[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE NEAR-TERM OUTLOOK FOR THE U.S. ECONOMY
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JANUARY 17, 2008
__________
Serial No. 110-27
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
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COMMITTEE ON THE BUDGET
JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut, PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas Ranking Minority Member
JIM COOPER, Tennessee J. GRESHAM BARRETT, South Carolina
THOMAS H. ALLEN, Maine JO BONNER, Alabama
ALLYSON Y. SCHWARTZ, Pennsylvania SCOTT GARRETT, New Jersey
MARCY KAPTUR, Ohio MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California JEB HENSARLING, Texas
LLOYD DOGGETT, Texas DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts K. MICHAEL CONAWAY, Texas
NIKI TSONGAS, Massachusetts JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington [Vacancy]
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
Professional Staff
Thomas S. Kahn, Staff Director and Chief Counsel
Austin Smythe, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, January 17, 2008................. 1
Statement of:
Hon. John M. Spratt, Jr., Chairman, House Committee on the
Budget..................................................... 1
Hon. Paul Ryan, ranking minority member, House Committee on
the Budget................................................. 2
Hon. Marcy Kaptur, a Representative in Congress from the
State of Ohio, prepared statement of....................... 4
Hon. Adrian Smith, a Representative in Congress from the
State of Nebraska, prepared statement of................... 5
Ben S. Bernanke, Chairman, Board of Governors of the Federal
Reserve System............................................. 5
Prepared statement of.................................... 9
Hon. Rosa L. DeLauro, a Representative in Congress from the
State of Connecticut, question for the record.............. 53
THE NEAR-TERM OUTLOOK FOR THE U.S. ECONOMY
----------
THURSDAY, JANUARY 17, 2008
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:00 a.m., in room
210, Cannon House Office Building, Hon. John M. Spratt Jr.
[chairman of the committee] presiding.
Present: Representatives Spratt, DeLauro, Edwards, Cooper,
Allen, Schwartz, Kaptur, Becerra, Doggett, Blumenauer, Boyd,
McGovern, Tsongas, Andrews, Scott, Etheridge, Hooley, Baird,
Moore of Kansas, Bishop, Moore of Wisconsin, Ryan, Barrett,
Bonner, Garrett, Diaz-Balart, Hensarling, Lungren, Simpson,
McHenry, Mack, Conaway, Campbell, Tiberi, Porter, Alexander,
and Smith.
Chairman Spratt. Call the hearing to order. Chairman
Bernanke, thank you for coming today. We welcome you and your
staff, and look forward to hearing your perspective on the
downturn in our economy, on actions the Fed has taken and has
available to it for the future, and on the role of fiscal
policy as a complement to monetary policy in order to keep our
economy moving.
It has become increasingly clear that our economy is
beginning to slow down, entering a slump if not a recession.
Here are just a few of the recent signs. Net job creation
during December equaled a meager 18,000 jobs. As a result,
unemployment spiked, rising from 4.7 percent to 5 percent, a
substantial increase for just 1 month.
Consumer spending seems to be losing steam, certainly as
indicated by the all-important holiday season. Retail sales in
December were expected to be flat, but instead fell four-tenths
of a percentage below the prior month.
Foreclosures are being filed at rates not seen in years,
home values are falling, and the price of gasoline is over $3 a
gallon. American households are getting squeezed on all sides,
and certain major corporations are booking record losses,
running into billions of dollars. Meanwhile, wholesale prices
for 2007 rose 6.3 percent, the highest increase in 26 years.
The Federal Reserve has been responsive to these
conditions. You have eased the monetary supply and access to
credit, and most forecasters expect further rate reductions to
come. But monetary policy has limits, such as inflation,
inherent lags due to the time it takes interest rates to
translate into spending and investment. And no one wants to be
the bearer of bad tidings, but there are ominous indicators all
around us. And all in all, it seems that a compelling case is
emerging for some form of fiscal stimulus on top of the
monetary stimulus that the Fed has already provided and will
continue to supply.
You acknowledge in your testimony that if fiscal policy
action is taken it could be helpful in principle, but you warn
us that design and implementation are critically important, as
is timing. Speaking for our side, we heed that warning. To
borrow a phrase from Larry Summers, we believe that a stimulus
plan has to be timely, targeted, and temporary. To be
effective, fiscal stimulus needs to be timely, arriving during
and not after the downturn, and it needs to be targeted,
directed at those most likely to spend it quickly. To be
credible, it needs to be temporary, otherwise it runs the risk
of becoming counterproductive, of driving up structural
deficits and interest rates, and undermining confidence in our
commitment to fiscal discipline.
Chairman Bernanke, as we ponder the near term economy, the
subject of your presentation today, and the need for counter-
cyclical policies, we look to you and the Fed for guidance, and
hope that in the course of this hearing you can address a few
fundamental questions. First of all, what are your views and
the views of the Fed on the ominous signs I have just cited and
other indications? Do these portend a recession, or at least a
significant decline in the economy?
Next, what actions has the Fed taken to date to avoid the
risk of recession? How successful have these been? And is your
monetary toolbox, the tools available to you, adequate to the
task?
Third, are there limits to the monetary policy that fiscal
policy in this case can complement?
Fourth, what monetary and fiscal policies are most likely
to be efficacious?
Fifth, to what extent is the distressed market in
securitized mortgages and complex financial instruments
impeding the economy? If this is a source of the problem,
should a counter-cyclical package deal directly with this
aspect of the problem?
And finally, how serious is the risk of a downward, vicious
spiral in which foreclosures drive down housing prices and low
prices complicate workouts, resulting in still more
foreclosures and even lower prices?
We look forward to hearing your insights on these and other
questions on the strength of the near-term economy. But before
you begin, let me turn to Mr. Ryan for his opening statements.
Mr. Ryan.
Mr. Ryan. Thank you, Mr. Chairman. And thank you for
organizing this hearing. It is well timed. And I can't think of
a more authoritative witness to discuss the state of the
economy than you, Chairman Bernanke, and thank for coming.
Clearly, the Fed faces a particularly challenging
environment right now. Americans have genuine and legitimate
concern about the expectations of slower economic growth in the
months ahead. Last week I held 15 listening sessions in my
district in Wisconsin. As I would imagine everybody else finds
in their districts, the economy was a key topic at every one of
these. People are concerned.
Lately, it seems that the Fed has been focused on
employment growth as its primary objective. We in Congress are
focused on job growth as well, given that we have jurisdiction
over fiscal policy. As such, we are all in the midst of
discussing a short-term economic growth package. But the Fed
has the sole responsibility for monetary policy. And many would
argue the primary mandate of the Fed is price stability.
Data released showed that the Consumer Price Index rose
more than 4 percent last year, the largest annual increase
since 1990. Oil prices have soared, food prices have increased,
and just this week the price of gold, which is a traditional
hedge against inflation, jumped to a nominal all-time high.
Meanwhile, the Fed's softer money policy stance and the
prospect of future rate cuts have contributed to a further
decline in the dollar, which can raise import prices further,
stoking inflation. My concern is that these interest rate cuts
could lead to even more inflation down the road. And history
has shown that once inflation pressures are in the pipeline and
expectations rise, they can prove costly to deal with. The Fed
risks having to put the brake on economic growth later on via
higher interest rates in order to wring that inflation out of
the system.
In your testimony, Chairman Bernanke, you point to the
Fed's dual mandate of promoting maximum sustainable employment
and price stability. In this respect, it is appropriate to
highlight the balance of risks associated with policy reactions
and to make sure that the benefits of any short-term measures
are not dwarfed by the costs of our long-term economic health.
Meanwhile, Congress and the administration, Republicans and
Democrats, are considering additional responses to the fiscal
policy. And like you, we face similar risks and trade-offs.
In considering our strategy for crafting an economic growth
plan, there are several key principles that we need to keep in
mind. First, do no harm. I am concerned that in our rush to
help we talk ourselves into a quick feel good hit today that
will leave us with a bigger budgetary hangover tomorrow.
The worst thing we can do right now is raise taxes. And we
simply cannot spend our way into prosperity. Whatever short-
term responses Congress undertakes should aim at reinforcing
the prospects for long-term, sustainable growth.
Second, we ought to play to our strengths. The strength of
our economy lies in its people, its innovation, productivity,
and resilience, and all flow from sound policies aimed at
sustained growth. These policies include a low tax burden and a
stable rate of inflation, a reliance on the private sector
before the government, an attractive investment climate, and a
dynamic labor force. Growth also requires tax certainty so that
American businesses and families can count on the future. And
Congress can do something about this. Right now Congress can
act to make the current tax laws permanent, thereby avoiding
the largest tax increase in our Nation's history. And we can
address the AMT earlier this year, giving middle class families
peace of mind that they won't face a much higher tax bill next
year. Unfortunately, I understand the majority has already
taken that particular growth proposal off the table.
And finally, we should not add to our entitlement crisis. I
am particularly concerned that Congress may be tempted to use
the excuse of fiscal stimulus in the short run to push through
new entitlement spending proposals, further worsening the
outlook for these programs, building up the spending baseline
that worsen our economic future. Expert after expert has warned
this committee that our largest entitlement programs,
particularly Social Security, Medicare, Medicaid, pose the
greatest threat to our Nation's future prosperity, and this
problem will remain long after the economy works through its
near-term problems.
In short, we believe that in addressing the current
economic concerns we have got to keep our focus on good
economic policy that lasts beyond the next few quarters, that
is consistent with long-term growth. And that is the best
recipe for long-term sustainable economic growth, which ought
to be our ultimate goal.
This is a very well-timed hearing. And Mr. Chairman, I
appreciate you having this hearing at this time. And I look
forward to your testimony, Chairman Bernanke.
Chairman Spratt. Thank you, Mr. Ryan. And let me ask
unanimous consent that all members be allowed to enter, if they
wish, an opening statement for the record at this point.
Without objection, so ordered.
[The prepared statement of Ms. Kaptur follows:]
Prepared Statement of Hon. Marcy Kaptur, a Representative in Congress
From the State of Ohio
I would like to thank Chairman Spratt and Ranking Member Ryun for
this timely hearing. I would also like to extend my thanks to Chairman
Bernanke, whose insight into the current economic downturn is
invaluable. It heartens me that this body, and the Fed, have recognized
the anguish of the American people, who are facing dire circumstances,
soaring inflation, and a possibly bleak economic outlook. I hope that
as a result of this hearing, the steps Congress can take to rectify
this situation will become more obvious, and that Congress can work
closely with the Fed to effectively stimulate the economy in the short
term, and to regain American financial security in the long term.
America is facing an economic situation that has the potential to
be catastrophic. Because of the poor judgment and intense greed of a
few banks, companies, organizations, and, indeed, politicians, the
average American has been thrust into economic insecurity. The sub-
prime mortgage crisis, perpetuated by profit-hungry lenders and those
who traded these loans, contributed heavily to the problems we are
discussing today. But the problem is larger than just the housing
bubble--the problem lies in the securitized culture of lending and in
the inherent flaws of the global finance system in its current
incarnation.
People in my district are not simply suffering because of the
rising foreclosure rates--though Ohio ranks among the top three states
for foreclosures--they are facing a more general economic downturn, or,
dare I say it, recession, and must watch while Wall Street and even the
American government parcel off our national security and sell it to the
highest bidder.
As a result of faulty judgment, bad planning, and corporate greed,
the mortgage crisis has taken a huge chunk from Citigroup, Merrill
Lynch, J.P. Morgan, and the rest of Wall Street. Now, these banks are
turning to Saudi princes, Chinese banks, and the government of
Singapore to come to their aid.
I realize, Chairman Spratt, that Chairman Bernanke can only
influence monetary policy, but I will be eager to hear his thoughts on
possibilities for fiscal stimulus. In my view, we must focus on using
infrastructure projects to create jobs, we must encourage Americans to
spend, but to spend on American products and American agriculture, and
we must curb our reliance on foreign companies and governments to bail
us out and become further and further indebted to their interests.
I look forward to working with Chairman Bernanke and with this
Committee to bring new, lasting wealth to the people of Ohio's Ninth
Congressional District, and to working Americans around the country.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Hon. Adrian Smith, a Representative in Congress
From the State of Nebraska
Good morning. There are a number of challenges facing our economy,
and I thank you, Chairman, for holding this hearing today on the Near-
Term Outlook for the U.S. Economy.
As Congress begins the fiscal year 2009 budget process, we must
rise to address our economic challenges in a bipartisan fashion.
Rushing to a solution, however, could prove more costly than our
current situation. We must not hamstring our economy by increasing
taxes to pay for more federal spending, as some have suggested.
We must ensure the prosperity of the last several years continues
for future generations. It is my sincere desire to see Congress take
the steps necessary to reduce spending and instead stimulate economic
growth.
I appreciate the Committee for holding this hearing today. Thank
you to Chairman Bernanke for testifying before the Committee. What we
learn here today will play a critical role in the decisions we make for
the future of the country.
Chairman, I look forward to continuing to work with you to achieve
real economic growth, and I thank you for your time.
Mr. Chairman, again, we welcome you to the hearing today.
And let me note for the record that your complete testimony
will be filed and made part of the record. You can summarize it
as you see fit, but the floor is yours. Thank you again for
coming. We look forward to your testimony.
STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Chairman Spratt, Representative
Ryan, and other members of the committee. I am pleased to be
here to offer my views on the near-term economic outlook and
related issues. Since late last summer, financial markets in
the United States and in a number of other industrialized
countries have been under considerable strain. Heightened
investor concerns about the credit quality of mortgages,
especially subprime mortgages with adjustable interest rates,
triggered the financial turmoil. Notably, as the rising rate of
delinquencies of subprime mortgages threatened to impose losses
on holders of even highly rated securities, investors were led
to question the reliability of the credit ratings for a range
of financial products, including structured credit products and
various special purpose vehicles. As investors lost confidence
in their ability to value complex financial products, they
became increasingly unwilling to hold such instruments. As a
result, flows of credit through these vehicles have contracted
significantly.
As these problems multiplied, money center banks and other
large financial institutions, which in many cases had served as
sponsors of these financial products, came under increasing
pressure to take the assets of the off-balance-sheet vehicles
onto their own balance sheets. Bank balance sheets were swelled
further by holdings of nonconforming mortgages, leveraged
loans, and other credits that the banks had extended but for
which well-functioning secondary markets no longer existed.
Even as their balance sheets expanded, banks began to report
large losses, reflecting marked declines in the market prices
of mortgages and other assets. Thus, banks too became subject
to valuation uncertainty, as could be seen in the sharp
movements in their share prices and in other market indicators
such as quotes on credit default swaps. The combination of
larger balance sheets and unexpected losses prompted banks to
become protective of their liquidity and balance sheet
capacity, and thus to become less willing to provide funding to
other market participants, including other banks. Banks have
also evidently become more restrictive in their lending to
firms and households. More expensive and less available credit
seems likely to impose a measure of restraint on economic
growth.
To date, the largest effects of the financial turmoil
appear to have been on the housing market, which, as you know,
has deteriorated significantly over the past 2 years or so. The
virtual shutdown of the subprime mortgage market and a widening
of spreads on jumbo mortgage loans have further reduced the
demand for housing, while foreclosures are adding to the
already elevated inventory of unsold homes. New home sales and
housing starts have both fallen by about half from their
respective peaks. The number of homes in inventory has begun to
edge down, but at the current sales pace the months' supply of
new homes has continued to climb, and home prices are falling
in many parts of the country. The slowing in residential
construction, which subtracted about one percentage point of
growth from the growth rate of real domestic product in the
third quarter of 2007, likely curtailed growth even more in the
fourth quarter, and it may continue to be a drag on growth for
a good part of this year as well.
Recently, incoming information has suggested that the
baseline outlook for real activity in 2008 has worsened, and
that the downside risks to growth have become more pronounced.
In particular, a number of factors, including continuing
increases in energy prices, lower equity prices, and softening
home values, seem likely to weigh on consumer spending as we
move into 2008. Consumer spending also depends importantly on
the state of the labor market, as wages and salaries are the
primary source of income for most households. Labor market
conditions in December were disappointing. The unemployment
rate increased by three-tenths of a percentage point to 5.0
percent from 4.7 percent in November, and private payroll
employment declined. Employment in residential construction
posted another substantial reduction, and employment in
manufacturing and retail trade has also decreased
significantly. Employment in services continued to grow, but at
a slower pace in December than in earlier months. It would be a
mistake to read too much into 1 month's data. However,
developments in the labor market will bear close attention.
In the business sector, investment in equipment and
software appears to have been sluggish in the fourth quarter,
while nonresidential construction grew briskly. In light of the
softening in economic activity and the adverse developments in
credit markets, growth in both types of investment spending
seem likely to slow in coming months. Outside the United
States, however, economic activity in our major trading
partners has continued to expand vigorously. U.S. exports will
likely continue to grow at a healthy pace in coming quarters,
providing some impetus to the domestic economy.
Financial conditions continue to pose a downside risk to
the outlook. Market participants still express considerable
uncertainty about the appropriate valuation of complex
financial assets and about the extent of additional losses that
may be disclosed in the future. On the whole, despite
improvements in some areas, the financial situation remains
fragile, and many funding markets remain impaired. Adverse
economic or financial news thus has the potential to increase
financial strains and to lead to further constraints on the
supply of credit to households and businesses.
Even as the outlook for real activity has weakened, some
important developments have occurred on the inflation front.
