up, and we will
    hurt our fiscal position to the detriment of our children and
    grandchildren.
        On the issue of holding the treasury debt, the reason that
    foreign countries hold our debt is, for the most part, because
    they find it beneficial to themselves to have ownership of this
    very safe, liquid, and convenient form of assets, and I find it
    unlikely that anywhere in the foreseeable future there will be
    a major sell-off of any kind. If there were to be some sell-
    off, there would probably be some short-term effects, but--
        Mr. Moore of Kansas. What kind of short-term effects, Mr.
    Chairman?
        Mr. Bernanke. We would have movements in the asset
    financial markets, responding to the sale of the treasuries and
    other securities.
        Mr. Moore of Kansas. Would interest rates respond to the
    sale of securities?
        Mr. Bernanke. The impact effect of large sales of
    treasuries would be to raise interest rates, yes, but over a
    longer period of time, I believe interest rates are determined
    by fundamentals, by Federal Reserve policy, and I would also
    point out that the ownership, say, by the Chinese, of dollar-
    denominated assets is less than 5 percent of all of the fixed-
    income dollar assets in the world, even though it is a larger
    share, as you point out, of the treasury market. So I do not
    consider that to be a major concern.
        As I mentioned earlier in response to a question, there
    could come a point where foreign investors become less willing
    to accumulate more of our debt and would begin to drive up
    interest rates, and in order to avoid that contingency down the
    road, we should probably be trying to bring our current account
    down gradually over time.
        Mr. Moore of Kansas. Well, I understand, and I appreciate
    the fact that you, I am sure, feel a responsibility not to
    alarm people by any statements you might make, but my concern
    again is if foreign nations decide for whatever reason to sell
    off our debt, that is going to--there is the old law of supply
    and demand in effect, and if foreign nations are not going to
    hold our debt, that means that we are going to have to finance
    that, and I would think that would cause interest rates to go
    like this.
        I remember 30 years ago there was a guy named Jimmy Carter,
    who was President of the United States. We had interest rates
    going up to 12-, 14-, 16 percent. That would be absolutely
    devastating for our Nation right now, and I am not trying to be
    an alarmist here. I just do not want to see us get in a
    position where anything like that happens again to our country,
    because that would be devastating, I think, for small
    businesses, for consumers, for people in this country, and that
    is my concern, I guess.
        One more question. Oh, we are out of time. Sorry.
        Mr. Chairman, thank you very much.
        The Chairman. Would the Chairman like to respond?
        Mr. Bernanke. No.
        The Chairman. Well, then we will take one more question.
        Mr. Moore of Kansas. Okay. I understand that you all have a
    rule that says that the presidents of your banks have to retire
    at a certain age.
        Is that consistent with what some people are saying, that
    because of life expectancy going up that we should require
    people to retire at a certain age?
        Mr. Bernanke. We have thought it valuable to have some
    turnover there. We do not have quite the same pressures that
    the private market would have, you know, with leadership in a
    company, so we think that getting new leadership is beneficial,
    but if there are concerns I would be certainly willing to ask
    our committees to look at that. I have found, basically, that
    there has been a reasonable amount of turnover in the sense
    that people do not stay so long as to stagnate, but they stay
    long enough that their knowledge and experience can accumulate.
        The Chairman. Of course, they could always retire, rest for
    a few years, and then run for the Senate.
        The gentleman from Texas.
        Mr. Hensarling. Thank you, Mr. Chairman, and Chairman
    Bernanke, thank you for your patience.
        To some extent, I would like to follow up a bit on a line
    of questioning from my colleague from Kansas, and I know that
    his commitment to the long-term fiscal health of our Nation is
    a very sincere one. We sometimes come about it in different
    ways, but I know his commitment is sincere.
        I was reviewing testimony you gave before the Senate Budget
    Committee recently on entitlement spending, and you have
    alluded to it today. I have had the occasion now to hear from
    the heads of OMB, GAO, CBO, and the Secretary of the Treasury,
    and there seems to be consensus among all of them that the
    number one fiscal challenge we face as a Nation is the pace of
    growth in entitlement spending.
        Would you concur in that assessment that it is, indeed, our
    number one fiscal challenge?
        Mr. Bernanke. Yes, or, more broadly, how to deal with the
    aging of the population.
        Mr. Hensarling. You spoke earlier about the percentage of
    debt to GDP by 2030, and you mentioned, I guess, the challenges
    of trying to, without entitlements, reform the level of
    spending decreases or tax increases, some combination of the
    two. I think I heard you say before we are not going to grow
    our way out of this challenge, is that correct?
        Mr. Bernanke. That is correct.
        Mr. Hensarling. If Congress ignored any entitlement
    spending reforms and chose no other offsets within the Federal
    budget, using 2030 as our guideline--it is kind of a good
    placeholder for the next generation--have you looked at models
    on what type of tax burden would be necessary to be placed on
    our people to balance the budget, say, in 2030?
        Mr. Bernanke. Well, the projection would be that in 2030
    the entitlement programs would be about 15 percent of GDP,
    which means that the entitlement programs and interest on the
    debt together would be something about our total budget today.
    So increases would have to be related to how much additional
    spending you would have. If you want to keep nonentitlement
    spending constant, you would have to raise tax rates
    approximately 6 or 7 percentage points of GDP, from about 18
    percent now to about 25 percent of GDP, with no other changes
    in order to retain about the same deficit.
        Mr. Hensarling. The Comptroller General has previously
    testified that if that happens, in his opinion, we are on the
    verge of being the first generation in our Nation's history to
    leave the subsequent generation with a lower standard of
    living, less opportunity.
        Would you agree with that assessment?
        Mr. Bernanke. Those are very high tax rates, and they would
    have adverse effects on growth.
        Mr. Hensarling. Changing subjects, Mr. Chairman, the debate
    about trade versus protectionism is as old as our Republic is.
    It is a debate that has certainly reared its head again in our
    Congress, many believing that somehow present trade policies
    have negative impacts on low income. I recently saw some Bureau
    of Labor statistics figures that indicate, within the last 5
    years, the price of durable goods have dropped 8.7 percent,
    appliances 6.5 percent, toys 25.8 percent, and televisions 55.4
    percent. Low-income people in the Fifth Congressional District
    of Texas, whom I represent, buy televisions, toys, durable
    goods, and appliances, and last I looked, each of these had a
    very heavy trade component.
        If trade barriers were erected, might the cost of these
    actually go up instead of decrease, and might that have a
    detrimental impact on low-income Americans?
        Mr. Bernanke. Certainly. Yes, I agree.
        Mr. Hensarling. That was such a quick answer that I was not
    ready for the next question.
        Mr. Bernanke. Well, I can elaborate.
        Mr. Hensarling. No. I think I will quit while I am ahead,
    Mr. Chairman. I think I will quit while I am ahead.
        To the extent that I have any time left, subprime lending--
    you mentioned that there is a great challenge in figuring out
    the difference between predatory and subprime. I believe the
    world works off of incentives.
        Are subprime lenders incented to actually take back the
    collateral, to take back the house, to repossess it,
    particularly since, I think you testified, we are now in a
    softening real estate market, and if that is not the incentive
    structure might the competitive marketplace help ameliorate
    what we are seeing as far as some of the high foreclosure
    rates?
        Mr. Bernanke. To some extent, that is correct. It is
    certainly the case that subprime lenders, certainly the
    legitimate subprime lenders, are not looking to have
    foreclosures. It is bad for their business--they lose money--
    and we have seen some failures of small lenders, and we have
    seen credit default swaps that measure the risk of subprime
    mortgages, those spreads widen considerably, and so, clearly,
    it is not in the interest of lenders to make bad loans.
        Mr. Hensarling. I am out of time. Thank you for your
    testimony.
        The Chairman. The gentleman from North Carolina.
        Mr. Miller of North Carolina. Thank you, Mr. Chairman, and
    Mr. Chairman.
        Mr. Chairman, I also read your remarks in the Greater Omaha
    Chamber of Commerce that Ms. Waters spoke of. She said she was
    very moved in reading it. I am not sure I have ever really been
    moved by a speech by an economist, but I have found a fair
    amount to agree with in what you have said, and there were
    things that we had discussed earlier when you testified here
    before and, actually before that, things that--topics about
    which I had questioned Chairman Greenspan earlier.
        You talked about the widening inequality, that between 1979
    and 2006 the wages of the people who are right in the middle
    had gone up by a total of 10.5 percent, the people in the
    bottom quintile, the bottom 20 percent, 4 percent, and those in
    the top quintile had gone up 34 percent, that the share of
    after-tax income for the top 1 percent had almost doubled as a
    percentage of all wages, all compensation from 8 percent to 14
    percent over a slightly lesser period of time, and that even
    within that 1 percent there was a widening inequality.
