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



 
         MONETARY POLICY AND THE STATE OF THE ECONOMY, PART II


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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 18, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-52



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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             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 18, 2007................................................     1
Appendix:
    July 18, 2007................................................    51

                               WITNESSES
                        Wednesday, July 18, 2007

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     8

                                APPENDIX

Prepared statements:
    Marchant, Hon. Kenny.........................................    52
    Price, Hon. Tom..............................................    53
    Putnam, Hon. Adam H..........................................    55
    Waters, Hon. Maxine..........................................    57
    Bernanke, Hon. Ben S.........................................    65

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Monetary Policy Report to the Congress, submitted by the 
      Board of Governors of the Federal Reserve System, dated 
      July 18, 2007..............................................    76
    Succeeding in the Global Economy: A New Policy Agenda for the 
      American Worker, submitted by the Financial Services Forum, 
      dated June 26, 2007........................................   107
Bachus, Hon. Spencer:
    Additional information requested from Chairman Bernanke......   169
Neugebauer, Hon. Randy:
    Responses to questions submitted to Chairman Bernanke........   171
Price, Hon. Tom:
    Responses to questions submitted to Chairman Bernanke........   173


                        MONETARY POLICY AND THE



                     STATE OF THE ECONOMY, PART II

                              ----------                              


                        Wednesday, July 18, 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, Maloney, 
Gutierrez, Watt, Meeks, Moore of Kansas, Hinojosa, Clay, Baca, 
Lynch, Miller of North Carolina, Green, Sires, Hodes, Ellison, 
Klein, Wilson, Perlmutter, Murphy; Bachus, Baker, Pryce, 
Castle, Royce, Paul, Gillmor, Manzullo, Shays, Capito, Garrett, 
Pearce, Price, Davis of Kentucky, McHenry, Campbell, Putnam, 
Bachmann, and Roskam.
    The Chairman. This is the semiannual Humphrey-Hawkins 
hearing. I do want to mention before the time starts, let me 
tell the timekeeper, there is one sort of general thing I want 
to take note of. This is, as people know, the Humphrey-Hawkins 
bill named for its authors, Senators Hubert Humphrey and Gus 
Hawkins. A month from today will be Gus Hawkins' 100th 
birthday. He couldn't be with us today, but we know he is aware 
of the hearing. His successor in Congress will be with us, the 
gentlewoman from California, Ms. Waters. But we did want to 
take note of this very significant accomplishment and wish Gus 
a very happy birthday as we his observe his birthday one month 
in advance with this very important part of his legacy.
    Now, beginning my statement, I want to express my 
appreciation for the part of the statement that deals with 
consumer problems. This a very important step forward. And I 
want to say that I think there have been some partially 
inaccurate stories in the press. It appears to me there is some 
unhappiness with the Chairman over consumer inactivity. In 
fact, I have historically been concerned about the Fed's 
failure to do that, and particularly their failure to use the 
authority they have had under the Federal Trade Act to spell 
out unfair deceptive practices. But this is something that well 
pre-dated the Chairman and that he is, in fact, addressing.
    And so I do not think it is appropriate for people to 
impute this unhappiness to him. As I read the report, and sort 
of the last 3 or 4 pages of the report were about this consumer 
issue, it became very clear to me that this is not ``Uncle 
Alan's semiannual report.'' We think that we are moving forward 
on this. I do, however, want to, in my statement, address the 
economic issue, the macroeconomic issue. Obviously the subprime 
and some issues are economic. I appreciate the Chairman's 
reemphasis in his opening remarks of the Fed's commitment to 
the dual mandate to dealing both with inflation and the need to 
restrain inflation and to maximize employment. But Mr. 
Chairman, we have an honest intellectual difference here. I 
must say I think this is an instance of cultural lag. That is, 
I believe that the single most pressing economic issue facing 
the country today is the excessive and growing inequality.
    And I want to read from a report issued under the auspices 
of Don Evans, President Bush's first Secretary of Commerce and 
a close friend of the President, the head of the Financial 
Services Forum, a 3-member panel that he commissioned, 
including Grant Aldonas, who was a high ranking Commerce 
Department official with trade responsibilities under President 
Bush, and Matthew Slaughter, immediate past member of the 
Council of Economic Advisors. And here on page 7, we have 
copies of this report available, and I think this is essential, 
this is a report put out by Secretary of Commerce Evans: Two of 
the three authors were high ranking economic officials of the 
Bush Administration, this Bush Administration.
    ``From the mid-to-late 1970's to the mid-to-late 1990's, 
the real and relevant earnings of less skilled Americans was 
poor relative to both economy-wide average productivity gains 
and also the earnings of their more-skilled counterparts. And 
since around 2000 the large majority of American workers has 
seen poor income growth. Only a small share of workers at the 
very high end has enjoyed strong growth in incomes. The strong 
U.S. productivity growth of the past several years has not been 
reflected in broad growth in wage and salary earnings.'' That 
is a fact that we need to accept. It is reinforced. Some 
statistics can be used in other ways, and people sometimes do 
averages, but I would call people's attention to the footnote 
on page 6 of the Monetary Policy Report that Chairman Bernanke 
has submitted.
    Let me read the footnote: ``According to the published 
data, real disposable personal income rose at an annual rate of 
4\3/4\ percent in the first quarter of this year. However, a 
substantial part of the increase occurred because the Bureau of 
Economic Analysis added $50 billion at an annual rate to its 
estimate of first quarter wages and salaries in response to 
information that bonus payments and stock option exercises 
around the turn of the year were unusually large. Because the 
BEA did not assume that these payments carried forward into 
April real disposable personal income fell sharply in that 
month.'' By the way, the figure that is given by that largely 
Republican panel on economic growth, which I talked about, is 
that about 3.8 percent of the population has seen real growth 
in income in these past 6 years and the rest have not, and some 
have seen a real erosion. That includes, by the way, people's 
college education.
    Education does not appear to be the talisman that dissolves 
this. Here is our problem: The resentment that is generated by 
that is a significant problem in America today. A couple of 
weeks ago, the immigration bill blew up noisily. Trade 
promotion authority expired very unnoisily, not only not with a 
bang, not even with a whimper; it just went away. In neither 
case, in my view, were the defeat of those two measures, 
whether people liked them or not, due to problems and issues 
intrinsic to those measures. The key factor was the anger on 
the part of that large percentage of Americans who were not 
seeing any of the increase in wealth being distributed to them 
who say, ``No, we are not going forward.''
    I think, in some cases, the anger was displaced at the 
wrong enemy, but the anger is there. My problem, Mr. Chairman, 
is that the report and the proposal, in some ways, will make 
this worse. Here's where we are. The report and your statements 
say that you expect us to grow slightly below trend for the 
rest of this year and next year, the trend being 3 percent of 
growth, and we are in the 2-plus percent. I do want to say 
semantically that when we are projected to be somewhat below 
growth, the answer is near trend. When we are above it, it says 
above. While mere trend means below trend. At the same time, 
you predict an increase in unemployment. Not a huge one, but up 
into the 4\3/4\ range. You know, that softness in the labor 
market is one of the things that will erode real wages. The 
only time we got real increases in real wages for the large 
number of people in the population was in the late 1990's when 
unemployment went to 3.9 percent. We hit a very tight labor 
market, because we have had an erosion of institutions that 
help labor in this country, as Peter Temin and Frank Levy 
pointed out in their MIT paper, which we have available. So we 
are really dependent on a high level of overall growth.
    You also predict, so you say, growth below trend--a slight 
increase in unemployment and you expect inflation to moderate. 
But in fact, in an odd phrase, you say the real danger is that 
inflation will fail to moderate as you expect it to. So your 
lack of confidence in your expectation says that the likeliest 
thing you ought to do is to raise interest rates and slow 
things down. That is you see the major danger is inflation.
    If you see the major danger is inflation at a time when 
inflation appears to be stable, and inflation expectations and 
the concept important to you appear to be fairly well-anchored 
for the long term, and we appear to be growing at somewhat 
below trend, not a huge amount, but below trend, and 
unemployment is going to go up, at best, we are going to 
continue this problem. You do note, and I appreciate this, that 
historically profits greatly increase, greatly exceed wages. 
Let me read the exact, and I give myself an extra minute to 
read this. I will make up for it in my questioning. But there 
is a specific reference to the fact that given historic trends, 
there is room for wages to go up and profits still would be in 
very good shape without it having an inflationary impact.
    And so with that, with wages having lagged significantly 
for years, with a very small percentage of the population 
having gotten any real increase in the last 5 years, with 
inflation predicted to be stable, with growth predicted to be 
below trend by a little bit, unemployment predicted to rise, 
even as the labor force drops, which means slower job growth, 
you say the main concern is inflation. I think that is cultural 
lag. I would have understood that better some time ago. But 
given the social--and, by the way, I would throw in here the 
savings rate. People omit the absence of a savings rate.
    When only 3.8 percent of the population has gotten any real 
increase in their wages, in their take-home pay in the last 5 
years, what is it that people expect them to save, cancelled 
stamps? People can't save money if at the end of the month they 
don't have any, if their wages have not come up. So with all 
that, the conclusion that the main danger facing us now, or the 
more important one, is inflation, troubles me, because I think, 
at best, this current situation of increasing inequality, with 
all of its negative social, economic, and political 
consequences, stays as is and could get worse. I now recognize 
the gentleman from Alabama.
    Mr. Bachus. I thank the chairman, and Chairman Bernanke, 
thank you for your support and continued strong and wise 
stewardship of our Nation's monetary policy. As I said when you 
appeared before this committee in February, there is a 
difference of opinion on the strength of the economy. I would 
like to review some of the facts, which I think are hard to 
argue with. First of all, economic growth is robust, as 
illustrated by 132,000 new jobs created in June alone, and as 
you say in your testimony, 850,000 since the start of the 
year--over 8 million new jobs created since August of 2003. 
Unemployment remains low. Despite higher oil prices, and really 
it is something I am going to mention later in my remarks, oil 
has gone from $50 to $75 a barrel just from the middle of 
January.
    And despite the rise in energy cost, inflation is under 
control following the 2.4 percent in February 2, 2007, and 1.9 
percent in May. While it has slowed recently, productivity has 
averaged 2.8 percent growth since 2001, well above the average 
productivity growth experienced in the 1970's, 1980's, or 
1990's. Real wages have shown a healthy increase over the past 
year. And are supporting concerned strong consumer spending, 
even in the face of declines in real estate values in many 
areas of the country. The stock market continues to deliver 
superior returns to investors. This economic success story is a 
result of sound economic policies pursued, I believe, by this 
Republican Administration, by our Treasury Department, and by 
the Federal Reserve.
    They are also a testament to the hard work and innovation 
of American businesses and workers who comprise the American 
economy. Chairman Bernanke, I believe you deserve a great deal 
of credit for the performance of the economy as well. Instead 
of micromanaging monetary policy, you have held an absolutely 
steady hand for a year now balancing the tension between modest 
upside inflation risk and modestly slower growth.
    No one has summarized your tenure at the Fed better than 
The New York Times. In a June 25th story, less than a month 
ago, they said this, ``Could an ivy league academic like this 
ever have street credibility?'' The answer is clear: yes, yes, 
and yes again. The same article also observed that the economy 
today is pretty much exactly where Mr. Bernanke hoped it would 
be one year ago. Economic growth has slowed slightly, gradually 
reducing inflationary pressures. And while job creation has 
slowed, unemployment remains low at 4.5 percent. That is The 
New York Times.
    Before I conclude my remarks, Mr. Chairman, I would like to 
bring your attention to two topics of particular interest to 
members of this committee. First, as you know, Chairman Frank 
and I are both concerned over the recent turmoil in the 
subprime lending market. Just last week, Representatives 
Gillmor, Pryce, Miller, LaTourette, Capito, and I introduced 
legislation on this subject. Developing a consensus solution to 
this problem, while determining the Fed's proper role in 
regulating the mortgage industry, are priorities for Members on 
both sides of the aisle.
    The committee would benefit from your thoughts on the 
current state of the subprime mortgage market and its potential 
impact in the larger economy. And second, Mr. Chairman, the 
Fed, it has often been said, has a dual mandate, and that is 
price stability and full employment. While that mandate has 
certain factors that are more subject to management and control 
than others, there is one wild card, possibly two, when you 
talk about core inflation and then backing out energy and food. 
The wild card to me, and the disturbing factor in our economy, 
is energy cost over which the Federal Reserve has very little 
short term or long term influence. As I said earlier, the price 
of oil, if you go back to July of last year, $75, where it is 
today, but we have gone down to $50 a barrel and back up to 
$75. Some people say we will get relief because there may be an 
economic slowdown in China or India or Europe and that may 
bring us relief, but that would not be good for the economy. So 
we get in a situation where China is growing at 11 percent. 
Their energy demands are growing. And U.S. manufacturing, in 
fact, the largest contributor to job loss in this country over 
the last 10 years is the high cost of energy. And yet this 
Congress, for 10 years--for a year or two we have talked about 
the subprime situation.
    I would tell colleagues on both sides of the aisle, for 10 
years, we have been talking about our dependency on foreign 
oil, we have been talking about the high cost of energy, we 
have talked about its devastating impact on employment and on 
manufacturing, but yet we have done nothing. China is building 
a new nuclear power plant every week. With every plant they 
bring online, they reduce the cost of energy and increase their 
competitiveness over us. Mr. Chairman, I believe that Congress' 
failure over many years to address this energy cost has created 
and will continue to create real problems for the Federal 
Reserve as you try to cope with both price stability and full 
employment, because I think the high cost of energy is a wild 
card over which you have no control. And it is my greatest 
concern, and I am sure it is a great concern to you moving 
forward.
    Let me conclude by saying that members--both Republican and 
Democrat--on this committee respect your experience, your 
judgment, and your obvious commitment to keeping America's 
economy strong and competitive. We appreciate you being here 
and look forward to your comments.
    The Chairman. The gentleman from Illinois, the chairman of 
the Domestic and International Monetary Policy Subcommittee, is 
recognized for 3 minutes.
    Mr. Gutierrez. Thank you, Chairman Frank, and good morning, 
Chairman Bernanke, and welcome back. I think you will hear some 
of the same major themes from this side of the aisle that you 
heard in February. There is good reason for this, I believe. I 
can tell you that when I go back to my district and meet with 
middle class and lower middle class working Americans, they 
just aren't feeling the benefits of a growing economy. Jobs can 
be found, but they aren't necessarily steady, well-paying jobs. 
And those who have steady work are facing stagnant wages. So 
much of the discussion I am hearing from economists about 
inflationary concerns caused by rising labor costs just don't 
ring true with many workers, at least not in my district. More 
than tangible concerns, many of my constituents just feel 
uneasy about their economic security. Of course, these are the 
same families who are feeling the crunch of rising health care 
costs and increasing costs of education, all the while trying 
to save for retirement. It is not just that these families are 
living paycheck-to-paycheck; it is that they have little or no 
savings, and in some cases, no bank accounts at all, so they 
pay higher interest rates and more fees for basic financial 
services than they should. I raise the issue of inequality, 
Chairman Bernanke, because I believe economic inequality is a 
product of monetary policy choices. And I believe that 
inequality is inside the scope of the Federal Reserve's ``dual 
mandate.'' Yesterday, Chairman Frank assembled an excellent 
panel of economists that he referred to earlier in a hearing 
held before the committee on the dual mandate. One of the 
economists who testified, James Galbraith, recently completed a 
study on whether the Federal Reserve has observed the dual 
mandate. One of the findings of the study is that inequality in 
pay or earnings, especially in the manufacturing sector, does 
react to rate setting decisions of the Federal Reserve, and 
that in the statistical sense monetary policy causes 
inequality.
    I would like you to respond to Mr. Galbraith's assertions 
and discuss whether or not the Federal Open Market Committee 
considers economic inequality issues as a factor in setting our 
monetary policy. I thank you and I yield back the balance of my 
time.
    The Chairman. The gentleman from Texas, Mr. Paul, the 
ranking member of the subcommittee.