Most notably, the same increase in oil prices that may be a
negative influence on growth is also lifting overall consumer
prices. Last year, food prices also increased exceptionally
rapidly by recent standards, further boosting overall consumer
price inflation. The most recent reading on overall personal
consumption expenditure inflation showed that prices in
November were 3.6 percent higher than they were a year earlier.
Core price inflation, which excludes prices of food and energy,
has stepped up recently as well, with November prices up almost
2\1/4\ percent from a year earlier. Part of this rise may
reflect pass-through of energy costs to the prices of core
consumer goods and services, as well as the effects of the
depreciation of the dollar on import prices, although some
other prices, such as those for some medical and financial
services, have also accelerated lately.
Thus far, the public's expectations of future inflation
appear to remain reasonably well anchored, and pressures on
resource utilization have diminished a bit. Further, futures
markets suggests that food and energy prices will decelerate
over the coming year. Given these factors, overall and core
inflation should moderate this year and next, so long as the
public's confidence in the Federal Reserve's commitment to
price stability is unshaken. However, any tendency of inflation
expectations to become unmoored or for the Fed's inflation-
fighting credibility to be eroded could greatly complicate the
task of sustaining price stability and would reduce the central
bank's policy flexibility to counter shortfalls in growth in
the future. Accordingly, in the months ahead we will be closely
monitoring the inflation situation, particularly inflation
expectations.
The Federal Reserve has taken a number of steps to help
markets return to more orderly functioning and to foster its
economic objectives of maximum sustainable employment and price
stability. Broadly, the Federal Reserve's response has followed
two tracks: Efforts to improve market liquidity and functioning
and the pursuit of our macroeconomic objectives through
monetary policy.
To help address the significant strains in short-term money
markets, the Federal Reserve has taken a range of steps.
Notably, on August 17th, The Federal Reserve Board cut the
discount rate, the rate at which it lends directly to banks, by
50 basis points, or one-half percentage point, and it has since
maintained the spread between the Federal funds rate and the
discount rate at 50 basis points rather than the customary 100
basis points. In addition, the Federal Reserve recently
unveiled a term auction facility, or TAF, through which
prespecified amounts of discount window credit can be auctioned
to eligible borrowers. The goal of the TAF is to reduce the
incentive for banks to hoard cash, and thus to increase their
willingness to provide credit to households and firms. In
December, the Fed successfully auctioned $40 billion through
this facility. And, as part of a coordinated operation, the
European Central Bank and the Swiss National Bank lent an
additional $24 billion to banks in their respective
jurisdictions. This month, the Federal Reserve is auctioning
$60 billion in 28-day credit through the TAF, to be spread
across two auctions. TAF auctions will continue as long as
necessary to address elevated pressures in short-term funding
markets, and we will continue to work closely and cooperatively
with other central banks to address market strains that could
hamper the achievement of our broader economic objectives.
Although the TAF and other liquidity-related actions appear
to have had some positive effects, such measures alone cannot
fully address fundamental concerns about credit quality and
valuation, nor do these actions relax the balance sheet
constraints on financial institutions. Hence, they alone cannot
eliminate the financial restraints affecting the broader
economy. Monetary policy; that is, the management of the short-
term interest rate, is the Fed's best tool for pursuing our
macroeconomic objectives; namely, to promote maximum
sustainable employment and price stability.
Monetary policy has responded proactively to evolving
conditions. As you know, the Federal Open Market Committee, or
FOMC, cut its target for the Federal funds rate by 50 basis
points at its September meeting and by 25 basis points each at
the October and December meetings. In total, therefore, we have
brought the Federal funds rate down by one percentage point
from its level just before the financial strains emerged. The
Federal Reserve took these actions to help offset the restraint
imposed by the tightening of credit conditions and the
weakening of the housing market. However, in light of recent
changes in the outlook for and the risks to growth, additional
policy easing may well be necessary. The FOMC will, of course,
be carefully evaluating incoming information bearing on the
economic outlook. Based on that evaluation, and consistent with
our dual mandate, we stand ready to take substantive additional
action as needed to support growth and provide adequate
insurance against downside risks.
Financial and economic conditions can change quickly.
Consequently, the FOMC must remain exceptionally alert and
flexible, prepared to act in a decisive and timely manner and,
in particular, to counter any adverse dynamics that might
threaten economic or financial stability.
A number of analysts have raised the possibility that
fiscal policy actions might usefully complement monetary policy
in supporting economic growth over the next year or so. I agree
that fiscal action could be helpful in principle, as fiscal and
monetary stimulus together may provide broader support for the
economy than monetary policy actions alone. But the design and
implementation of the fiscal program are critically important.
A fiscal initiative at this juncture could prove quite
counterproductive if, for example, it provided economic
stimulus at the wrong time or compromised fiscal discipline in
the longer term.
To be useful, a fiscal stimulus package should be
implemented quickly and structured so that its effects on
aggregate spending are felt as much as possible within the next
12 months or so. Stimulus that comes too late will not help
support economic activity in the near term, and it could be
actively destabilizing if it comes at a time when growth is
already improving. Thus, fiscal measures that involve long lead
times or result in additional economic activity only over a
protracted period, whatever their intrinsic merits might be,
will not provide stimulus when it is most needed. Any fiscal
package should also be efficient, in the sense of maximizing
the amount of near-term stimulus per dollar of increased
Federal expenditure or lost revenue. Finally, any program
should be explicitly temporary, both to avoid unwanted stimulus
beyond the near-term horizon and, importantly, to preclude an
increase in the Federal Government's structural budget deficit.
As I have discussed on other occasions, the Nation faces
daunting long-run budget challenges associated with an aging
population, rising healthcare costs, and other factors. A
fiscal program that increased the structural budget deficit
would only make confronting those challenges more difficult.
Thank you. I would be pleased to take your questions.
[The prepared statement of Ben S. Bernanke follows:]
Prepared Statement of Ben S. Bernanke, Chairman, Board of Governors of
the Federal Reserve System
Chairman Spratt, Representative Ryan, and other members of the
Committee, I am pleased to be here to offer my views on the near-term
economic outlook and related issues. Developments in Financial Markets
Since late last summer, financial markets in the United States and
in a number of other industrialized countries have been under
considerable strain. Heightened investor concerns about the credit
quality of mortgages, especially subprime mortgages with adjustable
interest rates, triggered the financial turmoil. Notably, as the rising
rate of delinquencies of subprime mortgages threatened to impose losses
on holders of even highly rated securities, investors were led to
question the reliability of the credit ratings for a range of financial
products, including structured credit products and various special-
purpose vehicles. As investors lost confidence in their ability to
value complex financial products, they became increasingly unwilling to
hold such instruments. As a result, flows of credit through these
vehicles have contracted significantly.
As these problems multiplied, money center banks and other large
financial institutions, which in many cases had served as sponsors of
these financial products, came under increasing pressure to take the
assets of the off-balance-sheet vehicles onto their own balance sheets.
Bank balance sheets were swelled further by holdings of nonconforming
mortgages, leveraged loans, and other credits that the banks had
extended but for which well-functioning secondary markets no longer
existed. Even as their balance sheets expanded, banks began to report
large losses, reflecting marked declines in the market prices of
mortgages and other assets. Thus, banks too became subject to valuation
uncertainty, as could be seen in the sharp movements in their share
prices and in other market indicators such as quotes on credit default
swaps. The combination of larger balance sheets and unexpected losses
prompted banks to become protective of their liquidity and balance
sheet capacity and thus to become less willing to provide funding to
other market participants, including other banks. Banks have also
evidently become more restrictive in their lending to firms and
households. More-expensive and less-available credit seems likely to
impose a measure of restraint on economic growth.
THE OUTLOOK FOR THE REAL ECONOMY
To date, the largest effects of the financial turmoil appear to
have been on the housing market, which, as you know, has deteriorated
significantly over the past two years or so. The virtual shutdown of
the subprime mortgage market and a widening of spreads on jumbo
mortgage loans have further reduced the demand for housing, while
foreclosures are adding to the already-elevated inventory of unsold
homes. New home sales and housing starts have both fallen by about half
from their respective peaks. The number of homes in inventory has begun
to edge down, but at the current sales pace the months' supply of new
homes has continued to climb, and home prices are falling in many parts
of the country. The slowing in residential construction, which
subtracted about 1 percentage point from the growth rate of real gross
domestic product in the third quarter of 2007, likely curtailed growth
even more in the fourth quarter, and it may continue to be a drag on
growth for a good part of this year as well.
Recently, incoming information has suggested that the baseline
outlook for real activity in 2008 has worsened and that the downside
risks to growth have become more pronounced. In particular, a number of
factors, including continuing increases in energy prices, lower equity
prices, and softening home values, seem likely to weigh on consumer
spending as we move into 2008. Consumer spending also depends
importantly on the state of the labor market, as wages and salaries are
the primary source of income for most households. Labor market
conditions in December were disappointing; the unemployment rate
increased 0.3 percentage point, to 5.0 percent from 4.7 percent in
November, and private payroll employment declined. Employment in
residential construction posted another substantial reduction, and
employment in manufacturing and retail trade also decreased
significantly. Employment in services continued to grow, but at a
slower pace in December than in earlier months. It would be a mistake
to read too much into one month's data. However, developments in the
labor market will bear close attention.
In the business sector, investment in equipment and software
appears to have been sluggish in the fourth quarter, while
nonresidential construction grew briskly. In light of the softening in
economic activity and the adverse developments in credit markets,
growth in both types of investment spending seems likely to slow in
coming months. Outside the United States, however, economic activity in
our major trading partners has continued to expand vigorously. U.S.
exports will likely continue to grow at a healthy pace in coming
quarters, providing some impetus to the domestic economy.
Financial conditions continue to pose a downside risk to the
outlook. Market participants still express considerable uncertainty
about the appropriate valuation of complex financial assets and about
the extent of additional losses that may be disclosed in the future. On
the whole, despite improvements in some areas, the financial situation
remains fragile, and many funding markets remain impaired. Adverse
economic or financial news thus has the potential to increase financial
strains and to lead to further constraints on the supply of credit to
households and businesses.
Even as the outlook for real activity has weakened, some important
developments have occurred on the inflation front. Most notably, the
same increase in oil prices that may be a negative influence on growth
is also lifting overall consumer prices. Last year, food prices also
increased exceptionally rapidly by recent standards, further boosting
overall consumer price inflation. The most recent reading on overall
personal consumption expenditure inflation showed that prices in
November were 3.6 percent higher than they were a year earlier. Core
price inflation (which excludes prices of food and energy) has stepped
up recently as well, with November prices up almost 2\1/4\ percent from
a year earlier. Part of this rise may reflect pass-through of energy
costs to the prices of core consumer goods and services, as well as the
effects of the depreciation of the dollar on import prices, although
some other prices--such as those for some medical and financial
services--have also accelerated lately.\1\
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\1\ Prices for some financial services are implicit; for example,
depositors may pay for ``free'' checking services only indirectly, by
accepting a lower interest rate on their deposits. The Bureau of Labor
Statistics uses estimates of such prices, as well as other nonmarket
prices, in calculating the inflation rate.
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Thus far, the public's expectations of future inflation appear to
have remained reasonably well anchored, and pressures on resource
utilization have diminished a bit. Further, futures markets suggest
that food and energy prices will decelerate over the coming year. Given
these factors, overall and core inflation should moderate this year and
next, so long as the public's confidence in the Federal Reserve's
commitment to price stability is unshaken. However, any tendency of
inflation expectations to become unmoored or for the Fed's inflation-
fighting credibility to be eroded could greatly complicate the task of
sustaining price stability and reduce the central bank's policy
flexibility to counter shortfalls in growth in the future. Accordingly,
in the months ahead we will be closely monitoring the inflation
situation, particularly inflation expectations.
MONETARY POLICY RESPONSE
The Federal Reserve has taken a number of steps to help markets
return to more orderly functioning and to foster its economic
objectives of maximum sustainable employment and price stability.
Broadly, the Federal Reserve's response has followed two tracks:
efforts to improve market liquidity and functioning and the pursuit of
our macroeconomic objectives through monetary policy.
To help address the significant strains in short-term money
markets, the Federal Reserve has taken a range of steps. Notably, on
August 17, the Federal Reserve Board cut the discount rate--the rate at
which it lends directly to banks--by 50 basis points, or \1/2\
percentage point, and it has since maintained the spread between the
federal funds rate and the discount rate at 50 basis points, rather
than the customary 100 basis points. In addition, the Federal Reserve
recently unveiled a term auction facility, or TAF, through which
prespecified amounts of discount window credit can be auctioned to
eligible borrowers. The goal of the TAF is to reduce the incentive for
banks to hoard cash and increase their willingness to provide credit to
households and firms. In December, the Fed successfully auctioned $40
billion through this facility. And, as part of a coordinated operation,
the European Central Bank and the Swiss National Bank lent an
additional $24 billion to banks in their respective jurisdictions. This
month, the Federal Reserve is auctioning $60 billion in twenty-eight-
day credit through the TAF, to be spread across two auctions. TAF
auctions will continue as long as necessary to address elevated
pressures in short-term funding markets, and we will continue to work
closely and cooperatively with other central banks to address market
strains that could hamper the achievement of our broader economic
objectives.
Although the TAF and other liquidity-related actions appear to have
had some positive effects, such measures alone cannot fully address
fundamental concerns about credit quality and valuation, nor do these
actions relax the balance sheet constraints on financial institutions.
Hence, they alone cannot eliminate the financial restraints affecting
the broader economy. Monetary policy (that is, the management of the
short-term interest rate) is the Fed's best tool for pursuing our
macroeconomic objectives, namely to promote maximum sustainable
employment and price stability.
Monetary policy has responded proactively to evolving conditions.
As you know, the Federal Open Market Committee (FOMC) cut its target
for the federal funds rate by 50 basis points at its September meeting
and by 25 basis points each at the October and December meetings. In
total, therefore, we have brought the federal funds rate down by 1
percentage point from its level just before the financial strains
emerged. The Federal Reserve took these actions to help offset the
restraint imposed by the tightening of credit conditions and the
weakening of the housing market. However, in light of recent changes in
the outlook for and the risks to growth, additional policy easing may
well be necessary. The FOMC will, of course, be carefully evaluating
incoming information bearing on the economic outlook. Based on that
evaluation, and consistent with our dual mandate, we stand ready to
take substantive additional action as needed to support growth and to
provide adequate insurance against downside risks.
Financial and economic conditions can change quickly. Consequently,
the FOMC must remain exceptionally alert and flexible, prepared to act
in a decisive and timely manner and, in particular, to counter any
adverse dynamics that might threaten economic or financial stability.
A number of analysts have raised the possibility that fiscal policy
actions might usefully complement monetary policy in supporting
economic growth over the next year or so. I agree that fiscal action
could be helpful in principle, as fiscal and monetary stimulus together
may provide broader support for the economy than monetary policy
actions alone. But the design and implementation of the fiscal program
are critically important. A fiscal initiative at this juncture could
prove quite counterproductive, if (for example) it provided economic
stimulus at the wrong time or compromised fiscal discipline in the
longer term.
To be useful, a fiscal stimulus package should be implemented
quickly and structured so that its effects on aggregate spending are
felt as much as possible within the next twelve months or so. Stimulus
that comes too late will not help support economic activity in the near
term, and it could be actively destabilizing if it comes at a time when
growth is already improving. Thus, fiscal measures that involve long
lead times or result in additional economic activity only over a
protracted period, whatever their intrinsic merits might be, will not
provide stimulus when it is most needed. Any fiscal package should also
be efficient, in the sense of maximizing the amount of near-term
stimulus per dollar of increased federal expenditure or lost revenue.
Finally, any program should be explicitly temporary, both to avoid
unwanted stimulus beyond the near-term horizon and, importantly, to
preclude an increase in the federal government's structural budget
deficit. As I have discussed on other occasions, the nation faces
daunting long-run budget challenges associated with an aging
population, rising health-care costs, and other factors. A fiscal
program that increased the structural budget deficit would only make
confronting those challenges more difficult.
Thank you. I would be pleased to take your questions.
Chairman Spratt. Thank you, Mr. Chairman. I note that you
have to be careful in the terms you use, and in particular of
using terms that might become self-fulfilling prophecies. But
as you look at all of these dire conditions and the recent
events that I described just earlier, how does the Fed sum it
up? What is the Fed's overall diagnosis of the course of the
economy over the next year to 18 months?
Mr. Bernanke. Well, we currently see the economy as
continuing to grow, but growing at a relatively slow pace,
particularly in the first half of this year. As the housing
contraction begins to wane, as it should sometime during this
year, the economy should pick up a bit later in this year. But
we believe we will see below-trend growth certainly in 2008,
and probably early into 2009 as well.
Chairman Spratt. You indicate in your testimony that
conditions appear to be worsening in 2008?
Mr. Bernanke. Yes. The latter half of 2007 was actually
reasonably good. The third quarter we saw growth of about 5
percent. Growth slowed significantly in the fourth quarter, but
is still moderate. Recent indications suggest, though, that the
economy has softened somewhat, and that the growth prospects
for 2008 are certainly below that of last year.
Chairman Spratt. But as I listened to you read the first
several pages of your testimony describing the conditions in
the financial markets in particular, the swollen nonconforming
mortgage portfolios, the lack of investor confidence in the
valuation of their investments, then the lack of confidence in
institutions holding those assets, a long litany of fairly
distinct and unique problems, it doesn't appear to be your
garden variety business cycle recession of the kind we were
used to in the years after the end of the last war.