        I asked you then about what programs we could get at, and
    you mentioned education again and specifically community
    colleges, life-long learning, job training, how to make sure
    that our workers have the skills to be personally responsible
    for increasing productivity so they might be compensated
    better. In the President's most recent budget, all line items
    for career and technical education in 2007 were $1.312 billion,
    and in the proposed budget it is $617 million. So it is being
    cut by more than half.
        Does that show a commitment--is that what we need to be
    doing if we do recognize income inequality as a significant
    problem for society?
        Mr. Bernanke. One point I tried to make in my remarks was
    that solving these problems of retraining and job search in
    life are difficult, and people may differ on how best to
    accomplish it. I do not know from your numbers whether there
    were offsets in other programs or different approaches--I
    simply do not know--but I think there is a legitimate debate
    among all of us about what are the most cost-effective,
    effective ways, to help people overcome the skills gap so that
    they can get better work.
        Mr. Miller of North Carolina. Actually, Mr. Sherman
    mentioned a systematic economic approach to approaching income
    inequality. I think before, I just asked if you could name any
    program that addressed anything Congress was doing and the
    President was doing that seemed to be addressing economic
    inequality, growing differences in income, and you mentioned
    specifically education. That was what you talked about.
        If we are serious about closing economic inequality, isn't
    that exactly what we should be looking to, making a real
    commitment to job training, to adult education, to education
    from pre-kindergarten all the way through life-long learning?
        Mr. Bernanke. I think we should, but I do not want to
    support or attack any specific program because there are many
    approaches to doing it. The President will, no doubt, reply
    that he has the No Child Left Behind Program, which is an
    attempt to increase the quality of schools.
        Mr. Miller of North Carolina. Which has also been funded at
    much less the level than what was promised, dramatically less,
    and actually the very programs within No Child Left Behind that
    are most clearly directed at closing achievement gaps are the
    very programs that have been cut the most.
        Chairman Bernanke, you also, in your speech in Omaha,
    talked about the kind of superstars in the world economy and
    how much--given what the economy is like now, relatively small
    differences in ability or in appeal from the very, very best
    and people who are just very, very good but not the very, very
    best--resulted in dramatic differences in income, and then you
    also mentioned CEO pay and said that in many cases CEO's who
    had failed spectacularly, who had appeared to have crashed and
    burned, had still done very well or were still compensated at
    breathtaking levels, and in earlier testimony you said that
    European CEO's appeared to be paid significantly less than
    American CEO's.
        Are European companies doing significantly less well
    because they do not have the superstars? Is there anything that
    suggests, really, that there is a difference based upon skill
    level between American CEO's and European CEO's?
        Mr. Bernanke. I have not really studied that. I think that
    there are some CEO's in Europe who are paid lower levels, and
    probably there are fewer in sort of the same league as the
    American CEO's.
        I think it is very important that boards of directors take
    shareholder interests very seriously when they make these
    compensation decisions, and that they try to attract the very
    best talent, and that they pay in a way that will motivate good
    performance.
        The Chairman. The gentleman from New Jersey.
        Mr. Garrett. Thank you, Mr. Chairman, and thank you, Mr.
    Chairman, for your testimony today. I appreciate your spending
    the time with us.
        I would like to go back and begin my questioning with a
    topic that is of great importance to me, and we have already
    touched on it, at least with one series of questioning, and
    that is dealing with GSE reform.
        On the one hand, I am pleased to see that the
    Administration is taking what I would say is a slightly tougher
    tone, if you will, on pushing for a brighter line test between
    what is appropriate and what is inappropriate between the
    primary and the secondary markets and what the GSE's are
    involved in. That is on the positive side.
        On the negative side, from my position, I have seen
    something of a softening with the Treasury stance with regard
    to portfolio limitations, which I believe should be a true
    concern to us. I know that there are ongoing negotiations, if
    you will, between the Treasury and our esteemed and gracious
    chairman behind us to try to reach a compromise on this issue,
    and as part of the negotiations there is consideration of what
    has been dubbed the MTI, the mortgage tax increase, better
    known as the ``Housing Fund,'' and I would be curious to have
    your take on an aspect of that.
        I raised a similar question to you when you were here
    before the committee a year ago and new on board, but I know
    since that time you have had an opportunity to get into the
    weeds a little bit more on this topic. You have already
    testified here and before other committees with regard to the
    importance of the housing market in general to our boom in the
    economy that we have had and the slight slowness of the housing
    market and what impact that could have on the overall economy.
        My first question to you is: What additional impact could
    we see if we did have a tax, if you will, on that marketplace
    by having a fee or an assessment on the GSE's for this new
    Housing Fund, or the MTI?
        Mr. Bernanke. So you are arguing that the Housing Fund
    would raise the cost of mortgages because we are putting a tax
    on the GSE's?
        Mr. Garrett. Yes. Well, we know the corporations in general
    do not pay their taxes in one way or another. The cost of doing
    business is not borne by the business but is passed on to the
    consumers in one sense or another.
        Here, the business that it is being passed on is to the
    low- and moderate-income homeowner who is trying to get into
    the market, which is the whole idea behind GSE's.
        Mr. Bernanke. Well, I have not done any analysis of that
    particular issue.
        I would reiterate what I said before, which is I think,
    that it is important for the GSE's to support affordable
    housing. The way I would recommend it would be to tie their
    portfolios to affordable housing products, for example, by
    holding MBS that are based on affordable housing mortgages, for
    example. That would seem to be a direct way to both create some
    limits, some limitation on the rapidity of the expansion of
    their portfolio, while still having a direct impact on the
    affordable housing.
        I have not taken a position on the Housing Fund, and I am
    afraid, if I do so, it will be portrayed as a change in
    position, because the Fed is focused very much on the safety
    and soundness and the systemic risk implications of the
    portfolios, and I think that is where the Federal Reserve needs
    to keep its focus.
        Mr. Garrett. Do you agree with my basic economic assessment
    that when you have a corporation such as GSCR or any
    corporation in general that the taxes that we assess on them
    are not borne, in essence, by them, but it has to be passed on
    to someone?
        Mr. Bernanke. Well, it could be passed on to the
    shareholders in terms of a lower share price. That is another
    possibility. So I would have to think about the incidence of
    that.
        Mr. Garrett. And, of course, the economic philosophy to
    that is, when you put a cost onto the share price of a company
    where they have to get their investments from, that impacts
    upon the economy. We can go into that.
        Can you elaborate a little bit more on the portfolio idea
    that you were talking about? I am limited in my time here. Are
    you suggesting that you allow them to increase the--or have an
    increase in the portfolio size of those holdings for the low-
    and moderate-income portfolios, and if that is the case,
    doesn't that go beyond what the GSE's were intended for--or
    what the portfolios were intended for in the first place? They
    were just for securitizing the loans, and they were just there
    to be in and out, if you will. Why would we need that to occur?
        Mr. Bernanke. I think the ideal situation would be one in
    which the portfolios did exactly what you said. They were to be
    the weigh station for securitized mortgages, and they would
    contain mostly liquid assets for the purpose of purchasing
    mortgages and then selling them back to the market.
        Mr. Garrett. Right.
        Mr. Bernanke. I would like to see a bill. I think we need
    to have a strong regulator in this arena, and we need to find
    some way that we can limit the growth of the portfolios. As a
    practical matter, I think that restricting portfolios to
    mortgages related to affordable housing might be an appropriate
    compromise and an appropriate approach that would provide some
    limitation, but the Federal Reserve has always been concerned
    about the size of portfolios. It never has found a substantial
    benefit to homeowners from large portfolios.
        Mr. Garrett. Does the Treasury have the authority--
        The Chairman. Gentlemen, we are into the timing.
        The gentleman from Missouri.
        Mr. Clay. Thank you, Mr. Chairman, and thank you for
    holding this hearing.
        Mr. Bernanke, welcome. I represent the First Congressional
    District of Missouri, which is comprised of north St. Louis
    City and north St. Louis County.
        Continuing with the same line of questioning as the
    gentleman from New Jersey about housing, in my district, and in
    many other districts across the country, we have a tremendous
    housing crisis. This must be addressed, and it must be done
    with urgency, especially when it comes to affordable housing.
        What changes in housing policy can be made that the United
    States can better foster an urban housing policy that puts
    people in homes in the inner cities so that they can build
    wealth through ownership and pass it on to future generations?
