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



                        MONETARY POLICY AND THE
                     STATE OF THE ECONOMY, PART II

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 27, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-93





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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel




























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 27, 2008............................................     1
Appendix:
    February 27, 2008............................................    51

                               WITNESSES
                      Wednesday, February 27, 2008

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     6

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron...............................................    52
    Bernanke, Hon. Ben S.........................................    53

              Additional Material Submitted for the Record

Bernanke, Hon. Ben S.:
    Monetary Policy Report to the Congress, dated February 27, 
      2008.......................................................    63
Castle, Hon. Michael:
    Letter from former Federal Reserve Chairman Alan Greenspan, 
      dated July 22, 2003........................................   113

























 
                        MONETARY POLICY AND THE
                     STATE OF THE ECONOMY, PART II

                              ----------                              


                      Wednesday, February 27, 2008

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Gutierrez, Watt, Sherman, Meeks, Moore of Kansas, 
Capuano, Hinojosa, Clay, McCarthy of New York, Baca, Lynch, 
Miller of North Carolina, Scott, Green, Cleaver, Bean, Davis of 
Tennessee, Sires, Ellison, Klein, Mahoney, Wilson, Donnelly; 
Bachus, Pryce, Castle, Royce, Paul, Jones, Biggert, Shays, 
Miller of California, Capito, Feeney, Hensarling, Garrett, 
Pearce, Neugebauer, Price, McHenry, Campbell, Putnam, Bachmann, 
Marchant, and McCarthy of California.
    The Chairman. The hearing will come to order. First, I 
would like to note that last summer we saw the passing of the 
co-author of the Humphrey-Hawkins bill, Congressman Gus 
Hawkins. He was a Member of the House who had a very 
distinguished career. He was the predecessor of our colleague 
from California, Ms. Waters. But the significance of his 
achievement in structuring that bill, and in particular, giving 
equal weight to two very important mandates, the need to combat 
inflation and the need to maintain adequate employment--I think 
recent events have shown that to be quite wise.
    I contrast what I think has been the good performance of 
our Federal Reserve in meeting our needs with a performance 
that I think has caused more difficultly in Europe in the 
European Central Bank where they have only the single mandate. 
So I want to pay again tribute to the wisdom of Gus Hawkins and 
to the fidelity with which the Federal Reserve under this 
Chairman has carried out what can be a complicated and 
sometimes--it's a relationship with some tension.
    We meet today under the usual circumstances. For many years 
past, I have focused on the problems of income inequality in 
our society and the question about how we promoted growth 
without it adding to inequality. Both the current Chairman and 
his predecessor acknowledged that those were issues and 
expressed views about how to deal with them. We have from time 
to time convened when we were in the midst of a downturn, 
whether or not it is a recession is a somewhat academic 
discussion. That we are in a significant downturn with a very 
chancey near-term future is indisputable.
    What is interesting is the extent to which this is a very 
different kind of downturn. We don't have the classic cycle 
where there were excesses, too much inventory, etc. We are in a 
downturn, maybe a recession, maybe about to become one, in 
which the single biggest cause was excessive deregulation. The 
failure to understand that a vibrant, free enterprise system 
needs as a partner a public sector that understands how the 
market works, supports it, helps create the conditions in which 
the free market can flourish, but also provides a set of rules 
that diminish abuses.
    That this current downturn was caused by abuses in the loan 
market for residences is fairly clear. In the report, the 
Monetary Report that the Chairman presents, on page 3, part 2, 
``The economic landscape after the first half of 2007 was 
subsequently reshaped by the emergence of substantial strains 
in financial markets in the United States and abroad, the 
intensifying downturn in the housing market and higher prices 
for crude oil. Rising delinquencies on subprime mortgages led 
to large losses on related structured credit products.'' 
Skipping over, ``Consequently, in the fourth quarter, economic 
activity decelerated significantly, and the economy seemed to 
have entered 2008 with little forward momentum.''
    This is relevant for a number of factors. Yesterday in the 
hearing we had preparatory to this one, the very distinguished 
economist, Alice Rivlin, a former Vice Chair of the Board of 
Governors, said this year in your hearing, monetary policy will 
not be as important. It will be somewhat down on the list. And 
I think that is accurate. In the classical recession we have 
had, the role of monetary policy is fairly clear. Here we have 
this problem that the normal tools we use, including a stimulus 
package, which in its detail pleased no one, and was therefore 
able to pass, and I think will on balance be constructive in 
helping deal with the shortfall, and we have seen a reduction 
in interest rates. That is, monetary and fiscal policy have 
been as stimulative as you can expect in this time. And I 
support both of those directions, but they are not enough.
    We are faced with the need to deal with a very serious 
structural problem, the continuing flood of foreclosures. And 
this committee will be considering measures to deal with that. 
Let me note that in the absence of the subcommittee chairman, 
and given the significance here, I'm going to take the 8 
minutes that we have. And I apologize to my colleagues, but not 
so much.
    We have a structural set of issues to deal with. And in 
this case, relying on fiscal and monetary policy alone won't be 
enough. Because unless we can deal with the specific structural 
problem caused by the deregulation more than anything else, and 
caused by excesses in the private sector, we will not be able 
to effectively deal with this situation. And in fact, if we 
were not to deal with this in a structural manner by trying to 
deal with foreclosures and with property on which there have 
been foreclosures, we would put too much of a strain on fiscal 
and monetary policy.
    It would not be appropriate to rely only on fiscal and 
monetary policy. So we will be trying in a variety of ways, and 
we have been talking to regulators, and I appreciate the 
cooperation we have gotten from staff at the Federal Reserve 
and the other Federal regulatory agencies. We may in the end 
have some differences, but there has been a cooperative effort 
to try and figure out how to deal with that.
    What is clear is that the ideology of deregulation is a 
large part of the cause of the problems we are in today. 
Indeed, in the mortgage market, it is clear. If you look at 
mortgages originated by the regulated entities, the deposit-
taking institutions, subject to bank regulation, they have 
performed much better than those that came with very little 
regulation.
    And it wasn't simply that. What basically happened was that 
securitization, which has been a great blessing and a great 
multiplier of our ability to do things, replaced the lender-
borrower discipline. We were told by the private sector that 
they had ways of replacing that, so that we would have a good 
deal of responsibility. We had risk management and quantitative 
models, and a whole range of other things. It turns out, when 
enough bad loans are put into the system because of the absence 
of the lender-borrower discipline, i.e., I'm not lending you 
the money unless I know you're going to pay me back, that some 
of these techniques did not contain the damage; they spread it.
    And the consequence has been a very serious, worldwide 
problem wherein the most significant economic troubles since at 
least 1998, and in America it is probably going to have more of 
a negative impact than then, and the single biggest cause was a 
failure for regulation to keep up with innovation. And of 
course it has had international consequences as well. We have a 
new export in America that had a big impact on the rest of the 
world--bad mortgages, which we exported and which caused 
economic problems elsewhere.
    So as we deal with this situation, it is important for us 
to continue to monitor monetary policy. We have already acted 
in the fiscal area. I believe that the Chairman and the Federal 
Reserve has acted appropriately with regard to monetary policy, 
but they could not be enough, given the cause of this. And what 
we need first of all is to deal with the problems that we have 
seen because of the failure to regulate, and we have to do 
something about the cascade of foreclosures that we still face, 
or we do not easily pull out of this problem. And we have to, 
once we have dealt with that, this committee will begin to work 
on that, think in cooperation with the regulators and the 
financial community and others what we do going forward so that 
we do not lose the virtues of securitization but we are able to 
diminish some of its abuses.
    The gentleman from Alabama.
    Mr. Bachus. I thank the chairman. Chairman Frank, I 
appreciate you holding this hearing on monetary policy and the 
state of the economy. And I thank you, Chairman Bernanke, for 
being here today and for your service to the country.
    You testified last July concerning the state of the economy 
and monetary policy. At that time we had a problem in one 
segment of our economy, and that was subprime lending. And as 
we all know, since that time, because of what we sometimes 
refer as interconnectedness of the markets, it has mushroomed 
into a full-blown credit crisis. We have unemployment inching 
up, although it is still at historic lows. It is still very 
good. We have factory orders and durable goods showing 
weaknesses, some weaknesses in retail sales, and obviously we 
are concerned about our credit card and auto lending markets 
because of the credit crunch.
    While economic activity and growth have clearly slowed, and 
while any threats to our economy should not be minimized, I 
don't believe anything has transpired over the past 7 months 
that distracts from the competitive strength of U.S. businesses 
and their innovativeness, and the productivity of American 
workers still remains very high. I think our workers are 
unrivaled in the world as far as their abilities and their 
productivity.
    Moreover, productive steps by the Federal Reserve and other 
regulators, combined with responses from the private sector and 
the natural operations of the business cycle, I believe will 
help ensure that the current economic downturn is limited in 
both duration and severity. I believe your aggressive cuts in 
the Fed funds rates and the recently enacted stimulus package 
will help. Although I believe it may not have the effect that 
many claim, I do believe that it does serve as a tax cut for 
millions of hardworking Americans, and it, too, will help.
    And all of those should begin to have a positive effect on 
our economy, I believe, by this summer--and I would be 
interested in your views--laying the groundwork for a much 
stronger second half of 2008 and sustainable growth in 2009. At 
that point, I believe the Fed's primary challenge, and we saw 
it, I think last week and this week, with the CPI and the PPI 
numbers, your challenge will shift from avoiding a significant 
economic downturn to containing inflationary pressures in our 
economy.
    Particularly when I go home, people talk to me about the 
hardship of high gas prices. That's something that I'm not sure 
any of us have much control over, short term. Long term, there 
are obviously things, including nuclear power that I have said 
many times we need to take full advantage of.
    One lesson we have learned from the subprime contagion is 
just how highly interconnected our financial markets are. The 
chairman in his opening statement mentioned a lack of 
regulation. We have a system of functional regulation where 
different regulators function in different parts of the market. 
I'm not sure that part of our problem is not that this 
sometimes almost causes overregulation, but there may be gaps 
in the regulation. And I wonder if that is in fact the case, 
there may be areas where the regulation needs to be 
strengthened or regulation needs to be coordinated better 
between different regulators, both State and Federal.
    As painful as the process and the challenges we have, I 
think it is pretty evident that we have faced our problems and 
that we are solving them. I think what we have done is far 
preferable to the kind of decay and denial that mark the 
Japanese response to their financial turmoil in the 1990's. And 
it's the reason I continue to have great confidence in the 
resilience of the American economy.
    Chairman Bernanke, in closing, let me say there is perhaps 
no other public figure in America who has been subjected to as 
much Monday morning quarterbacking as you have over the last 7 
months. But I believe on balance, any objective evaluation of 
your record would conclude that you have dealt with an 
exceedingly difficult set of economic circumstances with a 
steady hand and sound judgment.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    The Chairman. And next, the ranking member of the 
subcommittee, the gentleman from Texas, Mr. Paul, for 3 
minutes.
    Dr. Paul. Thank you, Mr. Chairman. I ask unanimous consent 
to submit a written statement.
    The Chairman. Without objection, the gentleman and any 
other members of the committee who wish to submit written 
statements will be allowed to do so. There will be no need for 
further requests. We will have general leave for everybody.
    Dr. Paul. Thank you.
    The Chairman. And Chairman Bernanke's full remarks will be 
submitted as well.
    Dr. Paul. Welcome to the hearing this morning, Chairman 
Bernanke. Obviously, the world, and especially we in this 
country, have come to realize that we are facing a financial 
crisis, and I think very clearly it is worldwide. That of 
course is the first step in looking toward solutions, but I 
would like to remind the committee and others that there were 
many who anticipated this not a year or two ago when the crisis 
became apparent, but actually 10-plus years ago when this was 
building.
    The problem obviously is in--the major problem is obviously 
in the subprime market, but, you know, in the last--in one 
particular decade, there was actually an increase, in $8 
trillion worth of value in our homes, and people interpreted 
this as real value, and $3 trillion was taken out and spent. So 
we do live in an age which is pushed by excessive credit, and I 
think that is where our real culprit is.
    But traditionally, when an economy gets into trouble, and 
they have inflation or an inflationary recession, the 
interpretation is always that there is not enough money. We 
can't afford this, we can't afford that. And the politics and 
the emotions are designed to continue to do the same thing that 
was wrong, that caused our problem in the first place; that is, 
it looks like we don't have enough money. So, what does the 
Congress do? They appropriate $170 billion and they push it out 
in the economy and think that's going to solve the problem. We 
don't have the $170 billion, but that doesn't matter. We can 
borrow it or we can print it, if need be.
    But then again, the financial sector puts pressure on the 
Fed to say, well, there's not enough credit. What we need to do 
is expand credit. But what have we been doing for the past 2 
years? You know, it used to be that we had a measurement of the 
total money supply, which I found rather fascinating, and still 
a lot of people believe it's a worthwhile figure to look at, 
and that is M3. Two years ago, the M3 number was $10.3 
trillion. Today it is $14.6 trillion. In just 2 years, there 
has been an increase in the total money supply of $4.3 
trillion.
    Well, obviously, if you pump that much money into the 
economy and we're not producing, but the money we spend comes 
out of borrowed money against houses, where the housing prices 
are going down, and that is interpreted as increasing our GDP, 
I mean, it just doesn't make any sense to come back and put 
more pressure on the Congress and on the Fed to say what we 
need is more inflation. Inflation is the problem. That has 
caused the distortion. That has caused the malinvestment, and 
that is why the market is demanding the correction in the 
malinvestment and the excess of debt which is not market-
driven.
    The Chairman. The Chair will announce the procedure for 
questions. There is obviously a great deal of interest in 
questioning the Chairman, or making speeches to him. And what 
we will do since we have a larger committee than any of us 
wanted, except perhaps for the most junior members, we will 
begin--
    Mr. Bachus. --with an opening statement, his opening 
statement?
    The Chairman. Yes, but I'm going to just announce the 
procedures before we get to that. We are going to have the 
members' questions after the statement in order of seniority on 
our side. We will pick up at the next hearing later in the year 
where we left off. The minority is apparently also going to be 
doing that, so we're going to begin with some members who 
weren't able on their side to talk later, and then we will go 
in their order.
    The Chairman has given us 3 hours, and we appreciate it. I 
am going to have to hold members pretty closely to the 5-minute 
rule. Any last thought when the 5-minute bell hits can be 
completed, but fairly quickly, because we do have all this 
interest.
    And with that, Mr. Chairman, please.
    Mr. Bernanke. Thank you, Chairman Frank, Ranking Member 
Bachus, and other members of the committee. I am pleased to 
present the Federal Reserve's monetary policy to Congress.
    Mr. Watt. Mr. Chairman, we are having a little trouble 
hearing down--
    The Chairman. Could you pull the microphone closer?
    Mr. Bernanke. How's that? In my testimony this morning, I 
will briefly review the economic situation. Is that okay, Mr. 
Chairman?
    Mr. Bachus. I would just pull it a lot closer.

