[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


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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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.]

                                  
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