    Dr. Paul. Thank you, Mr. Chairman, and welcome Chairman 
Bernanke. I share your concern for the inequality that has 
developed in our country. I think it is very real, I think it 
is a source of great resentment, and unfortunately, I think it 
is one of those things that puts a lot of pressure on Congress 
to increase the amount of government programs and government 
spending, which I do not think is the answer. I believe the 
inequality comes specifically from the type of currency we 
have. When there is a deliberate debasement of a currency, it 
is predictable that the middle class is injured, the poor are 
hurt, and there is a transfer of wealth to the wealthy, and 
until we understand that, I do not believe we can solve this 
problem.
    And if we resort to continued monetary inflation and more 
government programs, we will only make this inequality worse. 
This is exactly the opposite of what happens when you have a 
sound currency and free markets, because it is the sound 
currency and free markets which creates the middle class and 
creates prosperity and allows the best distribution of this 
wealth. Inflation is a monetary phenomenon. It comes from the 
Federal Reserve system. The Federal Reserve has tremendous 
pressure put on them, because almost everybody wants low 
interest rates, except if you happen to be a saver, then you 
might not like artificially low interest rates. But, of course, 
that contributes to the lack of savings, which is another 
problem that we have in this country. We concentrate on 
inflation by implying, and everybody casually accepts that 
inflation is a price problem. But the prices that go up are one 
of the consequences of inflation. Inflation causes 
malinvestment, it causes excessive debt, and it causes 
financial bubbles that we have to deal with. But we have a lot 
of information today available to us to show that there is a 
lot of monetary inflation going on.
    For instance if you look at MZM, it is growing at almost a 
9 percent rate. M3 is no longer available to us from official 
sources, but private sources tell us it is growing at a 13 
percent rate. Of course, we can reassure ourselves and say that 
the CPI is growing at a 2.6 percent rate. But if you go back to 
the old method of calculating the CPI, closer to what the 
average person is suffering, and one of the reasons why there 
is inequality going on, is it is growing at over a 10 percent 
rate.
    The fact that the dollar is weak on the international 
exchange markets cannot be ignored. For instance, in just 6 
months, the Canadian dollar increased 11 percent against our 
dollar. This should stir up some concerns. But one concern that 
I have, that I think is causing more problems and keeps us from 
coming to a solution, is the divorce between the exchange value 
of a dollar on the international exchange markets and the 
effort to lower the value of a dollar in order to increase 
exports, which can only be done through inflation, at the same 
time, believing that we can have stability in prices at home, 
because that is a disconnect that is not possible. If we strive 
for a lower dollar in exchange markets, we will have price 
increases here at home and we have to deal with it. I yield 
back.
    The Chairman. Thank you. Mr. Chairman, I appreciate, as I 
said, the comments and the efforts you are now undertaking 
regarding subprime, and we will work more with those. I will be 
talking not much about those this morning, but I do want to 
acknowledge that is a significant advance, and we look forward 
to working together. I also want to comment, I was just reading 
my clips as they come in, and I had one commentary saying that 
the difference between us was that I continued to believe in 
the Phillips Curve, and you do not. And I don't. In fact, one 
of the things that I have credited Chairman Greenspan for was 
in the 1990's ignoring those who told him that if unemployment 
dropped below first 6 percent, then 5\1/2\ percent, then 5 
percent, and then 4\1/2\ percent, it would be inevitably 
inflationary. It seems to me that this whole notion of a 
nonaccelerating inflation rate of unemployment turned out only 
to be a lagging indicator of unemployment.
    As unemployment dropped, people dropped that rate, but it 
never had that prediction. I think we were dealing with the 
real economy, and here are the issues, but here is my concern: 
It is on the inequality issue, which I think has become a 
significant political problem, and I assume you were not happy 
to see trade promotion authority die. My guess is that you 
thought we should have some form of an immigration bill. And 
again, I would stress, I don't think that the solution to 
either of those problems is intrinsic to those problems. It is 
the sea in which they have to survive that has turned against 
them. We know what the numbers are in inequality.
    What troubles me a little bit is that in the report, and I 
do remember in previous reports references to wages, there are 
no wage indexes in here. There are compensation indexes, which 
as you acknowledge, and we know, include pensions and include 
healthcare. But given what you expect to go forward, let me ask 
you, for I think it is one of the most important predictions, 
going forward do you see any abbreviation of this trend of the 
distribution of wealth being as concentrated as it now is. It 
is documented in the report that I assume you are familiar with 
that Don Evans put forward, where 3.8 percent of the population 
has gotten real wage increases in the last 5 years. Do you see 
any abbreviation of that trend going forward?
    Mr. Bernanke. Well, I have discussed this issue in a number 
of contexts. I think that in order to alleviate--
    The Chairman. I apologize. You haven't given your opening 
statement yet. And you can comment now if you want to. I was 
wondering why the time hadn't started yet. If this had been my 
first hearing, I could explain that mistake a little bit 
easier. No good explanation comes to mind. You can comment now 
or just do your opening statement and come back to it.

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

    Mr. Bernanke. I will do my opening statement. Thank you.
    Chairman Frank, Ranking Member Bachus, and members of the 
committee, I am pleased to present the Federal Reserve's 
Monetary Policy Report to the Congress. As you know, this 
occasion marks the 30th year of semiannual testimony on the 
economy and monetary policy for the Federal Reserve. In 
establishing these hearings--Mr. Hawkins and Mr. Humphrey were 
mentioned--the Congress proved prescient in anticipating the 
worldwide trend toward greater transparency and accountability 
of central banks in making monetary policy. Over the years, 
these testimonies and the associated reports have proved an 
invaluable vehicle for the Federal Reserve's communication with 
the public about monetary policy, even as they have served to 
enhance the Federal Reserve's accountability for achieving the 
dual objectives of maximum employment and price stability set 
forth by the Congress.
    I take this opportunity to reiterate the Federal Reserve's 
strong support of the dual mandate. In pursuing maximum 
employment and price stability, monetary policy makes its 
greatest possible contribution to the general economic welfare.
    Let me now review the current economic situation and the 
outlook beginning with developments in the real economy and the 
situation regarding inflation before turning to monetary 
policy. I will conclude with comments on issues related to 
lending to households and consumer protection, topics not 
normally addressed in monetary policy testimony, but in light 
of recent developments deserving of our attention today.
    After having run at an above-trend rate earlier in the 
current economic recovery, U.S. economic growth has proceeded 
during the past year at a pace more consistent with sustainable 
expansion. Despite the downshift in growth, the demand for 
labor has remained solid with more than 850,000 jobs being 
added to payrolls thus far in 2007 and the unemployment rate 
having remained at 4\1/2\ percent. The combination of moderate 
gains in output and solid advances in employment implies that 
recent increases in labor productivity have been modest by the 
standards of the last decade.
    The cooling of productivity growth in recent quarters is 
likely the result of cyclical or other temporary factors, but 
the underlying pace of productivity gains may also have slowed 
somewhat. To a considerable degree, the slower pace of economic 
growth in recent quarters reflects the ongoing adjustment in 
the housing sector.
    Over the past year, home sales in construction have slowed 
substantially and house prices have decelerated. Although a 
leveling off of home sales in the second half of 2006 suggested 
some tentative stabilization of housing demand, sales have 
softened further this year, leading the number of unsold new 
homes in builders' inventories to rise further relative to the 
pace of new home sales. Accordingly, construction of new homes 
has sunk further, with starts of new single family houses thus 
far this year running 10 percent below the pace in the second 
half of last year.
    The pace of home sales seems likely to remain sluggish for 
a time, partly as a result of some tightening and lending 
standards and the recent increase in mortgage interest rates. 
Sales should ultimately be supported by growth in income and 
employment, as well as by mortgage rates that--despite the 
recent increase--remain fairly low relative to historical 
norms. However, even if demand stabilizes as we expect, the 
pace of construction will probably fall somewhat further as 
builders work down the stocks of unsold new homes. Thus, 
declines in residential construction will likely continue to 
weigh on economic growth over coming quarters, although the 
magnitude of the drag on growth should diminish over time.
    Real consumption expenditures appear to have slowed last 
quarter following two quarters of rapid expansion. Consumption 
outlays are likely to continue growing at a moderate pace, 
aided by a strong labor market. Employment should continue to 
expand, though possibly at a somewhat slower pace than in 
recent years as a result of the recent moderation in the growth 
of output and ongoing demographic shifts that are expected to 
lead to a gradual decline in labor force participation. Real 
compensation appears to have risen over the past year, and 
barring further sharp increases in consumer energy costs, it 
should rise further as labor demand remains strong and 
productivity increases.
    In the business sector, investment in equipment and 
software showed a modest gain in the first quarter. A similar 
outcome is likely for the second quarter, as weakness in the 
volatile transportation equipment category appears to have been 
offset by solid gains in other categories. Investment in 
nonresidential structures, after slowing sharply late last 
year, seems to have grown fairly vigorously in the first half 
of 2007. Like consumption spending, business fixed investment 
overall seems poised to rise at a moderate pace, bolstered by 
gains in sales and generally favorable financial conditions. 
Late last year and early this year, motor vehicle manufacturers 
and firms in several other industries found themselves with 
elevated inventories, which led them to reduce production to 
better align inventories with sales. Excess inventories now 
appear to have been substantially eliminated and should not 
prove a further restraint on growth.
    The global economy continues to be strong. Supported by 
solid economic growth abroad, U.S. exports should expand 
further in coming quarters. Nonetheless our trade deficit, 
which was about 5\1/4\ percent of nominal gross domestic 
product in the first quarter, is likely to remain high.
    For the most part, financial markets have remained 
supportive of economic growth. However, conditions in the 
subprime mortgage sector have deteriorated significantly 
reflecting mounting delinquency rates on adjustment rate loans. 
In recent weeks, we have also seen increased concerns among 
investors about credit risk on some other types of financial 
instruments. Credit spreads on lower quality corporate debt 
have widened somewhat and terms for some leveraged business 
loans have tightened. Even after their recent rise, however, 
credit spreads remain near the low end of their historical 
ranges and financing activity in the bond and business loan 
markets has remained fairly brisk.
    Overall, the U.S. economy appears likely to expand at a 
moderate pace over the second half of 2007 with growth then 
strengthening a bit in 2008 to a rate close to the economy's 
underlying trend. Such an assessment was made around the time 
of the June meeting of the Federal Market Committee by the 
members of the Board of Governors and the presidents of the 
Reserve Banks, all of whom participate in deliberations on 
monetary policy. The central tendency of the growth forecast, 
which are conditioned on the assumption of appropriate monetary 
policy, is for real GDP to expand roughly 2\1/4\ to 2\1/2\ 
percent this year and 2\1/2\ to 2\3/4\ percent in 2008. The 
forecasted performance for this year is about \1/4\ percentage 
point below that projected in February, the difference being 
largely a result of weaker than expected residential 
construction activity this year. The unemployment rate is 
anticipated to edge up between 4\1/2\ and 4\3/4\ percent over 
the balance of this year and about 4\3/4\ percent in 2008, a 
trajectory about the same as the one expected in February.
    I turn now to the inflation situation. Sizable increases in 
food and energy prices have boosted overall inflation and 
eroded real incomes in recent months, both unwelcome 
developments. As measured by changes in the price index for 
personal consumption expenditures (PCE inflation), inflation 
ran at an annual rate of 4.4 percent over the first 5 months of 
this year, a rate that, if maintained, would clearly be 
inconsistent with the objective of price stability. Because 
monetary policy works with a lag, however, policymakers must 
focus on the economic outlook. Food and energy prices tend to 
be quite volatile, so that, looking forward, core inflation 
(which excludes food and energy prices) may be a better gauge 
than overall inflation of underlying inflation trends. Core 
inflation has moderated slightly over the past few months, with 
core PCE inflation coming in at an annual rate of about 2 
percent so far this year.
    Although the most recent readings on core inflation have 
been favorable, month-to-month movements in inflation are 
subject to considerable noise, and some of the recent 
improvement could also be the result of transitory influences. 
However, with long-term inflation expectations contained, 
futures prices suggesting that investors expect energy and 
other commodity prices to flatten out, and pressures in both 
labor and product markets likely to ease modestly, core 
inflation should edge a bit lower, on net, over the remainder 
of this year and next year. The central tendency of FOMC 
participants' forecast for core PCE inflation--2 to 2\1/4\ 
percent for 2007 and 1\3/4\ to 2 percent in 2008--is unchanged 
from February. If energy prices level off as currently 
anticipated, overall inflation should slow to a pace close to 
that of core inflation in coming quarters.
    At each of its four meetings so far this year, the FOMC has 
maintained its target for the Federal funds rate at 5\1/4\ 
percent, judging that the existing stance of policy was likely 
to be consistent with growth running near trend and inflation 
staying on a moderating path. As always, in determining the 
appropriate stance of policy, we will be alert to the 
possibility that the economy is not evolving in the way we 
currently judge to be the most likely. One risk to the outlook 
is that the ongoing housing correction might prove larger than 
anticipated with possible spillovers onto consumer spending.
    Alternatively, consumer spending, which has advanced 
relatively vigorously, on balance, in recent quarters, might 
expand more quickly than expected; in that case, economic 
growth could rebound to a pace above its trend. With the level 
of resource utilization already elevated, the resulting 
pressures in labor and product markets could lead to increased 
inflation over time. Yet another risk is that energy and 
commodity prices could continue to rise sharply leading to 
further increases in headline inflation, and if those costs 
pass through to the prices of nonenergy goods and services, to 
higher core inflation as well. Moreover, if inflation were to 
move higher for an extended period and the increase became 
embedded in longer-term inflation expectations, the 
reestablishment of price stability would become more difficult 
and costly to achieve. With the level of resource utilization 
relatively high and with the sustained moderation in inflation 
pressures yet to be convincingly demonstrated, the FOMC has 
consistently stated that upside risks to inflation are its 
predominant policy concern.
    In addition to its dual mandate to promote maximum 
employment and price stability, the Federal Reserve has an 
important responsibility to help protect consumers in financial 
services transactions. For nearly 40 years, the Federal Reserve 
has been active in implementing, interpreting, and enforcing 
consumer protection laws. I would like to discuss with you this 
morning some of our recent initiatives and actions, 
particularly those related to subprime mortgage lending.
    Promoting access to credit and to home ownership are 
important objectives, and responsible subprime mortgage lending 
can help to advance both goals. In designing regulations, 
policymakers should seek to preserve those benefits. That said, 
the recent rapid expansion of the subprime market was clearly 
accompanied by deterioration in underwriting standards, and in 
some cases, by abusive lending practices and outright fraud. In 
addition, some households took on mortgage obligations they 
could not meet, perhaps in some cases because they did not 
fully understand the terms. Financial losses have subsequently 
induced lenders to tighten their underwriting standards. 
Nevertheless, rising delinquencies in foreclosures are creating 
personal, economic, and social distress for many homeowners and 
communities, problems that likely will get worse before they 
get better.
    The Federal Reserve is responding to these difficulties at 
both the national and the local levels. In coordination with 
other Federal supervisory agencies, we are encouraging the 
financial industry to work with borrowers to arrange prudent 
loan modifications to avoid unnecessary foreclosures. Federal 
Reserve banks around the country are cooperating with community 
and industry groups that work directly with borrowers who are 
having trouble meeting their mortgage obligations. We continue 
to work with organizations that provide counseling about 
mortgage products to current and potential homeowners. We are 
also meeting with market participants--including lenders, 
investors, servicers, and community groups--to discuss their 
concerns and to gain information about market developments.
    We are conducting a top-to-bottom review of possible 
actions we might take to help prevent recurrence of these 
problems. First, we are committed to providing more effective 
disclosures to help consumers defend against improper lending. 
Three years ago, the Board began a comprehensive review of 
Regulation Z, which implements the Truth in Lending Act (TILA). 
The initial focus of our review was on disclosures related to 
credit cards and other revolving credit accounts. After 
conducting extensive consumer testing, we issued a proposal in 
May that would require credit card issuers to provide clearer 
and easier-to-understand disclosures to customers. In 
particular, the new disclosures would highlight applicable 
rates and fees, particularly penalties that might be imposed. 
The proposed rules would also require card issuers to provide 
45 days' advance notice of a rate increase or any other change 
in account terms so that consumers will not be surprised by 
unexpected charges and will have time to explore alternatives.