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

    Mr. Bernanke. Okay. In my testimony this morning, I will 
briefly review the economic situation and outlook, beginning 
with developments in real activity and inflation, and then turn 
to monetary policy. I will conclude with a quick update on the 
Federal Reserve's recent actions to help protect consumers in 
their financial dealings.
    The economic situation has become distinctly less favorable 
since the time of our July report. Strains in financial 
markets, which first became evident late last summer, have 
persisted, and pressures on bank capital and the continuing 
poor functioning of markets for securitized credit have led to 
tighter credit conditions for many households and businesses.
    The growth of real gross domestic product held up well 
through the third quarter despite the financial turmoil, but it 
has since slowed sharply. Labor market conditions have 
similarly softened, as job creation has slowed and the 
unemployment rate, at 4.9 percent in January, has moved up 
somewhat.
    Many of the challenges now facing our economy stem from the 
continuing contraction of the U.S. housing market. In 2006, 
after a multiyear boom in residential construction and house 
prices, the housing market reversed course. Housing starts and 
sales of new homes are now less than half of their respective 
peaks, and house prices have flattened or declined in most 
areas. Changes in the availability of mortgage credit amplified 
the swings in the housing market.
    During the housing sector's expansion phase, increasing lax 
lending standards, particularly in the subprime market, raised 
the effective demand for housing, pushing up prices and 
stimulating construction activity. As the housing market began 
to turn down, however, the slump in subprime mortgage 
originations, together with the more general tightening of 
credit conditions, has served to increase the severity of the 
downturn. Weaker house prices in turn have contributed to the 
deterioration in the performance of mortgage-related securities 
and reduced the availability of mortgage credit.
    The housing market is expected to continue to weigh on 
economic activity in coming quarters. Home builders, still 
faced with abnormally high inventories of unsold homes, are 
likely to cut the pace of their building activity further, 
which will subtract from overall growth and reduce employment 
in residential construction and in closely related industries.
    Consumer spending continued to increase at a solid pace 
through much of the second half of 2007, despite the problems 
in the housing market, but it appears to have slowed 
significantly toward the end of the year. The jump in the price 
of imported energy, which eroded real incomes and wages, likely 
contributed to the slowdown in spending, as did the declines in 
household wealth associated with the weakness in house prices 
and equity prices.
    Slowing job creation is yet another potential drag on 
household spending, as gains in payroll employment averaged 
little more than 40,000 per month during the 3 months ending in 
January, compared with an average increase of almost 100,000 
per month over the previous 3 months. However, the recently 
enacted fiscal stimulus package should provide some support for 
household spending during the second half of this year and into 
next year.
    The business sector has also displayed signs of being 
affected by the difficulties in the housing and credit markets. 
Reflecting a downshift in the growth of final demand and 
tighter credit conditions for some firms, available indicators 
suggest that investment in equipment and software will be 
subdued during the first half of 2008. Likewise, after growing 
robustly through much of 2007, nonresidential construction is 
likely to decelerate sharply in coming quarters as business 
activity flows and funding becomes harder to obtain, especially 
for more speculative projects.
    On a more encouraging note, we see few signs of any serious 
imbalances in business inventories, aside from the overhang of 
unsold homes. And, as a whole, the nonfinancial business sector 
remains in good financial condition with strong profits, liquid 
balance sheets, and corporate leverage near historic lows.
    In addition, the vigor of the global economy has offset 
some of the weakening of domestic demand. U.S. real exports of 
goods and services increased at an annual rate of about 11 
percent in the second half of last year, boosted by continuing 
economic growth abroad and the lower foreign exchange value of 
the dollar. Strengthening exports, together with moderating 
imports, have in turn led to some improvement in the U.S. 
current account deficit, which likely narrowed in 2007 on an 
annual basis for the first time since 2001.
    Although recent indicators point to some slowing of foreign 
growth, U.S. exports should continue to expand at a healthy 
pace in coming quarters, providing some impetus to domestic 
economic activity and employment.
    As I have mentioned, financial markets continue to be under 
considerable stress. Heightened investor concerns about the 
credit quality of mortgages, especially subprime mortgages with 
adjustable interest rates, triggered the financial turmoil. 
However, other factors, including a broader retrenchment in the 
willingness of investors to bear risk, difficulties in valuing 
complex or illiquid financial products, uncertainties about the 
exposures of major financial institutions to credit losses, and 
concerns about the weaker outlook for economic growth, have 
also roiled the financial markets in recent months.
    To help relieve the pressures in the market for interbank 
lending, the Federal Reserve, among other actions, recently 
introduced a term auction facility through which pre-specified 
amounts of discount window credit are auctioned to eligible 
borrowers. And we have been working with other central banks to 
address market strains that could hamper the achievement of our 
broader economic objectives. These efforts appear to have 
contributed to some improvement in short-term funding markets. 
We will continue to monitor financial developments closely.
    As part of its ongoing commitment to improving the 
accountability and public understanding of monetary 
policymaking, the Federal Open Market Committee, or FOMC, 
recently increased the frequency and expanded the content of 
the economic projections made by Federal Reserve Board members 
and Reserve Bank presidents and released to the public. The 
latest economic projections, which were submitted in 
conjunction with the FOMC meeting at the end of January, and 
which are based on each participant's assessment of appropriate 
monetary policy, show that real GDP was expected to grow only 
sluggishly in the next few quarters, and that the unemployment 
rate was seen as likely to increase somewhat.
    In particular, the central tendency of the projections was 
for real GDP to grow between 1.3 percent and 2.0 percent in 
2008, down from 2.5 percent to 2.75 percent as projected in our 
report last July. FOMC participants' projections for the 
unemployment rate in the fourth quarter of 2008 have a central 
tendency of 5.2 percent to 5.3 percent, up from the level of 
about 4.75 percent projected last July for the same period.
    The downgrade in our projections for economic activity in 
2008 since our report last July reflects the effects of the 
financial turmoil on real activity and a housing contraction 
that has been more severe than previously expected.
    By 2010, our most recent projections show output growth 
picking up to rates close to or a little above its longer-term 
trend, and the unemployment rate edging lower. The improvement 
reflects the effects of policy stimulus and an anticipated 
moderation of the contraction in housing and the strains in 
financial and credit markets.
    The incoming information since our January meeting 
continues to suggest sluggish economic activity in the near 
term. The risks to this outlook remain to the downside. Those 
risks include the possibilities that the housing market or the 
labor market may deteriorate more than is currently 
anticipated, and that credit conditions may tighten 
substantially further.
    Consumer price inflation has increased since our previous 
report, in substantial part because of the steep run-up in the 
price of oil. Last year food prices also increased 
significantly, and the dollar depreciated. Reflecting these 
influences, the price index for Personal Consumption 
Expenditures increased by 3.4 percent over the four quarters of 
2007, up from 1.9 percent in 2006. Core price inflation, that 
is, inflation excluding food and energy prices, also firmed 
toward the end of the year. The higher recent readings likely 
reflected some pass-through of energy costs to the prices of 
consumer goods and services, as well as the effect of the 
depreciation of the dollar and import prices.
    Moreover, core inflation in the first half of 2007 was 
damped by a number of transitory factors; notably, unusually 
soft prices for apparel and for financial services, which 
subsequently reversed. For the year as a whole, however, core 
PCE prices increased by 2.1 percent, down slightly from 2006.
    The projections recently submitted by FOMC participants 
indicate that overall PCE inflation was expected to moderate 
significantly in 2008, to between 2.1 percent and 2.4 percent, 
the central tendency of the projections. A key assumption 
underlying those projections was that energy and food prices 
would begin to flatten out, as was implied by quotes on futures 
markets. In addition, diminishing pressure on resources is also 
consistent with the projected slowing in inflation.
    The central tendency of the projections for core PCE 
inflation in 2008 at 2.0 percent to 2.2 percent was a bit 
higher than in our July report, largely because of some higher-
than-expected recent readings on prices. Beyond 2008, both 
overall and core inflation were projected to edge lower as 
participants expected inflation expectations to remain 
reasonably well anchored and pressures on resource utilization 
to be muted.
    The inflation projection submitted by FOMC participants for 
2010, which range from 1.5 percent to 2.0 percent for overall 
PCE inflation, were importantly influenced by participants' 
judgments about the measured rates of inflation consistent with 
the Federal Reserve's dual mandate, and about the timeframe 
over which policy should aim to attain those rates.
    The rate of inflation that is actually realized will of 
course depend on a variety of factors. Inflation could be lower 
than we anticipate if slower-than-expected global growth 
moderates the pressure on the prices of energy and other 
commodities, or if rates of domestic resource utilization fall 
more than we currently expect. Upside risks to the inflation 
projection are also present, however, including the 
possibilities that energy and food prices do not flatten out, 
or that the pass-through to core prices from higher commodity 
prices and from the weaker dollar may be greater than we 
anticipate.
    Indeed, the further increases in prices of energy and other 
commodities in recent weeks, together with the latest data on 
consumer prices, suggests slightly greater upside risks to the 
projections of both overall and core inflation than we saw last 
month. Should high rates of overall inflation persist, the 
possibility also exists that inflation expectations could 
become less well anchored.
    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 could reduce the flexibility of the FOMC to counter 
shortfalls in growth in the future. Accordingly, in the months 
ahead, the Federal Reserve will continue to monitor closely 
inflation and inflation expectations.
    Let me turn now to the implications of these developments 
for monetary policy. The FOMC has responded aggressively to the 
weaker outlook for economic activity, having reduced its target 
for the Federal funds rate by 225 basis points since last 
summer. As the committee noted in its most recent post-meeting 
statement, the intent of those actions has been to help promote 
moderate growth over time and to mitigate the risk to economic 
activity.
    A critical task for the Federal Reserve over the course of 
this year will be to assess whether the stance of policy is 
properly calibrated to foster our mandated objectives of 
maximum employment and price stability in an environment of 
downside risk to growth, stressed financial conditions, and 
inflation pressures.
    In particular, the FOMC will need to judge whether the 
policy actions taken thus far are having their intended 
effects. Monetary policy works with a lag. Therefore, our 
policy stance must be determined in light of the medium-term 
forecast of real activity and inflation as well as the risks to 
that forecast. Although the FOMC participants' economic 
projections envision an improving economic picture, it is 
important to recognize that downside risks to growth remain. 
The FOMC will be carefully evaluating incoming information 
bearing on the economic outlook and will act in a timely manner 
as needed to support growth and to provide adequate insurance 
against downside risks.
    Finally, I would like to say a few words about the Federal 
Reserve's recent actions to protect consumers in their 
financial transactions. In December, following up on a 
commitment I made at the time of our last report in July, the 
Board issued for public comment a comprehensive set of new 
regulations to prohibit unfair or deceptive practices in the 
mortgage market under the authority granted us by the Home 
Ownership and Equity Protection Act of 1994.
    The proposed rules would apply to all mortgage lenders and 
would establish lending standards to help ensure that consumers 
who seek mortgage credit receive loans whose terms are clearly 
disclosed and that can reasonably be expected to be repaid.
    Accordingly, the rules would prohibit lenders from engaging 
in a pattern or practice of making higher priced mortgage loans 
without due regard to consumers' ability to make the scheduled 
payments. In each case, a lender making a higher priced loan 
would have to use third-party documents to verify the income 
relied on to make the credit decision. For higher priced loans, 
the proposed rules would require the lender to establish an 
escrow account for the payment of property taxes and homeowners 
insurance, and would prevent the use of prepayment penalties in 
circumstances where they might trap borrowers in unaffordable 
loans.
    In addition, for all mortgage loans, our proposal addresses 
misleading and deceptive advertising practices, requires 
borrowers and brokers to agree in advance on the maximum fee 
that the broker may receive, and certain practices by servicers 
that harm borrowers and prohibits coercion of appraisers by 
lenders. We expect substantial public comment on our proposal, 
and we will carefully consider all information and viewpoints 
while moving expeditiously to adopt final rules.
    The effectiveness of the new regulations, however, will 
depend critically on strong enforcement. To that end, in 
conjunction with other Federal and State agencies, we are 
conducting compliance reviews of a range of mortgage lenders, 
including nondepository lenders. The agencies will collaborate 
in determining the lessons learned and in seeking ways to 
better cooperate in ensuring effective and consistent 
examinations of, and improved enforcement for, all categories 
of mortgage lenders.
    The Federal Reserve continues to work with financial 
institutions, public officials and community groups around the 
country to help homeowners avoid foreclosures. We have called 