    What are your ideas on this, and what is your approach to this
    housing crisis?
        Mr. Bernanke. Well, I recently had the opportunity to visit
    Anacostia in the District of Columbia and to see some of the
    projects going on there, and we saw the actions of community
    development financial institutions, CDFI's, who have worked
    together with banks, private investors, and with government
    sources to finance some very impressive projects, some new
    apartments, and some social centers for the community, with
    very good results, and I think that collaboration that we saw
    with the CDFI's, managing together with some nonprofit
    institutions, other nonprofit institutions, and private sector
    input, is a very promising approach to this.
        Mr. Clay. It sounds like we have to be creative in order to
    rebuild our inner cities and to come up with creative concepts
    so that people can take ownership of their neighborhoods, of
    their communities. It sounds like that is what you are saying,
    and you promote those policies.
        Mr. Bernanke. Ownership is very important because people
    then feel they have a responsibility for their community and
    for their home, and it is also valuable to try to develop a
    community, not house by house but in a broader sense, because
    unless you have a retail area and a school and a social area
    and other amenities, the house property values are not going to
    justify the cost. So you need to build a neighborhood rather
    than just an individual house.
        Mr. Clay. Thank you for that response. Let me shift over to
    a worker issue.
        Yesterday, DaimlerChrysler, throughout the United States
    and particularly in St. Louis, announced plans that will affect
    approximately 1,300 jobs at our Fenton plant in St. Louis
    County. They are losing an entire shift which makes the
    minivans. There have been other massive layoffs by the other
    automakers. Additionally, these corporations are trying to do
    away or drastically reduce legacy cost, healthcare, retirees'
    benefits, and pensions. Many of these employees have lost
    benefits that were promised them in exchange for working their
    careers at their workplace. They earned them, and now, as they
    approach retirement, they are not there.
        Do you have new approaches or plans for long-term employee
    healthcare, retirement benefits and pensions, and how do we
    address the problem facing our industrial workers in the
    automobile industry and manufacturing sector? We can include
    the airline employees and many other workers throughout this
    economy in that. What new systems will we put in place to
    replace these traditional safety nets that they have worked for
    and depended on all of their lives? What solution do you think
    we should be putting in place, and what are your thoughts on
    this? Could you elaborate?
        Mr. Bernanke. Well, first, if firms make promises to
    workers with respect to retirement benefits or healthcare
    benefits, we should make sure that those promises are kept. The
    recent legislation on pensions that Congress passed tried to
    toughen up the requirements for funding pensions, tried to make
    them more transparent, and to increase the premium paid to the
    Pension Benefit Guarantee Corporation. Those kinds of measures
    can help ensure that companies will not renege on the promises
    that they have made to their workers, so that is very
    important.
        I would say, more generally, that we need to diversify, to
    have more than one source of retirement security. Some people
    rely on defined benefit pensions. We need to expand access to
    defined contribution plans like 401(k)s and other kinds of
    private savings, and then there is, of course, Social Security,
    which we want to make sure is on a sustainable, long-term path.
    So if we put all of those things together, you can help people
    finance a reasonable retirement.
        The Chairman. The gentlewoman from West Virginia.
        Mrs. Capito. Thank you, Mr. Chairman.
        I have a question. You mentioned in your opening statement
    that there has been a large amount of consumer spending. We see
    a lot of credit card debt by individuals, a lot of higher
    education loan debt for young people coming out of college,
    also into the professions, medical school.
        How are people going to be able to overcome this debt when
    the wages are only rising a certain percent? Do you see this as
    a long-term problem that seems to be concentrated--I mean, if
    you are a college student, you can get a credit card like that
    and run it up to the maximum quite quickly and pay $20 a month,
    probably, for the rest of your life. What kind of problem do
    you think that presents to our economy?
        Mr. Bernanke. Well, the incidence of delinquencies and
    bankruptcies for the economy as a whole remains quite low.
    Because the job market is pretty good and incomes have gone up,
    wealth has gone up, the stock market is up, and so on. Most
    families, many of them, have home equity built up and have been
    able to manage their finances pretty effectively, and as I
    said, we have not seen any significant increase in financial
    stress in the broader economy.
        Now, there are pockets of problems, as I mentioned already
    several times, such as the variable rate subprime mortgage
    area. I think there are a number of approaches. The one that
    the Federal Reserve is particularly involved in is disclosures.
    We are responsible for Regulation Z, which implements the Truth
    in Lending Act, and it includes such things as the famous
    Schumer Box and other things that show to potential credit card
    applicants what are the terms, you know, what are the fees and
    so on.
        We are in the process now of completely reworking Reg Z for
    credit cards, for revolving debt, and we anticipate going out
    with a proposed rule in the next couple of months, and we have
    worked very hard on that. In particular, one thing we have
    done--people find it very difficult to understand the legalese
    that they see in the credit card applications, the credit card
    contracts, and yet of course the legal information has to be
    there. Otherwise, it is not a legitimate contract, and so the
    challenge is to create disclosures that meet the legal
    standards but that are also understandable, and so we have gone
    out and done a lot of consumer focus group testing and those
    kinds of things to try to find disclosures that will actually
    work in practice, and we hope that these new disclosures we are
    going to put out for comment in just a couple of months will be
    helpful in helping people understand, you know, the terms and
    conditions of credit cards and make them use them more
    responsibly.
        Mrs. Capito. Well, I will look forward to that, and I think
    it is an excellent idea, and I think that it is difficult when
    you turn it over and look at the fine print. I am admitting to
    not reading my credit card disclosures as closely as I should.
        I do not often mention it, but I am from the State of West
    Virginia, and it is very reliant on coal, and the energy
    production is extremely vital to our State economy, but we also
    have a population that is very sensitive to gas prices, to the
    price of healthcare, to all of the things that hit your
    pocketbook immediately.
        When you look at the long term, what do you see in terms
    of--and I know, in some of your statements, you sort of exclude
    the energy prices. Is that because of the volatility of that
    or, in trying to move from nonreliance on foreign sources of
    oil, do you think we are ever going to make an impact on the
    pocketbook of the individual citizen?
        Mr. Bernanke. Well, in the short term the demand for oil is
    inelastic; that is, it does not respond much to price changes,
    and so when there are fluctuations in the demand for oil, you
    get these big spikes and movements in oil prices, and we have
    seen quite an increase in oil prices in the last few years, as
    you know. Over the longer term, higher oil prices actually have
    a benefit, which is that they encourage conservation, and they
    encourage alternative supply sources. Coal, of course, is
    actually a very promising source. It is, of course, a
    traditional source of energy, but assuming we can find ways to
    address the environmental implications--and there are many
    promising directions there--coal could be a very big part of
    our energy diversification in the future.
        So my expectation is that as long as the markets are
    allowed to work, together with some support for research and
    development from the Government, together with clear and
    effective regulation, that we will solve our energy problems
    and that solution is going to come not just from one single
    magic bullet; it is going to come from a wide variety of
    different alternative sources, including, I think, coal.
        Mrs. Capito. Thank you.
        Do I have time for one more?
        The Chairman. You do. Go ahead.
        Mrs. Capito. I have one more quick question, and this is
    sort of an educational question for me.
        When I read your statistics and I see the large, you know,
    macro view that you have, living in a small State that has
    fluctuations always sort of at the bottom end of the economic
    scale in terms of per capita income, we always feel in small
    States that sometimes all of the statistics that we read are
    sort of driven by New York, California, Florida, and Texas.
        When you are formulating your data that you bring before
    us, what kind of considerations do you make for smaller States
    or does just the population number drive all of your
    statistics?
        Mr. Bernanke. Well, we see a lot of State data, for
    example, unemployment rate data by State, but the other
    important thing about the Federal Reserve is that it is a
    Federal--that is, a regionalized--system, and as I am sure you
    know, we have 12 Reserve Banks around the country--
        Mrs. Capito. Right.
        Mr. Bernanke. --and one of the most important elements of
    our monetary policy meetings is when we go around the table and
    ask each Bank president from each part of the country what is
    going on in your State, what is going on in your region, what
    is going on in various industries, various sectors, and various
    geographic areas within your Federal Reserve district; that
    gives us an awful lot of detailed information about what is
    happening in different parts of the country. This is a very
    large, diverse economy. The aggregate statistics really cover
    up a huge amount of heterogeneity in terms of economic activity
    and developments in the economy. So we pay a lot of attention
    to regional information in trying to understand what is
    happening in the economy.
        Mrs. Capito. All right. Thank you.