Mr. Bernanke. Well, again, we are not forecasting
recession, but rather at this point slow growth. But you are
absolutely correct, Mr. Chairman, that there are a number of
characteristics of this period that are somewhat unique,
including the financial market turmoil we have seen, pressures
on the banks. We are hit on the other side by these rapid
increases in oil and commodity prices, which create some
inflation risk and create a problem on that side. The housing
sector, of course, has been in a very sharp contraction and
relatively unusual pattern that we have seen there as well. So
there really is a confluence of different events that makes
this a difficult combination of circumstances.
I think it is important, as we are concerned about the
slowing growth of the economy, that the U.S. economy remains
extraordinarily resilient. It is very diversified. It has a
strong labor force, excellent productivity and technology, and
a deep and liquid financial market that is in the process of
trying to repair itself. So I think we need to keep in mind
also that the economy does have inherent strengths, and that
those will certainly surface over a period of time.
Chairman Spratt. Would you agree that the confluence, as
you put it, of these dire events calls for something broader
than monetary policy, and gives us particular reason for using
a fiscal policy stimulus in this particular set of
circumstances?
Mr. Bernanke. As I said, Mr. Chairman, I think a fiscal
stimulus package could be helpful in the current circumstances.
It would provide a broader base of support to the economy than
just that afforded by monetary policy. It would in some sense
diversify our policy tools as we attempt to address the
situation. It might have somewhat different timing, different
effects over--on the economy than monetary policy. So I think
it could be helpful. But as I emphasized in my testimony, it
needs to be done quickly, to be temporary, and to be effective
in the sense that for every dollar put into stimulus we get a
reasonable response in terms of extra activity during the next
year or so.
Chairman Spratt. Given the structural problems in the
financial markets, do you think that the fiscal policy solution
or package should go to the source of the problem, as you put
it, where the existing events were triggered, and attempt some
sort of structural fix as well as providing some aggregate
demand increases?
Mr. Bernanke. Well, there are a whole range of issues that
we will be looking at over the next couple of years. And the
financial markets will be wanting to review whether regulatory
and accounting policies need to be changed in light of what we
have seen in the last couple of years. I am sure there will be
continued attention to the housing market and mortgage market
and the issues that were raised in the recent experience there.
But I think from the perspective of fiscal stimulus, if we are
able to provide some additional strengths in the near term in
the economy, that that will be beneficial broadly. For example,
if the economy is growing more quickly, then the stresses on
the housing market, on the financial market would be
correspondingly reduced.
Chairman Spratt. Could you take just a second and explain
to us how it is that a problem so pervasive and so serious was
able to crop up or arrive under the radar without being
detected sooner by the regulators?
Mr. Bernanke. Well, there was--as I said, there was a
combination of factors. The economy was reaching its full
employment point a couple years ago, and the Federal Reserve
was very focused on trying to help the economy go along an
expansion path without inflation. We were very focused on that.
But we have, just as I said, a confluence of factors. One of
the key factors has been the housing boom and bust that we have
seen. House prices and house construction are obviously on the
down trend. That in turn has interacted with mortgage markets,
and particularly subprime mortgages, as I have discussed, and
created--particularly in the category of subprime mortgages
with adjustable rates, has created high rates of delinquency.
That in turn has fed into the financial system and created
pressures in the banking sector which are then being felt in
terms of their profitability, their capital, and their
willingness to extend credit. So it has been a complicated
interaction of factors that have led to this situation.
Chairman Spratt. Has the prevalence of securitized mortgage
packages made it more difficult to find a regulatory solution
to the problems in the financial market?
Mr. Bernanke. In some respects it has. Mortgages are no
longer generally held by the lender who made the mortgage.
Instead, the mortgages have been sliced and diced and sold
throughout the financial system as part of structured credit
products, or as part of mortgage-backed securities. We have
found some complexity arising from that in terms of loan
modifications and workouts. It has been somewhat more difficult
for the servicer to work out a loan with a troubled borrower
when the servicer doesn't own the mortgage. It has to
essentially meet the requirements and the interests of all the
holders of the mortgage.
We at the Federal Reserve, along with the other regulators,
have been working hard trying to find solutions to that. We
have tried to address technical problems such as accounting
rules that might impede servicers from modifying loans. We have
provided letters of encouragement essentially to servicers and
to banks encouraging them to do loan modifications wherever
feasible. Of course the Treasury and the HUD have undertaken
this HOPE NOW initiative to try to increase the scale and scope
of renegotiation and loan modifications.
So there are many efforts underway to try and increase the
scale and to address more effectively the problem of troubled
borrowers. But I think it is fair to say that the
securitization and the distribution of mortgage ownership very
widely has to some extent complicated that process, and that is
something we will have to be thinking about as we review the
lessons of this period.
Chairman Spratt. One final question, just to go back over
your testimony, as to the contents and configuration of a
fiscal stimulus policy package, what do you think the contents
should be? I know you can't get prescriptive of a specific, but
could you give us a broad outline? And in particular, can you
address at all whether or not the structural package should
include the renewal of the expiring tax cuts?
Mr. Bernanke. Mr. Chairman, I, as you know, in light of the
nonpartisan character of the Federal Reserve, I am going to try
very hard today to avoid taking positions in favor of any
specific tax or----
Chairman Spratt. I wanted to offer you the opportunity, but
I understand your reasons.
Mr. Bernanke. But I do think that you should be looking at
a number of different things that--a program that combine a
number of elements, you know, might in some sense address the
problem from a number of different angles and be more effective
than one that was only a single element.
Chairman Spratt. Thank you, sir.
Mr. Ryan.
Mr. Ryan. Thank you, Chairman. Mr. Chairman, I find it
interesting that Europe is also facing signs of a slowdown in
growth and feeling the effects of the credit market turmoil,
yet last week the European Central Bank opted not to lower
interest rates due to its concerns over inflation. To what
should we attribute the difference in policy action between the
Fed and the ECB given somewhat similar economic circumstances?
Mr. Bernanke. Well, I don't think the circumstances are
entirely similar. In particular, Europe has not faced this 2-
year decline in the housing market, with all its implications
for construction activity, for construction jobs, for
homeowners' prices--homeowners' equity, and for the credit
quality of mortgages in the banks. They have experienced some
credit issues, in part because of the international nature of
financial markets. And some have worried that that might imply
some restraint on their economies. But we at the Federal
Reserve, we follow, of course, all of our major trading
partners, and we try to develop forecasts and analyses of their
economies. And we do not see in Asia or in Europe the slowdown
in growth that potentially we will be seeing here in the United
States. And so I think the circumstances are rather different.
And that, you know, potentially leads to a different policy
response.
Mr. Ryan. Has the Fed given us an estimate, or has the Fed
come up with an estimate of the total dollar value loss
associated with the housing correction and the subprime market
fallout?
Mr. Bernanke. Well, you hear a lot of numbers being cast
about. And I think part of the problem is that people are
comparing apples and oranges. Some people want to include not
just losses in the subprime mortgage area, but throughout all
credit areas.
Mr. Ryan. Right.
Mr. Bernanke. Some people are double counting because they
are counting not only the credit losses, but also the losses to
the holders of derivatives, the credit default swaps and the
like. So there are a lot of numbers out there which are not
really comparable.
So the facts are the following, that in the subprime
adjustable rate mortgage market there are about 5 million
mortgages, with a total market value of--a total principal
value of about a trillion dollars. Currently, about 20 percent
of those mortgages are delinquent. If you assume that all of
those mortgages go into foreclosure, which is an exaggeration,
and you are pessimistic about recovery and say that only 50
percent of the value will be recovered, that would give you so
far about a hundred billion dollars in losses in that category.
Now, our expectations is that delinquencies will go higher
and that there will be ongoing losses in the subprime area.
There are also moderate additional losses in, for example,
subprime mortgages with fixed rates and in other mortgages as
well. But the thrust, the largest part of the problem so far
has been in subprime mortgages with adjustable rates. As I
said, I see so far about a hundred billion dollars, but it
could be certainly several multiples of that as we go forward,
and the delinquency rates and foreclosure rates rise.
Mr. Ryan. So to try and get an assessment of that specific
damage, we are looking at a hundred billion now, possibly more
hundreds, but not eclipsing the trillion dollar mark in an
economy, a $14 trillion economy. Is that just the proper way to
put this into perspective?
Mr. Bernanke. That is correct. Within the specific category
of subprime adjustable rate mortgages, the total outstandings
are about a trillion dollars, so the limits to possible
losses----
Mr. Ryan. Right.
Mr. Bernanke [continuing]. Must be less than half of that.
Mr. Ryan. So given that you have these different tools in
your toolbox, you have the discount window, you have the TAFs,
and then you have just broad interest rate policy, are you
concerned that there is a point at which a moral hazard occurs
with these policies? The discount window and the TAF is more of
a liquidity-producing policy, but the broader interest rate
policy, do you fear that this could reignite another housing
bubble down the road if the Fed goes too far and creates a
moral hazard within those policies?
Mr. Bernanke. Well, we are going to be certainly alert to
moral hazard issues. But at the moment, I don't think that is a
major concern for a couple of reasons. First of all, let me
just say in terms of what our objectives are, as I talked about
in my remarks, for example, in Jackson Hole in August, it is
not the Federal Reserve's job to protect investors from
decisions they made. And we are certainly not trying to do
that. However, we do want to make sure that if the financial
markets are in distress, that that distress does not result in
innocent bystanders, so to speak, the rest of the economy,
suffering. And therefore, we do want to try to address the
problem of keeping the economy as stable as possible.
Recently, the interbank markets have been quite
dysfunctional; that is, interest rates that banks lend to each
other have been quite high. That reduces the effectiveness of
monetary policy. That makes banks much less willing to lend.
And therefore, it is counterproductive from the point of view
of our objectives of stabilizing the economy. Our liquidity
measures have attempted to reduce those tensions. And I think
we have had some success in that direction, which is very
positive, will make banks more willing to lend and will help
strengthen the economy going forward.
With respect to moral hazard, again, as I said, we
certainly have not prevented banks from taking losses, as you
can see by the write-downs that have been coming for the last
several months now. And I would say in addition, that as we go
forward and as we look at the new bank regulations under Basel
II and so on, that we are going to want to be particularly sure
going forward that banks maintain adequate liquidity, adequate
capital. And so we will directly ensure that they are not
taking advantage of this program to skimp on their necessary
protective measures.
Mr. Ryan. On the inflation side of the ledger book, can you
give us a good sense of how we ought to measure inflationary
expectations? You know, we are using the traditional
measurements, we see gold at a nominal all time high, we see
other commodity prices that are post-cyclical indicators
showing us possible concerns of inflation. In your testimony
you mention that you think we will see a deceleration of those
prices in the second half of this year. We really haven't had
to deal with this since the Volcker era. And so this is new.
And the economy is global and different than it was during that
Volcker era. What does the Fed look at to try and measure
inflationary expectations? Because if those expectations come
into the economy then we have a real problem on our hands. And
I am assuming you would have to have a tightening regime to
follow. So what is it that the Fed looks at to measure
expectations in this new global economy we have?
Mr. Bernanke. Congressman, you make a very good point. We
do look at variables like gold and other commodities. They do
have some information in them. But it is not pure information
about inflation because gold, for example, responds to a whole
variety of concerns, geopolitical and others. Commodities have
been rising certainly in significant part because of the
increased demands by China and India and other emerging market
economies for these inputs. So that is by itself, I think, not
sufficient to evaluate the inflation situation.
We generally have two sources of information about
expectations. The first comes from financial markets. There are
a number of different financial instruments that give some
information about inflation expectations.
Mr. Ryan. Futures contracts, things like that?
Mr. Bernanke. The one that is most clear is the return on
the Treasury Inflation-Protected Securities, the TIPS, bonds.
By comparing the yields on TIPS bonds to non-indexed bonds you
can get an assessment of what investors think that long-term
inflation expectations are going to be--long-term inflation is
going to be. When you do that, you find that investors have not
ratcheted up their expectations for long-term inflation, which
is somewhat encouraging.
The other type of information we get is through various
surveys of either firms or households, asking people directly
what their expectations are. And what we see there is that
people have increased their inflation expectations for the very
near term, which is understandable given what is happening to
oil prices, and therefore to gasoline prices. But generally
speaking, both firms and households have kept pretty much
unchanged their views of what inflation is likely to be over
the longer period, say the next 5 to 10 years. And we take some
comfort from that as well.
But having said that, we recognize that inflation
expectations are not fixed. They depend on our policies and our
actions, and it is very important for us to keep a close eye on
inflation as we go forward.
Mr. Ryan. Yes. I think the concern is that it will happen
so fast before it--you know, after it is too late to do
anything about it. So I guess the final question is--I want to
be sensitive to other members' time, I know you have a hard
leave time--is do you believe that your indicators, these tools
you use to measure expectations give you enough lead time to
make the policy adjustments necessary to prevent inflation?
Mr. Bernanke. I believe they do. Besides those
expectational measures, we obviously have direct measures of
inflation and price change, and we monitor those very closely.
And we use things like the futures markets, as you mentioned.
So inflation generally moves in a fairly slow way, at least the
underlying inflation. We are watching it very carefully. And it
has got to be part of the equation as we look forward and try
to judge our policy actions.
Mr. Ryan. Thank you, Mr. Chairman. I yield.
Chairman Spratt. Thank you, Mr. Ryan. We may have votes on
the floor. In that event, unless they are serious votes, I plan
to continue the meeting, the hearing onward because the
Chairman has to leave at 12:30 today.
Mr. Edwards of Texas.
Mr. Edwards. Chairman Bernanke, to address our present
short-term economic challenges some in Congress have suggested
that we make permanent tax cuts that aren't scheduled to expire
until 2010. I have two questions to you regarding that
proposal. One, in your opinion, without talking about the long-
term consequences of that, in your opinion would making
permanent tax cuts that aren't going to expire for 3 years,
would that have any significant impact on our present economic
slowdown?
And my second question is given your focus and your
testimony and importance of maintaining long-term fiscal
discipline, if these tax cuts scheduled for 3 years, that would
start going into effect 3 years from now, if they are not paid
for by spending cuts or other tax increases, if they are paid
for primarily by borrowing money, including borrowing from
foreign nations and by significantly increasing the Federal
deficit, is there a risk that that policy could actually hurt
future economic growth?
Mr. Bernanke. Well, Congressman, it is possible that making
the tax cuts permanent might have some near-term effect. For
example, making dividend relief permanent could affect today's
stock market as the market looks forward in terms of dividend
payments. But I think there is a whole range of issues,
including tax policy, budget balance, tax reform that the
Congress has to look at, entitlements, which are very
important, but also very long run in nature. And I think those
who support making the President's tax cuts permanent would say
that the primary reasons for advocating that would be for long-
term growth purposes. And so, you know, our discussion today is
about short-term stimulus. And I think from the point of view
of getting stimulus in the next few months, I think that the
evidence suggests that measures that involve putting money in
the hands of households and firms that will spend it in the
near term would be more effective.
Again, I am not taking a view one way or the other on the
desirability of those long-term tax cuts being made permanent.
But I think they are a part of a set of very important long-
term issues on fiscal structure and fiscal stability that this
committee and the Congress needs to have.
Mr. Edwards. Could you address for a moment a bit more
specifically my second question, that if those tax cuts were
not paid for by other spending cuts or tax increases, they were
paid for by increasing the Federal deficit significantly and by
borrowing money from others, including foreign nations, could
that actually harm long-term economic growth in this country?
Mr. Bernanke. Well, I will answer this way, which is I
think that we need to have long-term fiscal responsibility. And
so those who want to have low taxes, and low taxes have many
benefits, also need to support a very disciplined spending side
as well. Those who want to spend more need to find the revenues
to support that. So as I have said a number of occasions, the
law I am most in favor of is the law of arithmetic. That, you
know, what comes in at least has to equal what goes out at some
point. And as you think about the various alternatives that the
Congress has over the longer period, I hope the law of
arithmetic will be part of your consideration.
Mr. Edwards. Perhaps that is a law we should pass in
Congress. Mr. Chairman, could I ask in just the 1 minute
remaining that I have, some have said that in a $14 trillion
economy, a hundred billion dollar stimulus package would be
nothing but window dressing. You testified a moment ago that if
done properly, it could actually assist us in trying to improve
our present economic situation. Would that impact, a hundred
billion dollars in a $14 trillion economy, be directly economic
or psychological on improving consumer confidence? What would
be the potential positive impact of a hundred billion dollar or
so stimulus package?
Mr. Bernanke. It would be--it would be significant. If you
did a hundred billion dollars of stimulus, and let us say for
sake of argument that 60 or 70 billion of that was actually
spent by say early 2009, and that was added to the GDP, that
the effects on the growth rates in the second half of the year
and early 2009 would be significant. It would be certainly
measurable, would not be window dressing.
Mr. Edwards. Thank you, Mr. Chairman.
Chairman Spratt. Mr. Garrett?