on mortgage lenders and servicers to pursue prudent loan 
workouts, and have supported the development of streamlined, 
systematic approaches to expedite the loan modification 
process.
    We have also been providing community groups, counseling 
agencies, regulators and others with detailed analyses to help 
identify neighborhoods at high risk for foreclosures so that 
local outreach efforts to help troubled borrowers can be as 
focused and as effective as possible. We are actively pursuing 
other ways to leverage the Federal Reserve's analytical 
resources, regional presence, and community connections to 
address this critical issue.
    In addition to our consumer protection efforts in the 
mortgage area, we are working towards finalizing rules under 
the Truth in Lending Act that will require new, more 
informative, and consumer-tested disclosures by credit card 
issuers. Separately, we are actively reviewing potentially 
unfair and deceptive practices by issuers of credit cards. 
Using the Board's authority under the Federal Trade Commission 
Act, we expect to issue proposed rules regarding these 
practices this spring.
    Thank you. I would be very pleased to take your questions.
    [The prepared statement of Chairman Bernanke can be found 
on page 53 of the appendix.]
    The Chairman. Thank you, Mr. Chairman. Let me just announce 
to members, we have one vote apparently on a procedural matter. 
We will break for that vote, and members who want to start 
going back--leaving now and coming back, we want to minimize 
the disruption. We are going to ask the Chairman to give us a 
few more minutes, but we are going to move promptly. I will ask 
my questions and then we may get in one more set. Members who 
want to can go and come back, and we may preserve continuity.
    Mr. Chairman, I have been here--it's my 28th year, and it's 
taken me that long to hear the following words, I think, from a 
Federal Reserve Chairman, ``Finally, I would like to say a few 
words about the Federal Reserve's recent actions to protect 
consumers in their financial transactions.'' That is a very 
significant change for the better, and it's particularly 
relevant, because it is the absence of this kind of approach 
that brought us to where we are today.
    You outlined things that you were doing under the Home 
Ownership and Equity Protection Act, and you correctly noted it 
was passed in 1994. It has taken until your chairmanship for 
this to be done, and I think we are seeing--and I don't ask you 
to comment on this--a reversal. I found Mr. Greenspan's 
response in the 1990's on monetary policy to be a very 
thoughtful one, when he resisted those who said as unemployment 
dropped below 5 percent and down into 3.9 percent, that somehow 
that automatically meant inflation. He resisted that. He was 
quite correct.
    But in another area, I think he erred, and that is his view 
that regulation was almost never required. And when you have no 
regulation whatsoever, what the Chairman, your predecessor, 
often told us was that I have two options, whether it was the 
stock market effervescence or exuberance, whether it was the 
subprime, I can either deflate the entire economy or I can let 
the problems continue. I appreciate that in two areas you have 
mentioned today, and we aren't going to obviously to agree on 
all the specifics, you have gone beyond that. And I think, as I 
said, that is essential.
    I note you say to reinforce the point about this being a 
very different kind of a recession--or going to be a recession. 
I don't want to impute to you the view that we're in a 
recession because I'm not going to be responsible for the 
nervous people at the stock market who overreact when you 
twitch your nose. So--but the problems we now have are 
different. And as you note, there is no inventory overhang. 
What is interesting is, as you note, the extent to which the 
rest of the economy is in pretty good shape, but the regulatory 
failures and the consequent abuses have caused this very broad-
scale problem. As you say at the bottom of page 2, we see very 
few signs of any serious imbalances in business inventories 
aside from houses. As a whole, the nonfinancial business sector 
remains in good financial condition.
    That makes this an unusual economic problem. It puts 
constraints on your ability to deal with it, and it makes it 
clear, we cannot either deal with the current problem or deal 
with a potential repetition without getting into sensible 
regulation. So we look forward to working with you in that 
regard.
    I also appreciate your reiterating the importance of 
worrying about the downside in unemployment. As you note, the 
central tendency is 5.2 to 5.3 percent, and you are then 
talking sensibly about downside risks being more likely to 
that. In other words, we're talking about edging back up close 
to 6 percent unemployment. If 5.3 percent is the central 
tendency, and the downside risks in employment are the greater 
ones, then we have to very careful.
    So let me now just finally say, and I don't ask you to 
comment on what I said, but going forward, what is your view--
you have talked about the problems with what you have called 
the originate to distribute model. Is that an area in which 
working together you think that regulators, the Congress need 
to adopt--is it possible for us to come up with rules that can 
preserve the great benefits of securitization and give us a 
better chance of diminishing the abuses?
    Mr. Bernanke. Yes, Mr. Chairman. I think the originate to 
distribute model and securitization have a lot of value. It 
allows borrowers to have essentially direct access to capital 
markets, but the recent experience shows we need to do some 
work on it, both the private sector and in collaboration with 
supervisors and regulators. We need to have more responsibility 
and accountability at the point of origination. We need to have 
better information and clarity about what securitized products 
contain. If we do those things, I think we can restore this 
market. But for the moment, as you know, it's very 
dysfunctional.
    The Chairman. Well, I appreciate that. Because one of the 
points you mention, one of the problems we have now is the lack 
of confidence on the part of investors. And I think this is the 
case, as I think was the case with much of Sarbanes-Oxley, 
everybody agrees on, I think, almost all of it, appropriate 
rules can be pro-market, because they can instill in investors 
a confidence that they otherwise didn't have. We have a kind of 
an investors' strike now. We have, as we're going to talk about 
next week, municipalities offering 100 percent guarantees, in 
my judgment, full faith and credit general obligation bonds, 
paying an unfair risk premium. So, it does seem to me that if 
we work together, we can give the investors more confidence, 
and that's part of getting us back into the operation. Would 
you comment on that?
    Mr. Bernanke. Well, I certainly agree that we need to work 
together, that regulators are trying to evaluate what we've 
learned from this experience and trying to see what we can do 
better in the future. Industry is doing the same thing. We want 
to make sure that any rules and regulations we adopt are wise 
and achieve their objectives and don't impose excessive costs. 
But clearly, we want to look back at this experience and try to 
learn what the lessons are.
    The Chairman. Thank you, Mr. Chairman. The gentlewoman from 
Illinois.
    Mrs. Biggert. Thank you, Chairman Bernanke, for your 
continued efforts to keep our economy growing. And I'd like to 
thank you for the Federal Reserve's thorough analysis of the 
debt level of the American families and for promulgating rules 
relating to high cost mortgages and credit cards.
    As you know, this committee continues to address issues 
related to the mortgages and to the credit cards, and I have 
concerns about some of the legislation before this committee 
that may cause a further tightening in the credit market. So I 
would like to just ask you a couple of questions based on 
credit cards. And based on the Fed's recent surveys and 
studies, what do consumers need to know to make informed 
decisions about their credit cards?
    And could you just describe briefly the Regulation Z and 
what you believe it will do to help consumers better understand 
the terms of their credit card agreements? And when do you 
anticipate, I think you said this spring, that the regulation 
will be finalized? And, finally, can you discuss actions that 
the Fed plans to take and when to crack down on unfair and 
deceptive practices of bad actors in the credit card industry? 
In 2 minutes, probably.
    Mr. Bernanke. Yes, I will. The Reg Z regulations are still 
out for comment. We are receiving comments, which we are going 
to review very carefully. But the intent of Reg Z was to 
provide clearer disclosure so people could understand what 
their credit card account involved. In particular, we have 
created a new Schumer Box, as it is called. It has new 
information about fees and penalties and provides more 
information to the consumer about the terms and conditions of 
their account.
    In addition, we propose to lengthen the period of time over 
which a consumer must receive notice before there is a change 
in terms of their credit card. These disclosures have been 
consumer tested. We have used companies to go out and use 
actual consumers to see what works, how much they recall, how 
much they understand. And we think there will be a substantial 
improvement in terms of allowing people to understand what is 
involved in their credit card accounts.
    We are beginning, as I mentioned, to look at some practices 
under the Unfair and Deceptive Acts and Practices rules. We 
anticipate setting out a proposal for comments within a couple 
of months, this spring, to address some issues that the 
disclosure rules themselves cannot address. The final release 
of both sets of rules will probably take place later this year. 
If possible, to minimize burden on the industry, would be to 
release the Reg Z disclosures and the new rules on unfair and 
deceptive acts and practices at about the same time, if 
possible. So I don't have a specific date yet for that release.
    Mrs. Biggert. My concern is always that sometimes what we 
do would restore credit, or make it impossible for consumers to 
have the credit if it is limited. So it would make all 
consumers, not just the ones who are having the credit 
problems, have to take responsibility for the payments in that 
effect would restore credit. Do you think the things that you 
are doing will have any effect on that?
    Mr. Bernanke. We are very sensitive--both in the credit 
card rules and also in the mortgage rules--that these markets 
are important. We don't want to create a chilling effect. We 
don't want to shut down these markets. We just want them to 
work better and, in particular, we think it's important for 
consumers to have a better understanding of what it is they're 
buying when they purchase products in these markets.
    Mrs. Biggert. If you had to say two things, what would 
consumers need to know to make informed decisions, would be the 
most important?
    Mr. Bernanke. Well, they certainly need to know the 
interest rate and how it varies over time and what that means 
to them in terms of payments. And they also need to understand 
other kinds of penalties or other fees that might occur if they 
violate certain conditions or other things occur. So they need 
to have a good understanding, not only of how they use a credit 
card for example, but also what the cost might be so they can 
make an informed judgment.
    Mrs. Biggert. Thank you. I yield back.
    The Chairman. Mr. Kanjorski has gone to vote and is on his 
way back. I am going to go vote now, so we may have a break of 
less than 3 or 4 minutes.
    As soon as he comes back, he will resume the questions. And 
I am assured this is the only vote until 4 p.m., so you will be 
out of here before this happens again.
    [Recess]
    Mr. Kanjorski. [presiding] The committee will come to 
order.
    Mr. Chairman, we now have the opportunity to seize control 
of this committee and do as we will. So, we should get started 
on all the serious problems that face us. Now, I am going to 
take my questions now so that we can save your time and the 
committee's time to get to the precious facts.
    Mr. Chairman, I listened to your statement in regard to 
your plans to correct some of the foibles within the subprime 
mortgage market, how we deal with reserving money for taxes, 
etc. As you know, this committee has sent and passed through 
the House a subprime bill that contains as a portion of it my 
bill or all of my bill, which deals with appraisals, deals with 
escrow reserve accounts, etc., and greater servicing powers on 
lenders.
    Yesterday--I think it was yesterday--I had the opportunity 
to talk with Attorney General Cuomo in New York. He has 
apparently entered into an agreement with Fannie Mae and 
Freddie Mac, not quite to the level of our legislation, but in 
the area of tightening up the rules and regulations on 
appraisals. He tells me that they were sort of inhibited from 
moving through with the agreement because some of the Federal 
regulators have not given their approval.
    He particularly cited, of course, the regulator for Fannie 
Mae and Freddie Mac. I then proceeded to call and ask him. I do 
not understand the concern. He said that he is going to look 
into it within the next week, and get back to me with a 
response. I think he intended to talk to you, as a principal 
regulator of the banks, and to others. I would appreciate it if 
you would really look at that matter. I think your proposed 
regulations are very good, and our bill is very good.
    But, if in the meantime we can get an agreement with the 
people who write 83 percent of the mortgages in this country, 
Fannie Mae and Freddie Mac, it would seem to me that we would 
go a long way in stemming some of the problems that we are 
having in the marketplace. Even though that agreement would 
fast be surpassed by your regulations or our legislation, I do 
not think that we should be particularly egotistic about whose 
idea is implemented or put forth. I think we ought to just try 
and work surgically to stop these problems. Do you agree?
    Mr. Bernanke. Well, you know, I hope that our regulations 
are going to take a good, positive step. I am not familiar with 
all the details of the Cuomo/Fannie agreement. I am in close 
communication with Mr. Lockhart, the regulator. And I continue 
to discuss issues with him, but I can't really comment on that 
specific proposal.
    Mr. Kanjorski. Well, of course, I am interested. Your 
regulations will take months to clear all the barriers, get all 
the comments, will it not?
    Mr. Bernanke. No, sir. I think we will have those out 
before I appear before you again in July.
    Mr. Kanjorski. Before July? I think July is months away. Is 
that right?
    Mr. Bernanke. Yes, sir.
    Mr. Kanjorski. Now, there is this other thing, you know, 
that I am a little disturbed about, and, to be honest, I have 
not totally lost faith in the regulators, but I am starting to. 
As Mr. Frank indicated, it seems to me, all of us should look 
at some introspection here and maybe take some responsibility--
I do not want to say blame or fault--for the problem we are in 
right now. But, certainly we did not quite fulfill our 
functions.
    In August, when there was a breakdown in the securitized 
market on subprime loans, I was led to believe by regulators in 
the Executive Branch that they thought everything was pretty 
much tightened up and most of all that we would not have a 
cross-contamination into other securities markets and other 