        The Chairman. The gentleman from Missouri.
        Mr. Cleaver. Thank you, Mr. Chairman, Mr. Bernanke.
        We are very likely going to have as a part of the upcoming
    elections a great deal of divisive language based on people's
    concerns about immigration, and in June of 2006, 500 American
    economists, including 5 Nobel laureates, signed an open letter
    on immigration and sent it to President Bush and to Members of
    Congress, and in that letter we are reminded, sir, that we are
    a nation of immigrants, and it talks about the economic
    benefits of immigration and speaks to the power of immigration
    to strengthen America and to lift the poor out of poverty, and
    the consensus reached is that most Americans, contrary to what
    is being said on the nightly news, benefit from immigration,
    but there is one portion of the letter that I think is
    extremely significant, and if you do not mind, I will just read
    from the letter:
        ``Immigrants do not take American jobs. The American
    economy can create as many jobs as there are workers willing to
    work so long as labor markets remain free, flexible and open to
    all workers on an equal basis.''
        Now, shortly after this letter was sent to us, Jack Kemp,
    George Shultz, Jeane Kirkpatrick, and 30 other non-liberals,
    including the former RNC Chairman, signed a separate open
    letter on immigration, and it embraced Ronald Reagan's view of
    allowing open, sensible immigration, and they go on to recite
    Reagan's quote from Winthrop about the city on the hill.
        Now, the statistics support these letters, and recent
    studies show that since 1980, immigrants have boosted the U.S.
    GDP by $10 billion per year, and during the 1990's, when the
    labor force grew by 16.7 million workers, 38 percent of those
    workers were foreign-born. In other words, at a time when U.S.
    unemployment was hitting record lows, immigrants filled 4 out
    of every 10 jobs. Now, in January of 2000, your predecessor,
    Chairman Greenspan, commented that easing restrictions on
    immigration would go a long way in solving labor shortages.
        Now, without going on, I am more interested in finding out
    whether or not you believe that immigration has a positive or a
    negative impact on our economy. Do you share in the philosophy
    of the 500 economists, and what do you think should be done
    with regard to the American workforce and immigration?
        Mr. Bernanke. Well, it is certainly true, as they say, that
    immigrants built the country. All of my grandparents were
    immigrants, and they came and they had new lives, and they
    contributed to our economy. So immigrants have played,
    historically, a very important role in U.S. economic
    development.
        I agree with you that they do not take jobs, and the labor
    market does adjust to the number of people available to work.
    We have had a lot of immigration. The unemployment rate is
    quite low. It is somewhat more controversial. Do they affect
    wages? One concern that some people have had is that because
    many of the more recent immigrants have relatively low skills
    that they compete, to some extent, with low-skilled workers in
    the United States and may have some effect on their wages. Most
    estimates are that those are pretty small effects, but there
    may be some effects. So I certainly agree that immigrants have
    played a big role. They continue to play a big role, and we
    need to have a national policy on that.
        I think I would stop short of recommending a specific
    program. This is a very tough issue and one I think Congress
    really has to take the lead on about how many people and under
    what conditions we admit, but it is certainly the case today
    that immigrants are playing a major role in our economy. There
    is no question about that.
        The Chairman. If the gentleman would yield, could I just
    ask: Would it also have implications--you have talked about the
    decline in the labor rate participation. Would it also have
    implications for our ability to deal with the entitlement
    issue?
        Mr. Bernanke. It goes in the right direction, but the CBO
    has done some simulations that suggest even fairly large
    increases in immigration, say from 1 million to 2 million,
    would not solve the problem by any means, but it does go in the
    right direction.
        The Chairman. It alleviates it.
        Mr. Bernanke. Yes.
        The Chairman. I thank the gentleman.
        Mr. Cleaver. Mr. Bernanke, have you seen the movie, ``A Day
    Without Mexicans?''
        Mr. Bernanke. I have seen it, yes.
        Mr. Cleaver. Would you recommend that for all Members of
    Congress and for people running for public office?
        Thank you very kindly.
        The Chairman. Did you say, ``A Day without Questions?''
        Mr. Cleaver. ``A Day without Mexicans.'' It is a new motion
    picture that--
        The Chairman. The gentlewoman from Minnesota.
        Mrs. Bachmann. Thank you, Mr. Chairman, and thank you, Mr.
    Chairman, for being here before this committee.
        I have appreciated your responses to the questions, and in
    particular, my colleague, Mr. Hensarling from Texas, had asked
    you about the entitlement problem that we will be having, and
    that is where my question is going as well. He had mentioned
    the Comptroller General and some of the comments that the
    Comptroller General had made. One of those that really captured
    my attention was the statistics that he gave that already our
    Federal Government's net liabilities exceed $43 trillion or
    about $350,000 for every full-time worker in the United States.
        Without fundamental changes and absent any movement by the
    Congress on changes in our entitlement, I am just wondering,
    Mr. Chairman, do you believe that there is any plausible amount
    of tax increases that could possibly deal with the coming
    crisis in our entitlement programs?
        Mr. Bernanke. Well, the tax increases would have to be
    quite large. The Congressional Budget Office has done some
    simulations, assuming 25 percent tax increases, which do not
    quite solve the problem. So it would have to be a pretty large
    increase in taxes to solve it.
        Mrs. Bachmann. And that is something that, I think, haunts
    all of us as we are looking toward the future, especially
    toward 2030. We are concerned about that. I appreciate your
    response on that.
        My next question deals with a happier subject of
    productivity, and that is something where the United States has
    been phenomenal in the area of productivity. You are quite
    familiar with the President's economic report that noted that
    between 2000 and 2005, here in America, we had a productivity
    increase of about 3 percent, which far outpaced the
    productivity growth levels in the other G7 nations. Whereas
    many of them suffered a slowdown in productivity growth, the
    United States, in fact, accelerated and is at an enviable
    level.
        I am just wondering, sir, if you have insight into perhaps
    what some of the factors are that led to this remarkable
    productivity growth given that Western European nations as well
    as the other G7 nations have the same access to technological
    improvements as, say, the broad capital markets that we have. I
    am just wondering if you could state for this committee why we
    have seen better results here in the United States than we have
    seen in the other G7 countries.
        Mr. Bernanke. That is an issue that has received a lot of
    attention. It is a good puzzle why we have gotten differential
    results. I think the answer is the interaction of the
    technologies and the economic system.
        To go back to themes we have already addressed today,
    technology creates change, and the system has to be able to
    adapt to change in order to make full use of the technology,
    and in the United States the combination of very deep capital
    markets which have been able to fund new start-up firms or
    venture capital support for entrepreneurial activities and a
    flexible labor market which has allowed for changes in the way
    people work and the distribution of workers across industries
    and across occupations has allowed these new innovations, these
    technological innovations and information communication
    technologies not only to lead to increased productivity within
    the narrow sphere of high technology industries but to spread
    out through the whole economy and to increase productivity in
    financial services, in retailing, in wholesaling, and in
    manufacturing.
        As firms have been able to apply effectively these
    technological innovations, in some countries there is a great
    deal of rigidity in the structure of labor and product markets,
    and those rigidities have prevented the technological
    innovations from being applied as effectively or as quickly as
    in the United States.
        Mrs. Bachmann. Thank you.
        My final line of questioning goes to the legislation that
    Congress may very soon pass, and that would be the increase in
    the minimum wage. We are looking at increasing perhaps at the
    level of 40 percent minimum wage in the upcoming bill.
        First, I am wondering if you could estimate how close we
    are currently to full employment here in the United States. I
    know, in Minnesota, we have just enjoyed wonderful low levels
    of unemployment. I think, for 2 months last summer, we were the
    job creators for about 10 percent of all new jobs across the
    country. We have a wonderfully strong, diverse economy.
        I was wondering first if you could comment, sir, on where
    you believe we are at in terms of full employment in this
    country, and second, I was wondering if you could share with us
    what your opinion would be on the impact of raising the minimum
    wage on employment. First, at the level that we are looking at
    now to go to $7.25, there were comments made by one of our
    United States Senators that he may be introducing a bill in
    perhaps 6 months to raise that minimum wage up to over $9 an
    hour.
        So, if you could, just comment on the impact of raising the
    minimum wage on employment and where you believe we are at in
    terms of full employment now.
        Mr. Bernanke. On the full employment issue, I do not know
    precisely where full employment is or whether we have reached
    it or not. I do know that the economy has come a ways in the
    last few years in increasing the utilization of underutilized
    resources. The unemployment rate has come down. Capacity
    utilization has gone up, and so we are certainly closer than we
    were a year or two ago, and, indeed, as you point out, in some
    areas labor markets are pretty tight and skilled workers have a
    lot of opportunities for work.