Mr. Garrett. Thank you, Mr. Chairman. And I appreciate your
holding the hearing. And I would like to thank Chairman
Bernanke as well for your testimony so far. As we all know, one
of the main reasons we are facing these current economic
downturns, as you already indicated, is the housing market. And
while I know there has been a lot of criticism by some as to
why we, if you want to say that, the government didn't act any
sooner or faster to head it off, as you indicated, and others
have said as well, many people never saw the breadth of the
problem we are currently experiencing coming. Even your
predecessor, Mr. Greenspan, was under the false impression that
a decline in the housing industry could precipitate broader
economic problems. In February of 2005, I asked that then-
Chairman about the possibility of a nationwide housing bubble,
not in this committee but over in Financial Services. He
responded, saying, I think we are running into certain problems
in certain localized areas. We do not have the characteristics
of a bubble in certain areas--or we do have the characteristics
of a bubble in certain areas, but not, as best as I can judge,
nationwide. I don't expect that we will run into anything
resembling a collapsing bubble. I do believe that it is
conceivable we will get some reduction in overall prices than
we have had in the past, but that is not a particular problem.
It is obvious it has become a problem, and I want to
compliment you now for your--and your colleagues at the Fed for
your hard work, for example, in a proposed rule to amend the
provisions of Regulation Z in an effort to prevent some of the
bad practices that have occurred in the mortgage market over
the last several years from happening again.
I also want to applaud the administration and the Treasury
Secretary Paulson for their efforts in bringing together all
the different participants in the mortgage loan process to work
with each other under HOPE NOW. It is to keep more people in
their homes, provide investors a maximum return on their
investment, and prevent the current mortgage market from
trickling into other parts of the economy.
That said, while I am pleased with the appropriate
government agencies that are focusing on the issues, I do want
to issue a word of caution. Whenever the government overly
interferes with the marketplace there is a potential, as Mr.
Ryan has already indicated, I believe, that a so-called moral
hazard that can affect future economic decisions and
transactions. It is very plausible to suggest that if
government bails everyone out of this mess that we will
continue to bail out bad actors in the future, and any market
discipline that currently remains will further erode.
Now, two or three questions I have in my time here. On the
last point that was just raised, would the possibility of a
stimulus package that would consist of infusing the number was
thrown out about a hundred billion dollars, and what impact it
would have, you suggested that would have some impact--I don't
know whether you used the word ``significant'' or not--and you
suggested that about 60-some odd percent of it might be
actually used for current spending. I think we have to go by
history on that to see what has occurred in the past. My
understanding in the past was that when the dollars were given
back out earlier in this decade that about a third of it went
to pay off credit card debt and other debt, which is what I
think most Americans would do right now, especially if you are
in a foreclosure. Another third of it just went into savings
accounts or otherwise. Basically, two-thirds of the money was
set aside and was not any stimulus package at all. The
remaining amount of money, therefore, was left over. And that
was only a third of the percentage of the dollars spent. So if
we gave everybody a hundred dollars, that means they would have
about $30 to spend to go out and buy a toaster of some sort.
So my first question is where do you come up with the
suggestion that this time around there would be twice as much
revenue spent than we have had in the past occasions?
My other question goes to a comment that you made back in
November. November 8th, in your testimony before the Joint
Economic Committee, you said that a large increase in net taxes
would tend to be a drag on consumer spending and on the economy
through a number of different channels. So my question here is
in the light of the fact that we may have some suggestions of
offsetting any spending packages that we do here, perhaps
potentially with taxes, do you still believe an increase in
taxes would have such a deleterious impact on the overall
economy?
Mr. Bernanke. Thank you, Congressman. Well, first on the
magnitudes, let me just say first of all that there is a lot of
uncertainty about exactly what the spending impact would be.
And there is a range of estimates out there. There has been
some very interesting recent work that looks at credit card
balances and how the credit card balances adjusted after the
checks were disbursed in 2001, which suggests a somewhat higher
response than I think you were indicating. And that is
described--the Congressional Budget Office has a recent
publication which gives a nice overview of some of the issues
and some of the evidence relating to different types of
spending impacts. But I certainly take your point that there is
a lot of uncertainty in terms of how big the effect would be
and how quickly it would be felt, which is one of the reasons
for considering perhaps a combination of issues, a combination
of programs to kind of diversify your risk, so to speak.
My presumption is that if this stimulus package was
undertaken, and again to be of value it would need to be timely
and well implemented and well designed, that it would result in
a near-term increase in the budget deficit, and not an increase
in taxes. That would be counterproductive to increase taxes as
part of this program. There could be offsets, you know, at
further horizons. And so this could or could not, may or may
not be consistent with the PAYGO approach, for example. But
certainly to be effective under the usual analysis it would
have to increase the deficit in the near term.
Chairman Spratt. Mr. Cooper of Tennessee.
Mr. Cooper. Thank you, Mr. Chairman. Mr. Chairman, I
welcome your testimony. Thank you for giving Congress some
guidance on the outlines of an overall stimulus package. I
think most of us agree with you that it should be timely and
well designed. I am hoping that we are not only getting a
congressional-Fed consensus here, but a Democratic-Republican
consensus, because I think there has been a lessening of
tensions on this important issue. We heard from Larry Summers
earlier in the week, and to put it bluntly, he said well, we
would get a gold medal if we got economic stimulus to hit the
streets by March or April. We would get a silver medal if it
were June or July. And maybe no medal at all if it was next
September. You seem to have indicated in your testimony that we
might have 12 months to work within. Do you think in general
the quicker the better as long as it is well designed, or do we
have 6 months or more to actually get the money working on the
streets of America?
Mr. Bernanke. The 12 months, Congressman, the 12 months I
was referring to is the amount of time over which the spending
effects would be felt.
Mr. Cooper. Okay.
Mr. Bernanke. I think in order for this to be effective,
you need to move very quickly. There are some constraints in
terms of how quickly--for example, if you have rebates to
consumers, there are some technical issues about how quickly
the IRS could gear up to do that. You know, it could be as much
as a couple of months depending on how much resources are put
into it. But I think in order for this to be useful, you would
need to act quite quickly.
Mr. Cooper. Promptly. And that will necessitate some sort
of a bipartisan agreement so that we can move this very
quickly. Fortunately, the AMT relief was given last year, so
between now and April 15th taxes will not be going up. And that
is $52 billion of help for some 27 million Americans. And that
is good. On the design of the package, that is the key
question. And you were talking earlier to Mr. Garrett, saying
that this could be accommodated within PAYGO. Because PAYGO
only says that things have to be paid for sometime within the
next 5 years. And that gives us until 2013 to pay for this. And
my preference would be to pay for things through spending cuts.
There are other ways to pay for things. But I am very much
hopeful that this well-designed package can be in fact paid
for, because exactly as you say in your testimony, we should do
nothing to exacerbate the longer-term financial problems, the
structural deficit problems that our Nation faces.
So I think that is going to be the key challenge for
policymakers today to go ahead and have the short-term fiscal
stimulus, but to make sure not only that we do no harm in the
long-term future, but that we actually try to improve the long-
term outlook. Because I was very disturbed last week when
Moody's joined Standard and Poor's, who had indicated a year
earlier projecting that the U.S. Treasury bond might lose its
AAA credit rating in about 10 years. And that seems like a long
time away, but when you are dealing with 5- and 10-year
horizons, that is probably within reach of the term of the next
President of the United States. So long-term situations cannot
be ignored as we debate this short-term fiscal stimulus.
So I welcome your testimony, and I appreciate your guidance
for this Congress. Thank you.
Chairman Spratt. Mr. Hensarling of Texas.
Mr. Hensarling. Thank you, Mr. Chairman. Welcome, Chairman
Bernanke. In looking at recent economic history, when I looked
at the recession that we were facing in '01, and I look at the
rebates that were given, I believe that in many cases they were
important.
But Chairman, as I look at those rebates, my reading of
history is that although consumer spending temporarily
increased, that capital investment spending perhaps decreased
by roughly the same amount, and that after that package was
passed, that the economy did not overall improve. It wasn't
until '03 that you had the lowering of marginal rates and the
significant cap gains tax relief and dividends relief that you
really stimulated the economy that has led to the longest
period I think of uninterrupted job growth perhaps in our
Nation's history. And certainly one of the most robust periods
of economic growth. And I see a similar phenomena in the 1981
package, where again marginal rates were lowered. And so
although it may be important, some type of rebate package,
since we all know that we have constituents who are struggling
to pay their healthcare premiums, send a child to college, keep
a roof over their head, I am not sure that rebates equate to
long-term economic stimulus.
And so one, my question is what is your reading of the
history of the '01 and '03 tax relief packages? And when we
talk about stimulus, is it more important to stimulate
temporary consumer demand, or is it more important to stimulate
long-term sustainable job growth?
Mr. Bernanke. Congressman, on the history--and let me just
reiterate what I said before, which is that economics is not
that precise a science. So there is plenty of room for
disagreement about how big these effects have been.
My judgment and I think the judgment of most of the
empirical analyses that have been done was that the rebates in
2001 did have some impact on spending and that that was of some
assistance in keeping the 2001 recession relatively moderate.
It is true that capital spending was quite weak. Indeed,
the 2001 recession was in some sense a business-led or
investment-led recession, and the interpretation that most
economists gave of that fact was that following a huge amount
of investment during the stock market run-up in the late 1990s,
that there was a capital overhang and that businesses didn't
see much reason to invest. And so they pulled back their
investment quite significantly.
In 2003, tax policy again, I believe, did help stimulate
the economy. Monetary policy also was quite stimulative in
2003. And those things helped the economy recover, as well as
its natural recuperative powers. So again I think there were a
number of factors at work.
In no way do I want to express lack of concern with the
critical, long-run issues of achieving an efficient, fair,
simple Tax Code and of achieving a well-balanced and fiscally
responsible government budget. I think those are critical
elements; and I hope and expect that this Congress over the
next--this session and the subsequent sessions will be looking
very closely at these important issues. They are critical
issues, and in terms of our long run health, they are clearly
quite important.
The topic that we are discussing today, though, is the very
near term and the risk of a significant slowdown associated
with the housing bust and with problems in financial markets
and the like. And the question has been raised to me and others
whether or not some kind of temporary stimulus might be helpful
in avoiding a slowdown or a more significant slowdown, and that
is what I am addressing today. And I think----
Mr. Hensarling. Chairman Bernanke, in that regard, on page
3 of your testimony you say that outside the United States
economic activity in our major trading partners has continued
to expand vigorously.
As I look at the EU and other industrialized nations, I see
that over the course of the last few years, many of these
nations have slashed their corporate tax rates, and I think,
with the exception of Japan, we have the highest business tax
rate of any industrialized nation in the world. And so, as we
see their economies expand vis-a-vis our own, is there a lesson
to be learned from that, particularly juxtaposed against the
threatened tax increases we have seen in this Congress,
including the one announced by the chairman of the Ways and
Means Committee, his alternative minimum tax plan that could
increase taxes for 90 percent of Americans at 3.5 trillion in
tax increases over 10 years?
So the question is, is there something to be learned about
expanding economies that are lowering their business tax rates?
Is there something to be learned about tax certainty so that
businesses know, long term, they won't be socked with these
long tax increases; and what is that connection to long-term
economic job growth?
Mr. Bernanke. Well, first, we are in different stages of
the business cycle. Over the last 5 or 10 years, the U.S.
compares very well with other countries in terms of its long-
term growth and productivity growth, so we have a strong
economy, resilient economy.
We rely on the market system. We do try to keep taxes low.
I think all those things are important. And I again am in no
way taking one side or the other in terms of these issues of
fiscal stability and an efficient tax system. I think they are
very, very important, and I hope that Congress will continue to
work on trying to improve our tax competitiveness and our
fiscal stability and our fiscal strength.
But again, in terms of the very near-term cyclical factors,
I think that those things that you are talking about are
important, but they are more about the long-term growth rate of
the economy and not about the next 6 months.
Chairman Spratt. Ms. Kaptur.
Ms. Kaptur. Thank you.
Welcome, Mr. Chairman. I can't see you, but I know you are
there. I thought I might begin with a brief perspective, having
been here over two decades now, and then ask a series of four
questions that can be answered very briefly or for the record.
In the last two decades, what I have witnessed here in the
housing finance sector as a result of legislation passed by
this Congress is a great power shift in housing finance and a
great responsibility shift. And that power shift has been from
local communities and local community banks to financial
centers very far from where my constituents live. We have seen
local banking institutions eliminated. Our thrifts, which used
to promote savings and provide housing finance no longer exist.
Wall Street was empowered, and we have gone as an economy
from a prosavings to a prodebt consumer credit, credit card--I
think delinquencies are at all-time highs. We have changed the
whole way we thought about savings and investment, including in
the most important sector that any family holds savings and
that is in their home.
The theory back when all of this happened, which I fought
against and didn't win, was that we would never have to worry
again about housing crunches leading this Nation into recession
because securitization was going to save us; and it was offered
as a cure-all to prevent recession. The old mantra of, well,
the local community banker who looked at character, collateral
and collectability, as well as community responsibility was
gone; and we have moved into an era now, a very--cursory credit
evaluations, very risky subprime and accounting practices and
securitization.
So the whole system was turned inside out. Local portfolio
lending was replaced by international securitization. Many
communities like those I represent became derivative. They
basically had no local institutions left but for some credit
unions and some small rural banks, and all that power shifted
to the megabanks and investment houses.
Here are my questions. Number one, what firms on Wall
Street and which financial regulatory agencies here in the
Nation's Capital are most responsible for the securitization of
subprimes into the international market? Number one, which
firms and which regulatory agencies are most responsible for
the creation of those practices?
Number two, in order to pay for this fiscal stimulus that
we are talking about here, should the bankers, financiers and
board members of those institutions who brought us to this
subprime debacle and were hugely rewarded while obviously
failing to do even the most minimal due diligence, be required
to pay back their salaries and bonuses to the people of the
United States?
Number three, seeing as how you were the former CEO of
Goldman Sachs, what percentage----
Mr. Bernanke. No. You are confusing me with the Treasury
Secretary.
Ms. Kaptur. I have got the wrong firm? Paulson. Oh, okay.
Where were you, sir?
Mr. Bernanke. I was the CEO of the Princeton Economics
Department.
Ms. Kaptur. Oh, Princeton. Oh, all right. Sorry. Sorry. I
got you confused with the other one. I am sorry. Well, I am
glad you clarified that for the record.
What percentage level of investment in a bank or investment
house do you consider to constitute effective control--10, 20,
30, 50 percent?
And finally, as we consider this fiscal stimulus package,
how can we design it, structure it, to create the greatest
wealth creation in our country and prevent the draining off of
those precious dollars toward hollow expenditures by consumers
or by the Government of the United States? How can we create
wealth creation with whatever small portion we are able to
direct towards investment in this country? Thank you.
Mr. Bernanke. Congresswoman, that is quite a list of
questions.
You are quite correct that there has been a major shift in
mortgage lending from what is called portfolio lending, banks
who lend from their own portfolio, including community banks,
to a securitization model. By the way, I think the important
institution that was involved in that was Fannie Mae, which
essentially created the securitization market for mortgages.
That was used very positive, I still think it is basically
positive because it makes the mortgage market less dependent on
flows of deposits into particular banks or thrifts. There were
periods in the past when, for whatever reason, deposits flowed
out of local banks and thrifts, and that made mortgage credit
more difficult to obtain; and so the idea that there would be
essentially direct access to capital markets was viewed as an
important step in terms of freeing up the housing market and
housing market finance.
Now, as we have learned and you correctly point out, the
securitization model is not without its problems, and we have
seen some of them, the so-called originate-to-distribute model,
which is what we have been seeing. In particular, the question
arises when you have one firm making the loan and another
investor holding the loan, does the firm that makes the loan
have appropriate incentives to make sure it is a good loan--a
well-underwritten loan.
If you are making the loan for your own portfolio, you have
a strong incentive to do so. If you are making it just to sell
it off, you may have much less incentive; and that clearly has
been part of the problem that we saw in the subprime situation,
going back.
Ms. Kaptur. Sir, could I ask you, does Freddie Mac have as
much responsibility as Fannie Mae in the change in that
securitization----
Mr. Bernanke. Freddie came later, but it has played, also,
an important role. That is essentially what those two firms do:
They buy mortgages from banks and other lenders and they sell
them on the secondary market. They securitize essentially. So
as we go forward, I think we are going to have to look very
carefully at that originates-to-distribute model, make sure
that incentives are properly aligned and make sure that
transparency is adequate so that people know--investors know
what they are buying.
I do want to indicate and take note of the fact that the
Federal Reserve has recently put out for comment an extensive
set of rules and regulations that would apply to all lenders of
the United States that would try to prohibit some of the
practices and underwriting practices that contributed to some
of these problems. But I do think that there is a major set of
issues here that we have to look at going forward.
I am not going to comment on the CEO question. I don't
think that is really my department.
Ms. Kaptur. But do you think that they might have
responsibility? Do they have some responsibility?
Mr. Bernanke. Well, some of them have been fired. Some of
them have lost money. Certainly their firms have taken
significant write-downs.
So again, as I said before, it is hardly the case that
these firms are protected from the consequences of what they
have done. And it is not our intention either as a central bank
or as a regulator to protect those who made mistakes from the
consequence of those mistakes.
Chairman Spratt. Mr. Chairman, Ms. Kaptur, we have got to
move on because he has to leave here at 12:30. So we have got
to move ahead with the----
Ms. Kaptur. Could I just ask the Chairman, what percentage
level of investment and banker investment house would the
Chairman consider effective control--10, 20, 30, 50?
Mr. Bernanke. It depends very much on the governing
structure, how many directors and what role the investor plays
in the management of the firm. If you are thinking of the
recent capital investments by a number of foreign wealth funds,
for example, those have been relatively small and they have, in
general, not involved any control rights in the firm.