    We are now engaged in a similar review of the TILA rules 
for mortgage loans. We began this review last year by holding 
four public hearings across the country during which we 
gathered information on the adequacy of disclosures for 
mortgages, particularly for nontraditional and adjustable rate 
products. As we did with credit card lending, we will conduct 
extensive consumer testing of proposed disclosures. Because the 
process of designing and testing disclosures involves many 
trial runs, especially given today's diverse and sometimes 
complex credit products, it may take some time to complete our 
review and propose new disclosures.
    However, some other actions can be implemented more 
quickly. By the end of this year, we will propose changes to 
TILA rules to address concerns about mortgage loan 
advertisements and solicitations that may be incomplete or 
misleading and to require lenders to provide mortgage 
disclosures more quickly so that consumers can get the 
information they need when it is most useful to them. We 
already have improved a disclosure that creditors must provide 
to every applicant for an adjustable rate mortgage to explain 
better the features and risks of these products, such as 
``payment shock'' and rising loan balances.
    We are certainly aware, however, that disclosure alone may 
not be sufficient to protect consumers. Accordingly, we plan to 
exercise our authority under the Home Ownership and Equity 
Protection Act (HOEPA) to address specific practices that are 
unfair or deceptive. We held a public hearing on June 14th to 
discuss industry practices, including those pertaining to 
prepayment penalties, the use of escrow accounts for taxes and 
insurance, stated income and low documentation lending, and the 
evaluation of a borrower's ability to repay. The discussion and 
ideas we heard were extremely useful, and we look forward to 
receiving additional public comments in coming weeks. Based on 
the information we are gathering, I expect that the Board will 
propose additional rules under HOEPA later this year.
    In coordination with the other Federal supervisory 
agencies, last year we issued principles-based guidance on 
nontraditional mortgages, and in June of this year, we issued 
supervisory guidance on subprime lending. These statements 
emphasize the fundamental consumer protection principles of 
sound underwriting and effective disclosures. In addition, we 
reviewed our policies related to the examination of nonbank 
subsidiaries of bank and financial holding companies for 
compliance with consumer protection laws and guidance.
    As a result of that review, and following discussions with 
the Office of Thrift Supervision, the Federal Trade Commission, 
and State regulators, as represented by the Conference of State 
Bank Supervisors and the American Association of Residential 
Mortgage Regulators, we are launching a cooperative pilot 
project aimed at expanding consumer protection compliance 
reviews at selected nondepository lenders with significant 
subprime mortgage operation. These reviews will begin in the 
fourth quarter of this year and will include independent State-
licensed mortgage lenders, nondepository mortgage lending 
subsidiaries of bank and thrift holding companies, and mortgage 
brokers doing business with or serving as agents of these 
entities. The agencies will collaborate in determining the 
lessons learned and in seeking ways to better cooperate in 
ensuring effective and consistent examinations and improved 
enforcement for nondepository mortgage lenders. Working 
together to address jurisdictional issues and to improve 
information sharing among agencies, we will seek to prevent 
abusive and fraudulent lending while ensuring that consumers 
retain access to beneficial credit.
    I believe that the actions I have described today will help 
address the current problems. The Federal Reserve looks forward 
to working with the Congress on these important issues. Thank 
you, Mr. Chairman.
    [The prepared statement of Chairman Bernanke can be found 
on page 65 of the appendix.]
    The Chairman. Thank you, Mr. Chairman. And sometimes you do 
get a second chance not to screw up, which I apparently have, 
and I can ask my questions at an appropriate time with the 
parties. Let me just ask two questions. The monetary report on 
page 2, and although unit labor costs in the nonfarm business 
sector have been rising, the average market for prices or for 
unit labor costs is still high by historical standards, an 
indication that firms can potentially absorb higher costs, at 
least for a time, through a narrowing of profit margins. That 
is where wages have gone, to some extent, in higher profit 
margins.
    And then in the Don Evans, Grant Aldonas, Matthew 
Slaughter, Robert Lawrence report, here is their summary on 
page 36 in the Financial Services Forum, during this period, 
2000 and 2005, an astonishingly small fraction of workers, just 
3.4 percent, was an educational group that have enjoyed any 
increase at all in mean inflation adjusted money earnings. 
Those with doctorates and JDs, MBAs and MBs, in contrast to 
earlier decades, even college graduates and those with 
nonprofessional masters degrees, 29 percent of workers suffered 
declines in mean real earnings. So the question is, is there 
anything in sight that would alleviate this situation?
    Mr. Bernanke. First, we have seen some recent increases in 
real wages over the last year. Average hourly earnings are up 
more than a percentage point. Secondly, I think that part of 
what has happened in the last few years has been the effective 
energy prices which have risen rather rapidly and absorbed a 
good bit of buying power from consumers. Over the longer period 
of time, people with greater education--college education and 
so on--have been seeing real increases in their incomes, and I 
expect that to continue. But many of the points you raise about 
inequality I would be happy to address, but I do think that we 
will see improvement.
    The Chairman. Well, I am troubled by kind of a complacency 
there, Mr. Chairman. First of all, yes, they went up some in 
the first quarter and went down in the second quarter according 
to your report, real wages. Second, you said, well, it is fuel. 
Well, 3.4 percent of the people, what, are they flying around 
on broomsticks? I mean, the fact is that it is not everybody. 
There is a real inequality here. The 29 percent who had college 
degrees and masters degrees have suffered real declines in the 
mean there over the last 5 years. I have to say, I know that 
education is always the answer. I am struck again. This is a 
report put forward by some very thoughtful Republican members 
of the Bush Administration in which they essentially say 
education is greatly exaggerated as a near-term improvement.
    And they point out there is a generational issue. But part 
of the problem with education is that some people were educated 
10 and 15 years ago and they were told, well, learn these 
software skills, learn these other skills, and many of those 
jobs are now either outsourced directly, or because of the 
threat of outsourcing, they are subject to competitive 
pressures that hold it down. And then it does seem to me what 
you talk about going forward, is inflation a greater danger to 
you than a continuation of this trend? I predict you are going 
to see this continued gridlock. Are there no things you think 
we should be able to do to try and reduce this trend of 
inequality than just sit and hope?
    Mr. Bernanke. No, Mr. Chairman. I have discussed some of 
these issues. First, the trend of inequality is not something 
in the last 5 years. We have seen this for at last 30 years, if 
not more.
    The Chairman. But it has gotten worse in the last 5 years.
    Mr. Bernanke. Well, again, I think that part of what you 
are seeing just in the last few years is the disproportionate 
effects on lower income people.
    The Chairman. No, no, Mr. Bernanke, that simply is not 
true. We are talking about the 29 percent in the last 5 years, 
the 29 percent of the population with college graduates and 
masters. I think there is a cultural lag here. This is Don 
Evans' report; 29 percent of the population in those groups 
with college degrees and masters have suffered real declines in 
the last 5 years. They are not lower income people.
    Mr. Bernanke. I would like to look at those data, but the 
fact is that over the last few decades, and this is the kind of 
thing you need to look at over a long period of time, we have 
seen a substantial spreading apart of incomes, which is key, in 
part to education, not entirely, but is key, in part to 
education.
    The Chairman. What do we do about it?
    Mr. Bernanke. There are several things we can do about it. 
First of all, the Federal Reserve can maintain a strong and 
stable economy, which we intend to do, and that will be 
helpful. But more importantly, there are several elements. 
First, I think the reference to education is a little bit too 
pessimistic because it refers, I believe, to sort of K-12 type 
education, which takes a very long time to work.
    The Chairman. No, they are talking about higher education.
    Mr. Bernanke. And higher education. But there are many 
other forms of skill acquisition. There is short-term job 
training, there are vocational schools, and so on. We are 
hearing in the field that finding someone with plumbing skills 
or welding skills or who can put lines on a telephone pole is 
very difficult, and they command high wages.
    The Chairman. Well, my time has expired. I just want to say 
that I would urge people to read this report. And I think, 
first of all, debunking by Mr. Slaughter who served on the 
Council of Economic Advisors, I believe under your 
chairmanship, along with you as a colleague, Grant Aldonas, 
they say that education is a good thing, but being made to tow 
too much weight. But here is the problem, even with education. 
Getting people that education requires, to a great extent, some 
public participation. We can't expect the private sector to pay 
for this out of what it does. And this is another factor. As 
long as we have the current situation in which government is 
considered to be a bad thing, etc.--let me put it this way: The 
way in which we finance education in the country today, 
particularly beyond K-12, reinforces inequality, it doesn't 
alleviate it. So yes, education properly done could do this. 
But kind of oh, well, that is the way the world is and we will 
just have to hope for the better, is a problem. The notion that 
a stable economy, and this is where I think, again, we have a 
fundamental difference, yes, I would like to see a strong, 
stable economy. That is a necessary condition for diminishing 
inequality. But it is clearly an insufficient condition, and in 
the absence of any recognition of that, you are going to 
continue to see the kind of gridlocking in which trade 
promotion and immigration and other issues don't go anywhere. I 
just urge people who want to see us move in this direction to 
help us diminish inequality, or you will have continued 
economic gridlock. The gentleman from Alabama.
    Mr. Bernanke. Mr. Chairman, if I can just respond very 
quickly. In my remarks in March on inequality, I talked a 
little bit about education and training. I talked about other 
policies as well, such as helping people move between jobs and 
other types of policies, more affordability of health 
insurance.
    The Chairman. I appreciate that. In fairness, could we have 
a hearing, perhaps, in which you might come and talk about 
this?
    Mr. Bernanke. Certainly.
    The Chairman. Thank you.
    Mr. Bachus. Thank you, Mr. Chairman. The chairman of the 
committee talked about how he was troubled by complacency. I am 
also troubled by complacency, and every member of this 
committee ought to be troubled by complacency. But it is not in 
the Federal Reserve. The Chairman of the Federal Reserve has 
come in here this morning, as many other people have said to 
us, that the rise in energy and food cost are impacting the 
poor and middle class and it is one of the chief reasons for 
income inequality. The National Association of Manufacturers 
recently said that high cost of energy is a cap on the wages of 
blue collar workers. And yet this Congress, for 10 years, has 
failed to turn to the cheapest form of energy, which would give 
relief for every American's electric bill, heating oil bill and 
everything, and that is nuclear energy; 86 percent of the 
energy produced in France at a much lower cost than most of our 
electricity is nuclear. France has done it, India and China are 
building a nuclear power plant every week--I mean, every week, 
I think it is, or every month, one comes on line.
    We can reduce the cost of not only energy costs, which the 
Chairman has said, he says right here, food and energy costs 
have eroded real incomes. And it hits us, he said, the poor and 
the middle class are the worse. The biggest component and the 
biggest contributor of the rise in food cost is the cost of 
energy, and one of the things we are doing, which does give us 
some relief, we are taking corn and turning it into ethanol. So 
whether that is good or bad, it is resulting in an increase in 
the cost of food. Fertilizer, the biggest component of 
fertilizer is energy, and it is the biggest component in 
producing food.
    So if any of us are concerned about, and I am, and I think 
we all are concerned about the poor and the high cost of their 
gas bills, their electric bills, their heating and oil bills, 
we will pass a bill next month, if not this month, and we will 
do away with all this regulatory and legal burdens that have 
prevented us from decades from building a nuclear power plant, 
and have cost millions of American jobs, mostly blue collar 
workers, their ability to exist and stay in their community.
    Visit some of the communities in Pennsylvania and Ohio and 
you will see the result of us standing and not doing anything 
about nuclear power. Mr. Chairman, I am going to change 
subjects. As I said in my opening statement, one of your 
biggest challenges has been created by the government's 
inability to address energy concerns, and you said that the 
wild cards are energy and food, and the biggest wild card in 
food is energy. This committee and this Congress has within its 
bull's-eye, as you probably read, private pools of capital, 
hedge funds and venture capital private equity funds. Would you 
like to address some of the benefits of private pools of 
capital, and if we do drive those private pools of capital 
offshore, what detrimental effects it may have on us?
    Mr. Bernanke. Certainly Congressman. Private pools of 
capital--hedge funds--raise a whole range of issues. I am not 
going to address them. But they certainly do provide some 
important benefits, and these include providing some ability to 
share risks. We now take risks and share them, so that they are 
held by lots of different people and not just by the banking 
system, for example. They provide a good deal of liquidity to 
help markets work more efficiently. And private equity in 
particular, plays an important role in the market for corporate 
control.
    We need to have a mechanism whereby poorly run companies' 
weak managements are subject to being taken over, replaced and 
their companies improved. When it is working right, at least, 
private equity, as LBOs in the past, helps to serve that 
function.
    So they serve some positive functions. They raise many 
issues of financial stability and the like, making sure that 
their counterparties are paying appropriate attention to their 
risks and the like. And we discussed some of the President's 
Working Group's principles. But they certainly are a benefit to 
the economy.
    Mr. Bachus. Thank you.
    My last question is this: When we looked at the subprime 
lending problem last year, we found that probably about 3 
percent of the brokers and actually, also, not only brokers, 
but mortgage bankers, people who worked for nationally 
regulated bankers--about 3 percent of them caused about 90 
percent of the mischief and the fraud, and they will lose their 
licenses in one State. Then they go to another State, and they 
set up shop, and they are really creating havoc. These are 
basically--to me, they are criminals, and they are inflicting a 
tremendous amount of pain. Would you like to comment?
    I introduced a bill, along with several of my colleagues, 
which called for a national registration and licensing standard 
for all mortgage originators. Would you like to comment on 
that, or on the legislation we introduced?
    Mr. Bernanke. Yes, sir. I will talk about the registration.
    I do think there is an issue about brokers who lose their 
licenses, who perform badly in one area, and then simply move 
to a new State. The Conference of State Bank Supervisors had 
been trying to develop a database essentially so they could 
provide information to each other.
    I think that, one, we should seriously consider some 
Federal licensing or at least some kind of Federal database 
that will allow States to know if a new broker who is coming 
into the State has some kind of previous problems in another 
location.
    Mr. Bachus. Would you look at the national registration and 
licensing provisions that we have introduced and maybe get back 
with us on any recommendation? Thank you.
    The Chairman. Thank you.
    Now, to explain the order here, this being a very large 
committee, not everybody gets to ask questions, especially if 
they wait until opening statements have been given, so I am 
going to go to the list of members on our side who did not get 
to ask a question the last time, by seniority, and then get 
back to the others. The first of those is the gentleman from 
Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I thank you for your 
judicious approach in managing the committee, and I am honored 
to associate myself with your comments, and I also thank the 
ranking member.
    Mr. Chairman, thank you for visiting with us today. I would 
like to visit with you very briefly about a crisis that 
continues, and it seems to go unabated, notwithstanding 
cyclical and temporary factors; notwithstanding excess 
inventories and the lack thereof; notwithstanding core 
inflation; commodity prices, whether they increase or flatten; 
notwithstanding energy prices and how they impact the economy; 
headline inflation, core inflation.
    We have a crisis, in my opinion, and we consistently find 
that one segment of our society has an unemployment rate that 
is always twice that of another segment of our society. White 
unemployment is, as of June 2007, 4.0 percent. Black 
unemployment is 8.5 percent. Poverty among whites is 10.4 
percent. Poverty among blacks is 25.6 percent. This is not 
something that is anomalous. It occurs consistently. There is a 
trend that is easy to track, and we consistently find that 
black unemployment is always twice that of white unemployment 
and is likely to be twice that of the national unemployment. 
The trend is there. The poverty trend is there.
    The question that I have for you is similar to the one that 
the chairman posed, but it relates to this segment of society, 
and the question is: Do you see a change in this trend? Is it 
possible for us to have African American employment to achieve 
parity with white employment? Is this trend going to continue?
    Mr. Bernanke. Well, I am hopeful to see improvement over 
time. There have been some improvements in terms of the average 
family income, in terms of the share of minorities who are what 
would be called the ``middle class.''
    Mr. Green. Because my time is limited, what must we do to 
change this trend so that we can achieve the parity that we 
really want in this country?
    Mr. Bernanke. You are a bit beyond my area of 
specialization, Congressman, but, again--
    Mr. Green. Well, if I may, though, Mr. Chairman, let me 
just say this now. You have talked about how we can impact 
employment generally speaking, and you have talked about how we 
can impact poverty generally speaking. Now, we have this one 
segment of society that is consistently higher than all other 
segments of society. Surely there must be some intellectual 
thought that you have to help us with this segment of society 
as well.