        On the minimum wage, economists generally agree that a
    higher minimum wage will have an adverse effect on employment
    of low-skilled workers, but they disagree extremely on how big
    that effect would be. Some are saying it would be very small.
    Others are saying it would be more significant. So I can only
    say that probably there will be some employment effect, but it
    is very difficult to know how big it would be. Given that a
    relatively small number of workers today are at the Federal
    minimum wage, in part because State minimum wages or many of
    them are higher than the Federal minimum wage, I do not think
    that the employment implications of the proposed bill for the
    Nation as a whole would be very significant one way or the
    other.
        Mrs. Bachmann. And--
        The Chairman. We are over time.
        Mrs. Bachmann. Thank you.
        The Chairman. The gentleman from Tennessee.
        Mr. Davis of Tennessee. Mr. Chairman, thank you very much.
    I have a comment and then a question.
        We hear a lot about undocumented workers in our country,
    and we hear between 12 million and 15 million working today who
    may or may not have legal documentation to indicate that they
    are actually here working as authorized by the certain laws
    that we have in this country, and then I hear that we have 4\1/
    2\ percent unemployment. The 4\1/2\ percent unemployment means
    we have roughly 6 million people in this country not working--
    is that about right?--135 million people working.
        So, if we were to round up those 15 million undocumented
    workers and send them back wherever they came from, would we
    have a deficit of 9 million employees to work in America's job
    market? What would that do to our economy?
        Mr. Bernanke. Well, it is certainly true that where we are
    today is that there are a lot of immigrant workers, many of
    them undocumented, who are working in various industries
    ranging from manufacturing to agriculture to leisure and
    hospitality and construction and other areas, and if they were
    all to leave immediately then there would be obviously a
    disruption in those industries and labor shortages in those
    industries.
        Mr. Davis of Tennessee. I ask that mainly to make a point.
        We have a lot of folks out here today who have a lot of
    ideas about America's economy, and we have a lot of ideas about
    some of the comments that have been made by many about the
    illegal immigration situation.
        My real question to you is this: As I go back from about
    the 1970's, late 1960's, up through about right now, we have
    gone from having a balance of trade in our favor to where we
    have gradually gone to a whole other level, over $700 billion
    for the last 2 or 3 years in deficits in trade. Now that means
    that we are sending $700-some billion more out of America's
    economy to other nations of the world that are holding that
    money. They are our dollars. It is a part of our capital assets
    of this country that is showing that up, and when I look at
    that, I get kind of frightened at it, and I look at the
    district that I represent and I see a Saturn plant in Spring
    Hill that has temporary layoffs, perhaps, and I fear that they
    may become more permanent than temporary, those 5,000 or 6,000
    jobs that we may be losing. The Carrier Corporation just left
    my district.
        So when I look at my Congressional district, which is the
    fourth most rural in America, this great booming economy that
    we seem to have throughout America does not exist in my
    district, and it does not exist I believe, perhaps, in most
    rural areas of America.
        As to the trade deficits and the budget deficits that we
    continue to elevate, are we just looking for a train wreck to
    happen, and are we sitting here in Congress kind of like Nero
    did in Rome as it burned, doing nothing about it? How do we
    stop this bleeding of huge deficit spending? Because we have
    seen us grow from 18.5 percent in a gross domestic spending
    percentage of government to about 20 percent in the last 5 or 6
    years. We have seen an increase in spending, a dramatic
    increase, and our revenues have gone down to fund government as
    the Congress for the last 5 or 6 years has seen fit to spend.
        So, in essence, there are two or three problems that I
    have, and I think it is hurting a lot of the more rural areas
    and maybe not the more urban areas, but we have lost 3 million
    industrial jobs. We are no longer producing. In export and
    production, we are consuming someone else's production. So how
    do the trade deficits, the budget deficits impact us, and when
    will we be in a situation where we no longer enjoy the great
    economy supposedly that we have, and when will it become a
    threat even to the world economy if that does happen?
        Mr. Bernanke. That is a very wide-ranging question. I think
    I would like to separate that into two issues. One is the trade
    aspect, and the other is the budget/current account deficit
    issue.
        On trade, as I have discussed several times today, trade
    can create painful dislocations, painful changes. Competition
    from abroad, movements of firms out of the country, can cause
    people to lose jobs, and that is a serious problem. On the
    other hand, trade also creates a lot of benefits to the
    country. It creates a lot of jobs both in terms of exports, and
    in terms of transplants. Like you mentioned Saturn. Well, there
    are also transplanted auto firms that hire Americans here in
    the United States, and as someone mentioned here, it does allow
    Americans to purchase goods and services at a lower price than
    they otherwise would. So there are disruptions caused by trade.
    There are also a lot of benefits from trade, and one of the
    messages I have been trying to convey is that the right
    solution is not to stop trade or to block trade but, rather, to
    try to find ways to help people adjust or to retrain as
    necessary to deal with these very real--and I take them very
    seriously--dislocations and problems that arise because of this
    changing, dynamic economy we have.
        A somewhat different question is about the trade deficit
    and the current account deficit, and to some extent, it is
    related to the budget deficit in the sense that, as I have
    indicated, the current account deficit reflects the fact that
    our savings rate is low relative to our investment, and
    therefore we have to borrow the difference abroad. In order to
    mitigate that situation over time, we need to raise our
    national saving, and that could be done either in terms of
    private saving or it could be done in terms of reducing budget
    deficits or increasing surpluses at both the Federal and the
    State and local government levels. That is going to take some
    time. I think, you know, we do not have to solve this problem
    overnight, but we should be, I think, working to reduce the
    current account deficit over time and at the same time that we
    continue to allow trade and technology to help our economy grow
    more quickly.
        Mr. Davis of Tennessee. We have actually tripled our
    budget--
        The Chairman. I am sorry. The gentleman's time is up. We
    cannot ask a new question.
        The gentleman from Delaware.
        Mr. Castle. Thank you, Mr. Chairman.
        Chairman Bernanke, I thank you for being here. I would also
    like to thank you for the cooperation of the Federal Reserve in
    the new dollar gold coin which we passed through this
    particular committee. I happen to be the sponsor of it. I think
    this is the issuance date today, as a matter of fact. Although
    we did something with the Treasury and the Mint people with
    George Washington and the Statue of Liberty on the other side,
    but your acquisition of $300 million is a nice start. We hope
    to make some $5 billion. So this is something that actually
    produces revenue for the U.S. Government.
        Going to a subject I want to ask you a question about,
    though, this committee, in a bipartisan way, passed the
    Sarbanes-Oxley Act in 2002, and you have heard, I am sure, a
    lot of criticism on that law--and I have read about it--and
    some praise of it one way or another, but they talk about the
    rising cost of regulation, and this, according to some people,
    is creating an incentive for firms to be listed on foreign
    markets or to withdraw from public markets altogether. We have
    more private capital and that kind of thing going on in the
    United States of America now, and there are other measures
    besides Sarbanes-Oxley that are attributed with those problems.
        In your opinion, has rising regulatory costs or other
    regulatory blocks of some kind or another weakened the
    international competitive position of our stock exchanges, and
    do they pose a threat to our competitiveness in the future?
        Mr. Bernanke. To some extent, the declining relative
    position of the American exchanges reflects the natural growth
    and development of exchanges abroad, in London, in Asia and so
    on, and as those economies, those exchanges become larger, more
    efficient, and deeper; that is actually not a bad thing because
    it gives, for example, American companies more alternatives for
    raising money.
        On the other hand, to the extent that business is being
    driven offshore by high regulatory costs, which was the
    conclusion of these two recent studies on capital market
    competitiveness, then that is a problem and we need to begin to
    address those costs.
        The Sarbanes-Oxley issue that you raised earlier has been
    cited by a number of these studies, and the SEC and the Public
    Company Accounting Oversight Board have recently issued a new
    audit standard which will attempt to reduce the costs of
    implementing Sarbanes-Oxley's Section 404 on internal controls
    and, in particular, to make it more focused on the most
    important matters rather than on trivial matters and also more
    appropriate for smaller and less complex firms. So I think that
    is going to be an important step in reducing that particular
    set of costs.
        There are many other issues, some of which Congress could
    address--issues of tort reform and litigation, the CFIUS bill
    about foreign investment coming to the United States, and
    striking the appropriate balance there between keeping a flow
    of foreign investment into the United States versus appropriate
    national security considerations. The Federal Reserve is
    working on the Basel II bank capital accord regulation, and we
    are working on that, and we want to make sure that does not put
    American banks at a capital disadvantage in the capital
    markets.