Ms. Kaptur. And finally, how can we target fiscal stimulus?
Chairman Spratt. Whoa, whoa. We have got to move on, Ms.
Kaptur.
Mr. Campbell of California.
Mr. Campbell. Thank you, Chairman Spratt and Chairman
Bernanke.
Yesterday we saw that inflation was up and growth has been
declining. If those two trends were to continue, we would head
towards a classic stagflation scenario which, as Mr. Ryan
alluded to, is not something we have seen since Jimmy Carter
was President or something we have had to deal with.
How do you deal with inflation when we have declining
growth and encourage growth while dealing with this inflation,
particularly if the inflation, as it appears to be, is driven
by international commodity prices?
Or conversely, how do you--through monetary policy or we
through fiscal policy--encourage growth while not igniting this
inflation and heading us towards a stagflation scenario?
Mr. Bernanke. Well, you put your finger on a very difficult
problem. We have two objectives and one instrument, and we need
to balance those risks appropriately.
It is our sense that--as I said before, that inflation
expectations are reasonably well anchored. We are looking at
forecasts made in futures markets of oil and other foods and
other commodities. And so our sense--and again, monetary policy
has to look forward because it works only with a lag, and
therefore our forecast is critical to our policy action.
Our anticipation is that both headline and core inflation
will moderate over the next year or two to a level which we
view as consistent with price stability.
Having said that, we recognize that the futures markets--
and accordingly, therefore, the Federal Reserve--has
consistently underestimated the amount of increase in the oil
prices, for example, and that our ability to be effective in
addressing growth shortfalls is critically dependent on our
maintaining our credibility for keeping inflation low; and so
in no way are we going to ignore that issue.
We are going to have to make sure that inflation remains
controlled and that our credibility for keeping inflation in
medium term at levels consistent with price stability is not
impaired.
But you are absolutely right that the last few months have
been very challenging because we have had on the one hand
growth issues; we have had inflation issues and we have had
financial market turmoil as well. And so we have had to balance
off a number of different risks as we try to choose the right
set of policies, going forward.
Mr. Campbell. I will fire two more questions at you and
that way I won't--make sure I won't run out of time.
The first is, you have done a lot of monetary policy--you
have done a lot at the window. You have lowered rates and you
obviously can lower rates some more. Other than that, lowering
rates some more, are there any tools left in your monetary bag,
if you will, relative--clubs left in that bag relative to this
economic growth side?
And the second question is somewhat unrelated. But as
relative to this potential fiscal stimulus package, wouldn't
some kind of business tax-related stimulus have more of a
multiplier effect on the economy? I mean, in the end, if you
give someone a few hundred dollars, that helps, but if you give
someone more confidence that there is going to be a job or that
jobs will increase because there is business activity--and
there is a lot of money sitting on the sidelines now not
knowing where to go; if there are some things that encourage
that money to come off the sidelines, wouldn't that create a
greater multiplier effect in providing stimulus over time?
Mr. Bernanke. In your first question, Congressman, we are
focused right now on liquidity provision and other measures to
try and help the markets work better, and our monetary policy.
And I think for now those are really our two main tools, and we
are going to continue to apply those to try to meet our
objectives.
On business tax relief, again a lot depends on the
structure. With respect to short-term business tax relief,
should you choose to do that, the experience has been that
temporary measures like temporary partial expensing, for
example, or bonus depreciation, whereas it is not particularly
helpful in the very long run because it is only temporary.
The fact that it is temporary may induce firms to bring up
spending they might otherwise have done into the current period
and therefore add to spending in the economy. And it has the
advantage that to the extent they do that, you also create more
capital in the economy which supports job creation. So that is
an alternative direction.
And again, as I said before, what the Congress might well
want to consider is a diversified mix of elements as you try to
craft a package.
Chairman Spratt. Mr. Becerra.
Mr. Becerra. Mr. Chairman, thank you very much for joining
us. I want to thank you for your thoughtful testimony.
Legislating, like economics, is a very imprecise science,
and some would say I am being generous even in that
description. So let me ask you to do me a favor. I am going to
give you one last chance to retract your statements that you
made today. And just to be sure you are clear, I am going to
look at your testimony and see if you still want to stand by
these statements:
To be useful, a fiscal stimulus package should be
implemented quickly and structured so that its effects on
aggregate spending are felt as much as possible within the next
12 months or so. Are you okay with that?
Mr. Bernanke. I am fine.
Mr. Becerra. Fiscal measures that involve long lead times
or result in additional economic activity only over a
protracted period, whatever their intrinsic merits might be,
will not provide stimulus when it is most needed.
Mr. Bernanke. Of course I support that--I believe that--and
I want to emphasize intrinsic merits. I have tried to make some
distinction between long-term ventures and short-term stimulus.
Mr. Becerra. That, I understand. And you have tried to
explain that a little, and I am not going to get too much into
that. I just want to make sure you are going to stand by these
statements, because obviously a lot of folks will cover what
you say today.
You also want to say any program should be explicitly
temporary?
Mr. Bernanke. Correct.
Mr. Becerra. A fiscal program that increased the structural
budget deficit would only make confronting those challenges--
the challenges of the aging population, rising health care
costs and other factors--more difficult.
Mr. Bernanke. I agree.
Mr. Becerra. You agree. Those are your statements.
Finally, a fiscal initiative at this juncture could prove
quite counterproductive if, for example, it provided economic
stimulus at the wrong time or compromised fiscal discipline in
the longer term.
Mr. Bernanke. Correct.
Mr. Becerra. Can you give me a quick definition of ``longer
term''?
Mr. Bernanke. Well, you know, it is very difficult to
forecast where the economy is going to be way down the road.
Mr. Becerra. Let me make it easier for you. Less than or
more than a year?
Mr. Bernanke. More than a year.
Mr. Becerra. Okay. That is plenty fine.
Now, let me ask you this. In your testimony and in your
responses to comments, you talk about the possibility of
monetary policy being complemented by some prudent fiscal
policy, fiscal policy that pursuant to your statements gets the
money into the hands of those who will spend it wisely, consume
it wisely, quickly?
Mr. Bernanke. That is right.
Mr. Becerra. That doesn't mean only a reduction in
someone's taxes through a tax rebate, but it could also be
something that puts money in your hand to buy food today or to
keep your ability to buy your clothes even if you might be on
the verge of losing your unemployment insurance benefits?
Mr. Bernanke. There are a range of possible ways to give
money.
Mr. Becerra. And so that could include food stamps for
those who are trying to figure out a way how to buy the next
meal for the family or how to make sure that you can buy the
clothes your child needs to go back to school, if you are about
to lose your unemployment benefits because you were a victim of
this latest downturn?
Mr. Bernanke. Those are all possibilities, but they differ
in details; and it is up to Congress to put it together.
Mr. Becerra. Possibilities, not necessarily what you do,
but possibilities. Thank you. I want to just broach for a
second--it seems to me that we now have to tell the American
people that that is it. Did you see it? Because we just passed
the best of times of this economic boom that we were
experiencing over these last few years. We saw the best of
times, I think most would agree; and I think your comments
would also concur with this, that we are now probably going to
see some worse times.
And so, if that is it, it is hard to believe that during
the best of times we saw the rate of poverty actually--the
number of people in poverty in this country actually go up. We
saw the number of people in this country increase by millions
in being uninsured for health, and that was during the best of
times.
And so as we talk about what we do--and as you said, we
should do something that is temporary and timely, and it seems
targeted--I have a figure from the Congressional Budget Office
that shows that the Bush tax cuts of 2001 and 2003--between the
year 2001 to the year 2017--so over the course of about 16, 17
years--will have cost the American public and taxpayers about
$3.4 trillion. How much we have gotten from them, that is to be
measured, but I think most economists agree that most tax cuts
don't pay for themselves. And if we were to extend those tax
cuts and make them permanently over that same course of 16 or
17 years to the year about 2017, it would cost the American
taxpayer about $7.2 trillion.
So given what you are saying, we have to have temporary,
timely and targeted tax cuts--I am not going to ask you to
respond if enacting or extending permanently the Bush tax cuts
would be wise policy, but I would just ask you, do you disagree
much with the CBO's figures on how much the tax cuts have cost
to date?
Mr. Bernanke. I agree that tax cuts generally do not pay
for themselves.
But the real question is to balance the efficiency or
growth benefits of lower taxes against the need to cut spending
if you have lower taxes. So again, it is the law of arithmetic.
Low taxes are a good thing generally, but you have to be
willing to make the spending cuts to go along with it.
Mr. Becerra. I find myself concurring with you.
Chairman Spratt. Mr. Lungren.
Mr. Lungren. Thank you, Mr. Chairman.
And thank you, Mr. Bernanke, for your testimony. I am a
lawyer; I am not an economist. The only thing more imprecise
than an economist are noneconomists trying to talk economy.
I have to come here to be educated to understand that when
the government doesn't tax me as much, it costs me? My God, the
tax cuts cost the American people. I hope the average American
understands that if we allow you to keep money in your pocket,
we have cost you money.
That is what I just heard, and I had to come here after 4
years of college and 3 years of law school and practicing law
to learn that. It is a novel idea.
Mr. Chairman, I tuned in television this morning, and I
heard the same litany of the terrible news of the economy. I am
not a Pollyanna. There is bad news out there. But when I hear
this drumbeat every single day, every single day, and you deal
with the psychology of the American people and the expectations
of inflation or the expectations of the economy and therefore
confidence, that has to have an impact.
And so a lot of people are tuning in to watch you today to
ask you, What is the state of the economy? And as I read your
testimony, you have pointed out the difficulties that we are
under right now and that we will see for the foreseeable short
term. But I thought I heard you say the underlying strengths of
the economy remain in terms of productivity, in terms of our
advances in technology, in terms of our unemployment rate at
the present time--even though it has gone up, the basic
employment status. And I wonder if you would talk a little bit
about that, because I think the American people need to hear a
little bit about the broader picture as we look at the serious
issues that are there.
What are the underlying strengths that the American people
ought to understand so that we don't accelerate our emphasis on
the negative such that the American people don't fully
appreciate the full picture?
Mr. Bernanke. Congressman, I agree with you. I think we
have some short-term issues associated with our dynamics of our
housing market and some of these issues in financial markets,
and so we are looking at a slowdown.
But over longer periods of time, the U.S. economy has shown
remarkable and consistent growth. Particularly in the last
decade or so, productivity growth has been outstripping other
industrial countries quite consistently. We have a very diverse
and flexible workforce. We have a highly productive economy,
strong technology, many factors that are encouraging.
I think, over the longer term, that the economy will
perform quite well; I think we have challenges as well.
Obviously, we need to address some of these fiscal issues. We
need to address our education system. There are issues about
health care. Those are all very important.
But the U.S. economy for the last--indeed, for more than a
century, has shown its tremendous resilience and ability to
grow despite all kinds of challenges. So in no way do I want to
detract from that. And, indeed, it is interesting that as
people express pessimism about the economy and so on, they
often say that their own personal situation looks okay or they
are more optimistic about their own personal situation.
So I am not here at all to be saying negative things about
the long-term potential of the U.S. Economy. I think it is
excellent. I think we have important challenges. But every
economy goes through ups and downs, and right now we are in a
slow period. And the question is, what policy actions might be
helpful.
Mr. Lungren. And one of the things I am most concerned
about is the long-term economic growth of this country, because
it is not only important to us now, it is important to our
children and our grandchildren. And if you look at the overall
trends over the last decade in terms of inflation, you see that
we are actually in pretty good shape, comparatively speaking--
unemployment rates and so forth--and I will probably end up
voting for some stimulus package.
But I think we ought to be honest. A stimulus package is an
economic vitamin B-12 shot. It is going to make you feel a
little bit better for a short period of time. But in terms of
the true impact on the overall health of the economy, it is not
that significant, is it?
Mr. Bernanke. Well, I think we would all prefer to have
steady growth over the next year rather than, you know, growth
that is too slow, and that it would have an impact on people
who are looking for work, will have impacts on family incomes.
So the Federal Reserve is mandated to try and support maximum
sustainable employment growth, and we want to do that. So to
the extent that we can prevent the economy from slowing unduly,
even over a relatively short period, I see benefit in doing
that.
But as I have indicated, in some sense the critical issues
are the long-term issues in terms of our market system, our
education, our Tax Code, our technology, all the things that
contribute to long-term growth. That said, I don't think we
should ignore the short-term issues, and certainly the Federal
Reserve is very focused on them.
Chairman Spratt. Thank you, Mr. Lungren.
Mr. McGovern of Massachusetts.
Mr. McGovern. Thank you, Mr. Chairman.
Thank you, Chairman, for being here. I think we all get it,
that we need to enact a targeted, timely and temporary stimulus
package and we need to act sooner rather than later. And I
think it is also clear that we need to enact a stimulus package
that adds up to more than just helping the rich get richer,
that we need to have a more broad-based approach to providing
relief to people across the country.
And experts across the political ideological spectrum seem
to be coming to consensus that we need to develop a plan that
also helps the most vulnerable people and households and that
allows currency to flow. Many of these experts believe strongly
that any stimulus plan should include a temporary increase in
food stamp benefits. And I know my colleague from California,
Mr. Becerra, kind of raised that issue.
My colleagues on this committee have heard me talk about
rising hunger and the moral need to ensure that nobody in this
country is without food or without adequate food. And I
understand that to kind of deal with that challenge, it
requires a long-term strategy.
And today we are focused on talking about the best way to
jump-start our economy. It seems clear to me that an increase
in food stamps not only should be part of any economic stimulus
package, but really needs to be. Increasing food stamp benefits
for the current recipients can be done quickly and,
particularly now with electronic benefit transactions, very
efficiently.
Fraud is not an issue today like it was under the old food
stamp program. The money goes to people who have trouble with
their food and other bills, and more importantly, these people
will spend this money and these funds go directly into the
economy.
Based on USDA research, we know that every food stamp
dollar generates nearly twice that in economic activity, and
according to the CBO, and I quote, ``The vast majority of food
stamp benefits are spent extremely rapidly, and because food
stamp recipients have low income and few assets, most of any
additional benefits would probably be spent quickly,'' end
quote.
Administrative costs of such an increase are negligible,
meaning that the majority of the stimulus would go directly
into the economy. Currently, over half of all benefits go to
the 39 percent of food stamp households whose income was less
than or equal to half the poverty line.
During fiscal year 2006, approximately 27 million people
received food stamp benefits. Each month nearly all benefits
went to 87 percent of food stamp households that were in
poverty. And according to the Center on Budget and Policy
Priorities, many low-income consumers do not receive
unemployment insurance and are not tax filers, and thus would
receive no help from extended unemployment insurance benefits
or a tax rebate. So a food stamp increase would reach a
significant portion of this group.
And I have read quotes from former Treasury Secretary Larry
Summers and Martin Feldstein, a former economic adviser to
President Reagan. All kind of seem to agree that this would be
a major help in terms of stimulus.
So my questions are--I mean, do you agree with these
assessments? Does this fit into the categories that you are
talking about in terms of what would constitute real stimulus?
What role do you see the food stamp program playing in any
economic stimulus package? And in your opinion, what would be
the effect of including in the stimulus package a temporary
increase in the food stamp program?
Mr. Bernanke. Congressman, I don't want to usurp Congress'
prerogative in terms of figuring out the best ways to get
money----
Mr. McGovern. That is okay. You can do that if you want.
Mr. Bernanke [continuing]. So I think what I will say is, I
think there is good evidence that cash that goes to low- and
moderate-income people is more likely to be spent in the near
term. And so I think that logic carries through. But the exact
way that you deliver--if you decide to do that, the exact way
you deliver an exact mix, I think is up to you.
I guess I would also comment that food stamps and some of
these other things are relatively small compared to the overall
size of a package, and so it certainly could not be the--if you
were doing that, it couldn't be the only mechanism.
Mr. McGovern. No. And I appreciate that.
But again, listening to what you were saying here today
about what could constitute an important stimulus, getting
benefits to people quickly, we know that we saw how--how we
were able to do that in Hurricane Katrina; and there was a big
snowstorm in Buffalo, New York, and we were able to respond
with food stamps quickly, you know, knowing that this generates
more economic activity.
I am not saying this should be the only thing in the
stimulus package, but clearly it seems to me that it should be
an important thing. And I wanted to make sure it fit into what
you were talking about in kind of general categories of what
would help the economy move forward.
Mr. Bernanke. Getting money to people quickly is good. And
getting money to low- and moderate-income people is good in the
sense of getting bang for buck.
Mr. McGovern. Thank you.
Chairman Spratt. Mr. Conaway.
Mr. Conaway. Thank you, Mr. Chairman.
And, Chairman Bernanke, thank you for being with us this
morning. One quick technical thing. You mentioned in the
testimony a ``term auction facility.'' Does the Fed guarantee
that principle? What is the attraction there for banks to go to
that window and buy that--swap those dollars with each other?
Mr. Bernanke. We have collateral. The banks put collateral
at our window, at our discount window, and they borrow against
that collateral. And since that makes the loan safe for us, we
can afford to----
Mr. Conaway. Less the discount rate, what the TAF----
Mr. Bernanke. The TAF is essentially the discount window,
except delivered through an auction format rather than through
a direct loan format.
Mr. Conaway. Thanks.