    Mr. Bernanke. Certainly, I was going to, at the risk of 
repeating myself, talk about the importance of training and 
skills, making sure young people have the opportunity to learn 
job-qualifying skills, to finish school. A lot of young, 
minority teenagers are out of school and have very high 
unemployment rates. We need to make sure that there is equal 
opportunity for both young people--
    Mr. Green. Let us focus on the equal opportunity, because I 
think that you and I may find some agreement here, Mr. 
Chairman. By the way, I admire you and respect you greatly, but 
as to the equal opportunity aspect of it, as the chairman has 
so eloquently put it, the way we fund higher education beyond 
the 12th grade promotes unequal opportunity in education 
because those who have the ability to acquire the education can 
achieve educational parity. Those who do not will not. There 
are still some systemic things that have to be addressed when 
we talk about achieving this parity in education, so how we do 
this is becoming a part of the debate that we have to contend 
with.
    Mr. Bernanke. Congressman, my wife is a high school 
teacher; she teaches in the D.C. public school system. She has 
been working for some time with minority students, and her 
objective is to work with students to get them into college. 
Many of them have parents who are single parents who have never 
been to college.
    Mr. Green. Mr. Chairman, if I may, listen, I hope to meet 
your wife, I am sure she is a lovely lady, but that will not 
help me with where I am trying to go.
    Mr. Bernanke. I am trying to explain that there is a whole 
mix of educational issues, social issues, opportunity, making 
sure that the opportunities that exist are open to everybody in 
a free way that does not discriminate, making sure that 
everybody has an opportunity to gain skills and education. That 
is the kind of society we want. I recognize that we do not have 
it yet. I think we need to work in that direction. Monetary 
policy can try to--
    Mr. Green. One other question quickly. Would you be 
amenable to attending an event--I will not say ``hearing''--but 
an event wherein you talk about--just as you talk about how you 
impact poverty and unemployment in society in the main, how we 
can deal with this one segment of society that for 300 years 
has consistently been at this level of inequality as it relates 
to employment, as it relates to poverty, as it relates to 
opportunity. Would you be amenable to such a thing?
    Mr. Bernanke. Yes, sir. I have been consistently available 
to talk about community development issues, about minority 
issues, and I think this is extremely important for our 
society.
    Mr. Green. Thank you, Mr. Chairman. I yield back.
    The Chairman. The ranking member tells me he is also going 
to follow the policy of giving preference to the people who did 
not get to ask questions, this being a larger-than-it-needs-to-
be committee, and so we now recognize the gentleman from North 
Carolina, Mr. McHenry, for 5 minutes.
    Mr. McHenry. I thank the chairman.
    Chairman Bernanke, I am certainly glad to have you here. It 
seems your presentation today is largely about residential real 
estate. You mentioned that declines in residential construction 
will continue to weigh on economic growth over the coming 
quarters.
    Do you have any words for Congress--at a time when lending 
standards have been tightened--on whether or not we should 
further tighten lending with additional rules and regulations 
on the mortgage marketplace?
    Mr. Bernanke. Well, I think there is a balance. I have 
discussed this in a number of speeches. I do believe the 
legitimate subprime lending in particular helps expand 
homeownership. It helps expand access to credit. At the same 
time, it is very important that we protect those who are 
possibly subject to abusive or to fraudulent lending, so we 
have to draw a fine line. We have to make sure we find ways to 
prevent the bad actors, the abusive lending, while preserving 
this market, which is an important market, both for the sake of 
those people who would like to borrow and to become homeowners, 
and also for the broad sake of our economy in maintaining the 
demand for housing.
    So it is really a case-by-case issue, but it is very 
important to try to walk that fine line between protecting 
consumers adequately by making sure that we do not shut down 
what is, I think, essentially, a valuable market.
    Mr. McHenry. Can the Federal Reserve and the regulatory 
bodies within the Federal Government adequately address those 
concerns?
    Mr. Bernanke. Congressman, I think I really need to leave 
that for the Congress to determine. We hope that we are taking 
steps, the steps I have outlined today, and we are prepared to 
take additional steps if necessary. I believe it will go some 
distance towards resolving some of these concerns. However, 
Congress may feel they need to take additional steps, and I 
think that is really up to the Congress to decide.
    Mr. McHenry. Last month, the Federal Trade Commission had a 
very interesting new study on mortgage disclosures--you 
mentioned mortgage disclosures in your presentation--and it 
concluded in this study that current disclosures fail to convey 
key mortgage costs to many consumers, and in the study they 
found that about a third of consumers cannot identify their 
interest rate, whether it is prime, whether it is the prime and 
subprime marketplace; half could not correctly identify the 
loan amount; two-thirds could not recognize that they would be 
charged a prepayment penalty; and nearly nine-tenths could not 
identify the total amount of upfront charges.
    Do you believe that changes in mortgage disclosures can 
help the marketplace so that individuals can decide for 
themselves? If they have those clear and upfront pieces of 
information, can they better decide for themselves?
    Mr. Bernanke. We think good disclosures are a critical part 
of a well-functioning market. We have had a series of hearings, 
and we have gotten exactly the same comment that you were just 
saying, which is that many borrowers simply do not understand 
all of the details of their mortgage. They do not get the 
information in a timely way. They do not understand the basics 
of what they need to know. So, as I mentioned, we are currently 
doing a complete overhaul of Regulation Z disclosures for 
mortgages. In particular, one thing we have found is that it is 
really essential to have real consumers look at these 
disclosures, because lawyers can write down these disclosures 
and say, ``This looks fine to me.'' If you give it to a real 
consumer, they will not know what to do with it.
    So one of the things we consider to be very important--and 
we have found this to be very helpful in our credit card 
disclosure work--is to do focus groups, consumer testing, to 
make sure, and to test people afterwards to see what they 
remember and what they understand, and to make sure those 
disclosures are effective. So I do not think there is any 
shortcut to getting good disclosures. You really have to make 
sure that the people can understand them.
    Mr. McHenry. Can that largely be done through the 
regulatory structure?
    Mr. Bernanke. Yes. As I said, we are currently undertaking 
that, and I hope that we will produce a good result that you 
will see, and you can make your own judgment.
    Mr. McHenry. Well, Congress is targeting policy pursuits 
when it comes to the equality of outcome as opposed to, really, 
the equality of opportunity in this country. You speak of 
ensuring that we have solid employment as well as low 
inflation. Now, Congress has actually had a great focus on 
income inequality and the disparities in income in this 
country. Should the focus be more on eliminating poverty and 
offering opportunities to move up the income ladder, or should 
it be focused on the top and ensuring that we pull down those 
top income numbers to ensure greater equality?
    Mr. Bernanke. The fact that there are some very wealthy 
people does not necessarily make me or you worse off if they 
are creating value. You know, I am a baseball fan. I like to 
watch Alex Rodriguez, and I do not particularly care that he 
earns a lot more money than I do. But we do need to make sure 
that people throughout the income scale have opportunities to 
raise their own standards of living and to make progress in our 
society. That is why I have advocated the principle of trying 
to give people opportunity through education, through skills, 
and through support during periods of transition between jobs 
to make them more productive and more able to deal with the 
disruptions that come with a globalized economy.
    Mr. McHenry. Touching on that, expanding on that in my 
final question here, as to the taxation of capital gains and 
Congress' discussion now on taxing partnerships, do you believe 
that a lower capital gains tax that is lower than income rates 
is good for investment and strengthens our economy and growth 
in this country and helps lead to lower unemployment rates?
    Mr. Bernanke. Congressman, I think I could talk about the 
pros and cons on this, but as you know, I am trying to avoid 
taking positions on specific tax and spending measures on the 
grounds that the Federal Reserve needs to maintain its 
nonpartisan status. So I am sorry. I really cannot give you a 
good answer on that one.
    The Chairman. The gentleman from Illinois.
    For 15 seconds, if I could, I would like to say when energy 
costs are blamed for the fact that real incomes are going down, 
I do want to congratulate the corporate sector. They have 
apparently found a way to insulate profits from the impact of 
energy costs, because, as noted in the report here, and as we 
have seen, profits have gone way up. So, while energy costs 
appear to have this terrible impact on college graduates' real 
incomes, somehow the corporate sector has managed to avoid 
that.
    I think, in fact, energy costs are being given much more 
blame than credit, and there are institutional other factors, 
and the soaring profit sector is a bigger, I think, explanation 
of the stalled wages.
    The gentleman from Illinois.
    Mr. Bachus. Would the gentleman yield just so I could 
respond?
    The Chairman. Well, it is the gentleman from Illinois' 
time.
    Mr. Bachus. Okay.
    The Chairman. The gentleman from Illinois.
    Mr. Gutierrez. Thank you very much.
    Welcome back, Chairman Bernanke.
    Just a side note, as Chairman, when you get together with 
the Governors, you might want to take a look at what I feel is 
going to be a real looming crisis, and that is for our 
generation of college kids today, because there is not a week 
that goes by that my daughter does not get another credit card. 
Worse yet, now she is getting loans to take a vacation, and to 
get a laptop. I mean, you should see the stuff that is coming 
in the mail. Fortunately, she has a very fiscally responsible 
dad who has taught her about money and monetary policy, at 
least I hope so, until I get the credit card bill in the mail.
    Very seriously, I really fear this can get out of hand, 
especially with the rising costs of how young people are going 
to manage their college. I would hate to see the next 
generation in such debt, but no matter what monetary policy you 
come up with, we are not going to be very helpful to them.
    Chairman Bernanke, at the February hearing, in response to 
a question from my good friend Congressman Cleaver regarding 
the positive role that immigrants have played and continue to 
play in our economy, you comment briefly on immigration reform. 
You state, ``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. This is a very tough issue, and I 
think Congress really has to take the lead about how many 
people and under what conditions we admit, but it certainly is 
the case today that immigrants are playing a major role in our 
economy. There is no question about that.''
    I appreciate your response, and agree with you in many 
respects, and I am not trying to play ``gotcha'' here by asking 
you to endorse any particular panacea--you just answered the 
last question in that regard--but I would like for you to 
expand a little bit on part of your answer from February.
    Specifically, do you think that the uncertainty with 
respect to the availability of a vibrant workforce created by 
Congress' failure to act on immigration reform has a negative 
impact or could have a negative impact on our economy?
    Mr. Bernanke. Well, as you know, the immigrant workforce is 
very important in some industries--construction, agriculture, 
and others. Some of them are seasonal, and I think the 
employers in those industries are interested in knowing where 
the workforce is coming from, and would like to have some 
clarity. But I understand that one of the key issues here is 
that many of the concerns about immigration go beyond purely 
economic considerations, and I understand that.
    So, within the economic sphere, as I said in February, 
immigrants do play a very substantial role in our workforce, 
and they represent a significant portion of the growth of our 
workforce. They are very important in some industries, and, 
from an economic point of view, we need to recognize that role 
they play.
    Mr. Gutierrez. We deported 160,000 undocumented workers 
from the United States last year, in the last 12 months. At 
that rate, it would take us about 65 years to ``rid ourselves'' 
of the 12 million undocumented as some would wish to do. But 
let us just say that we could do a better job, and that we 
could do it in 5 years. What do you think the economic impact 
would be on our economy if we just, all of a sudden ``rid 
ourselves'' of 12 million workers in our economy?
    Mr. Bernanke. Well, I do not think it is very surprising to 
say that would be a fairly disruptive event if it happened very 
quickly.
    As I said in February, I do think it is important for 
Congress to think through how many immigrants they would like 
to have and under what conditions, because it is important to 
try to create some certainty and some ability to forecast what 
workforces are going to look like.
    Mr. Gutierrez. Mr. Bernanke, I want to focus a minute on 
what I believe is an ongoing currency misalignment or 
manipulation by China and the effect of this practice on the 
American economy.
    The American workers' currency undervaluation by China is 
reaching critical mass. For over 10 years, China has fixed the 
exchange rate by intervening in currency markets. Economists 
estimate that the yuan is undervalued by at least 9.5 percent 
and as much as 54 percent. In the past, even you, Mr. Chairman, 
have characterized this undervaluation as a subsidy for exports 
from China. Suffice it to say, we cannot compete with this 
ongoing government subsidy, especially with our largest trading 
partner.
    In 2006, the U.S. gross trade deficit with China rose 
almost 15 percent, nearly $233 billion, a record high. 
Meanwhile, because China's government must buy U.S. dollars to 
keep the value of the yuan low, China holds more in foreign 
exchange reserves than any country in history. The latest 
tactic used by U.S. and third-party officials to try to 
convince China to allow its currency to fluctuate is to explain 
to the Chinese that doing so will benefit their own economy; 
that is, the Chinese economy.
    If you were to have a one-on-one meeting with your 
counterpart at the People's Bank of China, what arguments would 
you use to convince him or her that it is in the best interest 
of China and makes good economic policy for China to allow 
their currency to fluctuate?
    Mr. Bernanke. Congressman, I have had that meeting on a 
couple of occasions. I do think that it is in China's interest 
to allow their currency to float, to appreciate. There are two 
principal reasons why it is in their own interest.
    The first is that without a flexible exchange rate, they 
are unable to run an independent monetary policy. They are 
having some issues right now with a bit of inflation and some 
massive price changes that may reflect excess liquidity in 
their system, and that is a potential problem down the road.
    The other reason that it is in their interest to adjust the 
currency is one you already alluded to, which is that the level 
of the currency essentially distorts the economy and puts more 
resources into the export sector. In China right now, less than 
40 percent of total GDP goes to domestic household consumption. 
They need to reorient their economy towards producing more for 
the domestic market and being less oriented to the external 
market, and changing the value of the currency is one step to 
doing that.
    I think, in addition to currency change, though, that they 
ought to take additional structural measures to try to 
encourage domestic consumption so that, even at a given value 
of the exchange rate, the economy would be more focused on 
domestic demand rather than on the global market.
    Mr. Gutierrez. Thank you, Mr. Chairman.
    The Chairman. The gentleman from New Mexico.
    Mr. Pearce. Thank you, Mr. Chairman.
    Thank you, Chairman Bernanke.
    It is a positive report of our economy and on the world 
economy in general. On page 5, you make a statement that if 
energy prices level off, if anticipated. I will now ask you 
what would cause you to anticipate the prices to level, what 
factors?
    Mr. Bernanke. Well, we approach this at the Federal Reserve 
on, essentially, two levels. First, we try to do a fundamental 
supply-and-demand analysis and try to look at how we expect 
demand to grow not only in the United States, of course, but in 
emerging markets around the world, and where we see supply 
emerging in OPEC and outside of OPEC, and try to make some 
sense of where that market is going.
    Another very important piece of information is the futures 
markets. Investors, in dealing with NYMEX and with other 
futures markets, put their money where they think the price of 
oil is going to be at various horizons going out to 6 or more 
years. Those futures markets have been wrong in the past. They 
have underestimated the increase in oil prices that we have 
seen, which is one reason why we are very cautious about them. 
But over long periods of time, they are probably about the best 
source of information we have about where the markets see 
energy prices going. Those energy markets currently see oil 
prices remaining high, but leveling off over the next couple of 
years to the point where, if that actually happens, overall 
headline inflation would be about the same as core inflation.
    Mr. Pearce. I would note that the National Petroleum 
Council met just yesterday--these are inside industry experts--
and they forecast that supply will be very tight and that 
prices will be high, trending higher, and then I think that we 
are doing things--I have seen the bill that we have marked-up 
in the Committee on Resources that would begin to limit access 
internally to Federal lands and to also slow the process down 
so that our supplies internally are beginning--will collapse.
    I will tell you that, as a life-long member of the oil 
industry and growing up in an oil town that already--because of 
the things that we are doing here, that as to the remedial work 
on the wells that keeps the production curve steady instead of 
declining, it is beginning to shut down. That utilization of 
equipment is beginning to lag nationwide, but also, 
specifically, in the remedial area, and so you have to 
anticipate that there might be some clouds on the horizon in 
that forecast and then the effect.
    Now, there are about three pages of your report from about 
the bottom of page 6 on where we are dealing with the subprime 
market, and some portion of that is a difficult market. My 
question is as to the worst-case scenario: I am wondering why 
we have so much attention on the subprime market.
    If the entire market collapsed--let us take the worst, 
worst, worst-case scenario--how much effect would that have on 
our economy? I would like that answer in kind of the context 
of, recently, Dow Chemical announced, because of high energy 
prices, that they are building a $22 billion facility in Saudi 
Arabia, another $8 billion facility in China, and together, 
10,000 jobs are going to those places. Those would be high-six-
figure jobs here, and yet they are building.