        So it is certainly important for us across a whole variety
    of regulatory areas to try to keep those costs down and to keep
    working to reduce the burden of regulation on American public
    companies.
        Mr. Castle. Well, thank you. I do not mean to speak for our
    chairman or ranking member here, but I think these issues are
    of great importance to this particular committee. So,
    hopefully, we can be kept informed.
        Changing subjects, I am looking at page 2 of your testimony
    in which it says that the Federal Open Market Committee has
    maintained Federal fund rates, etc., of 5\1/4\ percent, and it
    says that, more or less, the risk of inflation is not
    overwhelming at this point. Then it goes on to say--and again,
    you have indicated this--the ``predominant policy concern is
    the risk that inflation will fail to ease as expected and that
    it is prepared to take action to address inflation risks if
    developments warrant.'' I suppose I should have learned this in
    Economics 101, but in addition, if there is an addition to
    dealing with interest rates, are there other things that the
    Federal Open Markets Committee can do with respect to that
    issue?
        Mr. Bernanke. No. That is the basic tool.
        The Chairman. If the gentleman would yield.
        Mr. Castle. I yield.
        The Chairman. He said he could not speak for me, but he
    just asked essentially the same question I asked. So, on those
    two questions about the congruity of those two statements, I
    agree with the gentleman.
        Mr. Castle. And I also apologize for being absent and not
    here when you asked, Mr. Chairman. I had a good reason for it,
    though.
        The Chairman. Submit it in writing.
        Mr. Castle. I have last year introduced legislation about
    transparency in hedge funds. I am concerned about hedge funds.
    You answered this yesterday in Senate testimony and basically
    indicating that the liquidity of hedge funds could be very
    important. I don't have a problem with that either, but I do
    have a problem in terms of what hedge funds could do with
    respect to commodity markets and a variety of things they get
    into because of the enormity of it and the number of them that
    have opened in recent years and where they are going.
        I am not one who looks for overregulation or
    overtransparency, if there is such an expression, but I think
    proper transparency is in order. I would like your thoughts, if
    you could, about where we are with respect to hedge funds, and
    what do you think the role of the--regulatory role or perhaps
    our committee role in this area should be.
        Mr. Bernanke. Well, the approach that regulators have taken
    since the report of the President's Working Group after the
    LTCM crisis has been a market-based approach, an indirect
    regulation approach, whereby we put a lot of weight on good
    risk management by the counterparties to the hedge funds such
    as the prime dealers, the lenders, as well as the good
    oversight of the investors, the institutions and so on that
    invest in hedge funds. And we found that is a very useful way
    to control leverage and to provide market discipline on those
    funds.
        The original report of the President's Working Group also
    suggested disclosures, and that never went anywhere in
    Congress, and I think part of the problem was it was difficult
    to agree upon what should be disclosed and what would be
    useful. The hedge funds are naturally reluctant to disclose
    proprietary information about their trading strategies and
    approaches, and their positions change very quickly, and so
    therefore position information can be overwhelming and perhaps
    not very useful.
        I think it is important to continue to think about hedge
    funds. They certainly play an important role in our financial
    system. Exactly, you know, what a disclosure regime would look
    like, though, is not yet clear to me how that best would be
    organized.
        The Chairman. The Chair is about to recognize the gentleman
    from Minnesota. I do want to thank the Chairman. It is the
    first time in my memory that freshman members of this extremely
    large committee are able to ask questions because--I appreciate
    the chairman being around because we are going to be able to
    accommodate our four remaining members, but the ranking member
    had one very specific brief question he wanted to ask, and if
    there is no objection, I will recognize him for that.
        Mr. Bachus. Mr. Chairman, this is more of a concern.
    Governor Susan Bies recently announced her retirement. I am
    very concerned about that in that she was expert on not only
    risk management, but on Basel, and I felt like under her
    leadership we made tremendous strides in Basel. She had real
    banking experience with a regional bank. And with Mark Olsen
    gone, too, I am just concerned that as that process goes
    forward--you know, he has a community banking background--that
    we had people who were bankers that we deal with as this
    process goes forward, because those are two major losses.
        Mr. Bernanke. We will miss Governor Bies, as well. She was
    an extraordinary colleague and very, very knowledgeable about
    banking matters, as you indicate.
        I think we will have good continuity. We have the skills at
    both the Board level and at the staff level to continue to move
    forward effectively with Basel II. And we will, of course, wait
    for the President to nominate two people to the Board.
        The Chairman. I would like to say to the Chairman that I
    hope that you can, in fact, bring the Basel process to a
    conclusion and I never have to think about it again for about 6
    years.
        The gentleman from Minnesota.
        Mr. Ellison. Thank you, Mr. Chairman.
        And thank you, Mr. Chairman.
        Mr. Chairman, in your remarks on page 2, you noted that
    real hourly compensation rose at an annual rate of about 3
    percent in the latter half of 2006.
        Could you describe how the longer period of time, for
    example, over the past 10 or, say, 15 years, what have real
    wages looked like?
        Mr. Bernanke. I don't know the exact number over the last
    10 years, but there has been a pattern, we have seen this time
    and we saw before, in the late 1990's, when productivity picked
    up quickly during that period in the late 1990's, real wages
    lagged behind productivity for a while, and then they began to
    catch up to it.
        I think in the current episode a couple of things have been
    at work. One is that the labor market remains somewhat weak
    even after the recession ended in 2001. A second concern has
    been the oil price increases, given nominal wage increases,
    modest nominal wage increases, when oil prices go up so much
    that it takes away from the buying power of real wages. And
    then thirdly I think it is, again, somewhat normal for real
    wages to catch up later in the business cycle to--and
    particularly when there have been periods of increased
    productivity growth as we have seen in the last 3 years.
        So I am encouraged to see this increase in real wages.
    Barring new shocks, new increases in oil prices, I would think
    we would see further increases in real wages going forward. And
    I would just add that the 3 percent number is for the whole
    nonfarm business sector, but you get about the same number for
    average hourly earnings for production workers, which is more
    representative of the broader middle of the middle
    distribution.
        Mr. Ellison. I am encouraged by the increase in real wages,
    too, since the middle of 2006, but I have heard people describe
    the real wages over the longer period, maybe 20 years or so, as
    flat. And so I don't know if that conflicts with what you are
    saying or if it is--or if what you are saying is more
    descriptive of more recent events.
        Mr. Bernanke. The behavior of real wages depends on the
    skill levels. I have some discussion of this in this speech
    that Representative Waters referred to on inequality. Over the
    last 25, 30 years, we have seen really modest increases in real
    wages for those with less than a high school education, much
    more significant increase in real wages for those who have a
    college education or better, and intermediate increases for
    high school graduates. So it depends very much on where you are
    in the wage scale.
        Mr. Ellison. Thank you.
        I want to ask you a little about loans. What is your best
    prescription or recommendation to fix what I would generally
    describe as predatory loans? And I am not only referring to the
    mortgage market, but what could also--some phenomena in the
    credit card area? It sounds like what you are saying what we
    need is more disclosure to the consumer. Did I understand your
    views accurately on that?
        Mr. Bernanke. Well, I indicated that it is very difficult.
    And I am not just trying to hedge here, because we want to
    eliminate predatory and abusive lending, but we don't want to
    shut down the legitimate subprime market. And that is sometimes
    a difficult task, and that is why I was praising some of the
    State efforts that represent good experiments along those
    lines.
        So approaching that I think involves disclosure, it may
    involve barring certain practices as well. The Federal Reserve,
    I should say, is very much involved in trying to control
    predatory lending. We are responsible for the Home Mortgage
    Disclosure Act. We recently added information requirements
    there on pricing so we can find out whether pricing is varying
    across, for example, minorities and nonminorities. We are
    responsible for the Home Ownership Equity Protection Act and
    other things, Regulation Z. So we are very much involved in
    that from the Federal level.
        But again, I think there is still a lot of creativity we
    can see at the State level to try to understand better how to
    address this problem.
        Mr. Ellison. Thank you, Mr. Chairman. I only have 5
    minutes. So is the proposal--the rule proposal regarding
    regulation Part D, is that basically a rule--do you anticipate
    that rule focusing on disclosure, or will it include barring
    certain practices?
        Mr. Bernanke. Did you say Regulation Z?
        Mr. Ellison. Yes.
        Mr. Bernanke. Yes. That is part of the Truth in Lending
    Act. By nature of the act, it is focused on disclosures, and it
    will be focused on short-term credit like credit cards.