Some of this issue has been created by folks borrowing
money they can't pay back, whether it is on housing or credit
cards or whatever it is. Much of your testimony focused on
helping provide more credit, extending more credit.
Is there evidence, either empirically or anecdotally, where
qualified borrowers are, in fact, unable to borrow money and
that we can continue to debt our way out of this issue? Am I
misunderstanding that?
Mr. Bernanke. First of all, the fiscal proposals don't
involve anyone increasing their debt. It would just involve
either tax rebates or some other----
Mr. Conaway. But your monetary side, where----
Mr. Bernanke. Yes. So I think it is a concern if banks--you
want banks to make sound loans. You want them to do good
underwriting. But if banks get to a position where they simply
decline to take on new customers, for example, or they are
extraordinarily tight in their standards because they are
afraid of using up their available capital, then that can be a
restraint on the economy. We want to have a balance.
Mr. Conaway. I understand that. But we want to make sure
the medicine is for the right disease. And do we have a credit
issue with respect to banks, in general, being unable to lend
to good, qualified customers that you want, underwriting
standards, the character that Ms. Kaptur was talking about, the
local guy knows? Are we at that point?
Mr. Bernanke. The biggest problems right now are in
mortgage markets where terms and conditions have tightened
considerably and banks are relatively reluctant, for example,
to make good, jumbo, prime loans. They charge a significant
premium for those.
For low- and moderate-income people, there is such a thing
as good subprime lending. It has been done responsibly and can
be done responsibly, but essentially, at this point, there is
none being done at all because they know they can't securitize
it. So particularly in the mortgage market, but to some extent
in other markets we are seeing some tightening of credit
conditions.
I agree with you that you want to have good, strong
underwriting and make sure it is the best borrowers who get
loans. But we just don't want to have banks sort of
overshooting, so to speak, and making it difficult even for
qualified borrowers to get loans.
Mr. Conaway. But that is something you would watch for,
qualified borrowers unable to get--I spent a brief bit of time
in my career in banking and loaning money to people who pay you
back was the idea, and not loaning to folks who hadn't paid
other folks back was generally a red flag to not do that kind
of stuff.
Back on the tax side and certainty of our Tax Code,
whatever it might or might not be, you mentioned that business
incentives, higher depreciation, bonus depreciation, are the
kinds of things that immediately would accelerate that. Can we
also infer from that that future tax increases either
threatened or in the Code now would lead businesses to delay
investment into those periods where their tax rates go higher?
Mr. Bernanke. There is a theoretical possibility there that
if----
Mr. Conaway. If next year's tax rate is going to be higher
and I have got to build something or buy something, wouldn't it
be to my advantage to delay that purchase into a period where
the tax depreciation rules are more favorable or the rate is
higher, and that makes the depreciation I am going to get more
valuable to me?
Mr. Bernanke. I think your point in principle is certainly
correct. I am not sure that--are you contemplating raising----
Mr. Conaway. I am not, but everybody else on the other side
is.
Mr. Bernanke. I see. In terms of trying to stimulate near-
term capital spending, I think the general view is that using
taxes that apply--tax provisions that apply directly to capital
formation, such as depreciation or investment tax credits, have
a bigger bang for the buck than do just general corporate tax
rates.
So if you are going to do that, if you are going to try to
make investment spending part of this package, then temporary
measures that provide incentive to firms to bring up their--
increase their capital spending are probably the most
effective.
Mr. Conaway. Thank you, Mr. Chairman.
Thank you, Mr. Spratt.
Chairman Spratt. Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman.
Thank you, Chairman Bernanke. I think you have done the
country a really good service by your laying out of the problem
and some principles to help us solve it. You have obviously
learned well from your time on the Montgomery Township, New
Jersey, Board of Education. We appreciate that.
There are three ideas on the table for short-term stimulus
that we have heard members talk about. One is accelerating some
business tax reduction, whether it is expensing or what have
you. The second is direct consumer tax rebates. The third is
some expansion of programs, such as food stamps.
Are there any data that suggest that among those three
there is one that is better than the others in terms of
multiplier effect, in terms of effectiveness?
Mr. Bernanke. Well, there are multiple considerations. I
think just in terms of the effect on--for each dollar spent on
spending, the highest multipliers are probably from tax rebates
or other payments to low- or moderate-income people, who are
likely to spend quickly.
The immediate impact through, for example, accelerated
depreciation is more disputatious. There are different views on
that. But there are other considerations, such as the fact that
you create more capital and that is beneficial.
So none of these things depends only on the multiplier. But
I think most packages we have seen in the past have included at
least some component of tax rebates to low- and moderate-income
people.
Mr. Andrews. Given the fact that that is a desirable
option, are there data on efficiency levels of spending by
quartile of income group? In other words, do the people at the
bottom quarter spend more of that rebate more quickly than
people at the top?
Mr. Bernanke. There are some studies which suggest--and
again, I really need to emphasize the uncertainty associated
with econometric estimates and so on, but the studies do
suggest that people of lower incomes or those who are
``liquidity constrained,'' which means they find it difficult
to borrow for one reason or another, are more likely to spend
in the near term than people, for example, that have extensive
assets to draw on and therefore don't need to adjust their
spending to their income.
Mr. Andrews. I think I heard you say there are some pretty
solid data that tax rebates to consumers are an effective
stimulus, given the way we are defining effectiveness in this
discussion; and second, that tax rebates that, I won't say
disproportionately, but at least to a fair share go to the
people at the bottom ladder are also quite effective in
achieving that short-term bump that we are looking for; is that
correct?
Mr. Bernanke. In terms of stimulus, because people who are
of low income or have few assets or find it difficult to borrow
are more likely to spend the money in the near term? That has
that benefit from the stimulus point of view.
Mr. Andrews. One of the things that is striking about your
testimony is this balance that we have to find between the
short-term needs that we have and avoiding long-term harm. It
is sort of like steroids, that you want to address an infection
quickly, but you don't want to create an adverse impact.
I guess this is a timely week to be raising that issue
around here.
Chairman Spratt. On that note, I think we had better move
on, Mr. Andrews.
Mr. Andrews. Yes, Commissioner.
The question, if I can just quickly ask, is there a way
that we could do some short-term stimulus that actually helps
to solve one of our structural long-term problems? For example,
energy, is there any argument for the proposition that there
should be a steeper subsidy or a larger rebate if what is
purchased is something that uses renewable fuels, for example?
In other words, would we want to have a policy that encourages
the purchase of automobiles that are more efficient vis-a-vis
other----
Chairman Spratt. Mr. Andrews, let's get the answer to that
question, and then we will move on.
Dr. Bernanke.
Mr. Bernanke. As I said in my testimony, there are many
intrinsically interesting or useful things that may not be part
of a stimulus package. And the issue you need to address there
is how quickly would spending take place and what would be the
marginal amount of spending that such a program would produce.
Mr. Andrews. Thank you.
Chairman Spratt. Mr. Barrett of South Carolina.
Mr. Barrett. Thank you, Chairman Spratt.
Chairman, great to see you. Here I am. We are jumping
around over here. Thank you for being here today.
Reading your testimony, quote, ``economic stimulus at the
wrong time or compromised fiscal discipline in the longer
term''--and you are talking about a stimulus package, fiscal
initiatives and stuff like that. Fiscal discipline in the
longer term is what I want to concentrate on, Chairman. And
this is not a Republican problem, this is not a Democrat
problem, because I can tell you when we were in charge, we did
it too. We are doing it now.
Does the Congress spend too much money, Mr. Chairman?
Mr. Bernanke. That is not my call. My call is to say that--
government spending----
Mr. Barrett. It is a nonpartisan question, Mr. Chairman.
Mr. Bernanke. No, it is not a nonpartisan question. There
are value judgements there.
If you spend on a certain kind of program, you have got to
make a judgment: Is it--is the value of this to society worth
the extra taxes you need to pay for it? And that is something
that only the elected leaders of our country can represent the
people's views on. That is not a value-neutral question.
My concern is that we have, I think, a pro-growth Tax Code,
one that is efficiently designed and fair and simple. I am also
concerned that we have budget balance in the long run. Those
are the things that are important for growth.
But in terms of whether an additional program is worth the
extra taxes, that is for Congress. And I really don't have----
Mr. Barrett. I appreciate it. We need to get you back down
to South Carolina a little bit more, because I can tell you in
South Carolina they think we spend too much money. I think this
is a nonpartisan.
What about uncertainty in our fiscal policy? If we had some
sense of certainty out there in the free market, don't you
think--no matter what the policy is, if there was certainty,
that certainly would help in our potential growth. Would you
agree with that?
Mr. Bernanke. I think certainty is helpful, yes.
Mr. Barrett. Good. That is a good one.
Moving right along, trying to get us out of this recession
when we are thinking about a package, some people have said,
okay, let's give the money back in a bulk sum, so we can give
some instant stimulus; some people have said long-term tax cuts
or looking at fiscal policy.
Does it make sense, Mr. Chairman--and I am--again, I am not
saying one is better than the other. What I am saying is, does
it make sense to look at both of them and maybe have a balance
in our policy that may have a combination of both?
Mr. Bernanke. Between spending and tax cuts?
Mr. Barrett. Yes, sir. Like a tax credit as part of it in
the short term, and in the long term having some type of long-
term tax cut fiscal policy, something like that, so we could do
a combination in a package. Does that make sense to look at
both of those?
Mr. Bernanke. Well, as I have indicated, I think there are
some really important long-term issues which this fiscal
stimulus doesn't--is not necessarily designed directly to
address. And I think there is a political question about
whether or not--you know, within the short period of time we
are talking about, the Congress can address all these very
difficult long-term issues. They have to be addressed, and if
you can do so, that is terrific.
Mr. Barrett. And I don't mean to cut you off, Chairman,
because my time is short.
You know as well as I do, sometimes having the opportunity
to address some of these things, you know, timing is
everything. So if there would be a way we could address both of
these issues in the same package, would it make sense to do
that?
Mr. Bernanke. If you can address the stimulus and at the
same time make good decisions about long-term tax policy and
long-term fiscal balance, that would be a terrific thing.
Mr. Barrett. Good. Thank you.
Last question, I think is all I am going to have time for:
High prices in oil coupled with the weak dollar, kind of tell
me how that affects what we are doing and if there is anything
we can do in the short term with the price of oil and the
devaluing dollar.
Mr. Bernanke. I don't think there is that much that can be
done in the short term. The most important factors affecting
oil prices are supply and demand, and we have a growing world
demand for oil and for energy and for commodities, and supply
is limited. So that is difficult. That is another one of the
long-term issues that Congress needs to address in terms of
energy, energy efficiency and security.
For us at the Federal Reserve, high oil prices are a real
bane because they create inflationary pressure at the same time
that they take away spending and income and tend to depress the
economy. So they make it very difficult for us.
Mr. Barrett. The falling dollar, does it concern you,
Chairman, that maybe someday we will wake up and the world will
say, Hey, guess what, guys, we are not using the dollar as the
world standard anymore; we are going to use something else?
Mr. Bernanke. I always have to begin by saying that the
Secretary of the Treasury is the official spokesman on the
dollar.
Mr. Barrett. I understand. I understand.
Mr. Bernanke. My view on that is that--at the Federal
Reserve is that we need to make this economy strong and have
price stability. And if we do that, then in the medium term,
the dollars will reflect the strength of the U.S. economy,
which I have a lot of confidence in, again in the medium term,
as we discussed before.
Mr. Barrett. Good. Thank you, Chairman.
Chairman Spratt. Mr. Allen.
Mr. Allen. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke, for being here. I want to
just follow up and say, it may seem like Economics 101, but you
said that cash, whether it is tax rebates or other money going
to low- and moderate-income people is more likely to be spent
quickly, that is the phenomenon of the multiplier.
But could you just explain the multiplier enough to help us
understand why it is true that money going to those groups is
more likely to create--have a stimulative effect on the
economy?
Mr. Bernanke. Well, one of the concerns that people have
right now is that the consumer is pulling back and that
consumer spending is not going to grow as quickly, which would
tend in the short term to depress the economy because
consumption spending is about 70 percent of total spending. So
the question is, can we find a way to get the consumer to be a
little less hesitant to spend.
In terms of who is most likely to spend, if you are
somebody who has lots of financial assets and you receive an
extra dollar, you may not change your spending much because you
can simply either put the dollar in your bank account or take
out a dollar as you need it. If you are somebody who lives
paycheck to paycheck, you are more likely to spend that extra
dollar. The evidence seems to be consistent with that.
Now, I want to be clear that people at all levels of income
do seem to respond to some extent to extra cash. But both sort
of economic logic and the empirical work we do have suggested
that effect is somewhat stronger for people with low financial
assets or low and moderate income.
Mr. Allen. Thank you.
My state, like many others, has seen an erosion of middle-
class jobs in recent years, with particular losses in the
manufacturing industries. And in your testimony, you remark on
recent changes in the labor market, stating that while
employment in the service sector has continued to show slow
growth, there were significant decreases in residential
construction, manufacturing and retail trade. And though you
say we shouldn't read too much into one month's data--but it
is--it sure looks as if job losses in construction,
manufacturing and retail trade indicate we are losing middle-
class jobs, we are losing the kinds of jobs that people could
support a family with. Do you agree with that?
Mr. Bernanke. Well, those categories contain a wide range--
construction can include labor, it can include a foreman.
Retail can include a salesclerk, it can include the CEO of
Sears. So there is a quite a range of people who are in these
different categories.
Manufacturing, you mentioned specifically. Manufacturing
does tend to be cyclical. So when the economy overall slows,
manufacturing tends to slow generally by more, and therefore
the loss of manufacturing jobs, as we have seen recently, is
partly indicative of a slowing economy.
Now, more generally--I don't want to take all of your
time--but more generally, of course, we have seen a long-term
downward trend in manufacturing jobs--a lot of reasons for
that. One of them is simply the fact that U.S. manufacturing is
so productive and has become so much more productive that even
though we produce as much stuff now as we did 20 years ago, we
can do it with many fewer workers, and that productivity gain
reduces the number of workers that are needed.
Mr. Allen. Let me just conclude with this question.
As we think about different components of a stimulus
package, can you comment on whether there are some components
that might drive job creation more than others?
Mr. Bernanke. Well, as I have noted, I have noted the
spending propensities of lower- and moderate-income people, and
I think that is one consideration. But you also have to look at
all of the factors involved. For example, the business-oriented
cuts create capital formation, which has additional benefits.
So you need to look at a variety of factors.
And also you need to think about the fiscal implications.
For example, you might be inclined to say, well, the bigger the
package the better, which might be true up to a certain point
in terms of near-term stimulus, but it isn't obviously the case
if you are taking into account the need to offset that or at
least eliminate that deficit implication going into the future.
Mr. Allen. I guess I will just conclude by thanking you for
being one in a long line of economists who have sat there and
testified that tax cuts don't pay for themselves. We have such
a challenge in getting to balance, as you put it, and making
sure that whatever we do right now with a stimulus package
provides the maximum amount of stimulus in the short term, but
doesn't increase the long-term financial condition of the
United States, make it worse than it is today.
I yield back. Thank you.
Chairman Spratt. Mr. Bonner.
Mr. Bonner. Thank you, Mr. Chairman.
Mr. Chairman, welcome. I have sat here this morning
listening to you and I had the privilege of doing so with your
predecessor a few years ago. And I must tell you, it is an
amazing country we live in. I have a 9-year-old son and a 12-
year-old daughter, and I have a very difficult time most times
convincing them that what I have to say has merit and value and
that they need to listen to me. And yet as Chairman of the
Board of Governors of the Federal Reserve, the world is
watching, and certainly the people of this country and Wall
Street and others, and we are hanging on every word you say and
what color tie you wear and whether you feel good. And I think
that is a statement about where we are as a country; I guess
also a statement about the important role that you play in our
country and as the world leader--economic leader in the world.
There has been some conversation earlier about tax cuts,
and you did say that tax cuts do cost money. I think most
everyone here, Republicans and Democrats, concede that point.
But I guess from your perspective, do tax cuts cost the
American people money or do tax cuts cost the American
Government money? And to that end, in your view, which
historically--as we are talking about a short-term stimulus
package, which historically have been most influential in
making a difference in our economy, taxpayers or government
spending?
Mr. Bernanke. Well first, let me say my children don't
listen to me either. So tax cuts, I think whether they pay for
themselves is not the issue. The question is whether you have
well-designed taxes that promote efficiency, promote growth,
promote saving, promote productive economic activity. That is
very, very important. The challenge, and I hate to fall back on
this law of arithmetic point again, but you know, government
spending does have value, of course, and we all have programs
that we think are producing good things for society, and the
military, and national parks, and many other things that we
want to spend money on. And the challenge is finding the right
balance. How big a share of the Nation's GDP do we want to flow
through the government? If we really want low taxes, and that
certainly has benefits, we also have to make a judgment about
what--you know, be very tough about what government programs we
are willing to spend on. There is some who think that
government programs can be very productive, and point to many
different things. That is fine, that is the prerogative of a
Congressperson to make that judgment on behalf of their
constituents. But again on that side you then have to take the
higher taxes that go with it.
So I am just trying to say that you need to make--it is up
to you as representatives of the people to make a judgment
about how big a share of the economy should be devoted to
government spending. A lot does depend--it is not just a share
of the economy that is controlled by the government, a lot of
it depends on how well the money is used and how well the taxes
are collected. If you have an efficient tax system, that will
support growth. On the spending side, all else equal, you are
better off if you put money into things that promote growth,
like technology and education, and things of that sort. So
those are all, you know, tough decisions that you have to make.