problems, and that it was going to be put back together and we 
would not see that.
    Then in December, of course, other thunderish shocks hit 
us, more came in January, and now it seems weekly that some 
financial entity that we have all relied on that would not be 
subjected to these crash problems now is. For example, just 2 
weeks ago, it was the student loan bonds that were not selling. 
Last week, it was the auction rate securities that failed and 
jumped from 4 percent to 20 percent, in some cases. This week 
it is the variable rate demand notes that are failing to have a 
market because the banks will not come in and play their role 
of specialist and provide that market.
    Would you say that this would represent in the credit 
market a metastization of the problem, that it has spread and 
it is spreading rather wildly and quickly, and that we should 
come up with some game plans to do something other than the 
stimulus demand that we had out there 2 or 3 weeks ago?
    Mr. Bernanke. Well, Congressman, as I mentioned in my 
testimony, the subprime problem was a trigger for all this, but 
there were other things that then began to kick in, including a 
pull-back from risk taking, concerns about valuation of these 
complex products, issues about liquidity and so on which, as 
you say, caused the problem to spread throughout the system.
    Right now, we are looking at solutions. The Federal 
Reserve, for example, is engaging in this lending process 
trying to reduce the pressure in the short-term money markets. 
I think, very importantly, the private sector has a role to 
play. I would encourage, for example, banks to continue to 
raise capital so they would be well able to continue to lend. 
They also need to increase transparency, to provide more 
information to the markets so the market could begin to 
understand what these assets are and what the balance sheets 
look like.
    Mr. Kanjorski. On that point, Mr. Chairman, wasn't it quite 
clear to the Federal Reserve that maybe we didn't have the 
transparency in all these securities that were broken into 
various tranches? It seems to me, 6 months later, that most 
banks still don't know what their exposures are. Wasn't that 
apparent to the regulators? Maybe we should have come forth 
with some regulatory authority to require these things be 
broken out in inventories?
    I have to tell you I am astounded that major banks in this 
country and around the world are still saying we do not know 
what our exposure is. That is sort of scary to me. They backed 
it up periodically on a month-to-month basis coming out and 
announcing more failures on their part and more losses than 
they had anticipated.
    When will we get to the endpoint? What do we have to do? 
Doesn't the Federal Reserve, the present regulator, have enough 
authority to demand that nothing be done that's so clouded that 
you can't understand what your obligation would be or quickly 
come up with what your exposure would be? Don't we have the 
capacity to do that?
    Mr. Bernanke. Well, there were two sets of issues in this 
case. The first was that many investors took the credit rating 
agencies ratings as all the information they needed. They 
didn't do initial analysis, so they just looked at the rating. 
They didn't look at what was in these structured credit 
products. We are now looking at that situation much more 
carefully. The credit rating agencies are reviewing their own 
procedures. And, clearly, investors now understand they need to 
look at more details than just the credit rating.
    Another issue is that with the markets being relatively 
illiquid--in many cases quite illiquid--it can be very hard to 
evaluate what even a straightforward mortgage is worth. With 
the economy changing, with mortgages and other assets not 
trading on a liquid market, it makes it more difficult for the 
banks to evaluate what their holdings are and that's a problem 
going forward.
    Going forward, the approaches, I think, involve working 
with the SEC and the accounting authorities and so on to try to 
find better ways of disclosure, more transparent approaches to 
disclosure, and also to take measures to ensure this drying up 
of liquidity doesn't happen again. There's enough liquidity in 
markets so that price discovery can take place and we can value 
what these assets are worth.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    I note that I ran away with my time. The chairman is about 
to come and remove me physically from the chair. Let me 
recognize Mr. Miller.
    Mr. Miller of California. Thank you very much. It's good to 
have you here again. If you'd like to say something really good 
about the economy, those stockholders would really love it.
    But, short of that, I remember the first time you 
testified. My questions were associated with the housing 
market, and there didn't tend to be that big a concern back 
then, but I think things have changed. And we've tried to do a 
lot from our side raising, conforming in high cost areas and 
GSEs and FHA. And you've lowered the basis points about 225 
basis points to try to stimulate the economy.
    It has done a good job of lowering cost of funds to 
lenders, but from mid-January, we are looking at the opposite 
when it comes to mortgage rates to people who wanted to buy a 
house. They shouldn't be going up.
    Could you address that?
    Mr. Bernanke. Well, mortgage rates are down some from 
before this whole thing began. But we have a problem, which is 
that the spreads between, say, Treasury rates and lending rates 
are widening, and our policy is essentially, in some cases, 
just offsetting the widening of the spreads, which are 
associated with various kinds of illiquidity or credit issues.
    So in that particular area, you are right. It has been more 
difficult to lower long-term mortgage rates through Fed action. 
We are able, of course, to lower short-term rates and they do 
have implications. For example, resets of existing mortgages 
affect the ability of banks and others to finance their 
holdings of assets. So I think we still have power to influence 
the housing market in the broader economy, but your points are 
well taken. A lot of what we have done has been mostly just to 
offset the tightening of credit that has arisen because of the 
financial situation.
    Mr. Miller of California. I am looking at lending since 
about January 24th has raised about 56 basis points to the 
consumer. Yet, your cost to the lenders are down considerably 
based on what CDs are being, you know, sold out today, and 
such.
    Mr. Bernanke. That's true for even the conforming mortgages 
like Fannie and Freddie mortgages.
    Mr. Miller of California. Do you see a benefit and a help 
to the industry? I do in what we have done in raising and 
confirming in high cost areas there, but people couldn't get 
lower-rated GSEs when they sell their home or they're buying a 
home than they could before.
    What impact do you see that having in the long term?
    Mr. Bernanke. In the jumbo?
    Mr. Miller of California. Yes, us being able to get a 
Freddie and Fannie at the $700,000 range.
    Mr. Bernanke. Well, I think we are going to have to see. It 
is going to take a bit of time for them to get geared up to 
accept those kinds of mortgages, and there has been a ruling by 
the bond association that they can only securitize those jumbo 
mortgages in separate instruments and not mix them in with the 
conforming mortgages. And that will perhaps reduce the 
liquidity.
    So it remains unclear how much benefit will come from this; 
however, my understanding is that Fannie and Freddie are 
committed to doing a significant amount of securitization of 
these jumbo mortgages. And we would certainly encourage them to 
raise capital to allow them to do more and to securitize more 
of both conforming and jumbo securities. Of course, at the same 
time, I hope that Congress will continue to push forward on 
getting a comprehensive reform that will make these entities 
safe and sound for the future.
    Mr. Miller of California. Yes. On January 17th, you 
presented your near-term economic outlook to the House Budget 
Committee. In that outlook you indicated the future market 
suggests the new prices will decelerate over the coming year. 
However, since then, all prices have reached record highs in 
nominal terms.
    If oil continue to remain at its current levels, thereby 
adding further pressure on the overall inflation, it may be 
more difficult for the Feds to cut interest rates; and, if that 
were the case, what option do you have beyond cutting interest 
rates?
    Mr. Bernanke. Well, the oil prices rose in 2007 by almost 
two-thirds. It was an enormous increase and put a lot of 
pressure, obviously, directly on energy products and is also 
feeding through into air fares and other energy intensive goods 
and services.
    Oil prices are very volatile. They've moved around a lot in 
the last month or so, but the end-of-year futures markets have 
oil prices about $95. Oil prices don't have to come down to 
reduce inflation pressure; they just have to flatten out.
    Mr. Miller of California. But if they don't flatten out?
    Mr. Bernanke. Well, if they continue to rise at this pace 
it is going to create a very difficult problem for our economy, 
because on the one hand it is going to generate more inflation, 
as you describe, but it is also going to create more weakness 
because it is going to be like a tax. It is extracting income 
from American consumers. So if that happens, it will be a very 
tough situation. We are going to have to make judgments looking 
at the risk to both sides of our mandate and make those 
judgments at that time.
    But I think it is relatively unlikely that we will see the 
same kinds of enormous increases in energy prices this year 
that we have seen in 2007.
    Mr. Miller of California. So you feel confident your 
projection of a decrease in the long-term throughout the year 
will come true; that you project this point that you see oil 
decreasing as the year progresses?
    Mr. Bernanke. Well, we don't know what oil prices are going 
to do. It depends a lot on global conditions, on demand around 
the world. It also depends on suppliers, many of which are 
politically unstable or in politically unstable regions or have 
other factors that affect their willingness and ability to 
supply oil.
    So there's a lot of uncertainty about it, but our analysis 
combined with what we can learn from the futures market 
suggests that we should certainly have much more moderate 
behavior this year than we have. But, again, there's a lot of 
uncertainty around that estimate.
    The Chairman. The gentlewoman from New York, the chair of 
the Financial Institutions Subcommittee. The gentlewoman from 
New York?
    Mrs. Maloney. It's my turn?
    The Chairman. The gentleman from Illinois. We will get back 
to you. Sorry.
    Mr. Gutierrez. Let me just follow up. So over the last 6 
months, you have taken actions to reduce the cost of money, and 
in January, I called my daughter and told her to go and get a 
mortgage around the 15th. I think I gave her good advice, Mr. 
Chairman. I said go and lock it in for as long as you can. She 
is going to buy her first home. Because it was like 5\1/2\ 
percent, and I said, ``Now is the time, honey.''
    And then I checked the Wall Street Journal and it's like 
6.38 percent. What happened? I'm sorry, I didn't quite--if 
money costs less--if the money is cheaper--why are mortgages 
increasing over the last, I don't know, 45 days?
    Mr. Bernanke. Well, again, I don't necessarily want to try 
to explain fluctuations over short periods of time; financial 
markets move back and forth. But a couple of things have 
happened. There has been some back-up in longer-term Treasury 
rates--the safe long-term rates. But, again, I think a big part 
of the story is that even as the Fed has lowered interest 
rates, and as the general pattern of interest rates has 
declined, the pressures in the credit markets have caused 
greater and greater spreads, particularly for risky borrowers.
    And that to some extent--I would say not entirely by any 
means--offset the effects of our easing. Our easing is intended 
in some sense to respond to this tightening of credit 
conditions, and, I believe we have succeeded in doing that. But 
there certainly is some offset that comes from widening 
spreads, and this is what's happening in the mortgage market.
    Mr. Gutierrez. I just find it--I'm not the economist that 
you and others are--but I just found it so surprising to watch. 
Because it hasn't had the same kind of relationship in the past 
as I have seen what the Fed does. And then I see what the 
market does. Because it is very substantial. A 30-year 
mortgage, I mean, between 5\1/2\ and 6\1/2\ percent--it's huge, 
a lot bigger than between 4\1/2\ and 5\1/2\ percent. The amount 
of money you pay on a 30-year mortgage really is substantial.
    So we will talk some more about how we continue to deal 
with that. I want to take a step back from the macroeconomic 
discussion for a moment and discuss a regulatory issue. As you 
know, under our current regulatory scheme, there is no lead 
Federal regulator to oversee money remitters or the money 
service business industry.
    What we have is kind of a patchwork of State and Federal 
regulations. At the Federal level, we have FinCen monitoring 
money laundering reporting requirements in the Federal Trade 
Commission with jurisdiction over consumer issues. Last year, I 
held a couple of hearings in my subcommittee with consumer 
groups and others to weigh in on the issue.
    The consumer groups were unanimous in support for a 
stronger Federal regulatory scheme with a lead regulator. 
Because of the account discontinuance problem, the industry 
sees the benefit of having a single-lead regulator, where the 
stakeholders differ as to which regulator should take the lead.
    Most agree the Federal Reserve will play a substantial 
role, if not a lead role, because the Federal Reserve's ACH 
system and its experience with Director Mexico program. But 
some have advocated creating a new Federal agency for this 
purpose. Do you believe the Federal Reserve would be the 
appropriate lead regulator for the remittance industry? If not, 
why not? And is there an agency that is in a better position to 
monitor the industry; and, should we be looking at creating an 
entire--or should we be looking at creating entirely?
    Do you think you should lead? Do you think there is a 
better agency? Or do you think we should create something new? 
Because in the hearings it becomes quite clear that financial 
institutions are going to keep backing away, and as they do, 
it's going to get harder to get money to people who earn less 
here back to the very needy ones who really need it, and every 
nickel counts. What do you think, Mr. Chairman?
    Mr. Bernanke. Well, as you point out, the money remittances 
are currently regulated by States, by the FTC and so on. And I 
think, as in some other areas, the State regulation varies in 
terms of its aggressiveness and quality. I am not sure the 
Federal Reserve is the right agency. Our expertise is in 
banking. This is quite a different industry, with many small 
operators.
    We have taken a somewhat different approach, which is to 
encourage banks and other federally-regulated institutions to 
offer remittance services and to try to attract people 
interested in that to come into the banking system. The 
advantage of doing that is, first, banks can often offer 
better, cheaper services.
    But, in addition, people who are ``unbanked''--that is, 
they are not part of the regular banking system--through this 
particular service may become more comfortable with banks, may 