    So my question is that 30 percent of your report is about 
subprime, and the addressing of things that we should be 
addressing, but I am not sure that 30 percent of our time 
should be addressed versus the effect of high energy prices.
    Could you give me some understanding of those two factors?
    Mr. Bernanke. Well, the Federal Reserve has multiple roles, 
and the primary purpose of this hearing is to talk about 
monetary policy in the economy, and that is normally the only 
topic I would cover. In this case, though, the Federal Reserve 
also has some regulatory roles in reference to subprime 
mortgage markets in particular, and I thought this would be a 
useful opportunity to update this committee on some of the 
actions we are taking specifically in this particular market.
    The concerns are in terms of what the effects of tightened 
lending standards might be on the housing demand, for example, 
which is one of the factors affecting the growth of the overall 
economy. But the main concerns I was addressing in the latter 
part of my testimony were really the maintenance of legitimate 
subprime lending and the protection of consumers from abusive 
practices.
    Mr. Pearce. I appreciate that and hope that we do more of 
that. I think there are factors that are going to have a 
potential upset to our economy that would be important to get 
your perspective of, and that is the cost of energy long term 
seems to me to be the greatest threat to our economy, and with 
the National Council saying supply is limited and price is 
high, I would hope that we could get input on that also. But I 
appreciate your work, and again, it is a good report. I 
appreciate that.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    The gentleman from Texas.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for giving us an update on the 
economy of the United States and abroad and for giving us an 
opportunity also to ask some questions that are of concern to 
us. I hope that in this brief time that we have, I can address 
housing, the NADBank, immigration, and possibly the college 
student loan industry as it refers to the for-profit entities.
    This week the House of Representatives passed two of my 
rural housing bills, authorizing funding for the Housing 
Assistance Council and the Rural Housing and Economic 
Development Program. I introduced those two bills in my 
capacity as chairman of the Congressional Rural Housing Caucus 
to improve the affordability and the availability and the 
quality of housing in rural America.
    What data can you share with us as to the economic 
wellbeing of rural America, and what types of Federal policy 
changes do you recommend to improve their livelihood?
    Mr. Bernanke. Well, one suggestion that I will just put out 
for consideration is that the Congress is looking at farm 
support bills, and the payments are made to individual farmers 
on different crops.
    Certainly one way to think about supporting the farm 
economy is less through direct payments to individual farmers 
and more to supporting the broader infrastructure of the rural 
economy--irrigation, land preservation, erosion, roads, some of 
the things you have been talking about--to make the rural 
economy healthier and stronger more generally. I think that 
would be one thing to consider under the general rubric of the 
agricultural bill.
    Mr. Hinojosa. I agree with you because, in my district, I 
have seen that we give out about 7,500 checks a year as 
subsidies, and 10 percent of the biggest farms in our district 
receive 80 percent of the total amount of money given by the 
Federal Government. So I agree with you.
    The second question refers to Mexico and to the fact that 
it is the United States' second leading trade partner. This is 
especially visible on the border in my congressional district 
in south Texas. The communities along the Mexico-U.S. border 
have faced great burdens on their infrastructure due to such 
trade growth.
    Do you support an increase in resources for the NADBank to 
support local projects such as wastewater treatment facilities, 
roadways, and bridges to address this regional challenge?
    Mr. Bernanke. Congressman, I am afraid I have not really 
had a chance to evaluate that particular issue.
    I do know that there is an awful lot of economic activity 
along the border there, and my very first trip as a member of 
the Board of Governors some years ago was to Brownsville. I saw 
a building there of some new colonias and the cooperation 
between Mexicans and U.S. citizens. So I think that is a very 
vibrant area, and I hope that its infrastructure is well-
served, but I am afraid I do not know enough about your 
specific proposal.
    Mr. Hinojosa. Yes. I may want to point out to you that the 
Administration zeroed out the amount of money for the BEC 
Board, which is the one that receives the applications for 
those entities that are asking for assistance, even though the 
North American Free Trade Agreement has caused us to increase 
our trade with Mexico so much, and yet this Administration 
failed to allow some money so that the NADBank could continue 
to do what it was intended to.
    The third question is on immigration, and I want to say 
that since immigration reform appears to be set aside by the 
Senate, at least for now, what strategies for increasing the 
labor force must be pursued to meet the future needs of United 
States' businesses? If immigrants are not encouraged to be 
employed as legal workers or are not brought in as temporary 
employees, what alternatives must we pursue to make sure we 
have enough workers for all of our industries, especially 
agriculture, construction, manufacturing, hotels, restaurants, 
and landscaping? Those are areas where we are hurting from not 
having enough employees.
    Mr. Bernanke. Well, there are two ways, essentially, to 
increase the effectiveness of our labor force. One, of course, 
is to improve the skills and training of U.S. citizens and 
bring more people into the labor force here. The issues 
concerning the immigration bill notwithstanding, I do not think 
anyone is arguing that we should not have a legal immigration 
policy, and bringing in people with the appropriate mix of 
skills can be productive and useful for the economy.
    In particular, currently there is something of an imbalance 
between low-skilled and high-skilled workers, and I think it 
would be beneficial to our economy to allow additional high-
skilled workers as well as some of the workers whom you were 
alluding to, working in agriculture and the like.
    Mr. Hinojosa. I agree with you that we ought to spend more 
money in retraining and in helping our own folks here in the 
United States to be able to fill those jobs and to possibly 
increase the amount, but when the government and the 
Administration took 10 years to raise the minimum wage, you can 
see why it is difficult to get people to take those jobs.
    So, again, I thank you for coming to speak to us.
    I yield back.
    The Chairman. The gentleman from California, Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman.
    Oddly enough, Chairman Bernanke, I have a series of 
economic questions for you.
    I believe I am correct in characterizing that about 6 
months ago, you said that you thought one of the greatest risks 
to economic growth would be a hard fall in the residential 
housing market. You have said that today some of our slow-down 
in growth is largely attributable to that sector.
    How would you assess the risk of a hard fall in that market 
at this point? What are the risks to that happening, or what 
are the opportunities for its not happening?
    Mr. Bernanke. Well, we think it remains a risk.
    It is important to understand that even should demand begin 
to stabilize--and it has shown signs at times of stabilizing--
we have what you might call an ``inventory problem.'' That is, 
homebuilders have a large number of unsold homes. So, even if 
demand were to stabilize, homebuilders would have to continue 
to cut back on construction in order to eventually bring those 
inventories into line. So that would, of course, reduce 
economic activity. It might have some impact on the 
construction employment and so on.
    The related concern in terms of the downside risk is that, 
in order to clear out those inventories, we might start seeing 
falling prices, and for many people the equity in their homes 
is their major financial asset. So, the question is whether 
price declines, moderate price declines, have any significant 
impact on consumer spending?
    The evidence so far is that there really has been no 
spillover that we can see. We are certainly watching for any 
potential impact of changes in housing values on consumers and 
on their moods, attitudes, sentiments. It is part of what we 
are doing, and we are following that market very closely.
    Mr. Campbell. Are there any policy actions we should be 
considering in that regard, or is the best policy action to do 
no harm?
    Mr. Bernanke. I think that there is an adjustment 
correction going on. The housing market expanded to very high 
levels of production. Despite the fact that we are off 30 
percent in terms of construction this year from the peak, we 
are at levels that were reached in the late 1990's, for 
example, so the housing market is still producing more than 1 
million homes a year.
    So I think we have to watch very carefully what is 
happening. We need to make sure our mortgage markets are 
functioning well and so on. But I think this is a process that 
is going to have to work its way out, and it has been working 
its way out, and we will be watching it as it does.
    Mr. Campbell. Okay. The dollar has been falling on currency 
markets of late, but our trade deficit has not. Why is that 
occurring, and are you concerned about either trend?
    Mr. Bernanke. Well, the dollar is the responsibility of the 
Treasury. We do not comment on the dollar. We simply take the 
dollar as given, and make monetary policy as best we can given 
the performance of the dollar.
    The trade deficit actually has shown some signs of looking 
a bit better. That has been disguised, to some extent, by the 
fact that oil prices have gone up so much. And so the oil 
import bill has risen, but other components of our net trade 
balance do seem to have stabilized somewhat, and there are some 
encouraging signs in that direction.
    As I alluded to in my earlier comment about the Chinese 
currency, I think that relying entirely on exchange rate 
changes to improve the trade balances is a mistake. It is 
important that there be structural changes that affect the 
ratio of domestic and foreign demand that different economies 
are relying on so--particularly in China--that they make 
changes that will allow a greater portion of their output to be 
devoted to domestic consumption, domestic demand. Whereas, here 
in the United States, we save more in order to rely less on 
imported capital.
    So exchange rates notwithstanding, I think some changes in 
the balance of saving and investment--and the changes in the 
balance of domestic versus foreign production--need to take 
place in order to move us in the direction towards a better 
balance.
    Mr. Campbell. On the inflation front, you talked about the 
energy versus the core inflation rate and that you expect, 
based on futures contracts, energy and food price increases to 
soften to some degree.
    If that does not occur, at what point does that become a 
concern for you?
    Mr. Bernanke. Well, first of all, we are unhappy with 
inflation, including energy and food prices running higher than 
we would like, so it is already a concern in that respect.
    Looking forward, I think the real issue for us is, if there 
are temporary bursts in prices of food and energy, will those 
higher prices somehow get embedded in the long-run, underlying 
trend of inflation. There are a couple of ways in which that 
could happen. One would be if say, higher crude costs, 
materials costs, were passed through by producers into the 
higher prices of other consumer goods, for example. The other 
possibility would be if consumers, having seen for many years 
very high increases in their food and energy costs, began to 
lose confidence in the Federal Reserve and to worry that 
inflation would be higher in the future. Their expectations of 
inflation would begin to move upward. Once that happens, it is 
much more difficult to keep inflation low, because people are 
building into their wage and price decisions higher 
expectations of inflation.
    So there are some concerns there, and it is part of the 
reason why I think we do have to be quite vigilant on inflation 
at this juncture.
    Mr. Campbell. Thank you. I am not out of questions, but I 
am out of time.
    The Chairman. The gentleman from New Jersey.
    Mr. Sires. Thank you, Mr. Chairman.
    Thank you, Mr. Bernanke, for being here with us today. I 
just want to follow up on the housing issue.
    I represent a district that is across from New York, the 
northern part, the Jersey City area, which has seen a boom of 
housing over the last few years. With that, the prices really 
went up high. A lot of people had to resort to subprime lending 
to get housing, and it created a lot of jobs, a lot of good-
paying construction jobs. I do not know whether this is 
regional, but I have seen the prices of the houses not really 
going down when we are losing a lot of those jobs that were 
created. I would just like to know the impact on these 
construction jobs.
    I know that approximately 10 percent of the jobs created in 
this country are through construction. What effect is this 
going to have on the economy? Do you see it as regional? 
Because I know they are going to--I have friends in Florida, 
and they are going through the same process, the same things 
where good-paying jobs are being lost. Do you see this trend 
changing? I know mortgages are getting tighter. Subprime is 
very difficult to get. Home equity loans to create these jobs 
are impossible in some cases.
    Do you see this trend changing anytime soon?
    Mr. Bernanke. Congressman, first of all, you are quite 
right that there is a very strong regional component in the 
housing market. Florida is an example where there is quite a 
bit of weakness. There are other parts of the country that are 
doing better--where prices are still rising and where the real 
estate markets are pretty healthy. So it does depend a lot on 
where you are.
    We would expect, as the residential real estate market 
adjusts towards a more sustainable level, that there would be 
some loss of residential construction jobs, but there are some 
offsets. In particular, the nonresidential construction 
offices--commercial real estate, factories--are growing at a 
very rapid pace, and a lot of the labor that has left 
residential construction has been absorbed by nonresidential 
construction.
    In addition, we are seeing increases, for example, in home 
improvement. People are saying, well, we cannot move because of 
the housing market. We are just going to redo our kitchen. That 
has also proved to be a source of employment.
    So, although the official statistics have some puzzles, 
frankly, they so far do not show a significant decline in 
construction employment, and partly for those reasons that I 
have just described.
    Mr. Sires. But these other jobs that people are taking are 
not as good, obviously, as the jobs that were in the 
construction field.
    Mr. Bernanke. Well, again, many of the construction workers 
are finding construction work, but in nonresidential or in home 
improvement-type sectors.
    Mr. Sires. Not as well-paying as those jobs.
    Mr. Bernanke. I think it varies. Some of the specialty 
contractors who are building apartment buildings or who are 
building office buildings and the like are pretty well-paid, 
and those are pretty productive jobs.
    Mr. Sires. I know the lending rate seems to have 
stabilized. Do you see any changes downward for the future?
    Mr. Bernanke. Well, in terms of the mortgage rate, a lot 
depends on what the bond market does, and, as you know, the 
Federal Reserve does not have perfect control over the bond 
market.
    Mr. Sires. Thank you very much.
    The Chairman. The gentleman from Texas.
    Dr. Paul. Thank you, Mr. Chairman.
    I find it rather ironic that the Federal Reserve has 
complete control over the money supply, yet it is the Treasury 
that is supposed to protect the value of the dollar. It seems 
like you have a little bit of responsibility for the value of 
the dollar as well.
    I have a question about the GDP. In the first quarter, our 
GDP did not do so well; it was less than 1 percent. Our 
population growth averages about 1.5 percent. So, if we have 
total wealth divided by the population, we actually have 
negative growth. Could this not be a part of the explanation as 
to why some people feel there is inequality and that they are 
not doing as well in the economy? Wouldn't this explain some of 
the concerns that we have?
    Mr. Bernanke. Well, Congressman, that was, of course, a 
single quarter, and there were a number of temporary factors 
that held down GDP growth in the first quarter, including the 
liquidation of the inventory overhang, which I mentioned 
before, a swing in our trade balance--a temporary swing--and a 
temporary decline in Federal defense spending. All of those 
things have been reversing now, so I think we will be seeing in 
the second quarter something closer to a 3 percent growth. 
Between the first half of the year overall, it will be a more 
healthy rate of growth.
    Dr. Paul. We have a savings rate which is negative, and if 
we had true capitalism, this would be very, very serious 
because we would have no savings and no capital to invest. 
Today, with our monetary system, we resort to other means. We 
can create credit and money out of thin air, and it acts as 
capital by stealing value from the existing currency, and we 
have been doing that for a long time, so the process can 
continue, but it literally is inflation. Also, we can resort to 
borrowing overseas, and we are permitted, because we have the 
reserve currency of the world, to export our inflation, and 
that seems to be a free ride for us as well.
    How long can we fool the world? How long can we continue 
with the current account deficit of 6 percent? If our 
productive jobs are going overseas--and like the gentleman 
mentioned earlier about more jobs going overseas--eventually, 
this is going to catch up with us.
    Is it conceivable that we could live on capital formation 
by the creation of money and credit out of thin air? If that is 
the case, we would never have to go to work again if that is 
true. It seems like we really have to go to work. We really 
have to save, and we really have to invest, and we really have 
to get these jobs back. But I see so many of our problems as a 
consequence of a monetary system that discourages savings and 
encourages a free ride for us because there is still a lot of 
trust for the dollar, although that trust is going down every 
day. I think we have to face up to the consequences of what 
this might mean to us.
    Mr. Bernanke. Well, first, our national savings includes 
corporate savings as well as household savings. If you put 
those together, you get a positive number, so there is some net 
savings going on in the United States.
    Congressman, you are absolutely right that we are also 
relying pretty heavily on borrowing from abroad, which is our 
current account deficit. I think that is sustainable for a 
while because foreigners seem quite interested in acquiring 
U.S. assets. We have very deep and liquid financial markets. 
However, I also agree with you that that is not a long-term, 
sustainable situation by any means, and we need to be working 
to try to bring that current account deficit down over time.
    In answer to a previous question, I talked a bit about the 
importance of a structural change--increasing savings here in 
the United States, increasing attention to domestic demand with 
our trading partners.