Mr. Bonner. Could you also share, just shifting gears
briefly, at the beginning of this Congress the price, average
national price for a gallon of gas was $2.22. Today the average
national is $3.04 a gallon, an $.80 increase. Oil a year ago at
this time was $45 a barrel. It is today $89.60 in the United
States. World price is over that. It has been over a hundred
dollars a barrel.
What influence, in your view, if any, has the fact that we
have not, Republicans and Democrats alike, taken a real bold
step toward energy independence in this country in terms of its
impact on the economic situation we find ourselves in today?
Mr. Bernanke. Well, certainly oil and gas are still,
obviously, a huge part of our energy portfolio. And people are
still driving and using oil and gas despite these high prices.
I guess one of the advantages of high prices is that ultimately
they are going to induce people to conserve, and it is going to
make it profitable for firms to come up with alternative energy
sources. And I think the government should support that
activity. Government can help support basic research, for
example, that can help us find different ways to provide
energy. The government can provide regulatory clarity and
certainty so that, for example, if you want nuclear plants, can
they be constructed in a safe way, but that meets regulatory
scrutiny? And to some extent, you know, the government can try
to encourage specific approaches. But I think, as painful as
high oil prices are, and they certainly are painful and causing
a lot of problems, they do have one benefit, which is that they
do provide a strong incentive, both for suppliers and
demanders, to find alternative sources of energy. And I hope
that is going to be the case over the next 10, 15 years.
Mr. Bonner. Thank you, Mr. Chairman.
Chairman Spratt. Thank you, Mr. Bonner.
Mr. Doggett of Texas.
Mr. Doggett. Thank you, Mr. Chairman, and thank you for
your testimony. You know, some people spend so much time here
in Washington they lose sight of what low and moderate income
people means in this country. What do you mean by that term?
Mr. Bernanke. Well, the median income in the U.S., I
believe I have got this right, is about $48,000 for a family.
Mr. Doggett. So you are talking about people $48,000 and
below in----
Mr. Bernanke. Well, it is not a sharp cutoff. I think,
again, people of lower income will tend to spend more out of
these rebates. But as I said, even relatively high income
people do spend some out of a rebate. And so it is more like a
continuous line than a sharp----
Mr. Doggett. Sure. When you talk about the best multiplier
effect for a stimulus being for low and moderate income people,
you are really talking about, you know, $50, $55,000 and below,
aren't you, in terms of the maximum multiplier effect?
Mr. Bernanke. Again, weighting towards low or moderate
income people for multiplier purposes is beneficial. I think
you are going to have to think about the problem of how to
distribute the money in a timely way.
Mr. Doggett. Sure.
Mr. Bernanke. For example, if you--one way to do it would
be to use tax filers, because we obviously have that data
available and the IRS can send checks. But of course if you do
only tax filers, you would be excluding some people who don't
file taxes.
Mr. Doggett. Right.
Mr. Bernanke. So there is some question about how the best
way to get money out quickly is.
Mr. Doggett. And in terms of the fiscal stimulus that you
feel would be desirable, given the economic conditions we have
today to supplement what you are doing with monetary policy,
how big a fiscal stimulus is too big in terms of a total amount
of stimulus?
Mr. Bernanke. I don't think I can--you know, the numbers
that have been thrown around, between say 50 and 75 up to 150,
all those things are----
Mr. Doggett. Within a range?
Mr. Bernanke [continuing]. Within a range that from a
macroeconomic viewpoint is, you know, reasonable. Obviously,
you get more stimulus the more dollars you throw at it.
Mr. Doggett. But if you go overboard, and that is my
concern----
Mr. Bernanke. Right.
Mr. Doggett [continuing]. With all these lobby groups
lining up to get their program in----
Mr. Bernanke. I certainly hope that Congress can resist
having, you know, a huge list of different things that should
be kept separate, I mean may be valid, but should be kept
separate from----
Mr. Doggett. Just in terms of a range, up to 150, 50 to
150, in a broad range like that would not be unreasonable?
Mr. Bernanke. Those are all reasonable ranges. But again,
one of the issues you are going to have to think about is the
fiscal implication, and how you--if you are going to pay for
it, are you going to pay for part of it and----
Mr. Doggett. And that is really an important part of your
testimony, because the first hearing that this committee had
was back on December 5th. And we had three very diverse
economists, as I think you know, Dr. Feldstein, Fred Bergsten,
Peter Orszag, all say that it is possible to have a significant
stimulative effect from fiscal policy and still pay for it
within the requirements of our PAYGO rules. And you agree with
that?
Mr. Bernanke. I do.
Mr. Doggett. And as far as the way we got into the problems
that we have today, we would not have any need for fiscal
stimulus at all today had it not been for the collapse of the
home mortgage market, would we?
Mr. Bernanke. Well, the combination of the housing cycle
and subprime mortgages and the interaction between those two
has been a big part of it, yes.
Mr. Doggett. And you believe that in addition to any fiscal
stimulus steps we take we should be looking at the regulatory
issues that are associated with that whole subprime debacle
that got us into this problem?
Mr. Bernanke. I do, although I would point out again that
the Federal Reserve has already issued for comment an extensive
set of rules addressing subprime lending, which at perhaps some
other occasion I would be happy to discuss with you.
Mr. Doggett. And certainly it would--you conclude in your
written testimony, I think quite appropriately, by expressing
concern about the structural budget deficit. If we put in place
significant long-term, not temporary but long-term tax cuts,
you think that would be undesirable in terms of increasing--
unpaid long-term tax cuts, in increasing the structural budget
deficit?
Mr. Bernanke. Again, I think you need to look at the
overall budget and, you know, make some tough decisions about
the combination of taxes and spending which promote our
national goals the most effectively.
Mr. Doggett. But I gather from your testimony when you talk
about a fiscal program that increased the structural budget
deficit would only make confronting the challenges more
difficult, that whether it is unpaid for spending or unpaid for
long-term tax cuts, the effect is the same, it increases the
structural budget deficit, and you don't want either?
Mr. Bernanke. If you want low taxes you need to find ways
to keep spending low. And if you want high spending, you need
to find ways to raise the revenue.
Mr. Doggett. Exactly. Thank you.
Chairman Spratt. Mr. Tiberi.
Mr. Tiberi. Thank you, Mr. Chairman. Your testimony was
excellent today. And I would like to follow up on some of the
comments that you have made and some of the comments that have
been talked about today. I agree with everything you said with
respect to short-term stimulus. A year from now when you come
back and testify before us, after we get behind this issue, we
are looking at the next year, 2 years, what effect does tax
uncertainty going forward in the next 2 to 3 years have on
taxpayers? On savers? On investors? On entrepreneurs? When they
hear over and over on TV, on news shows that the tax cuts that
were passed earlier this decade are going to expire, and if
they are not repassed taxes will go up on a variety of
different things, what does that uncertainty do for those
taxpayers, investors, workers, and entrepreneurs?
Mr. Bernanke. I am sure that uncertainty causes some
problems. And I don't know how to quantify that exactly. And
there are many dimensions of that. I mean, another example
would be--I know you are referring to the President's tax cuts.
But yet another example is the Alternative Minimum Tax----
Mr. Tiberi. Right.
Mr. Bernanke [continuing]. Which has been patched 1 year at
a time, and there has been no sort of long-term resolution of
that. I think this does--I mean I think the fact that the Code
keeps changing and that there is uncertainty about that does
have some adverse effects. So to the extent that as part of,
you know, going forward you can find a more stable, you know,
long-term solution to our tax and spending priorities, that
would obviously be helpful.
Mr. Tiberi. If you look at the tax cuts that are set to
expire in a couple years, which would you look at as having, if
they do expire, and go up, pro-growth taxes, which could do the
economy most harm by going up if you look at people's behavior
in terms of pro-growth economics?
Mr. Bernanke. If you wouldn't mind, I would prefer not to
get into that. Again, I would be--again, I am concerned about
at this point, particularly in this discussion of fiscal
stimulus, about taking a strong position on one side or
another. But that is a very complicated issue. And there are a
lot of factors that I could talk about, but----
Mr. Tiberi. But it does have impact on people's behavior?
Mr. Bernanke. Certainly taxes obviously have impact on
people's behavior, and I would certainly agree as a general
matter that low taxes tend to stimulate efficient economic
behavior and stimulate growth. And the trade-off one faces is
between low taxes on the one hand and higher spending on the
other.
Mr. Tiberi. Thank you. Thank you, Mr. Chairman. I will ask
you that question a year from now.
Mr. Bernanke. Okay.
Mr. Tiberi. The other avenue I wanted to head down is with
respect to this housing issue that you have talked about. And
you made a comment earlier. As a former realtor, I found it
interesting that there was good subprime and bad subprime,
which I think has been missed in the national media. Would you
concur there are people in homes today, and in fact we have
home ownership levels at all time highs, which also gets failed
to be mentioned, that there are people in homes today who would
have never been in homes in terms of their economic status 20
and 30 years ago because of the change in the way that the
American marketplace has worked with respect to lending, and
that there are people in homes today that have subprime loans
given to them that are fine, and they are living in their
homes, and they are absolutely fine, and they wouldn't be if it
weren't for that loan product? And that the housing--the credit
crunch and the housing slump is more complicated than just
blaming it on bad, and there are bad, subprime loans?
Mr. Bernanke. Well, I have been to many communities where I
have seen, for example, cooperation between lending
institutions and local community groups that have been
extraordinarily effective in making subprime loans with low
rates of default and high rates of home ownership. So I know
from personal experience that it can be effective. If you look
at the aggregate data, you will see that there has been this
huge increase in delinquency rates among subprime mortgages
with adjustable rates which adjust to very high levels, but if
you look at subprime mortgages with fixed rates there has been
some increase but they remain on the whole, reasonably stable.
I don't think there is any reason why people of--you know, with
less complete credit histories cannot qualify for home
ownership or for a mortgage. And there is plenty of experience
to show that it can be done well. Obviously, it was not done
well in many cases in the last couple of years.
Mr. Tiberi. Thank you, Mr. Chairman. Thank you.
Chairman Spratt. Mr. Moore.
Mr. Moore of Kansas. Mr. Chairman, thank you for being here
and for your testimony. Our country has a $9.2 trillion
national debt, a debt which has increased $3 trillion over the
past 7 years. I am concerned that this unprecedented increase
in debt, along with the long-term fiscal challenges our country
faces will hurt our country's economic future and force my
eight grandchildren and other children their age and future
generations in our country to bear the burden of the debts that
we are incurring now. As our debt has grown, the United States
has relied more on foreign investors to purchase our debt. In
fact, foreign investors have doubled their holdings of U.S.
debt since 2001. Today they hold a substantial portion of our
public debt outstanding, which increases our economy's
vulnerability to potential political or economic instability
from abroad.
Mr. Chairman, if the Federal Government continues to run
consistently large deficits, and accumulates more debt, what
impact could this have on economic growth in our future and in
our country, and both in the short and long term? Would you
agree that ongoing deficits are a serious threat to the health
of our economy?
Mr. Bernanke. I do. And I think that the $9 trillion that
you cite in some sense understates the problem because it
doesn't include the unfunded liabilities of----
Mr. Moore of Kansas. Right. Social Security and Medicare?
Mr. Bernanke. Social Security and Medicare, which are
enormous, in fact dwarf the $9 trillion.
Mr. Moore of Kansas. Yes, sir.
Mr. Bernanke. The fundamental thing is that we are an aging
society, we are the boomers who are going to be retiring, and
our children are going to have to find a way to support us one
way or another, through private or public means. And we need to
address that problem by finding ways to, you know, maintain the
long-term fiscal stability. That is a very, very tough
challenge. But if we don't do that, we are going to come to a
crisis at some point, because you can't grow the debt of the
government indefinitely. Eventually, at some point it begins to
explode in some sense, and we can't continue to finance it.
So CBO, for example, has done a number of studies,
different scenarios showing how the debt would increase over
the next 20, 25 years. And it is not more than two decades away
before we will be reaching levels that are really
unsustainable. And we need to begin, as I said in another
testimony 10 years ago, if possible to try to address these
issues.
Mr. Moore of Kansas. Mr. Chairman, should we be concerned
about foreign nations such as China, which holds almost a
trillion dollars of our debt now, about their influence in our
country and how--what that might portend for our country in the
future? Do you have any concerns about that, or is that
something you feel comfortable commenting on?
Mr. Bernanke. Well, China holds our debt for their own
economic purposes. They use it for foreign exchange reserves--
--
Mr. Moore of Kansas. Right.
Mr. Bernanke [continuing]. And sovereign wealth funds and
the like. I don't think they have any particular incentive, for
example, to see----
Mr. Moore of Kansas. Sure.
Mr. Bernanke [continuing]. The value of that debt fall
sharply. So, you know, given that we are, as a country that we
are investing more than we are saving, we are not saving
enough----
Mr. Moore of Kansas. Yes, sir.
Mr. Bernanke [continuing]. We have to borrow from someone.
And it is good that we have creditors who will extend us the
credit. But obviously, as you point out, we need to move in the
direction of greater balance. And what you are referring to is
the trade balance----
Mr. Moore of Kansas. Right.
Mr. Bernanke [continuing]. Which is somewhat different from
the government deficit. I think the good news is that there has
been some tendency for improvement in the trade balance over
the last couple of years. And I think that is going to continue
for a while. The bad news is it is still quite large, and
therefore the foreign debt, not just to the Chinese but by many
other creditors as well, is continuing to accumulate.
Mr. Moore of Kansas. Thank you, sir.
Chairman Spratt. Mr. McHenry.
Mr. McHenry. Thank you, Mr. Chairman, and thank you,
Chairman Bernanke, for being here. I think you should be
commended by Congress and the American people for your actions
in August of this past year that significantly strengthened our
ability to get through these challenging times in the
marketplace, and so thank you for your leadership there.
There are some things you touched on in your testimony, you
have touched on them in speeches you have made around the
country, that the crisis we are facing, the mortgage crisis as
some of the media have called it, and I want to touch on this
just for a few minutes, I want to get your feedback on it.
Are there things that Congress can do actively, do you have
any suggestions in broad terms, you know, I am not asking you
specific policy areas, but in broad terms are there things that
Congress can do that can be helpful and constructive? And I am
not asking for a yes-no question, but are there thoughts that
you have that you would like to offer?
Mr. Bernanke. Well, in terms of loan modifications and
workouts, I guess there are a few things. We at the Federal
Reserve are working with community groups and counselors in
trying to help people work with their lenders to get their
loans modified. And to the extent the Federal Government wants
to support those kinds of activities, that is one direction.
You have the initiatives from the Treasury, the HOPE NOW
initiative, which is trying to find ways to create a voluntary
large-scale renegotiations and loan modifications to try to
reduce some of the financial stress coming out of this
situation.
Beyond those kinds of measures, one possibility that I have
discussed in the past is to continue to expand and modernize
the Federal Housing Administration, the FHA. Its market share
has dropped to a very low level. If it had a more user-friendly
front end, if it had a diverse set of products that some of
them--like shared appreciation mortgages, for example, that
could be useful to low- to moderate-income homeowners, then it
might be possible for more people to refinance their mortgages
or to obtain new mortgages through that agency. So that is one
area where I hope Congress will take a look.
Mr. McHenry. Likewise, are there things that could have a
negative effect on the liquidity in the mortgage marketplace
based on congressional action? Are there negative actions that
Congress could take?
Mr. Bernanke. Well, as I mentioned, we, the Fed, have done
a set of regulations which are out for comment. And what we
have tried to do there is walk a fine line, strike a balance
between setting up rules that will protect consumers, but will
not be so punitive or onerous that they will simply shut the
market down. And I think as Congress considers measures it
might take, assuming that you agree with me that subprime
lending if done properly is a positive thing, I hope that you
will think about, you know, whether the measures that are being
taken are consistent with the market actually flourishing and
continuing to operate in the future when we are past this
particular crisis.
Mr. McHenry. For instance, if we changed the legal
liabilities that CDOs, mortgage-backed securities have, for
instance, you know, a number of different changes have been
contemplated and discussed, could that have a negative effect
on liquidity in the mortgage marketplace?
Mr. Bernanke. You are talking about so-called assignee
liability, which would give investors responsibility for what
happens at the front end of the transaction. As I have
discussed in earlier testimonies, if assignee liability is used
in order to avoid this chilling effect that you are describing,
there should be very tightly delineated provisions, safe
harbors and the like, in those occasions where there have not
been sharply drawn lines. For example, the State of Georgia had
an experience. Then you may find that lenders are simply
unwilling to participate in the market. And so----
Mr. McHenry. Likewise, if judges have been given the power
to change loan terms, would that have potentially a negative
effect?
Mr. Bernanke. You are addressing now the possibility of
changes in the bankruptcy laws. And that is a very, very
complex question. The Federal Reserve did not take a position
on the earlier round of bankruptcy legislation, and I think I
am going to stay out of that this time as well. But I do
recognize that there are issues on both sides of that,
including the possible effect on the cost of credit in that
market.
Mr. McHenry. So rising costs of credit in a tough economic
time is sort of a fact of it. It would increase the cost of
getting credit?
Chairman Spratt. Mr. McHenry, we have got to move on.
Mr. McHenry. Well----
Chairman Spratt. We will let him answer that question, and
then we will move ahead.