begin to have a checking account, a savings account, credit and 
so on. So that has been our approach. It is to encourage banks 
in their own interest, and also through CRA motivation and 
other ways, to try to reach out and bring remittances into 
their operations.
    Mr. Gutierrez. Well, let me just suggest that because the 
MoneyGrams, the Western Unions, and the large ones, which have 
many facilities, I agree they should be banked. But in the 
interim period, they have all of these facilities throughout 
the neighborhoods and they have facilities in the nations which 
receive the money; that is, they have a disbursement level in 
the nations where we should have more conversation about how we 
take that private sector so they are not so fearful anymore as 
large financial institutions won't back them up but are backing 
away.
    Mr. Bernanke. Congressman, it is worth discussion and 
Congress really needs to think about this.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I want to turn my attention a little bit. You mentioned in 
your testimony a little bit about the dollar and the fact it 
has increased our exports, because American goods are more 
competitive. But, at the same time, it swings the other way in 
the fact that it raises prices. It has an inflationary impact 
on the American consumer.
    I believe one of the reasons that oil is $100 a barrel 
today is because of our declining dollar. People settled oil in 
dollars and I think a lot of them have obviously just increased 
the price of the commodity. And so I really have two questions. 
One is, what do you believe the continuing decline of the 
dollar is?
    What kind of inflationary impact do you think that is going 
to have? And then secondly, as this dollar declines, one of the 
things that I begin to get concerned with is all of these 
people who have all of these dollars have taken a pretty big 
hickey over the last year or so and continue to do that.
    At what point in time do people say, you know, we want to 
trade in dollars and other currencies, and what implication do 
you think then that has on the capital markets in the United 
States?
    Mr. Bernanke. Well, Congressman, I always need to start 
this off by saying that the Treasury is the spokesman for the 
dollar, so let me just make that disclaimer. We obviously watch 
the dollar very carefully. It is a very important economic 
variable.
    As you point out, it does increase U.S. export 
competitiveness and, in that respect, it is expansionary. But 
it also has inflationary consequences, and I agree with you 
that it does affect the price of oil. It has probably less 
effect on the price of consumer goods or finished goods that 
come in from out of the country, but it does have an 
inflationary effect.
    Our mandate, of course, is to try to achieve full 
employment and price stability here in the United States, so we 
look at what the dollar is doing. We think about that in the 
context of all the forces that are affecting the economy, and 
we try to set monetary policy appropriately. So, we do not have 
a target for the dollar. What we are trying to do is, given 
what the dollar is doing, figure out where we need to be to 
keep the economy on a stable path.
    With respect to your other question, there is not much 
evidence that investors or holders of foreign reserves have 
shifted in any serious way out of the dollar at this point, 
and, indeed, we have seen a lot of flows into U.S. Treasuries, 
which is one of the reasons why the rates on short-term U.S. 
Treasuries are so low, reflecting their safety, liquidity, and 
general attractiveness to international investors. So we have 
not yet seen the issue that you are raising.
    Mr. Neugebauer. One of the other questions that I have, and 
just as your thought is, you know, the U.S. economy is based on 
encouraging the consumer to consume as much as he possibly can. 
In fact, the stimulus package that we just passed the other 
day, $160 billion, was really by and large the same to the 
American people go out and spend.
    And this consumption mentality, away from any kind of a 
savings mentality, concerns me. That means the economy is 
always going to be a lot more volatile, because there is not 
much margin. And a year ago, people were testifying for this. 
Don't worry about the low savings rates, because people had 
these huge equities in their homes, so that was compensating 
for the lack of savings in the United States.
    But now, we see some reports, the valuation of real estate, 
10, 12, 15 percent, and the savings rates add to zero and 
negative. Does that concern you long-term, that we are trying 
to build an economy on people to use up every resource that 
they have?
    Mr. Bernanke. Yes, Congressman. I think in the long term we 
need to have higher saving, and we need to devote more toward 
investment and foreign exports than to domestic consumption. 
That is a transition we are going to have to make in order to 
get our current account deficit down, in order to have enough 
capital and foreign income to support an aging population as we 
go forward the next few decades.
    The stimulus package is going to support consumption in the 
very near term. But there is a difference between the very 
short run and the long run. In the very short run, if we could 
substitute more investment, more exports, that would be great. 
But since we can't in the short run, a decline in total demand 
will just mean that less of our capacity is being utilized. We 
will just have a weaker economy.
    So that is the rationale for the short-term measure, but I 
agree with you that over the medium and long-term, we should be 
taking measures to try to move our economy away from 
consumption dependence, more towards investment, more towards 
net exports.
    The Chairman. The gentlewoman from New York, Ms. Maloney.
    Mrs. Maloney. Thank you very much, and welcome, Mr. 
Bernanke.
    New problems in the economy are popping up like a not-very-
funny version of Whack-a-mole, as Alan Blinder, a former Vice 
Chair of the Fed, recently observed, and yesterday's news was 
no exception with their wholesale inflation soaring consumer 
confidence falling and home foreclosures are spiking and 
falling sharply.
    Added to this, many people believe that the next shoe to 
fall will be credit card debt, which is securitized in a very 
similar way as the subprime debt. And, as you know, the Fed has 
a statutory mandate to protect consumers from unfair lending 
practices. But there is a widespread perception that the 
Federal Reserve and Congress did not do enough or act quickly 
enough to correct dangerous and abusive practices in the 
subprime mortgage market.
    Many commentators are now saying that credit cards will be 
the next area of consumer credit where over-burdened borrowers 
will no longer be able to pay their bills. We see a situation 
with our constituents where many responsible cardholders, folks 
who pay their bills on time and do not go over their limit, are 
sinking further and further into a quicksand of debt, because 
card companies are raising interest rates any time, any reason, 
retroactively, and in some cases quite dramatically--30 percent 
on existing balances--and there are very, I'd say scary, 
parallels between the subprime mortgage situation and what is 
now happening with credit cards.
    In your response to Chairwoman Biggert's question on what 
the most important thing a consumer needs to know about their 
credit card you responded, and I quote: ``Consumers need to 
know their interest rate and how it varies over time.''
    You also mentioned that it is important for consumers to 
know how their interest rate works. I have introduced 
legislation with Chairman Frank and 62 of our colleagues that 
would track your proposed changes to Regulation Z to always 
give consumers 45 days notice before any rate increase. But it 
would also give consumers the ability to opt out of the new 
terms by closing their account and paying off their balance at 
existing terms.
    Would you agree that this notice and consumer choice would 
allow consumers to know their interest rate and how it varies 
over time and how it works?
    Mr. Bernanke. Congresswoman, first of all, I agree. It is 
very important to protect consumers in their dealings with 
credit cards. As you mentioned, we have put out Reg Z revisions 
for comment, and includes this 45-day period.
    Within the Reg Z authority, we could not take that second 
step that you mentioned, but as I mentioned in my testimony, we 
are currently looking under a different authority, which is the 
FTC, Unfair Deceptive Acts and Practices Authority, at a range 
of practices including billing practices.
    And we will hope to come up with some rules for comment 
within the next few months. So we are looking at all those 
issues and we will be providing some proposed rules.
    Mrs. Maloney. Well, I congratulate you on your efforts in 
this area. It is very important. Would you agree that 
regulation of credit cards and credit card practices beyond 
disclosure, beyond Reg Z is necessary?
    Mr. Bernanke. If there are circumstances in which the 
actions of the credit card issuer are essentially impenetrable 
by the consumer, or the consumer doesn't understand and can't 
be expected to understand the action. Or if the actions of the 
credit card issuer are in fact literally different from what 
was promised, that is essentially taking different actions 
specified in the contract. Certainly in both of those cases one 
would surely say that further action other than just pure 
disclosure would be needed.
    Mrs. Maloney. And as you said to Ms. Biggert, you believe 
substantive corrections of credit card practices can be done 
without restricting access to credit or restricting consumer 
spending?
    Mr. Bernanke. Again, I think it is important for people who 
have credit card accounts or any other form of credit to 
understand what it is that they are buying, like buying any 
other product. If you are buying a credit card account, you 
should know what it is, how it works, and then you can make a 
reasoned choice.
    Mrs. Maloney. Thank you.
    The Chairman. The gentleman from Georgia.
    Mr. Price of Georgia. Thank you, Mr. Chairman.
    Mr. Chairman, we appreciate you being here again today and 
we know that monetary policy certainly is a balancing act and 
you have a difficult challenge balancing things. I find it 
interesting today that some members who are now upset with the 
current situation were the same ones who were clamoring the 
most in years past for an expansion of credit.
    And so I think it may be that those individuals as we clamp 
down on credit are those who will then be clamoring for us to 
open it up again in the relatively near future. So it is indeed 
a balancing act. The Federal Government has come under 
significant indictment by some for its lack of regulation and I 
am interested in what degree you believe there is 
responsibility for our current situation that is due to the 
lack of regulation.
    Mr. Bernanke. Well, as I mentioned to the chairman earlier, 
I think appropriate regulation combined with market forces can 
provide the best results. I think regulation can often be 
helpful in situations where there is an asymmetry of 
information or knowledge, where the one side of the transaction 
is far more informed than the other side. So, for example, if 
you have two investment banks doing an over-the-counter 
derivatives transaction, presumably they both are well-informed 
and they can inform that transaction without necessarily any 
government intervention.
    In the case of consumer credit, though, I think there can 
be circumstances when the products are very complicated, and it 
is important to help make sure that there are disclosures and 
practices so that the consumer can understand properly what it 
is that they are buying. As I said to Congresswoman Maloney, 
the market works better if people understand what the product 
is. And so I think there are circumstances when regulation can 
be helpful.
    We also, of course, supervise banks because the government 
insures deposits, and, therefore, we want to make sure that 
they are acting in a safe and sound way as well.
    Mr. Price. Is overregulation possible or harmful?
    Mr. Bernanke. Of course it is possible. As I said in a 
recent speech, whenever we do regulation, we need to think 
about the cost and benefit of that regulation, and make sure 
there is an appropriate balance between them. And as we have 
done regulations on mortgage lending, I believe, for example, 
that subprime mortgage lending, if done responsibly, is a very 
positive thing and can allow some to get homeownership who 
might otherwise not be able to do so. There is plenty of 
evidence that people can do subprime lending in a responsible 
way.
    So in doing our regulations, we wanted to be sure that we 
didn't put a heavy hand on the market that would just shut it 
down and make it uneconomic. We want to help consumers 
understand the product, but we don't want to censure the 
market.
    Mr. Price of Georgia. Sure. Would you agree with the 
statement that excessive deregulation is the single greatest 
cause of the challenge that we currently find ourselves in?
    Mr. Bernanke. Well, I think there were mistakes in terms of 
regulation and oversight. But I think there also were private 
sector mistakes as well.
    Mr. Price of Georgia. A lot of other situations going on.
    Mr. Bernanke. There are a lot of factors involved.
    Mr. Price of Georgia. The stimulus package that Congress 
recently passed, many of us were concerned about it being 
temporary and having questionable effect, truly to stimulate 
the market, the economy, in the long-run. And if we think about 
the housing situation currently, I think there are two basic 
options available. One is to try to stimulate housing purchase 
through some tax policy. And the other is to increase the 
liability of the taxpayer for becoming the natures mortgage 
banker.
    Do you have a sense about which road we ought to head down?
    Mr. Bernanke. Well, I don't generally comment on specific 
tax or spending programs. I think what the Fed is trying to do 
right now is encourage the private sector, the servicers and 
the lenders, to scale up their efforts to address this tidal 
wave of foreclosures that otherwise would occur. And I also 
have discussed the modernization of FHA to provide a vehicle 
for refinancing of some of these mortgages and supported reform 
of GSE oversight as another mechanism.
    So those are the things that currently Fed Reserve has been 
talking about.
    Mr. Price of Georgia. Having the taxpayer be the sole 
holder of the nation of mortgages, though, is probably not a 
wise idea. I want to get to my last question, the final 
question about oil prices and crude. It has been suggested that 
increasing domestic production is not necessarily helpful in 
decreasing the cost of oil to our Nation, but wouldn't you say 
that in fact increasing domestic production or increasing 
refining capacity, all of that helps decrease, puts downward 
pressure on the cost of gas sat the pump and would be helpful?
    Mr. Bernanke. Increasing supply generally lowers the price, 
so I think that's correct. But in these circumstances, Congress 
has to weigh the benefits of more oil supply against other 
considerations, including environmental issues and the like.
    Mr. Price of Georgia. Thank you.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman, for holding 
this hearing, and I thank Chairman Bernanke for once again 
being here and helping us to understand his vision for how we 
deal with our economy, and, of course, we are all pretty much 
focused on the subprime crisis, because I think we all 