        Mr. Ellison. Do you have any views on things like universal
    default? This is a credit card practice I am sure you are
    familiar with. If you default, if you are late on one credit
    card, a credit card company you are not late on can jack up
    your rate. Do you have any views on that practice and how
    Congress might approach that kind of phenomena?
        Mr. Bernanke. That is a difficult one. We don't want to
    rule out the possibility that when someone's creditworthiness
    drops for a variety of reasons, that their creditors get that
    information and use it.
        However, I think some of the concern about universal
    default provisions is that people don't get enough warning or
    notice that this condition is going to kick in. So that might
    be one direction to go, which is to increase the amount of
    warning that consumers get when their credit histories
    deteriorate and when that may affect their pricing and their
    credit cards.
        Mr. Ellison. Thank you.
        The Chairman. The gentleman from Illinois.
        Mr. Roskam. Thank you, Mr. Chairman.
        Mr. Chairman, I am a new Member of Congress and a new
    member of the committee, and I appreciate the detailed
    questions that my colleagues have asked. I guess I would ask a
    broader question, and that is, you know, it seems to me that
    economic strength and weakness, success and failure is
    mysterious in a lot of ways, and it is difficult for somebody
    outside of this arena to gaze in and really discern all the
    factors that go into a good, successful mix. And I realize
    there is really nobody who can do that.
        But for purposes of this committee and future committees
    that have this responsibility of oversight for you, Mr.
    Chairman, and the Fed, what are the things that you are
    responsible for? What are the tools that you have at your
    disposal? And can you sort of, and maybe in an Econ 101 sort of
    fashion, in the remaining 4 minutes just break that down and
    say, look, maybe start--these are the things that we frankly
    have no influence over, that are just off the table. I think
    that would help me and maybe some other members of the
    committee in the future.
        Mr. Bernanke. Well, the Federal Reserve has multiple
    responsibilities. The one that is best known is our
    responsibility for monetary policy, which we use to pursue the
    Congressional mandate of price stability and maximum
    sustainable employment.
        It is important that the Federal Reserve be independent and
    be able to make independent decisions about interest rates in
    order to preserve the credibility of the central bank. However,
    it is also important that Congress exert oversight over the
    Federal Reserve to make sure that we are following our stated
    mission, and that we are pursuing coherent and rational plans.
        The other areas include banking supervision, where we are
    involved in developing the new capital accord, providing
    various guidances and regulations together with the other
    banking agencies, and there we are more like the other agencies
    in terms of the kinds of responsibilities we have.
        We have considerable responsibility in the consumer
    protection area--that has come up a lot today--for various
    regulations that provide disclosures to consumers on credit
    cards, on mortgages, and that provide some tools to address
    predatory lending, or high-cost lending. And there, like other
    agencies, we are given instruction by the Congress, by the law,
    in terms of what the Congress wants us to achieve and with what
    instruments. And then it is our job to implement the
    regulations that will most effectively accomplish Congress's
    goals.
        So we have a range of activities, all of which fall into
    the underside of Congress obviously.
        The Chairman. I thank the gentleman. The Chair will now
    exercise his prerogative. We have four Members left who haven't
    asked questions. We have about a half hour. That is going to be
    the end of it. So I will go to the gentleman from Colorado, the
    gentleman from Ohio, the gentleman from Indiana, and the
    gentlewoman from Wisconsin. Anyone who is within the sound of
    my voice or whose staff is here, don't bother to show up
    because we are going to end it at this. And the gentleman of
    Ohio is recognized--I am sorry the gentleman from Colorado.
        Mr. Perlmutter. Thank you, Mr. Chairman, and Chairman
    Bernanke, thank you for your stamina and patience. I have
    several questions.
        The Chairman. What about mine?
        Mr. Perlmutter. Well, yours has been remarkable, Mr.
    Chairman. Thank you.
        On page 2 of your report, you say that consumer spending
    continues to be the mainstay of the current economic expansion.
    Where are we on consumer debt? I mean, have you seen a trend in
    that, and can you tell me where we are?
        Mr. Bernanke. Consumer debt has risen quite a bit. It is
    rising more slowly recently mostly because home mortgages
    aren't rising as quickly due to the flattening out of prices
    and the slower amount of home purchase.
        Generally speaking, though, as we said in the testimony,
    households are in reasonable financial shape. Offsetting their
    debt is an increase in wealth; the stock market is up. House
    prices over the last few years have gone up a lot, and so many
    people have a considerable amount of equity in their home. And
    moreover, the strength of the labor market means that the job
    availability, incomes, wages are also pretty strong. So for the
    larger part of the population, finances seem reasonably good
    relative to historical norms.
        Now, of course, there are always some people who are having
    problems, and as I noted in testimony, there are some sectors,
    notably the subprime lending sector, where we were seeing some
    distress, and we are watching that very carefully.
        Mr. Perlmutter. So no alarm bells in the trend of consumer
    debt, because I guess my perception has been that we have had
    significant increase to consumer debt really as compared to
    over the last 10 years, and that there have been some concerns
    about that.
        Mr. Bernanke. There have been increases in consumer debt.
    There have been even larger increases in consumer assets, and
    so our wealth has grown. Our wealth is now at the highest level
    ever.
        So, again, for most people there is a reasonable balance
    between assets and liabilities.
        Again, there are some pockets of concern, but I don't think
    that at this point that they have significant implications for
    the behavior of the overall economy, although we obviously have
    to watch the individual sectors.
        Mr. Perlmutter. Okay. Any exact pro or con by the recent
    changes in the Bankruptcy Code now that we have had a year,
    year-and-a-half under our belts? And, you know, if you don't,
    if it is too early to tell, then that is fine, too.
        Mr. Bernanke. It is a bit early to tell. We saw a big spike
    in bankruptcy filings in advance of the law because people, if
    they were thinking of going bankrupt, they wanted to get that
    done before the law change. Since then we have seen a moderate
    rate of bankruptcy, I think somewhat lower than in the past,
    but whether that is due to the change in the law or just to
    generally good financial conditions in the last few years is
    hard to say. Again, we have seen, for example, very few
    delinquencies in consumer credit or in mortgages outside the
    subprime market, so there has been a generally good credit
    situation in the last couple of years, and that seems to be
    reflected in a relatively low rate of bankruptcies.
        Mr. Perlmutter. Speaking of the subprime market, last week
    the bottom kind of fell out of that market, or there was a
    tremendous drop in that market. Has that leveled off? I haven't
    read anything since Friday, but it seems there was a tremendous
    loss of value in that market.
        Mr. Bernanke. There have been a few small companies that
    have gone out of business, and others that have lost money.
    Nowadays, mortgages are not just made and held by individual
    firms, they are then securitized and sold into the general
    financial markets. And so we can look at financial market
    prices and see what the market more broadly thinks is happening
    in this area. And the value of subprime-mortgage-backed
    securities has dropped pretty significantly, suggesting that
    financial market investors are concerned about the loss
    probabilities in this area.
        Mr. Perlmutter. My last question, I had a number of
    organizations, interest groups, approach me on the issue of
    banks getting into the real estate business as opposed to
    remaining in the lending business. Does the Fed have an opinion
    on that, or do you have an opinion on that?
        Mr. Bernanke. The Federal Reserve is charged, along with
    the Treasury, in determining whether allowing banks to enter
    the real estate brokerage business is consistent with Gramm-
    Leach-Bliley. However, the Congress every year has essentially
    forbidden that consideration, so we have not yet had an
    opportunity to consider whether, based on the law, that should
    be allowed, so we have not had the opportunity to try to
    evaluate that.
        Mr. Perlmutter. Do you have an opinion on it, or if the
    answer is no, it is premature, that is fine.
        Mr. Bernanke. Since I am charged with making a
    determination, it would certainly be inappropriate for me to
    speak about it until such time as I have a chance to look at
    the information and data.
        The Chairman. The gentleman from Ohio.
        Mr. Gillmor. Thank you, Mr. Chairman, and also thank you,
    Mr. Chairman, for spending so much time with us.
        I want to touch on the question of ILC's. As you know, a
    lot of retail firms are trying to make an end run around the
    banking laws. Chairman Frank and I have had legislation in now
    for three Congresses. In the past you have always--also your
    predecessor, Mr. Greenspan, made comments in favor of closing
    that loophole. Would that still be your opinion?
        Mr. Bernanke. Yes, it would.