    Dr. Paul. You did say in your talk that the predominant 
policy concern was inflation, which is encouraging that there 
is a concern. Of course, once again, inflation is a monetary 
phenomenon, and we have to deal with it. War sometimes is not 
healthy for a currency or for keeping prices down, at least 
inflation. It is hard to find throughout all of history when 
war did not create price inflation because, even in ancient 
times, countries resorted to clipping coins and diluting values 
or whatever--they inflated the currency--because people do not 
generally like to pay for the war. Yet, in the 1970's, we had 
consequences of guns and butter. Now we are having guns and 
butter again, and we are having consequences, and it just looks 
like we may well come to a 1979/1980.
    Do you anticipate that there is a possibility that we will 
face a crisis of the dollar such as we had in 1979 and in 1980?
    Mr. Bernanke. The Federal Reserve is committed to 
maintaining low and stable inflation, and I am very confident 
we will be able to do that.
    Dr. Paul. So you are not answering whether or not you 
anticipate a problem.
    Mr. Bernanke. I am not anticipating a problem like in 1979 
and in 1980, no.
    Dr. Paul. With your fingers crossed, I guess. Okay.
    Thank you.
    The Chairman. The gentleman from New Hampshire, Mr. Hodes.
    Mr. Hodes. Thank you, Mr. Chairman.
    Chairman Bernanke, I am glad to see you here. Chairman 
Frank and the staff made available to us the Financial Services 
Forum report to which he referred. I want to follow up on some 
of the questions that arise from reading that report and from 
reading your monetary policy report.
    The Financial Services Forum report talks about--and you 
will have to pardon me, this is their word--the astonishing 
``skewness'' of U.S. income growth. They point out that, since 
the year 2000, U.S. corporate profits have nearly doubled, and 
say that in recent years the large majority of American workers 
has seen poor income growth. Indeed, 96.6 percent of Americans 
are in educational groups whose mean total money earnings have 
been falling, not rising, since 2000. Only a small share of 
workers at the very high end has enjoyed strong growth in 
incomes. The strong U.S. productivity growth of the past 
several years has not been reflected in wage and salary 
earnings, and instead, it has accrued largely due to the 
earnings of very high-end Americans and to corporate profits.
    The New York Times reported the other day that 5 percent of 
the wealth of this country is concentrated in the hands of 
15,000 families. In a large sense, given that productivity is 
up, and you talk about the continuing expansion of the economy, 
and you predict at least moderate growth in the economy, we are 
seeing the rich get richer, the poor get poorer, and the middle 
class get squeezed.
    How can productivity and expansion serve as accurate 
measures of the true strength of an economy when what the 
Financial Services Forum reports to be happening is, in fact, 
happening?
    Mr. Bernanke. Well, in the past I have taken a view very 
similar to what Chairman Frank advanced, which is that I do 
believe that globalization, technological change, those 
factors, do make our country richer. But there is essentially a 
political problem if the majority of the population does not 
feel that they, personally, are benefiting from that, and so we 
need to pay attention to how--
    Mr. Hodes. Can I just stop you for a moment?
    It is not about what people feel. If these statistics are 
correct, almost 97 percent of Americans are going backwards in 
terms of their real wage income growth, while, at the very top, 
things are getting better, and corporate profits are up. So it 
is more than a feeling, isn't it?
    Mr. Bernanke. I do not want to dispute the study. I am sure 
they have picked some period of time and have looked at it. I 
do not think that is a good characterization of the last few 
decades, for example.
    For example, if you take the families with children and 
look at the middle quintile--so that is sort of a typical 
middle-class family--the real income of that family is about 30 
percent higher today than it was in 1980, and about 15 percent 
higher than it was in 1995, and about 5 percent higher than it 
was in 2000.
    There are many different ways to cut these data, and I 
absolutely agree that there is increased inequality, and that 
we are not seeing gains as large as we would like in the 
middle. But characterizing 97 percent as falling backwards is 
not really a fair representation of the trends in the United 
States over the past decade or two.
    Mr. Hodes. Assuming that these figures are accurate, and 
that since the year 2000 there has been this astonishing 
skewing of growth for those at the very top as compared to 
those in the middle or in the lower rungs, what role do you 
think tax policy since the year 2000 has played in the skewing 
of that picture?
    Mr. Bernanke. I think tax policy is not the major factor. 
Empirically, the major factors are technological change, which 
particularly favors people with high sets of skills, and to a 
lesser extent globalization. I think that most of the research 
points to that. Over time, of course, the tax system is 
progressive, but it has not offset these other factors which 
have made incomes more unequal.
    Mr. Hodes. What are the long-term implications for an 
economy if this trend continues, where the rich get richer and 
corporate profits go up, but real incomes for the rest fall?
    Mr. Bernanke. Well, as I was indicating before, what a 
superstar baseball player makes does not necessarily affect me. 
But even putting that aside, it is important that the mass of 
people see improvements in their living standards. That is very 
important, and I know of no other approach other than trying to 
make our economy more productive for the broad swath of 
society, and that involves research and development, education, 
saving--it involves doing all of the things that make an 
economy strong. Congress has a tremendous role here in making 
good economic policies that will strengthen our economy and 
will allow the benefit of that economic growth to be spread 
more widely.
    Mr. Hodes. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from Ohio.
    Ms. Pryce. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman, for the time you take with us in 
these Humphrey-Hawkins marathons twice a year. You are very 
gracious. I know you are required to do it, but thank you for 
doing it so graciously.
    I also want to thank you for the initiatives the Fed has 
taken in terms of consumer protections, especially in my State 
of Ohio, with the mortgage problems that we are having. Your 
attention to that is critical and very, very much appreciated. 
So thank you for that.
    I would like you to talk a little bit today to us about the 
extent and the impact of the use of credit or the overuse of 
credit, as Mr. Paul might refer to it, in our country. I am 
particularly interested in credit card debt, but you can go 
beyond that if you would like, because I think that this 
committee will be addressing some of those issues in the fall.
    We would love to have some of your guidance in terms of 
consumer protections when it comes to things like data 
breaches. In my home State of Ohio, we have had major financial 
institutions, universities, retailers--even our own State 
government has had just a series of terrible breaches in data 
and has the identity theft issues that go along with those 
things. Credit is a wonderful convenience, and credit is one 
thing that is keeping our economy healthy or unhealthy, as the 
case may be in your perspective.
    How can we better address the issue of data breaches and 
securing people's information in every way we use it when the 
use of credit is so pervasive and is on the Internet?
    Mr. Bernanke. Thank you.
    On the general issue of credit, there is sort of a paradox 
where, on the one hand, we want people to have access to 
credit. Credit allows you to buy a home much earlier than you 
otherwise could, for example. But as I was discussing with 
Congressman Paul, there is a very low savings rate, and we 
would like people to save more and to build more wealth.
    In particular, as to the discussion we were having on 
inequality, the inequality in wealth-holding is much more 
severe than the inequality of income, because many people just 
simply do not build wealth in terms of acquiring financial and 
real assets. So that is very important.
    Specifically, and as to the two things you mentioned on the 
credit cards, as I said, we have just put out a very extensive 
set of new disclosures. We believe that they will help people 
understand the terms of their card, so they are not surprised 
by unexpected fees and penalties, and we are prepared to take 
additional steps. Congress has given us and other regulators a 
good bit of power to try to make sure that credit cards are 
marketed in an honest way and that people understand what their 
accounts are about. So we want to proceed along those lines, 
and Congress will have to judge whether they need to take 
additional steps.
    On the issue of data breaches, we have a model that you 
might want to look at. The Gramm-Leach-Bliley law of 1999 
instructed the Federal regulators to develop a set of data 
breach policies for depository institutions, banks essentially, 
which we have done.
    So we have a set of rules, a set of principles, which, of 
course, promote safeguarding of information--methods of doing 
that--and also give some advice under what circumstances 
notification is needed. If there is a trivial problem, maybe it 
is not necessary to notify the public. If there is a serious 
breach of security, then obviously the public needs to know 
about it. So that exists. I might suggest that in drawing up 
legislation for the broader market, you might take a look at 
some of the things we have learned in the banking agencies.
    Ms. Pryce. Let me ask you one specific question that seems 
to be the subject of some controversy. How do you feel about 
the consumer's ability to freeze their credit? Do you think 
that will have any impact on our economy? Do you think 
technology is at a place where that can be turned off and on at 
will? Do you have any opinion at all on freezing?
    Mr. Bernanke. If a consumer wishes either to prevent access 
to their credit records or prevent additional credit charges 
being made, that seems perfectly reasonable to me. I am not 
aware of any particular technological problems, but I could be 
unaware of something. I am not sure. But certainly, the 
consumer should have some control, significant control over 
their credit records, and preventing unwanted access is 
certainly part of that.
    Ms. Pryce. Thank you very much.
    The Chairman. The gentleman from Florida.
    Mr. Mahoney. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman, for being here today. I appreciate you coming before 
us. First, a general question, and then a couple of specific 
questions on debt. Yesterday, the Dow hit a milestone mark of 
14,000, which is not a question of benefit to the haves and 
have-nots; it is a good thing. We appreciate the fact that the 
market has hit this high for those investors in this country. 
It is a very positive statement. But at the same time, we know 
that there are many people in the country who are still 
struggling. They may or may not be investors.
    There is still a big portion of our country that is not 
invested in the market, and whether it is relating to energy 
costs or food costs or the staples that impact people's day-to-
day lives, we know that these are things that are at their gut 
level impacting them. I think one of the questions that we keep 
looking at is why is it that some of these gains in large 
business sectors or the market side are not translating into 
the middle class, if you will. And I know that we look at 
unemployment being low. I am from Florida. And in Florida we 
do, as you mentioned, have a softening of the real estate 
sector, which has had a big impact. We also have a lot of 
hospitality jobs, which traditionally are relatively low wage 
jobs in large quantities. So even unemployment figures don't 
always tell the whole tale when people are getting paid minimum 
wage or relatively small numbers. What can be done in terms of 
monetary policy, if there is anything, to help the middle 
class, or people who are in a small business, or trying to get 
an upper hand in trying to benefit from an economy that through 
the Wall Street public security side is doing very well, but 
maybe in the small business, private closely held businesses or 
people that are workers are just not accomplishing as much?
    Mr. Bernanke. Well, in terms of monetary policy, I react to 
a comment that Chairman Frank made earlier, which is that, on 
the margin, good monetary policy can do a bit about inequality. 
I notice that when the poverty reports are issued periodically, 
they show the recession periods and the expansion periods of 
the economy--because poverty tends to rise during recessions, 
as you might espect. And therefore to the extent that the Fed 
can maintain a stable economy--low inflation, sustainable 
expansion--there is a modest benefit in terms of income for the 
poor and for the middle class. But I think that to make real 
changes--real differences in terms of across groups 
differences--you need to have structural changes, changes in 
behavior.
    We know, for example, that the Federal Reserve manages the 
Survey of Consumer Finances, which is the leading source of 
information about wealth holdings. You mentioned stocks 
before--across the population--and what we find there is that a 
very large fraction of the population really has almost no 
savings. It is a paycheck-to-paycheck situation. Now, 
obviously, it is hard to save when your income is low or 
irregular. But there certainly should be opportunities for low- 
to moderate-income people to build some wealth, to gain 
financial literacy, to learn how to get a checking and savings 
account. And helping people do those kinds of things could be 
one way of improving their situation. I have referred many 
times to skills, and I do believe that it does not require a 
Ph.D. to get a good-paying job. There are a lot of what we used 
to think of--and still think of--as blue-collar type jobs that 
are now paying pretty good salaries given the supply and 
demand. So that is another important dimension of this. But 
from a monetary policy perspective, our main goal is trying to 
maintain maximum employment price stability in a stable economy 
as best we can.
    Mr. Mahoney. As we go through this, we may want to continue 
to have these discussions with your Board and with Congress as 
far as what policies. We can promote some of its communication 
and promotion of educational understanding of savings. That is 
a segue to a second question; in your speech today, you 
mentioned that consumer spending has advanced vigorously over 
the last number of quarters. Sort of looking at the trend over 
the last number of years, savings have been going down, as you 
have said. Many people during this boom of real estate started 
with a lot of home equity loans, taking equity out of their 
home to support consumer spending, building up more debt that 
way. And now with the real estate market in many parts of the 
country very flat, interest rates having gone up, adjustable 
rates, that is not available for many people, so they have debt 
on top of that. And then a lot of the consumer spending is on 
the backs of more consumer debt in terms of credit cards. 
Congresswoman Pryce mentioned that as well. Again, what impact 
do you see that having on the long-term basis of the stability 
of the economy when people are borrowing more and more and more 
and not saving? And again, what can we do through your offices 
or through the Congress?
    Mr. Bernanke. Well, one of the reasons that the personal 
saving rate declined, and actually has gone negative, is that 
capital gains in an individual's house, stocks, or any other 
assets are not counted as part of saving. It is only the part 
of one's income that you set aside out of current income that 
is counted as saving. Part of the reason that people saved less 
over the last decade or so is precisely because home values and 
stock values went up. People felt wealthier. Maybe they didn't 
feel they had to put aside part of their income and spent out 
of their wealth. Therefore we had negative saving rates. As you 
point out, though, the stock market has still gone up this 
year, but housing prices are flattening out. To the extent that 
house prices no longer generate home equity gains that they 
have in previous years, consumers won't be able to tap that 
source of spending power.
    Mr. Mahoney. And the costs have gone--I know in many parts 
of the country, between insurance and mortgage rates and 
everything else, the net amount has.
    Mr. Bernanke. So, they will have to begin to save more out 
of their current income, and that might lead to some increase 
in the household saving rate. In the short-run, we don't want 
consumption to drop too quickly because it is a huge part of 
the demand that drives our economy. But over our medium term 
horizon, we do want to see more saving, and that would be a 
positive thing.
    Mr. Mahoney. Thank you.
    The Chairman. The gentleman from California.
    Mr. Royce. Thank you very much, Mr. Chairman. We discussed 
that since 2000, we have seen stagnant wages for low skilled 
workers. Well, supply and demand are a reality, and certain 
business interests on the right want low skilled labor because 
it will drive down wages. They want more low skilled labor in 
the country. On the other end of the spectrum, there are those 
who believe in open borders for the disadvantaged. But the 
result of the policy is that until we have enforcement against 
illegal immigration, wages will lag. They are going to lag if 
you have massive illegal immigration of low skilled wages in 
the United States. You can't expect anything else to happen if 
you have 20 million people here illegally other than to have 
the pressures of supply and demand force down wage rates.
    Indeed that has happened since--well, for the last decade. 
To encourage monetary inflation, shifting to that subject, is 
to encourage a return of the boom and bust in a business cycle 
and to abandon a stable monetary unit. That is what I think the 
effect would be if we move towards the direction that didn't 
attempt to really control inflation.
    Now, Chairman Bernanke, as you know, in the past decade we 
have also seen unprecedented growth in the mortgage industry. 
If you went back to the 1960's, there was very little movement 
back then in home ownership rates until the development of 
technology and tools such as risk based pricing, which allowed 
lending institutions to more accurately calculate the risk 
associated with potential borrowers. As a consequence of that, 
in 2004, the home ownership rate went up to just under 70 
percent, hitting record highs. Much of this growth which we had 
not seen in the decades prior was in a sector of the population 
which was previously locked out from obtaining mortgages, 
therefore, they rented instead of owning homes.
    For the most part, they had blemished credit, and they 
benefited greatly from the transformation in the industry as a 
result. As you know, the subprime lending market has come under 
tremendous scrutiny. Some believe we should rush to legislate. 
I believe we should approach this topic with tremendous 
caution. While deceptive lending practices should be prevented, 
I believe effective disclosure is the proper anecdote. 
Expanding liability to include secondary market participants 
for abusive loan originations would be a misguided policy. My 
fear is that if we overlegislate, which we have been known to 
do, it will prompt a credit crunch for Americans.
    I believe that the availability of credit has been good for 
consumers, by and large. The economy has benefited as a result, 
and any potential solution to concerns that have arisen should 
be very closely scrutinized.
    So Chairman Bernanke, I would like to get your thoughts on 
this issue and whether you believe an ill-conceived legislative 
fix will have any potential unintended consequences. Lastly, as 
you know, the outflow of capital from our markets has been 
discussed at length over the last few months. Much of the 
debate is centered around two major burdens faced by our public 
companies. One is cumbersome regulation and the prevalence of 
securities class action lawsuits. The threat of overregulation 
and overlitigation has caused many companies to reconsider 
listing on our public markets. This has resulted in a growth in 
the amount of capital in a private equity and hedge fund 
industry.