understand the role that it is playing in our economy--the 
negative role that it is playing in our economy at this time.
    Yesterday, Mr. Bernanke, we had some economists here 
testifying before this committee, and there was some discussion 
about the role of regulatory agencies, and some discussion 
about public policymakers and whether or not we were going to 
overdo it and come up with new laws that may prove to be 
harmful to the overall industry and thus the economy.
    And let me just say that I think that you have been very 
forthcoming in talking about some missed opportunities maybe 
early on, you know, with maybe what could have been done based 
on information that regulatory agencies should have known 
about, should have had access to, should have acted on. So that 
is behind us, but I am concerned about voluntary efforts by the 
financial institutions who have some role in responsibility in 
the subprime crisis.
    For example, I held a hearing where Countrywide said that 
it had made 18 million contacts, had done 60,000 workouts, and 
out of that, there were 40,000 loan modifications. This other 
coalition called HOPE NOW said they had done 545,000 workouts, 
150 loan modifications, and 72 percent of these were what we 
found, that 72 percent of these were kind of repayment plans 
and they were not real modifications. Now we are trying to act 
on the best information. And here we have these voluntary 
efforts that are representing to us that they are making these 
contacts. They are doing these workouts, and we look at this. 
We don't see it in our communities. We don't have people who 
are saying that they got a workout that made good sense and 
that they had been contacted.
    How can you help us if we are to have any faith in 
voluntary efforts at all and not get so focused on trying to 
produce laws that will do some corrections? How can you help us 
with determining whether or not this information we are getting 
is true; whether or not they are doing these workouts; whether 
or not they are doing this outreach.
    What do you do to track this voluntary effort?
    Mr. Bernanke. Well, Congresswoman, you are quite right that 
the information has been very mixed. They did a whole bunch of 
different surveys. They haven't been comparable. We don't 
necessarily know exactly what is going on. I think one of the 
benefits of the HOPE NOW alliance is that they are trying to 
get a more comprehensive and more systematic data collection so 
we will know better how many people are being helped, how many 
are not, what the form of the help is, and so on.
    So I do think that the first requirement for a good policy 
here is to know exactly what's happening, and I agree with you 
absolutely on that. I also have some sympathy for your point 
that many of the actions being taken are very temporary, like a 
temporary payment plan or perhaps a forgiveness of a couple of 
payments, and that kind of thing.
    In many cases the only solution that is going to be 
enduring is a more sustainable mortgage or some kind of 
restructuring or modification. And I do think that we need to 
encourage the private sector to do a greater share of 
modifications and restructurings in order to solve the problem 
rather than just to put it off for a few months. I think that 
is very important.
    In addition, I believe the Federal Housing Administration, 
the FHA, could be helpful in that respect, if it had more 
flexible products and more flexibility to refinance mortgages 
coming from the private sector to create again a sustainable 
solution for people in difficulty.
    Ms. Waters. We are willing and prepared to do the 
legislative work. Again, we have relied on a lot of voluntary 
efforts. And I guess my question to you is, are we going rely 
on these voluntary efforts to continue to strengthen their 
product, their work, or is there some way that you can have in 
your office someone or someones who can trace, follow, and 
dissect and determine whether or not these voluntary efforts 
are real?
    Mr. Bernanke. Well, again, Congresswoman, I think the lead 
on the data collection is coming from HOPE NOW, but we also get 
our own data from some of the private suppliers of loan 
information, for example. So we are doing a good bit of 
analysis at the Fed, and we are looking for alternative 
solutions. But, quite frankly, finding solutions that will be 
focused and help the right people, at a reasonable cost, is 
very difficult.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. In recent testimony over in the Senate, and 
responding to the Senator from my State, Senator Carper, you 
indicated that Regulation Z might be out by opening day of 
baseball season. It was unclear to me as to whether everybody 
understood when opening day of baseball season is. I believe it 
is March 30th, which is about a month away.
    But this is not important. What is in it is obviously very 
important, but it is not important to have it out in terms of 
what we are doing here. Congresswoman Maloney indicated that 
she has already introduced legislation which is very extensive, 
which may go substantially beyond where Regulation Z may be, 
with respect to credit cards and the issuance thereof and what 
can be done under those contracts, and some of her points may 
be well taken, and some may not be well taken. And I think 
until we see and compare it to Regulation Z, we're not going to 
really be able to make that decision.
    My question to you is, can you be more specific or can you 
reaffirm or do you know for sure when the date of opening 
season of baseball is? Or whatever. I'd just like to get some 
sense of where this is coming from.
    Mr. Bernanke. I thought it meant opening day of football 
season. I'm sorry. I did misspeak in that answer, and we 
corrected the answer with Senator Carper.
    The reason for the delay is that as mentioned, we are going 
to be doing another set of rules related to the Unfair 
Deceptive Acts and Practices under the FTC Act. Those should be 
out, I hope, in the spring. I don't have an exact date, but not 
too far in the future, and that would give the public a chance 
to look at and comment on these rules that relate to some of 
the issues that Congresswoman Maloney was talking about. We 
would then do a comment period and review those comments. It is 
our belief that because there would be some interaction between 
the Reg Z rules and the UDAP rules, in order to minimize the 
cost for the industry, we would probably be better off 
releasing both of them somewhat later this year.
    So the opening day is probably closer to where we would be 
releasing the proposed UDAP rules rather than when we will be 
having the final Reg Z rules. I apologize for that.
    Mr. Castle. So Reg Z may be closer to the World Series, or 
something of that nature? Would that be a correct statement?
    Well, I think it's a matter of some concern to us. I hope 
you understand as your people go about their work, and they 
have to do their work correctly, how important that it that we 
have that in order to formulate legislation or determine where 
we are on legislation.
    Along those lines, let me ask you another question. In July 
of 2003, your predecessor, Chairman Greenspan, sent me a 
letter, which I will submit for the record, expressing deep 
skepticism about legislators' attempts to limit creditors' use 
of information regarding borrowers' payment performance with 
other creditors when pricing risk. Risk-based pricing, as this 
practice is commonly called, lowers the price of credit for 
some and provides access to otherwise unavailable credit to 
many.
    Mr. Chairman, do you share Mr. Greenspan's view of that? I 
quote from the letter, ``Restrictions on the use of information 
about certain inquiries or restrictions not considering the 
experience of consumers in using their credit accounts will 
likely increase overall risk in the credit system, potentially 
leading to higher levels of default and higher prices for 
consumers?''
    Mr. Bernanke. Well, as a general rule, in the same way that 
riskier credit leads to higher interest rates in the mortgage 
market, you would expect the same thing would happen in the 
credit card market, and so reasonable attempts to measure the 
risk of the borrower, I think, are appropriate and could be 
reflected in interest rates.
    We will be looking at the specific measures taken and the 
specific approaches taken when we look at these practices under 
the UDAP authority, but as a general matter, one would expect a 
higher rate to be charged to a risky borrower.
    Mr. Castle. Thank you, Mr. Chairman. Let me ask a question 
on a different subject. We don't have time to go into a lot of 
details, but what we have seen both in the House of 
Representatives and in the United States Senate is a series of 
proposals concerning the mortgage problems. One of these is a 
proposal in the Senate that gives bankruptcy courts the ability 
to revise mortgage terms. Over here we have had a suggestion to 
suspend litigation for a period of time after we pass 
legislation to allow the banks to reform mortgages. There are 
other suggestions of having lump sums of money go the various 
States, who could then use it to help alleviate the problems of 
the mortgage companies.
    Some of this may be beyond your typical perspective, but do 
you have any thoughts or ideas on any of that kind of 
legislation, either good or bad, that you can share with us?
    Mr. Bernanke. Well, I certainly welcome and commend you and 
Chairman Frank and others for thinking about these issues. They 
are the very, very difficult ones. As I said, we have been 
thinking about them a lot at the Federal Reserve and discussing 
them with Congress, with the Treasury, and others. At the 
moment I don't see a clear and obvious additional set of steps 
that can be taken beyond what's happening now, other than, as I 
mentioned, FHA modernization, GSE reform.
    But we are certainly open to the possibility, and we 
continue to look at alternatives, but I don't have an 
additional one to recommend at this point.
    Mr. Castle. Thank you, Mr. Chairman.
    The Chairman. Thank you very much. I will now recognize Mr. 
Meeks for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    It is good to be with you, Chairman Bernanke. You know, 
sometimes you get some of these conditions, and you do one 
thing and it helps, you do something else and it hurts. And 
such is the situation that I think that we are currently in.
    It seems to me that if you move aggressively to cut 
interest rates and stimulate the economy, then you risk fueling 
inflation, on top of the fact that we have a weak dollar and a 
trade deficit. You know, you have to go into one direction or 
the other. Which direction are you looking at focusing on 
first?
    Mr. Bernanke. Congressman, I think I'll let my testimony 
speak for itself in terms of the monetary policy. I just would 
say that we do face a difficult situation. Inflation has been 
high, and oil prices and food prices have been rising rapidly. 
We also have a weakening economy, as I discussed. And we have 
difficulties in the financial markets and the credit markets. 
So that is three different areas the Fed has to worry about--
three different fronts, so to speak.
    So the challenge for us, as I mentioned in my testimony, is 
to balance those risks and decide at a given point in time 
which is the more serious, which has to be addressed first, and 
which has to be addressed later. That is the kind of balancing 
that we just have to do going forward.
    Mr. Meeks. So you just move back and forth as you see, and 
try to see if you can just have a--
    Mr. Bernanke. Well, policy is forward-looking. We have to 
deal with what our forecast is. So we have to ask the question, 
where will the economy be 6 months or a year down the road? And 
that's part of our process for thinking about where monetary 
policy should be.
    Mr. Meeks. But let me also ask you this. The United States 
has been heavily financed by foreign purchases of our debt, 
including China, and there has been a concern that they will 
begin to sell our debt to other nations because of the falling 
dollar and the concerns about our growing budget deficits. Will 
the decrease in short-term interest rates counterbalance other 
reasons for the weakening dollar, enough to maintain demand for 
our debt? And if that happens, what kind of damage does it do 
to our exports? And I would throw into that because of this 
whole debate currently going on about sovereign wealth funds--
and some say that these sovereign wealth funds are bailing out 
a lot of our American companies--so is the use of sovereign 
wealth funds good or bad?
    Mr. Bernanke. Well, to address the question on sovereign 
wealth funds, as you know, a good bit of funding has come in 
from them recently to invest in some of our major financial 
institutions. I think, on the whole, that has been quite 
constructive. The capitalization, the extra capital in the 
banks, is helpful because it makes them more able to lend and 
to extend credit to the U.S. economy. The money that has flowed 
in has been a relatively small share of the ownership or equity 
in these individual institutions, and in general has not 
involved significant ownership or control rights.
    So I think that has been actually quite constructive, and 
again I urge banks and financial institutions to look wherever 
they may find additional capitalization and allow them to 
continue normal business.
    More broadly, we have the CFIUS process, as you know, where 
we can address any potential risks to our national security 
created by foreign investment, and I think that is a good 
process. Otherwise, to the extent that we are confident that 
sovereign wealth funds are making investments on an economic 
basis and for returns--as opposed for some other political or 
other purpose--I think it is quite constructive, and we should 
be open to allowing that kind of investment.
    Part of the reciprocity is that it has allowed American 
firms to invest abroad as well, and so there is a quid pro quo 
for that.
    Mr. Meeks. What about the first part of my question?
    Mr. Bernanke. I don't see any evidence at this point that 
there have been any major shifts in the portfolios of foreign 
holders of dollars. We do monitor that to the extent we can, 
and so far I have not seen any significant shift in those 
portfolios.
    Mr. Meeks. Thank you.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Thank you. Chairman Bernanke, have the markets 
repriced risk? Where do we stand there? You know, we talked 
about the complex financial instruments.
    Mr. Bernanke. That is an excellent question. Part of what 
has been happening, Congressman, is that risk perhaps got 
underpriced over the last few years, and we have seen a 
reaction where risk is being now priced at a high price. It's 
hard to say whether the change is fully appropriate or not. 
Certainly part of the recent change we have seen is a movement 
towards a more appropriate, more sustainable, pricing of risk.
    But in addition, we are now also seeing concerns about 
liquidity, about valuation, about the state of the economy, 
which are raising credit spreads above the normal longer-term 
level, and those increased spreads and the potential restraint 
on credit are a concern for economic growth. And we're looking 
at that very carefully.
    Mr. Bachus. Are investors making a flight to simplicity, or 
are they getting better disclosures, or is there a role that, 
say, the Federal Reserve plays on seeing that those disclosures 
are there or are other regulators?
    Mr. Bernanke. Well, we do work with the SEC and the 
accounting board and FASB and others to make sure that the 