        Mr. Gillmor. Let me ask you another question regarding the
    economy, which has been generally good by all historical
    standards and when you have a good economy for a long time, you
    have low interest rates, thank goodness. We are all happy to
    see that. You see some of the economic commentators talking
    about whether it is time for the Fed to take the punch bowl
    away, and I guess my question is while the party is still going
    good economically, do you think we are still sober enough to
    leave the punch bowl there? So my question is what are you
    going to do with the punch bowl?
        Mr. Bernanke. We are going to conduct monetary policy so as
    to satisfy the chairman and meet our congressionally mandated
    responsibility for maximum employment and price stability.
        Mr. Gillmor. Thank you.
        One other question, and I don't know if you are familiar
    with this recent report, but many of us are worried about
    America's global competitiveness, and the World Economic Forum
    recently released its Global Competitiveness Report in which
    the United States dropped from first to sixth.
        I guess my question is, do you agree with that assessment
    and the recommendations made therein?
        Mr. Bernanke. First, I think that notion of competitiveness
    between countries is a little bit deceiving. It is not quite
    the same as GM and Ford. Any country that is successful in
    increasing its productivity will increase its wages and living
    standards independent of whether other countries are doing the
    same.
        I have looked at that report. It seems to me that the
    change in ranking is based on relatively small changes in the
    numbers. Some macroeconomic factors like our savings rate have
    entered into that calculation. So I don't take that in
    particular as an alarm bell. I don't think it is particularly
    significant, but, as always, we need to find ways to improve
    our macropolicies, improve our regulatory policies, and keep
    the country as productive and efficient as possible.
        Mr. Gillmor. Thank you very much, Mr. Chairman, and thanks
    again for spending so much time with us.
        Mr. Bernanke. Thank you.
        The Chairman. And thanks to the gentleman from Ohio for
    dropping in.
        Mr. Gillmor. I was on the Floor, Mr. Chairman.
        The Chairman. The gentleman from Indiana.
        Mr. Donnelly. Thank you, Mr. Chairman.
        Thank you, Chairman Bernanke.
        My district has Chrysler plants, Delphi plants, and small
    manufacturers, the heartland of this country, and in your
    testimony you talked about painful changes that are taking
    place. What the people of my district have asked me to tell you
    is that the changes are even more painful when the competition
    isn't fair. And we see China manipulating their currency,
    having no labor standards, no environmental standards, and
    intellectual piracy. And I guess my question to you, Mr.
    Chairman is do you see this as unfair competition, and if so,
    why do we let this continue?
        Mr. Bernanke. Well, I have spoken about the yuan, about the
    Chinese currency, and I think that it is undervalued. And I
    think that the Chinese ought to allow it to be more market-
    determined, that they should move in that direction.
        I also think that we should continue to work with them to
    enforce their intellectual property rights and to make sure
    that both sides are living up to trade agreements.
        So going forward, I agree that trade agreements need to be
    enforced, and intellectual property rights are important, and
    we should continue to apply pressure to China on those issues.
        Mr. Donnelly. I appreciate that. There is a feeling back
    home and on my part that the Chinese don't take us seriously in
    that respect--that we talk and we talk and we talk, and while
    we talk, more jobs leave my district from manufacturers who
    have shaved every corner they can, who have put in all the
    computer integration they can, and they see product coming into
    this country at costs they can't even touch to manufacture.
        And so there is a feeling that you are the home team, our
    Treasury Secretary, he is the home team. He was over in China
    recently, and there is a dispiritedness both on Republicans and
    Democrats, this is bipartisan, that the home team has walked
    away. Our own coaches have left us on the field all by
    ourselves. And so when I go back and say, well, they are
    talking, my manufacturers laugh and say, well, they will talk
    us until our doors are closed. So what do I tell them about
    that, Mr. Chairman?
        Mr. Bernanke. The Chinese have recognized that the large
    trade surplus is, in fact, a problem for them as well, and they
    understand that there is a risk of reaction, protectionism
    perhaps, and they have made it part of their official economic
    plan to try to reduce the trade surplus that they currently
    have.
        Greater exchange rate flexibility is part of the way to do
    that, but in addition, the Chinese are currently trying to
    increase the reliance of their economy on domestic consumption,
    domestic spending, and reduce reliance on exports. If they can
    make that adjustment towards a domestically driven economy,
    reduce their export reliance, that will help more, I think,
    even than some other measures to create a better global
    balance. So that is one step that they are taking.
        I would also say in terms of our conversations in
    discussions with the Chinese that I think that while the
    exchange rate is a very, very important issue, there is a wide
    range of issues that we as Americans have to discuss with the
    Chinese including issues of trade; you mentioned intellectual
    property rights and trade agreements, but things like the
    environment. For example, I think there is a lot of mutual
    benefit if, for example, we were able to provide equipment and
    technology to the Chinese to help them clean up their air, that
    would be beneficial to both parties. Similarly energy security
    is another interest we have in common.
        So another way to look at this is that, yes, we have to
    keep working on the exchange rate, but we also have a lot of
    other things that we need to be talking about, and I think it
    is important to keep that conversation going.
        Mr. Donnelly. And I guess I would ask you to discuss with
    the Chinese when you talk to them, and the Secretary of
    Treasury when he talks to them, that the folks back home who
    are running these shops, who are supplying families with the
    money to purchase their home, and we have increasingly high
    foreclosures back home, have said to me, Joe, we sent you there
    to do something about this, and if the Treasury Secretary and
    the Fed and the President aren't willing to do it, then we are
    looking to Congress to step up and take the steps necessary to
    make this a fair ballgame, again because they feel it is a
    rigged game, and our team won't step up for the people at home.
        Thank you very much, Mr. Chairman.
        The Chairman. The gentlewoman from Wisconsin.
        Ms. Moore of Wisconsin. Well, thank you very much, Mr.
    Chairman, and thank you very much, Mr. Chairman, for your
    patience here today.
        Thank you, Mr. Chairman. I did have an opportunity to
    review your testimony before the committee, and I do want to
    thank you. I have a reached some conclusions, which I guess I
    want to sort of vet with you.
        As others have mentioned, you mention several times in your
    testimony that consumer spending continues to be the mainstay
    in the current economic expansion, and you also seem to
    indicate that the resilience of this consumer spending is
    important towards sustaining our economic growth.
        You also indicate that increase in people's compensation
    accounts for this, and that our higher labor productivity and
    perhaps a narrowing of corporate profits might offset the
    higher labor productivity and that narrowing--I am sorry--
    profit margins of companies might prevent higher prices from
    occurring, and people might experience a real higher
    compensation.
        A couple of questions come to mind when I review this
    testimony. First of all, I guess I want to ask you if you
    account for this stronger gain in personal income as many of us
    do, foresee that it is all aggregated kind of at the top, that
    this increase in consumer spending is a very narrow number of
    consumers, and that imposes some kind of risk unless we spread
    the purchasing and consumer spending power a little bit
    broader.
        And secondly, leading into that sort of executive
    compensation, if we were to--again, if we are depending--if our
    economy is depending on consumer spending, wouldn't it be
    better if we sort of spread the wealth a little bit and, in
    keeping with your testimony, resist raising prices by narrowing
    corporate prices, profits?
        Mr. Bernanke. Well, as I discussed, there has been a long-
    term trend toward increased inequality in the United States
    that has been going on for a long time, but it is certainly an
    issue. I think most recently there has been some improvement
    just in terms of general earnings in the broader economy. I
    mentioned the statistic of the average hourly earnings which
    are for production workers, so that does not exclude the top 20
    percent of wage earners, and that has grown recently at a
    pretty reasonable pace. So I think that real wage gains
    currently are going to help support consumption spending. But I
    agree that we want to see a broad-based consumption in order to
    make this sustainable.
        Ms. Moore of Wisconsin. I am glad that you mentioned,
    because there seems to be a lot of resistance toward things
    like raising the minimum wage. I think we talk a lot about
    minimum-wage workers, but there are people who don't make the
    minimum wage that could benefit and would spend if they had
    more so-called disposable income. And I think your testimony
    really contributes a great deal to the discussion of how
    important it is to support our economy through elevating
    people's wages, and that is what I took away from your
    testimony. Thank you.
        Mr. Bernanke. Thank you.
        Ms. Moore of Wisconsin. I yield back, Mr. Chairman.
        The Chairman. I thank the gentlewoman, and I want to thank
    the Chairman, and I want to say that I thank the members of the
    committee. This has been a very thoughtful discussion. I
    appreciate the Chairman. I think these are issues that we will
    continue to talk about. And the hearing is adjourned.
        [Whereupon, at 1:50 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               February 15, 2007

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