[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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