accounting rules are followed, and I know they're being looked 
at and revised to try to increase disclosure. The Basel II 
Capital Accord also has a Pillar 3, which is about disclosure. 
So more disclosure is on the way and is a good thing.
    And we continue to encourage banks and other institutions 
to provide as much information as they can to investors, and I 
think that's a very constructive step to take. It's not the 
whole answer, though, at this point. Relatively simple 
instruments like prime jumbo mortgages, for example, are not 
selling on secondary markets, less because of complexity and 
more just because of uncertainty about their value in an 
uncertain economy.
    Mr. Bachus. One thing you didn't mention in your testimony 
is the municipal bond market, and the problem with bond 
insurers. Would you comment on its effect on the economy and 
where you see--
    Mr. Bernanke. Yes, Congressman. The concerns about the 
insurers led to the breakdown of these auction rate securities, 
which were a way of using short-term financing to finance 
longer-term municipal securities. And a lot of those auctions 
have failed, and some municipal borrowers have been forced, at 
least for a short period, to pay the penalty rates. So there 
may be some restructuring that is going to have to take place 
to get the financing for those municipal borrowers.
    But as a general matter, municipal borrowers have very good 
credit quality, and so my expectation is that with a relatively 
short period of time, we'll see adjustments in the market to 
allow municipal borrowers to finance at reasonable interest 
rates.
    Mr. Bachus. Yes. In my opening statement, I mentioned that 
we have a functional regulator system, where we have different 
regulators regulating different parts of a market, which we now 
know is very interconnected. Do you think there are gaps in the 
regulatory scheme today that need to be addressed? Maybe the 
bond insurers may be an example where we did have State 
regulation, but it didn't appear that they were up to the task.
    Mr. Bernanke. The bond insurer's problem was a difficult 
one to foresee. I mean, first of all they were buying what were 
thought to be high-quality credits, and secondly they do have 
some sophistication of their own, doing some evaluation. So 
that was a difficult one to anticipate.
    In general, I think even though we have many regulators, 
there's a very extended attempt of regulators to work together 
in a collegial and cooperative way, and at the Federal Reserve 
we certainly try to do that. As I mentioned, we work with the 
SEC and the OCC and FDIC, and the like, and will continue to do 
that.
    One area where sometimes there have been, I think, some 
coordination problems is between the Federal and the State 
regulators, and we saw some of that in the mortgage lending 
issues in the last couple of years. We have undertaken a pilot 
program of joint examinations, working with State regulators. 
The idea is to try to improve even beyond where we are now in 
terms of our information sharing and coordination with those 
State regulators, and that is what we are trying to do. But 
that is sometimes an area where the communication may not be as 
good as in some other areas.
    Mr. Bachus. Let me ask one final question. You are a former 
professor, and I think the phrase is ``financial accelerator.'' 
What that means is that there are problems in the economy 
called sentiment problems; there is a lack of confidence. Is 
negative sentiment a part of what we're seeing now? I know I 
was in New York, and the bankers there said there were a lot of 
industries who were just waiting because of what they were 
reading in the paper, as much as anything else, to invest.
    Mr. Bernanke. Well, there is an interaction between the 
economy and the financial system, and it is perhaps even more 
enhanced now than usual in that the credit conditions in the 
financial market are creating some restraint on growth, and 
slower growth in turn is concerning the financial markets 
because it may mean that credit quality is declining. And so 
this financial accelerator or adverse feedback loop is one of 
the concerns that we have and one of the reasons why we have 
been trying to address those issues.
    Mr. Bachus. Thank you.
    The Chairman. Thank you. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. Welcome, Chairman 
Bernanke. In the 108th Congress, Congressman Brad Miller and I 
introduced the first predatory lending bill as H.R. 3974. In 
the 109th Congress, we introduced it in 2005 as H.R. 1182. The 
regulators weren't paying much attention to this, say 
minimizing the significance of it, and it took a crisis to 
finally get a bill passed.
    My concern is that looking finally at the last page of your 
testimony, you finally reached the credit card part of the 
equation, one paragraph, and my concern is that a lot of people 
who are seeing their credit dry up on the mortgage side are 
getting more and more credit on the credit card side, and that 
could portend potentially a similar kind of effect in the 
credit card market as we have seen in the mortgage market.
    Now I have not yet signed on to Ms. Maloney's bill, because 
we are still looking at it, but I have been meeting with 
industry participants, and one of the things that they have 
said is that we should give them more time for the regulator to 
do more. That is the same argument that we were hearing back in 
2004 and 2005 and 2006: Give the regulators more time.
    And I asked them, does the regulator have enough authority 
to really do anything if they were inclined to do something? 
And it appears to me from page 9 of your testimony, the one 
paragraph we have, the only authority you appear to have is the 
Federal Trade Commission Act, or the Truth in Lending Act, 
which is a disclosure act. Actually the Truth in Lending Act is 
the one that is under your authority, which is a disclosure 
statute. I'm not even going to get into the issue that Ms. 
Maloney raised, do you think we need to do something, but tell 
me what authority the regulators would need, what authority 
would you need to be more aggressive in this area, as we were 
trying to get the Fed to be in 2004 and 2005 in the mortgage 
area?
    Even if you were inclined to be more aggressive, if you 
didn't have the authority, you really couldn't do it, and one 
of the concerns I'm seeing is that disclosure won't do 
everything. Unfair and Deceptive Trade Practices won't do 
anything if both of those things are required. Some things are 
unfair that are not necessarily deceptive.
    What kind of additional authority should we be considering 
giving to the Fed or to somebody, some regulator if it's not 
the Fed, and to whom in this area?
    Mr. Bernanke. Well, Congressman, as you pointed out, we 
have two different authorities. We have the Reg Z Truth in 
Lending authority, which is disclosure authorities, and we have 
already put out a rule for comment. It was a very extensive 
rule that involved consumer testing and several years of 
efforts to put together. I think that proposal is going to 
improve disclosures a lot.
    But we also have this Unfair Deceptive Acts and Practices 
authority, which allows us to ban--not just failure to 
disclose--but allows us to ban specific practices, which are 
unfair or deceptive for the consumer, and I think--
    Mr. Watt. So you a're interpreting that ``or'' to be an 
``or'' rather than an ``and.''
    Mr. Bernanke. Yes.
    Mr. Watt. That's a good--
    Mr. Bernanke. That's right. Yes.
    Mr. Watt. Okay.
    Mr. Bernanke. So we are able to address certain practices 
of billing, rate setting, rate changing and so on, and in terms 
of the delay issue, as I mentioned earlier, we will have some 
rules under this authority out for your examination, and for 
public comment, sometime this spring, just a few months from 
now.
    So you will see what we're able to do with that, and you'll 
have to make your decision whether or not more action by 
Congress is needed.
    Mr. Watt. Thank you, Mr. Chairman. My time has expired and 
I--
    The Chairman. Thank you. The gentleman from Texas, a 
ranking member of the subcommittee.
    Dr. Paul. Thank you, Mr. Chairman. Chairman Bernanke, 
earlier you were asked a question about the value of the 
dollar, and you sort of deferred and said, ``You know that is 
the Treasury's responsibility.'' I always find this so 
fascinating, because it has been going on for years.
    Your predecessor would always use that as an excuse not to 
talk about the value of the dollar. But here I find the 
Chairman of the Federal Reserve, who is in charge of the 
dollar, in charge of the money, in charge of what the money 
supply is going to be, but we don't deal with the value of the 
dollar.
    You do admit you have a responsibility for prices, but how 
can you separate the two? Prices are a mere reflection of the 
value of the dollar. If you want to control prices, then you 
have to know the value of the dollar. But if you are going to 
avoid talking about the dollar, then all you can do then is 
deal with central economic planning.
    You know, if we stimulate the economy, maybe there will be 
production and prices will go down, and if prices are going up 
too fast you have to bring on a recession. You have to try to 
balance these things, which I think is a totally impossible 
task and really doesn't make any sense, because in a free 
market if you had good economic growth you never want to turn 
it off, because good economic growth brings prices down just 
like we see the prices of computers and cell phones, those 
prices come down where there is less government interference.
    But you know the hard money economists who have been around 
for awhile, they have always argued that this would be the 
case. Those who want to continue to inflate will never talk 
about the money, because it isn't the money supply that is the 
problem, it is always the prices.
    And that is why the conventional wisdom is, everybody 
refers to inflation as rising prices, instead of saying 
inflation comes from the unwise increase and supply of money 
and credit. When you look at it, and I mentioned in my opening 
statement that M3, now measured by private sources, is growing 
by leaps and bounds.
    In the last 2 years, it increased by 42 percent. Currently, 
it is rising at a rate of 16 percent. That is inflation. That 
will lead to higher prices. So to argue that we can continue to 
do this, continue to debase the currency, which is really the 
policy that we are following, is purposely debasing, devaluing 
a currency, which to me seems so destructive.
    It destroys the incentives to save. It destroys--and if you 
don't save, you don't have capital. Then it just puts more 
pressure on the Federal Reserve to create capital out of thin 
air in order to stimulate the economy, and usually that just 
goes in to mal-investment, misdirected investment into the 
housing bubbles, and the NASDAQ bubble.
    And then the effort is once the market demands the 
correction, what tool do you have left? Let's keep pumping--
pump, pump, pump. And it just is an endless task, and history 
is against you. I mean, history is on the side of hard money. 
If you look at stable prices, you have to look to the only 
historic, sound money that has lasted more than a few years, 
fiat money always ends.
    Gold is the only thing where you can get stable prices. For 
instance, in the last 3 to 4 years, the price of oil has 
tripled, a barrel of oil went from $20 to $30 up to $100 a 
barrel. And yet, if you look at the price of oil in terms of 
gold it is absolutely flat, it is absolutely stable. So if we 
want stable prices, we have to have stable money.
    But I cannot see how we can continue to accept the policy 
of deliberately destroying the value of money as an economic 
value. It destroys, it is so immoral in the sense that what 
about somebody who saved for their retirement and they have 
CDs. And we are inflating the money at a 10 percent rate, their 
standard of living is going down and that is what is happening 
today.
    The middle class is being wiped out and nobody is 
understanding that it has to do with the value of money, prices 
are going up. So how are you able to defend this policy of 
deliberate depreciation of our money?
    Mr. Bernanke. Congressman, the Federal Reserve Act tells me 
that I have to look to price stability, which I believe is 
defined as the domestic price--the consumer price index, for 
example--and that is what we aimed to do. We looked for low 
domestic inflation.
    Now you are correct that there are relationships obviously, 
between the dollar and domestic inflation and the relationships 
between the money supply and domestic inflation. But those are 
not perfect relationships, they are not exact relationships. 
And given a choice, we have to look at the inflation rate, the 
domestic inflation rate.
    Now I understand that you would like to see a gold standard 
for example, but that is really something for Congress, that is 
not my--
    Dr. Paul. But your achievement, we have now PPI going up at 
a 12 percent rate. I would say that doesn't get a very good 
grade for price stability, wouldn't you agree?
    Mr. Bernanke. No, I agree. The more relevant one, I think, 
is the consumer price index, which measures the price consumers 
have to pay. And last year that was between 3\1/2\ and 4 
percent. I agree that is not a good record.
    Dr. Paul. And PPI is going to move over into the consumer 
heading as well.
    Mr. Bernanke. And we are looking forward this year, trying 
to estimate what is going to happen this year, and a lot of it 
depends on what happens to the price of oil. If oil flattens 
out, we will do better, but if it continues to rise at that 
rate in 2007, it will be hard to maintain low inflation, I 
agree.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. We face 
significant challenges in the housing market that have led in 
part to serious problems in the credit markets and our larger 
economy. Some of these problems begin as a result of predatory 
lending practices, which reached epidemic proportions in recent 
years, and took millions of dollars from American households of 
the equity in their homes and undermining the economic vitality 
of our neighborhoods.
    Approximately 1.8 million subprime borrowers will be facing 
resetting adjustable rate mortgages over the next couple of 
years, unless the government or the lending industry helps them 
modify the terms of their loan in some other form.
    I don't support a government bailout for all these 
homeowners, particularly for wealthy investors and speculators 
who borrowed against the equity in their homes, betting on 
profits from a soaring housing market. But I do believe we need 
to make a strong effort to help lower-income homeowners, who 
were the victims of predatory lenders, refinance in order to 
stay in their homes.
    If foreclosures, Mr. Chairman, continue to rise, what 
impact do you believe this will have or could have on the 
economy in the next couple of years?
    Mr. Bernanke. The high rate of foreclosures would be 
adverse to the economy. Obviously, it hurts the borrowers, but 
it also hurts their communities if there are clusters of 
foreclosures. And it hurts the broader economy, because it 
makes the housing market weaker and that has effects on the 
whole economy.
    So clearly, if we can take actions to mitigate the rate of 
foreclosure, do workouts and otherwise modify loans or find 
ways to help people avoid foreclosure, I think that is 
certainly positive.
    Mr. Moore of Kansas. Thank you, sir. Some believe that we 
should enact legislation that would amend the bankruptcy code 
to allow judges to modify the terms of a loan on a debtor's 