    So my second question, Chairman, is if our private equity 
and hedge fund industries are subjected to a sharp increase in 
regulation and taxation, what do you believe will be the end 
result? Thank you.
    Mr. Bernanke. Earlier, we mentioned the 30th anniversary of 
the Humphrey-Hawkins Act. Thirty years ago was also the 
creation of the Community Reinvestment Act (CRA), the premise 
of which was to address the fact that banks were not lending in 
certain neighborhoods--there was red lining--and that it was 
important to extend credit to low- and moderate-income people. 
The development of the subprime lending market made that 
feasible to a significant extent. And I agree with you that 
legitimate, well-underwritten, well-managed subprime lending 
has been constructive. It does give people better access to 
credit and better access to home ownership.
    Moreover, regulations should take care not to destroy a 
legitimate part of this market, even as we do all that we can 
to make sure that bad actors are not taking unfair advantage or 
confusing or misrepresenting their product to people who are 
essentially being victimized by them.
    So it is our challenge--and we take it very, very 
seriously--to provide regulation and disclosures that will 
allow this market to continue to function, but at the same time 
to eliminate some of the bad aspects that we have seen in the 
last couple of years.
    The Chairman. The gentleman from Connecticut, Mr. Murphy.
    Mr. Murphy. Thank you, Mr. Chairman, and thank you, Mr. 
Chairman, for coming here today. I want to spend just a few 
minutes on a subject that within, we think, the next 5 or 10 
years is going to account for about $1 out of every $5 spent in 
this economy, and that is health care spending. We talked a lot 
about food and energy costs today, and that is probably in part 
because they tend to rise and fall with some degree of drama, 
and they tend to get some headlines in the newspapers. But the 
fact is what we have seen in health care spending is a very 
slow but steady growth in the rate of our GDP that is dedicated 
to health care spending going from about 8 percent in 1980 up 
to bordering on 16 to 17 percent today.
    There seem to be two schools of thought, and I probably 
fall in the first one, but I would like to get your thoughts on 
this, Mr. Chairman. The first is that this is a very dangerous 
trend with $1 out of every $5 being spent on health care 
spending; that is less money available to our economic sector 
for growth, and less money available to consumers for 
discretionary spending. On the other hand, as opposed to the 
increases in spending in energy and food costs, that money is 
generally almost completely being recycled back into our own 
economy rather than with energy costs and food costs. Much of 
that money is going outside of the United States economy.
    So that is a very broad way of asking what your thoughts 
are and how troubling you believe the trend is towards more of 
our GDP and more of our economy being dedicated to health care 
spending.
    Mr. Bernanke. Well, there have been interesting studies 
about the cost-benefit of this extra spending that we have been 
doing. The general view is that the money we have spent on 
things like improving recovery from heart attack, on mental 
illness, and on some other major categories of disease has been 
worthwhile in that the benefits of life expectancy, 
productivity, and so on does exceed the cost. That being said, 
it is not inconsistent to say that we probably could achieve 
the same health outcomes at a lot less cost if we had a more 
efficient system.
    Of course, this is a huge issue about how to achieve 
greater efficiency. I would like to point out that this has 
become extremely important, not just to the share of GDP issue 
as you mentioned, but also as a fiscal matter--as Medicare and 
Medicaid become huge portions of Federal spending, and also as 
a generational matter, as we have become an increasingly older 
society and young people are responsible for the maintenance of 
the retired. To the extent that older people require additional 
medical care, that care is becoming more and more expensive and 
puts a heavy burden on the younger generation. So there are 
some important reasons. While health care is a wonderful thing 
and is certainly worthwhile, there are very good reasons to 
improve the efficiency of the system.
    Mr. Murphy. I certainly appreciate your thoughts on that. I 
share your view that we can get very similar, if not better, 
outcomes for less money spent within the system. The last 
related question is in regard to global competitiveness in 
relation to the costs being borne by American businesses on 
health care costs versus competitors in other countries who 
simply aren't required to bear the burden of providing health 
care for their employees. Do you, as you look at the future 
outlook of American competitiveness, worry about the burden 
that American businesses have to bear regarding health care 
costs?
    Mr. Bernanke. Well, there is some complexity to that issue 
because, even in a society where government provides health 
care, corporations still have to pay taxes to support that. So, 
it isn't free. That being said, the more resources are 
unnecessarily consumed by health care--as opposed to the part 
which is valuable--clearly lowers the overall productivity of 
our society and the lower our living standards will be in the 
long run. So, it is a first-order issue to make sure that our 
health care system is delivering good outcomes, but at a 
reasonable cost.
    Mr. Murphy. Thank you very much. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman, and thank you, 
Chairman Bernanke. I would like to go to something that you 
have in your written comments, and you also spoke about orally 
when you spoke, and that is inflation. I am afraid maybe I 
didn't understand inflation as well as perhaps I thought I did 
coming in here. But you talk about core inflation here, which 
apparently excludes food and energy prices. And there is also a 
reference to an annual inflation rate of 4.4 percent in the 
first 5 months of this year. I don't know if that does include 
the food and energy.
    Mr. Bernanke. Yes.
    Mr. Castle. Apparently it does. Why are food and energy 
excluded from core inflation? And when you speak generally 
about inflation, or giving the rate such as 4.4 percent, are 
you generally giving a noncore inflation and giving inflation 
including energy and food? I mean, energy is a major component 
of virtually every household in this area, but also there is a 
lot of major businesses in the country as well. I realize it is 
subject to short-term happenings, and obviously food prices are 
also subject to short-term weather events and other things. 
There may be some logistical problems in terms of inflation. 
But it just seems to me to exclude them from any form of 
inflation measurement would not be correct.
    And my follow-up to that question, if you can answer at the 
same time, is should we be concerned that persistently elevated 
food and energy inflation might presage an increase in that 
core inflation, since it is already not included there.
    Mr. Bernanke. The dual mandate says price stability, it 
doesn't say price stability without energy and food. The 
Federal Reserve is concerned about the overall inflation rate, 
that is our long-term objective in the sense of maintaining 
price stability. But there are some technical issues involved 
in achieving that. In particular, when oil prices rise sharply, 
as they have in the last few months, there is really not much 
the Federal Reserve can do in a short period of time to reverse 
that. Rather, what we have to do is look forward 1 to 2 years, 
which is the horizon over which monetary policy has its effect. 
And so we really have to ask ourselves, what is the underlying 
trend of inflation going forward?
    What is the best forecast of inflation going forward? 
Because energy and food prices have been so volatile up and 
down historically, the core portion, which excludes energy and 
food, is sometimes a better indicator of where sort of the 
trend of inflation is going to be a year or 2 from now. So, it 
is not that we think core inflation is more important in 
itself, or rather we think it is an important indicator of the 
underlying inflation trend.
    So by paying attention to core inflation, we are, in a way, 
saying that this is how we hope to maintain stability in 
overall inflation over the horizon in which the monetary policy 
can be effective. It is a concern, as I mentioned in my 
remarks, if energy and food prices rise a lot and you have very 
high overall inflation. It is a concern that the public will 
begin to expect higher inflation. That will, perhaps, then 
creep into core inflation and raise the inflation trend, which 
we don't want to happen. So we pay attention not only to core 
inflation, we also look at inflation expectations as an 
indicator of what people think is the longer term behavior of 
inflation.
    Mr. Castle. I want to change subjects here, but I hope that 
because something that has volatility wouldn't necessarily be 
excluded from the inflationary rates, as far as I am concerned. 
I want to ask you about where you are with Regulation Z. I 
don't know if Regulation Z is going to be the answer. As far as 
credit card plans are concerned, this obviously is what you, 
the Fed, look at in terms of the disclosures of what should be 
in there. It is the first comprehensive review of Regulation Z 
since, I think, 1980 or 1981, something like that. We have had 
a hearing on that here. And I know that you have issued your 
initial statement and comments being made. What have you 
learned in the comments and when do you expect to finalize the 
rule? Are you at a comfort level to resolve some of the 
concerns that I think most of us on this committee have with 
the credit card industry?
    Mr. Bernanke. We issued the Regulation Z rules on credit 
cards in May for comment. It was a very comprehensive review of 
all the regulations applying both to credit cards and to other 
revolving credit. The comment period is open until October. 
After that we will move as expeditiously as possible to issue a 
final rule that will apply to credit card issuers. We are also, 
as you know, doing a complete overhaul of Regulation Z as it 
applies to mortgage lending. We have had a series of hearings 
on that.
    We are also, as we did with credit cards, going to do 
consumer testing to make sure that people can understand the 
disclosures. That is going to take a while. It will probably be 
next year in 2008, as we come to some conclusions on that. But 
in a nearer term, in order to address some of the current 
issues in the subprime mortgage market, we have taken off a few 
elements that we think we can move on more quickly relating to 
solicitation and advertising of mortgages and when you have to 
give information to consumers, how quickly you have to make 
those disclosures. So there is some element to that that we 
think we can move up. The full Regulation Z on mortgage 
lending, however, is going to still take a while because of the 
need to do consumer testing.
    Mr. Castle. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Massachusetts.
    Mr. Lynch. Thank you, Mr. Chairman.
    The Chairman. I very much appreciate the Chairman staying 
with us. After 2\1/2\ hours, you are entitled to call something 
a rehash when it is. We have, I think, four members left who 
haven't asked questions. That should take us about 20 or 25 
minutes, and that will give us time to finish the hearing. So 
if you can accommodate that, we would appreciate it.
    Mr. Lynch. Thank you, Mr. Chairman. I will try to be brief. 
I do want to go back to an issue that Mr. Royce and others have 
talked about, the subprime mortgage problems that we have been 
having. In your own remarks, Mr. Chairman, you mentioned that 
the subprime mortgage sector has deteriorated significantly, 
the conditions there, and that reflecting mounting delinquency 
rates on adjustable rate loans continue to be a growing 
problem. You also note that one risk to the economic outcome is 
that the ongoing housing correction might indeed prove larger 
than originally anticipated with possible spillovers into the 
consumer spending area.
    And in addition, you made remarks that the recent rabid 
expansion of the subprime market was clearly accompanied by 
deterioration underwriting standards, and in some cases, by 
abusive lending practices and outright fraud. And while we all 
agree that promoting access, as you have noted, to credit and 
to homeownership are important objectives, we do, in my 
opinion, need to do something more concrete, not only going 
forward. And I appreciate that I know you worked with some 
other Federal supervisory agencies to issue a principles-based 
guidance and nontraditional mortgage regulation, and that in 
June, you issued a supervisory guidance on subprime lending 
going forward.
    But I do want to note that in Massachusetts, this is just 
one example that I throw out there, Governor Deval Patrick 
instituted a moratorium working with mortgage lenders in 
Massachusetts, instituted a moratorium on foreclosures and a 
coordinated workout process for some of those folks that were 
harmed because of the, as you have noted, abusive lending 
practices and in some cases outright fraud.
    And I was wondering, is there anything--it is sort of a 
two-part question. One, are we doing anything going forward 
more significantly and more specific than described in your 
general guidance, and are we looking at all at possibilities 
working--I know you are working with the States--are we looking 
at any ways to maybe hold those people harmless or to mitigate 
the damage that might have been done because of abusive lending 
practices or that fraud?
    Mr. Bernanke. Well, in terms of workouts, our supervisory 
letter emphasized to the banks and other lenders that we 
encourage them to look for loan modifications. Foreclosure 
involves a considerable financial loss to the lender as well as 
to the borrower. In many cases, it is economically beneficial 
to both sides to try a loan modification, and we encourage 
firms to do that. We have also been looking at whether there 
have been some artificial barriers to doing modifications.
    For example, we have looked at some of the accounting rules 
that may serve effectively to make it more difficult to do 
modifications. We have also looked at some of the legal 
agreements involved in the securitization of mortgages, the 
pooled service agreements. So I think there are ways to 
facilitate this modification process by looking at some of the 
legal and accounting barriers that stand in the way. I think 
one thing that we should be a little careful about is not 
rewarding lenders for making bad loans. We don't want to get 
into a bail-out where lenders who have made bad loans find 
themselves essentially getting paid off.
    So, what we need to do is work with borrowers to try to get 
these loans changed. A couple of things that we have observed, 
in many conversations with the industry, with consumer groups, 
and the like, is, first, one of the most basic things that a 
borrower can do is to call their lender since lenders often 
find that the borrower will not get in touch with them until 
they are well into the delinquency situation. If you see your 
rate about to reset several hundred basis points in the next 6 
months, and you think that is going to be a serious problem, 
then you probably should talk to your lender in advance to get 
more time to work that out. The other thing is that, 
unfortunately, lenders are very reluctant to do sort of mass 
restructuring. It is a very labor intensive, loan-by-loan kind 
of process, and we don't really see a way around that, except 
to try to provide support, encouragement, counseling and the 
like, to facilitate this process.
    Mr. Lynch. Lastly, turning to another issue. We talked a 
lot this morning about the deplorable savings rate here in the 
United States. And from our own example here in the Congress, 
we have a Thrift Savings Plan where there is a match. I know a 
lot of employers have incentivized savings among employees. Is 
there not some model out there that we could use to expand that 
across the Nation to incentivize people to save with that match 
maybe? Certainly it is doable. I think if we created incentives 
for employers in the Tax Code, treated them more favorably if 
they set up these matched savings plans within their companies, 
I think that we could do great things for the United States and 
reduce our reliance on foreign investment and reduce our 
foreign borrowing. We could do a lot more for our citizens if 
we just induced that behavior. I am wondering if you had any 
thoughts on that? I yield back.
    Mr. Bernanke. Just a couple. The pension bill that was 
passed by Congress recently had a provision that allows 
employers to create savings plans with an opt-out provision. 
That is, the employee is put into the savings plan unless they 
explicitly request to be let out. There is a lot of research 
which suggests that with that opt-out approach, most people 
will stay in the saving plan, and you actually get very 
significant effects that way. I have a couple of other 
thoughts. First, one might consider using the existing Social 
Security system. There was a big debate here in Congress about 
carveout accounts. Something that might be less controversial, 
possibly, would be an add-on account, whereby individuals had a 
chance through their payroll taxes to contribute to an 
independent account that would be in their name.
    Finally, I think it is probably worth taking a look at the 
long list of savings programs and incentives that now exist in 
our Tax Code and in our government policy. They are quite 
confusing and sometimes somewhat contradictory, so there might 
be some benefits to simplifying our savings programs in a way 
that people can understand better and provide more explicit 
incentives for saving. While I think there are some things to 
do, the truth is, we have never found the magic bullet to 
induce the public to save a good deal more.
    The Chairman. The gentleman from New York.
    Mr. Meeks. Thank you Mr. Chairman. Chairman Bernanke, thank 
you. I first want to make sure that I associate myself with 
many of the comments of my colleagues, a concern about the 
growing disparities that are taking place here between those 
who have and have not and the middle class and the pains that 
they are feeling. And as a result, folks are trying to figure 
out what is the best way to do it. Some have suggested that 
maybe we should take a pause in pursuing trade and investment 
legalization with some of our trading partners. So my first 
question, I am going to go in two areas, and this area is, 
would there be any economic benefits or losses to the United 
States if, in fact, we did take a short pause in pursuing trade 
legalization and investment with some of our trading partners?
    Mr. Bernanke. I think it would be very costly economically 
to do that, both because there are many benefits to expanding 
trade investment and because if you interfered with existing 
trade investment relationships, that could be very disruptive. 
The main concern about trade is that, even if it provides 
general benefits to the economy, there are some people who are 
worse off because their company or their plant shuts down 
because of foreign competition. I think a better approach, 
rather than blocking trade, would be to try to assist those who 
are displaced to find new work, to get retraining--and this 
could apply to communities as well as individuals--to help them 
overcome the problems created by this dynamic change in the 
economy. So that would be my preferred approach, rather than 
just shutting down what has been for the economy, as a whole, a 
very beneficial direction.
    Mr. Meeks. I heard the gentleman talk earlier about the 
trade assistance program currently; as we know, it doesn't 
work, and it hasn't been working. So I think that to the degree 
that we could use all of the mires as possible to come up with 
something that does, in fact, work. That is clearly what we 
have in place now. And it goes even bigger in trade, I think, 
because also people are losing jobs because of efficiency and 
technology.