Mr. Bernanke. Possibly it would, but again I am not taking
a position one way or another on that particular proposal since
there are considerations in terms of what benefits it might
have as well.
Chairman Spratt. Mr. Etheridge. Mr. Etheridge, could you
hold your questions to about 4 minutes? We will shave a minute
or two.
Mr. Etheridge. I will try to do that. Thank you, Mr.
Chairman. And thank you for being here. And let me join the
others in thanking you for your openness and being available.
It is helpful. Let me ask a couple of questions very quickly.
And you have touched on this, but if you have an opportunity to
expand on it I would appreciate it, because I realize we got
here through the subprime. But I would be interested in your
comments of how much the economic downturn may have been
exacerbated by the continual high prices of gasoline. Because
that affects the confidence level of the consumer. You only buy
a house, hopefully, in a lifetime, but you buy gas several
times a week. And when you see it at $3, and especially for the
people who are working every day, and I go by and purchase my
gasoline as others do it in the service station, and I see
people who buy $3, $5. And at three bucks, that is just over a
gallon. And people buy just enough to get to work. And then
they buy enough to get home. I would be interested in how that
is impacting the economy. Because if you had a drop in December
of the consumer purchasing, there has got to be a direct
correlation--they are going to put money in that vehicle to get
to work--and how that has impacted on the working family.
Mr. Bernanke. Congressman, as I mentioned in my testimony,
that is an important issue. The increases this year have been
so great--or 2007 have been so great that conceivably it has
had as much as half a percentage point of an effect on growth.
And that really is a drag on the consumer going forward. So
along--I should have mentioned that--along with housing,
subprime issues, financial issues, that is another factor that
is contributing to the slowing in the economy.
Mr. Etheridge. And that being said, you know, the
stubbornness of it staying there is, you know, is a confidence
issue. And you keep seeing it on TV. And let me come back to
the housing piece. You know, we talk about the subprime piece,
but the truth is, as you spoke a few minutes ago, it has had an
impact. I remember when my wife and I, we bought our first
home. That was a big deal. It was a big deal for a lot of
folks. And it still is today, as part of the American dream.
That being said, with the drop in savings as we are having
today--I was able to take benefit of the VA guarantee. And I am
afraid today we aren't using those, and the FHA, as you
indicated earlier. I think we need not forget the tremendous
challenge we face, because the housing market is a tremendous
mover in this economy. And you may not want to comment on this,
but it seems to me we could take a hard look, we ought to be
looking at the long term as well as the short term. And I agree
with you, the three T's, timely, targeted, et cetera. But over
the long haul, we need to look at our infrastructure in this
country, not only roads and bridges, but also schools and other
things that we could help facilitate that would help in
downturns like this. I would be interested in your comments in
this area for the long-term look as we look at our overall tax
structure, looking at these pieces for public investment across
America.
Mr. Bernanke. Well, Congressman, you are putting out the
case for the other side of what we have been talking about. I
mean it is important to keep taxes low----
Mr. Etheridge. No, I am not talking doing it now. I am
talking about we ought to be looking----
Mr. Bernanke. Talking about the long run. In the long run,
we have to make that hard decision about how big a share of the
economy we want to pass through the government. And there are
valuable things the government can do. And that includes public
infrastructure, for example. I agree with that. So on the other
hand, you want to make sure that the projects you pick are
highly productive ones, and will be useful and will be
valuable. So that is the balancing act that only Congress can
do, which is to balance the size of the tax burden against the
size of those public spending elements.
Mr. Etheridge. Thank you, sir. I yield back.
Chairman Spratt. Mr. Scott. And I would say the same thing
to you. If you could sort of shave your----
Mr. Scott. Thank you, Mr. Chairman. And thank you, Mr.
Chairman. You know, it seems we have an agreement, we have been
using the terms ``timely, targeted, and temporary.'' Your
remarks said it ought to be implemented quickly, be efficient,
and be temporary. So I think we have an agreement as to what
the framework ought to be. We have heard the fact that a $150
billion stimulus package would be minuscule in a $15 trillion
economy, but I think you pointed out that if the growth rate is
2 or 3 percent, that $150 billion, just one little percent
would change the growth rate 30 to 50 percent, which would be a
significant impact on the economy. So that we ought not
disparage--although it is just 1 percent, we ought not
disparage the impact it could have. And we have heard comments
about what--how quickly people would spend money if it were
injected through the Food Stamp Program. They would spend that
money almost immediately. Unemployment compensation would be
spent immediately. Summer jobs to low income teenagers, I
assume you would have the same comment about that, that would
go right into the economy.
We have heard tax cuts as if all tax cuts were the same.
You mentioned accelerated depreciation. The thing I like about
accelerated depreciation, that over a 5- or a 10-year period,
the corporation would eventually deduct the same amount of
money. The only cost to the government is the time value of
money. So that that is a very inexpensive way, particularly if
you target it just to increases in capital expenditures over
say a 5-year average so you are getting actual new spending and
not just a--actually, you are rewarding a stimulus.
Could you say a word about capital expenditures, roads, new
buildings, housing, or the gentleman from New Jersey mentioned
investments in things like solar panels? I know the solar panel
industry went out of business when the tax cuts expired. If we
renewed the solar panel tax credit, not only would you have an
incentive to get solar panels, but that industry, with all the
jobs attendant to it, would come back into existence. Could you
say a word about what effect capital expenditures might have?
Mr. Bernanke. Well, on infrastructure generally or on solar
energy-related spending, in terms of stimulus, as long as it is
productive spending, that is positive. But the issue I would
just want you to keep in mind is the time frame. And the
question is, you know, whether the program you have in mind
would be implemented, the funds disbursed, and result in actual
spending and activity within the sort of 1-year time frame. If
so, then it would meet those criteria that you mentioned.
Mr. Scott. Well, the thing I like about accelerated
depreciation is when you pass the bill the spending gets done.
The government doesn't actually spend the money until next
year, when people take their deductions. So that is about as
quick as you can get some money into the economy. We also heard
you say tax cuts ought to be aimed at low and moderate income.
And hopefully we will follow that admonition, too.
Mr. Chairman, out of respect to my colleagues, I will yield
back.
Chairman Spratt. Thank you very much. Mr. Chairman, we have
two more questioners, two more people. If you could indulge us,
if we could impose upon you for about 5 minutes.
Mr. Bernanke. Certainly.
Chairman Spratt. We will limit their time. And we would
very much appreciate it. Thank you.
Ms. Schwartz.
Ms. Schwartz. Thank you. And thank you, Mr. Chairman. And
Mr. Chairman, I appreciate your giving us an extra few minutes.
You have been really very clear today, and I really appreciate
that very much, about how important it is to make sure that
whatever we do, and there is a diversity of what we do, variety
as you pointed out, that we do it quickly, and that we target
it to, particularly on the individual side or the family side,
to people who will put that money in the economy quickly. So I
appreciate your saying that and making it really, really clear.
And I have just one quick question about that, and I really
wanted to focus on the business side of it if I could, because
we haven't talked about that very much. We just started to with
Mr. Scott. But just one quick question on the individuals or
the family side.
Does it matter what they spend it on? I mean if they are
spending it on credit card debt, are they spending it to pay
their heating costs, if they are spending it to pay for health
insurance premiums so they don't lose their health coverage
versus other kinds of commodities rather than buying food or a
new TV? I mean does it matter in terms of the economy?
Mr. Bernanke. Well, you would hope they would spend it on
things that are domestically produced so the spending power
doesn't go elsewhere.
I guess I would add the point that although usually paying
down your credit card debt is a negative in this kind of story
because it doesn't involve immediate spending, I think given
the financial pressures that we are seeing, broadly speaking,
that reduced--people paying down debts, you know, has some
benefits of its own.
Ms. Schwartz. Okay. Well, I appreciate that, because I
think, as you know, at other times we are trying to encourage
people to think about those immediate expenses, and they are
really stretched obviously, and just being able to meet those
needs.
My question about some of the ideas that have been proposed
on helping businesses be able to make the kind of investments,
how do we make sure in that case as well that we--should we be
targeting smaller businesses that might be more on the--more
marginal in the sense of where they make capital investments?
Would that be a smart thing to do? I assume it is important for
us to make sure that they are doing--as well that they are
going to go out there and spend the money rather than be money
they spent last year, benefiting that--it wouldn't help at all,
I assume. It has to be moving ahead and making sure that they
are actually making those kinds of investments now.
Could you comment on that, and how we might be able to
target those kinds--any kind of help we give to businesses to
be able to spend those dollars to make those kind of
investments? And is there any way for us to do it so that it
might actually encourage them to create new jobs?
Mr. Bernanke. I think Congress has already in the past
structured these tax credits in ways that favor small
businesses. And that reflects a value judgment on the part of
Congress about where they want to provide the support. There
may be some, but I am honestly not aware of any evidence on,
you know, which type of business is most likely to invest given
a tax credit. So I couldn't give you general advice about how
to--you know, which type of business to favor. It is true, for
example, though, that equipment is more likely--you know, there
is a shorter lead time, can more quickly be purchased than a
new building, for example. And so frequently these types of
programs have an emphasis on equipment and software as opposed
to structures. One would hope that this would involve new jobs.
I think it would both directly and indirectly, indirectly in
that the people who produce the capital then have more demand,
and they would hire people, and that process would continue.
And those companies that hire more capital and have more
capacity may, although not necessarily, hire more workers to
work with that capital.
Ms. Schwartz. And just if you have a real quick comment,
one of the other thoughts is that if we could speed up some of
the public infrastructure projects. We did this once in
Pennsylvania a number of years ago. We called Jump Start. It
was on transportation projects actually, although it could be
on school construction, it could be any number of things.
Projects that are almost already in the works, so it is a short
lead time to be able to try and speed that up so that that
would put people to work. Is there any comment about that kind
of public infrastructure?
Mr. Bernanke. Well, the question is whether or not that can
be done in a timely way. It would have--obviously, building
things takes long lead times because you have to plan and
design and get permits, et cetera. So it would have to be--and
I am not sure how common this would be--something that was
essentially ready to go but had been delayed and could be
brought up more into the present. I don't know how often or
frequent that kind of situation----
Ms. Schwartz. But if it were practical we might be able to
do that?
Mr. Bernanke. If it were possible.
Ms. Schwartz. Thank you very much.
Chairman Spratt. We have to move ahead. The last
questioner, member of our committee, is Ms. Moore of Wisconsin.
Ms. Moore, you weren't here, but the Chairman has to leave
by 12:30, and we are almost imposing on his time already. If
you could limit your time to 4 minutes, I thank you very much.
Ms. Moore of Wisconsin. Thank you very much. Thank you for
your generosity for being here today. We find ourselves in a
conundrum here, because we--I think everybody appreciates the
notion that we need to target our assistance to get down to
low-income families and to help them. I guess my question is,
you know, what vehicle? The vehicles that have been proposed
don't really seem to be able to accomplish or achieve that. We
have a 5.2 percent national unemployment rate. But when you
disaggregate those numbers in my district, those people, for
example, who are not receiving unemployment compensation
insurance, but who have just given up looking for jobs for the
longest period of time, I find that 17 percent, three times,
over three times the national average, 17 percent of white
males in my district are unemployed, 23 percent of Hispanics in
my district are unemployed, and 47 percent of African American
men in my district are unemployed. Twenty-eight thousand
African Americans in my district--we have the highest
incarceration rate in the Nation--are under some sort of
Department of Corrections supervision, and we really need to
help them. They may not be heads of households because they
don't have jobs, so food stamps are not going to help them. The
unemployment compensation insurance will help some of them, but
some of them have been unemployed for so long that even if we
look back 6 months that may not help them. The low income
heating program, that is a great vehicle. And if we give it to
State and local governments, the only suggestions that have
been made is that we help them underwrite their Medicaid
program.
Can you tell me how we get this money--and I haven't even
talked about the women who are on welfare and the time limits
and the clock may hit them. Can you suggest for me some sort of
vehicle to get the truly poor and the truly needy folk that I
have described some of this assistance?
Mr. Bernanke. Congresswoman, you have put your finger on an
important problem. You have listed most of the vehicles that
people could think about. If we want to get the money out
quickly, you know, the easiest way is to go through the tax
system or one of the existing programs. I don't have a good
suggestion for you.
Ms. Moore of Wisconsin. And these are not tax filers. Don't
you agree it would be really a bang for the buck if we could
figure out how to get assistance to these people? I mean there
are--it is not like we don't have lists of these people who
have in the past received general assistance through the
counties. It is not like we don't know who these 28,000, for
example in my community, men are who are on probation, living
with their mommas, living with their sisters, living with a
live-in girlfriend. It is not like--and living off them. So it
is not like we don't know who they are. But I just want to hear
that it would be worth the effort to try to figure out a
vehicle to help these folks in terms of the impact of an
economic stimulus.
Mr. Bernanke. I do want to draw a distinction, which is
that we need to address these problems as part of long run
policy. I mean obviously poverty is a problem. And there is a
whole, you know, range of things that could be done and should
be done to try to address it. We are not going to fix that
with, you know, with a check, with one check. So we clearly
want to make that part of our long-term policy issue, policy
priorities.
With respect to current fiscal stimulus, as I said, the
evidence does suggest, and I have said a number of times, that
low and moderate income people are more likely to spend the
money in the near term. So from the fiscal stimulus point of
view, there is some benefit to finding ways to providing money
to people in that category. Timeliness, though, is an issue,
and we need to find ways to do it, you know, that will not take
us, you know, well into 2009.
Ms. Moore of Wisconsin. Thank you. And thank you, Mr.
Chairman.
Chairman Spratt. Mr. Chairman, thank you very much indeed,
not just for your clear and helpful answers, but for your
patience and forbearance. You have added to our knowledge of
the subject matter. We said we would come here looking for your
advice and guidance about how to do this, if we do it, and you
have given it to us forthrightly. And we very much appreciate
that. Thank you.
Mr. Bernanke. Thank you, Mr. Chairman.
Chairman Spratt. One final housekeeping matter before
wrapping up the hearing. I ask unanimous consent that members
who did not have the opportunity to ask questions of the
witness be given 7 days to submit questions for the record.
[Question for the record submitted by Ms. DeLauro follows:]
Question Submitted to Chairman Bernanke From Congresswoman DeLauro
Following the Hearing
Question: Henry Kaufman, who spent 26 years with Solomon Brothers
where he served as the managing director and the last 20 years where he
has been president of Henry Kaufman & Company, warned in the Wall
Street Journal back in October that the subprime is only part of a far
larger problem in the way our credit markets function. Kaufman argues
that the Federal Reserve and U.S. Treasury Department have failed to
keep pace with fundamental changes in the market. He states, ``Today's
regulatory system is largely a historical artifact left over from the
era when financial markets and institutions were much more fragmented
and insulated from one another.'' Can you comment on Mr. Kauffman's
observation and whether you believe The Fed, under your predecessor,
was negligent when it failed to regulate private sector players, such
as Goldman Sachs, who were making these subprime loans and packaging
them into risky securities that ultimately failed? In light of fact
that the Fed's inaction helped create the crisis, what do you plan to
do as chair of the Fed to fix the problem and prevent it from happening
in the future?
Answer: I agree with Mr. Kaufman that the manner in which credit is
provided to businesses and to households has changed substantially in
recent decades. Whereas commercial banks used to be the primary source
for many businesses or households, a considerable volume of credit is
now intermediated through the financial markets. As with banks,
investors in private financial securities have strong incentives to
understand the credit risks to which they are exposed. Nonetheless, it
has become evident that, in the past couple of years, some market
participants failed to perform adequate due diligence, particularly in
regard to investments in a variety of structured finance products. Too
many investors seemed to rely heavily on the risk assessments of others
and apparently were complacent about their exposures.
A variety of private and public efforts are underway to address the
revealed deficiencies. Ratings agencies are reevaluating their methods
for rating structured finance products and considering significant
changes to how credit risk on those products will be communicated to
investors. Regulatory oversight of the mortgage industry has become
more challenging as the breadth and depth of the market has grown over
the years, and as the role of nonbank lenders, particularly in the
subprime market, has expanded. To address this challenge, the Federal
Reserve, together with other federal and state agencies, launched a
pilot program last summer to conduct reviews of consumer protection
compliance and impose corrective or enforcement actions, as warranted,
at selected non-depository lenders with significant subprime mortgage
operations. In December 2007, the Federal Reserve used its authority
under the Home Ownership and Equity Protection Act to propose new rules
that address unfair or deceptive mortgage lending practices.
The proposal addresses abuses related to prepayment penalties,
failure to escrow for taxes and insurance, stated-income and low-
documentation lending, and failure to give adequate consideration of a
borrower's ability to repay. Our proposal is comprehensive, covering
most mortgage loans with certain protections and the entire subprime
market with other, more specific regulations. In addition, we drafted
the proposal to ensure that protections remain strong over time as loan
products and lending practices continue to evolve.
The Federal Reserve works closely with other government agencies to
promote the efficient functioning of capital markets. As you know, the
Federal Reserve System has supervisory and regulatory authority over
bank holding companies, state-chartered banks that are members of the
System, foreign branches of member banks, and U.S. branches of foreign
banks. We do not have supervisory or regulatory authority over broker-
dealers or their holding companies; that authority rests with the
Securities and Exchange Commission.
There being no further business, the committee is
adjourned.
[Whereupon, at 12:39 p.m., the committee was adjourned.]