    In fact, we probably lose a lot of jobs in regards to the 
technology that is being created today, and so we need 
something for the displacement of all workers. And what we have 
today is not working, and we have to figure out something 
better. Otherwise the anxiety that individuals have will roll 
over to trying to do something that could be what you 
described, a disastrous situation. That is why I think we need 
to all focus on all levels in that regard. My other question in 
that particular area is foreign investment in the United 
States. It seems that it is growing. And my question to you is, 
do you think that it will continue to grow and how important is 
foreign direct investment for the United States economy?
    Mr. Bernanke. It will continue to grow. We have, as you 
know, a very large current account deficit, which means that 
our investment here in the United States greatly exceeds our 
own saving, so we are borrowing a great deal of money from 
foreigners. A lot of that borrowing is taking the form so far 
of selling treasury bills and other kinds of fixed income 
instruments. But in the future, I think it is quite likely that 
we will see more and more foreign direct investment coming from 
abroad. Generally speaking, I think foreign direct investment 
(FDI) is positive for the economy. We are already the major 
recipient, the largest recipient in FDI in the world. 
Transplants that come, like the automobile transplants, provide 
jobs, they bring new technologies, and they bring managerial 
talent. There are also investments that don't move quickly in a 
financial sense. There are permanent kinds of investments. So I 
think they are beneficial. The Congress has recently, of 
course, just revised the CFIUS program to address whatever 
issues there may be of national security. It is really up to 
Congress to make sure you are satisfied with the provisions to 
ensure that acquisition of U.S. assets by foreigners doesn't 
interfere in any way with national security.
    But putting aside that issue, I think there is a 
substantial benefit to be had by having foreigners invest in 
our country, provide jobs here, provide capital, and provide 
technology for the United States.
    Mr. Meeks. Let me go into another area. I only have time 
for one question, although I have many. With what is now 
becoming known in issues of managed funds, hedge funds, private 
equity, my question is related to, for example, the collapse of 
the long-term capital management where there was this concern 
about how exposed the banking system was to LTCM. And so my 
question is, do you feel that currently we have adequate 
regulatory safeguards in place to make certain that say, for 
example, the collapse of a few major hedge funds won't create a 
systematic risk for all of the banking industry? Do we have 
enough in place currently?
    Mr. Bernanke. Well, you can never be too careful. We always 
have to keep alert and on top of the situation. But the 
President's Working Group on Financial Markets recently issued 
a set of principles which argues that the best way to 
discipline hedge funds and other pools of capital is through 
market discipline.
    What that means is that it is incumbent on the investors 
and on the counterparties and the creditors who work with those 
hedge funds to assure themselves that the risks, the leverage 
associated with the funds, is not excessive. From the 
supervisor's or the regulator's point of view, it is our job to 
make sure that the investment banks who are dealing with the 
hedge funds are in fact managing their risks adequately and are 
getting sufficient information to protect themselves in case 
there are problems in a hedge fund. So, I think that is the 
right approach. It is not a laissez-faire approach. It does 
require that the supervisors and the regulators to look very 
carefully to make sure that the banks and investment banks are 
doing due diligence in their dealings with these pools of 
capital. But it seems to be the best approach that preserves 
financial stability while allowing these pools of capital to 
perform the positive functions that they perform in the 
economy.
    The Chairman. Thank you. Let me just take 10 seconds. I 
appreciate the answer, Mr. Chairman. It just occurred to me--it 
is one of the questions that we ask. Are all the counterparties 
subject to some regulation? That would be the question.
    Mr. Bernanke. Not private investors.
    The Chairman. And should there then be something--I mean, 
if the main protection is to ensure that the counterparties, 
etc., are under the supervision, is there a problem with 
unsupervised counterparties? Do they reach a level where that 
could be a problem?
    Mr. Bernanke. Well, it is less a question of making sure 
the hedge funds don't fail. I mean, some of them are going to 
fail and that is not necessarily a bad thing. It is a question 
of making sure that the major institutions are secure in case 
there are problems.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you Mr. Chairman. I would like to thank 
you again for holding this hearing. And I would like to thank 
you for all of the work that you have put into getting the 
Chairman over here today to make sure that we honor the work of 
Gus Hawkins, my predecessor. He is responsible basically for, 
as was described, the 30th year of semiannual testimony on the 
economy and monetary policy by the Federal Reserve. The 
Humphrey-Hawkins Act was basically established by him. And the 
goals, as I understand it, that had been established a year 
before Humphrey-Hawkins is what Mr. Hawkins focused on and that 
should be a part of these semiannual hearings.
    So thank you for recognizing that in your testimony. And 
let me just say that I have been very pleased about some of the 
speeches that you have made and the focus that you have placed 
on income equality. I would like to note that you certainly 
have been talking about this issue. I really want to cover 
several things today. I found myself feeling a little bit 
uncomfortable because as we talk about income equality, and we 
all know and feel that something is going on here, and that the 
gap is growing, what I don't find is any real steps or answers 
to deal with it. I was talking with my colleagues here a little 
bit earlier about the ways in which the income of the average 
person is just going out the window. We have all this new 
technology, as well as new products in our lives with 
incredible fees. What an average family is paying for telephone 
service now probably has been quadrupled based on the home had 
one telephone with an extension. Now everybody has a cell phone 
and you have to pay Internet charges. You have late fees; and 
you have to pay all these extraordinary banking fees if you 
don't use a teller; and on and on and on. But I hear no 
discussion of these issues. And someone brought up even the 
amount of money that we are paying for health care, etc. You 
continue to talk about it in a traditional way and you talk 
about the increased costs of energy and food. But what about 
all of the new expenditures that the average family is 
confronted with today? I want you to talk about that.
    Second, on subprime mortgages, why is it that it has taken 
so long to know what was happening, and so many people have 
been hurt? Even the answers that you are giving us such as 
disclosure are not adequate. And then you are talking about 
going back and taking a look at prepayment penalties, the use 
of escrow accounts for taxes and insurance, stated income, and 
low documentation and no documentation loans. The advocacy 
groups have been talking about this for years now.
    Why has it taken us so long to be of any real assistance to 
the average citizen out there? It is not enough, I think, to 
just talk about disclosure. First of all, why did it take us so 
long to find out what was going on in the subprime market? And 
why can't you just come forward and say that there really 
should never be any no documentation loans? Why not even take a 
look at interest only loans and the resetting of the loans? 
Those are some problems that it shouldn't take us another 2 
years while people continue to be hurt. Why can't we speed up 
the process and know in advance about these trends and at the 
time that these practices are being put into play, why can't we 
know sooner than later? With that, I would just give you an 
opportunity to comment on it.
    Mr. Bernanke. Well, on the first part of your comments, 
there are many issues that affect a consumer's budget: energy; 
health care; a whole variety of items. Each one of these things 
is a big and complex problem. There is not a single solution. 
We are just going to have to address them piece by piece. So we 
talked about energy, we talked about health care, we talked 
about other aspects of the cost of living. Let me turn, though, 
to your very good question about subprime.
    First, there always have been some concerns about these 
practices; you are correct about that. But there was a period 
that lasted perhaps less than a year--late 2005, early 2006--
when there was just a tremendous sea change, a deterioration in 
underwriting and its standards. That came about because of the 
confluence of a number of different events, including this huge 
demand for high-yield mortgage securities from Wall Street, the 
expansion of lenders outside the banking system where they are 
closely regulated, financial innovation, new kinds of products. 
An important factor was the fact that with high house prices, 
people were stretching for affordability. All those things came 
together at the same time and underwriting standards really 
deteriorated pretty quickly.
    And we have seen that of mortgages written in 2006, with 
many of them the first payment doesn't get made; they get 
returned within a few months. So, something seems to have 
changed in late 2005 and early 2006. We were very active early 
on in providing guidance on best practices, on doing disclosure 
work, on doing fair lending reviews and so on. But it is clear, 
having seen some of these recent developments and asking my 
staff to do a top-to-bottom review, it does seem clear we need 
to take additional steps, which I have talked about today, and 
they include not just disclosure, but the rules.
    And among the rules we are considering are addressing low 
doc loans, escrow, some of these other prepayment penalties, 
and some of these other things you have mentioned. Some of 
these things have already appeared in our subprime mortgage 
guidance, which a lot of the States have adopted for their own, 
so a lot of these things are going to be put in place more 
quickly. But in terms of the rulemaking process, there are 
obviously some procedural steps that we have to take. We have 
to go through a full process of getting commentary and the 
like, and we can't go faster than that.
    Ms. Waters. Do you have any suggestions for legislation for 
us? We would move it a little bit faster if we understood it a 
little bit better and knew what to do.
    Mr. Bernanke. I would be happy to talk about you about it, 
Congresswoman. There are a number of different bills that have 
already been introduced, as you know, with many different 
aspects. I mentioned earlier the point about a national 
registration of mortgage lenders that are not bank lenders. You 
could, of course, if you wished, achieve some of the rules that 
we are trying to do through the rulemaking process more 
quickly, potentially through legislation. A very, very tough 
issue is the enforcement issue, because most of the lenders 
outside of the banking system are State-licensed. Some of the 
States are very good at enforcement, others have less 
resources. The question is what to do about that.
    Our approach has been to work more closely with the States 
and hope that we can get everybody working effectively 
together. So that is another question that you might want to be 
thinking about.
    The Chairman. Thank you. One of the things you just said 
was one of the causes of this phenomenon was we are only 
looking for a high yield. It was sort of an interesting thing 
where the need for the high yield created a product. I mean, it 
goes counter to being told, oh, we needed to do this to meet 
the housing need. There is almost a perversion of what ought to 
be the way the system works.
    Mr. Bernanke. That is how markets work. People look for 
profit opportunities.
    The Chairman. Right. But when that leads to the creation 
of--it undercuts the justification. The argument has been, oh, 
no, this is just a response to the demand for housing. And you 
are now talking about a somewhat different approach, which 
doesn't mean you do away with it all together, but it affects 
how we deal with it if there is sort of an artificiality in the 
product driven by the demand. The gentleman from North 
Carolina.
    Mr. Miller of North Carolina. Thank you, Chairman Bernanke. 
There have been several members who have asked about income 
inequality. Mr. Hodes asked a series of questions that were 
very like the questions I have asked of you in your previous 
appearances before this committee. You said that in the last 5 
years the middle quintile of American families, in answer to 
Mr. Hodes, had increased, I think, real income had increased by 
5 percent, is that right?
    Mr. Bernanke. The data I have is, I believe, if I recollect 
it correctly is the middle quintile of families with children.
    Mr. Miller of North Carolina. Right. The middlest class.
    Mr. Bernanke. So of the five quintiles, the one in the 
middle.
    Mr. Miller of North Carolina. The middlest.
    Mr. Bernanke. Yes.
    Mr. Miller of North Carolina. Now, Mr. Castle asked you 
questions about core inflation versus total inflation. Are you 
backing out of income growth core inflation or total inflation?
    Mr. Bernanke. Total inflation.
    Mr. Miller of North Carolina. The information that I have 
is that from November of 2001 until May of 2007, the wages of 
production workers, which is about 80 percent all workers, had 
increased 17.28 percent and total inflation had increased 17.22 
percent, which is barely treading water. Is that an incorrect 
number?
    Mr. Bernanke. That could be correct. I don't know the exact 
number. But the real wages have not grown very much in the last 
5 or 6 years, that is true.
    Mr. Miller of North Carolina. Okay. That is total 
inflation?
    Mr. Bernanke. Yes.
    Mr. Miller of North Carolina. What are you backing out?
    Mr. Bernanke. If you have multiple family workers, for 
example, who change the number of hours they work, or if they 
have investment income of some kind.
    Mr. Miller of North Carolina. What are you backing out this 
inflation rate?
    Mr. Bernanke. I am totaling the CPI inflation rate.
    Mr. Miller of North Carolina. Then I am looking at very 
different numbers.
    The Chairman. Will the gentleman yield? You are talking 
about wages?
    Mr. Bernanke. I am talking about income.
    The Chairman. So if a second member of the family goes to 
work, it is going up. I think that is the explanation?
    Mr. Miller of North Carolina. That may be the explanation 
then. But income wages are not keeping up with inflation or 
barely keeping up.
    Mr. Bernanke. That is true.
    Mr. Miller of North Carolina. In your discussion with Mr. 
Castle, and in your testimony, you gave the explanation for why 
core inflation doesn't really include energy costs and food 
costs because traditionally those are the most volatile costs 
and that you would see more fluctuation than you would long-
term trend. Is that generally the explanation for not including 
energy costs and food costs?
    Mr. Bernanke. Again, it is not that we don't care about it. 
We drive, we eat, we understand that inflation involves all 
prices, not just those that are not volatile. But the nature of 
monetary policy is, if we want to address inflation, there is 
nothing we can do today that is going to affect today's oil 
price. We have to affect inflation over a period of 1 to 2 
years, and therefore we have to ask ourselves where is 
inflation going.
    Mr. Miller of North Carolina. But my question is, do you 
really believe the increases we have seen in energy costs is 
simply a fluctuation and not long-term? Aren't the pressures 
that have pushed gasoline prices to $3 a gallon or more at the 
pump a long-term here to stay, the permit, not a fluctuation? 
Don't you really believe--and in your testimony, you gave the 
reason for the increase in food costs as being the cost of 
grains because grains are now being used for fuel production. 
Isn't that permit, is that really a fluctuation?
    Mr. Bernanke. The best guess is that food and energy 
prices, or at least energy prices, will stay high. The 
question, though, is whether they will keep rising at the pace 
that they have been rising. As best we can tell, as best as 
futures markets suggest, while they may remain high, they will 
not continue to rise at the same pace. Now, that is a very 
uncertain judgment. I discussed in my testimony that this is 
one of the risks that we are examining. One of the things that 
could happen to make inflation more of a problem would be if 
energy prices in fact did continue to rise at the pace they 
have in recent years.
    Mr. Miller of North Carolina. I have more questions, but I 
want to move on to subprime lending. Many people have asked 
about subprime lending. When I have asked in the past about 
subprime lending, it has been a pretty lonely effort. The 
concerns about subprime lending are not new for many of us. I 
introduced a predatory mortgage lending bill 4 years ago, 4\1/
2\ years ago, when I first came to Congress, and I dearly wish 
that Congress had enacted that legislation because we would not 
have seen the spike, the disastrous spike in foreclosure rates 
and the default rates that we have. There has been more 
discussion in the press about the spike in foreclosures in the 
subprime market has affected the stability, what it has done to 
hedge funds that hold portfolios than there has to how it 
affects the families who have lost their homes.
    You have talked some about the importance of homeownership, 
equity in homes, to the wealth of no class families. The 
information I have: there were about 900,000 residential 
foreclosures in 2005; 1.2 million foreclosures last year; and 
there will be 1.5 million foreclosures this year. As you have 
said, based upon the change in underwriting last year, it is 
going to explode the year after that and the year after that. 
What is that doing to the wealth, to the life savings of 
families who are now facing foreclosure?
    Mr. Bernanke. We have numbers which are a bit lower than 
yours, but I agree that the number is high and rising. It 
depends very much on individual circumstances. Frankly there 
are a few cases of investors who just walked away from a condo 
which they no longer thought was worth holding onto. But there 
are cases also of families who have refinanced, taken equity 
out of their home and now, given the situation, they will lose 
their home and some of the accumulated equity.
    Certainly, for some families, there is going to be an 
adverse financial impact. There is also a concern, which I am 
very aware of, that there are certain communities in 
neighborhoods where if you have a lot of foreclosures within a 
square mile, the values of the other homes go down and so there 
is kind of a neighborhood effect as well. So yes, there are 
implications of this for financial markets because there are 
significant financial losses. But there are obviously also very 
important implications for household wealth building and for 
communities.
    Mr. Miller of North Carolina. The adverse financial 
consequence you refer to for a middle-class family who loses 
their home to foreclosure, they fall out of the middle class 
and into poverty and probably will never climb out for the rest 
of their lives.
    The Chairman. I thank the members and I thank the Chairman. 
This has been very useful for us. I appreciate the endurance of 
Chairman Bernanke, and we will continue all of these 
conversations at a later date.
    [Whereupon, at 1:00 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             July 18, 2007
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