principle residence in chapter 13 in order to provide relief to 
these homeowners. This would essentially treat primary 
residences in a similar way to credit cards under the 
bankruptcy code. In 1978, Congress created this exemption in 
the bankruptcy code with the intent of encouraging 
homeownership by providing certainty to mortgage lenders that 
terms and conditions of the loan were secure.
    Do you believe that changes in the bankruptcy code to make 
primary residence lending more akin to credit cards will place 
up our pressure on mortgage interest rates and what effect 
could this have on investor confidence and mortgage-backed 
securities market in the broader economy?
    Mr. Bernanke. Well, I think the proposed changes to the 
bankruptcy code have some conflicting effects. On the one hand, 
they might help some people who could appeal to the bankruptcy 
code in order to--
    Mr. Moore of Kansas. Could you get a little closer to the 
microphone sir, please, thank you.
    Mr. Bernanke. The proposed change to the bankruptcy code 
would have conflicting effects. I think it would help some 
people. On the other hand, it would probably lead to concern 
about the value of existing mortgages and probably higher 
interest rates for mortgages in the future. And so it is a very 
difficult trade-off.
    The Federal Reserve did not take a position on the previous 
bankruptcy code changes--
    Mr. Moore of Kansas. I understand.
    Mr. Bernanke. --and I think we are going to leave this one 
to Congress to figure out the appropriate trade-off.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    Mr. Chairman. Next, we have the gentleman from California.
    Mr. Royce. Thank you, Mr. Chairman. I wanted to ask 
Chairman Bernanke a question. To date, the U.S. banking system, 
I think, has handled the stress originated in the housing 
sector. But I think this is a result of these institutions 
being adequately capitalized prior to the turmoil that we found 
ourselves into.
    And given the ability of these institutions now to 
adequately handle that stress with existing leverage ratio 
requirements, I wondered if it caused you to rethink your 
attitude toward implementation of Basel II?
    Mr. Bernanke. No, Congressman, I still think Basel II is 
the right way to go, because Basel II relates the amount of 
capital that banks have to hold to the riskiness of their 
portfolio. So, if done properly, risky assets require more 
capital, and that allows for better risk management and greater 
safety.
    Now, it is certainly true that some of the lessons we 
learned from this previous experience require us to go back and 
look at Basel II and see, for example, if there are changes 
that might need to be made. But that is one of the beauties of 
the system; it is a broad set of principles and can be adapted 
when circumstances change, as we have seen in the last couple 
of years.
    But we look at banks across the country and try to decide 
why some did well and some did poorly. The ones who did well 
had really strong risk management systems and good company-wide 
controls for managing and measuring risk. And that is the 
central idea behind Basel II.
    Mr. Royce. But they were also very well capitalized.
    Mr. Chairman. Stop the clock on the gentleman from 
California. There are three votes coming up. The first one is a 
general vote. Anyone who feels the need to vote on the general 
can go, but we are going to keep going.
    There will then be two further votes, which I think members 
won't want to miss. And at that point, when the general vote is 
concluded, and the next vote starts, we will just let the 
Chairman go. Anyone who wants to, though, can stay. We will 
have another couple of hours of questions.
    I plan to stay. I will leave once we get the call for that 
second vote, and we will all run over there. So the gentleman 
will resume at this time, and members who wish to stay will be 
called on through the general vote and then we are going to 
have adjourn the hearing. The gentleman from California.
    Mr. Royce. Thank you again, Mr. Chairman. I wanted to 
continue with another question, Chairman Bernanke, and that has 
to do with the success of our country's economy. I think, to a 
certain measure, it is based on an economic model that has a 
solid foundation in terms of free and flexible markets, and 
respect for the sanctity of a contract for the rule of law.
    And understanding this Chairman Bernanke, do you believe it 
is in the best interest of our economy for the government to 
begin rewriting contracts between two private parties? And 
let's say for a minute, should Congress end up setting a 
precedent and grant the authority to change the terms of a 
contract, do you believe that this could potentially have a 
negative impact on the flow of capital that then comes into the 
housing market?
    Mr. Bernanke. I agree the sanctity of contract is very 
important. It shouldn't be rewritten unless there is evidence 
of fraud or deceit, or other problems in the contract itself.
    Mr. Royce. And there are several studies, I have seen 
economists arguing that we could see a 2 percent increase in 
home loans, because banks would face increased uncertainty of 
future revenue if loans could be rescinded. And basically, the 
economists are looking at the prospect of a judge undermining 
existing contracts as a result of such a law.
    And that is one of the reasons I think mortgage debt has 
always been treated differently than other types of debt, it 
was to encourage lower rates on a less risky investment. And so 
these lower rates are dependent upon the ability really of the 
lender to recover collateral, and that would be a heavy price 
to pay.
    The last line of questioning that I wanted to pursue with 
you is one on the estimates that have the deficit rising to 
$400 billion or more in the coming year. I think a lot of us 
were concerned about that $152 billion stimulus package. I 
voted against it because of my concern for what it would do, 
piling up the deficits.
    And you know now, we understand that in the Senate, they 
are working on a second bill, maybe in the $170 billion range 
without any offsetting spending cuts. And I just ask, are you 
concerned we may be headed toward the scenario that you 
described to the Senate Budget Committee when you testified 
earlier this year?
    You said at that time you know something to the tune of ``a 
vicious cycle may develop in which large deficits could lead to 
rapid growth in debt and interest payments, which in turn adds 
to subsequent deficits.'' And you said, ``ultimately a big 
expansion of the nation's debt would spark a fiscal crisis, 
which could be addressed only by very sharp spending cuts tax 
increases, or both should such a scenario play out.''
    If we didn't have the policy changes here in Congress to do 
something about those deficits and thus I ask you about the 
magnitude of the deficits that we are running up with the 
stimulus package and now a second one being organized in the 
Senate. Your response please, Mr. Chairman?
    Mr. Bernanke. Congressman, when I discussed whether the 
stimulus package should be undertaken, I emphasized it should 
be temporary and not affect the structural long-term deficit. I 
do think that there are serious issues with the long-term 
structural deficit, and they relate primarily to the aging of 
our society and therefore to entitlements and medical costs.
    And I stand by what I said to the Senate Budget Committee 
that it is very important to attack all those issues.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Chairman. The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Chairman Frank. Chairman Bernanke, 
I want to follow up on what Congressman Kanjorski touched on 
briefly in his questions. As chairman of the Subcommittee on 
Higher Education, I am concerned about the impact that the 
current crisis in the housing market is having on the liquidity 
of the overall marketplace, especially on student college 
loans.
    I have talked to banks who say that they are lending money 
to students and then they package the loans but are having 
difficulty placing them in the marketplace. Do you believe that 
we should have some contingency plans to ensure access to 
college student loans and what should those plans include?
    Mr. Bernanke. Congressman, I believe about 80 to 85 percent 
of the student loans are federally backed or insured in some 
way. And to my knowledge, those securities are, or soon will be 
marketed normally. And so I don't expect that part of the 
market, which is a big part of the market, to have any 
sustained problems.
    With respect to the so-called private label student loans, 
there has been some withdrawal from that market, partly because 
Congress reduced the subsidy, I believe, to those lenders. And 
certainly, the most recent episode has made it more difficult 
to market or securitize some of those loans. So there may be 
some disruption in that market, but I do think that this is a 
category of loans that has generally performed pretty well, and 
I expect to see that come back in the near future.
    I am not sure what else to suggest other than to encourage 
banks to continue to find new ways to market those loans. 
Again, most of that market is federally insured already, and I 
think those loans are going to be fine.
    Mr. Hinojosa. The last question I would ask is, in today's 
newspaper, the Washington Post talks about the, I think they're 
called appraisers who are forced by someone to falsely increase 
their appraisal value of properties, and what that is doing of 
course is causing the homeowner to pay such high taxes and also 
to, in my opinion, contribute to the current crisis in housing 
market. What are your recommendations for us to stop that and 
to get to what are realistic appraisals instead of what I just 
described?
    Mr. Bernanke. Well, the Federal Reserve has tried to 
address that issue. For banks which we directly supervise, we 
have had a longstanding set of rules about working with 
appraisers to make sure they are not given incentives to 
overestimate the value of a property, for example.
    In our HOEPA regulations, which are out for comment, which 
I discussed briefly in my testimony, we include some new rules 
that would prohibit any lender, not just a bank, from 
explicitly or implicitly coercing an appraiser to overestimate 
the value of a property. So we are trying to address that in 
our rules.
    I'm not sure whether additional Federal action would be 
needed. My hope is that these steps will address the problem.
    Mr. Hinojosa. Thank you. I yield back, Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman, and again welcome, 
Chairman Bernanke. At a recent appearance before the Joint 
Economic Committee, you were quoted as saying, ``A net increase 
in taxes that was substantial would probably not be advisable 
because of its effect on aggregate demand.'' In the same 
appearance, which I think was late last year, you also said, 
``A large increase in net taxes would tend to be a drag on 
consumer spending and the economy through a number of different 
channels.'' My question is, Mr. Chairman, from your 
perspective, how do you define substantial? And how to you 
define large in the context of tax increases?
    Mr. Bernanke. Well, I don't have a number in mind, but I'm 
sure there are small changes that can be made to the tax code. 
But in the current environment--where consumers are under a lot 
of pressure and the economy is slowing down--a tax increase 
that was a significant fraction of a percent of GDP, for 
example, would be a drag on the consumer, and our demand would 
have adverse short-term demand effects.
    Mr. Hensarling. Well, let me try this one on you, Mr. 
Chairman. As you know, presently the alternative minimum tax--
Congress has a tendency to do what we all know is a 1-year 
patch--but the AMT is still alive and well. If we don't patch 
it beyond a year, we have 25 million taxpayers who will pay an 
average of an extra $2,000 in taxes. Would that qualify as a 
substantial increase, in your opinion?
    Mr. Bernanke. My assumption is that Congress will either 
patch it or find some alternative solution. But--
    Mr. Hensarling. Well, the chairman of the Ways and Means 
Committee has proposed an alternative that represents a $3.5 
trillion tax increase over the next 10 years. Coupled with the 
expiration of tax relief that was passed in 2001 and 2003, 90 
percent of all Americans would have their taxes raised. In your 
opinion, would that qualify as a substantial tax increase?
    Mr. Bernanke. Congressman, there are two issues. What I was 
referring to earlier was that in the very short term, higher 
taxes would offset some of the effects of this fiscal stimulus 
package that we've seen. In the longer term, I agree that low 
taxes tend to promote economic efficiency and economic growth, 
but they have to balanced against the need for revenue for 
government programs that Congress may want to undertake. That 
is what Congress's principal job is, to figure out how much 
taxation is needed to support worthwhile programs.
    So that is a decision for Congress.
    Mr. Hensarling. Mr. Chairman, in today's testimony you 
said, ``The vigor of the global economy has offset some of the 
weakening domestic demand and that U.S. export should continue 
to expand at a healthy pace, providing some impetus to domestic 
economic activity and employment.'' Would that be a rough 
translation that in today's economy, trade is good?
    Mr. Bernanke. I think trade is always beneficial, but right 
now net exports are a positive source of demand and jobs and 
are helping to keep our economy stronger.
    Mr. Hensarling. Would you be concerned, as there are I 
believe five, maybe six free trade agreements that are still 
pending in Congress that Fast-Track authority has expired, and 
that at least two major presidential candidates that I'm aware 
of have called for reducing trade with our major trading 
partners, Canada and Mexico? Might that be a bad thing for the 
economy?
    Mr. Bernanke. I don't know the details or concerns people 
might have on individual agreements, but as a general matter, I 
think that open trade is beneficial to the economy. There may 
be dislocations that occur because of trade, and a better way 
to address those dislocations is to help those people directly 
rather than to shut down the trading mechanism.
    Mr. Hensarling. There has been some discussion--I see my 
time is running out--on proposed credit card legislation. 
Certainly I guess for the first time in almost a quarter of a 
century the Fed is undertaking a soup-to-nuts review of 
Regulation Z. You've been quoted before in budget committee, 
where I also served, that more expensive and less available 
credit seems likely to be a source of restraint on economic 
growth. If the credit card legislation that might be considered 
by Congress--and I'm not speaking of any specific bill--but if 
it had the net impact of causing credit card companies to 
increase credit cost for millions of Americans and cut off 
access to credit for millions of other Americans, would that be 
a source of concern to you?
    Mr. Bernanke. Well, it is important for people to know what 
it is they are buying. They need to have enough information to 
make a good decision, shop properly, and to get the product 
they think they are getting. So that is important.
    Onerous regulations, though, that reduce credit 
availability unconnected with the issues of disclosure, for 
example, would be negative in the current environment.
    Mr. Hensarling. I am out of time. Thank you.
    The Chairman. The gentleman from Missouri.
    Mr. Clay. Thank you, Mr. Chairman.
    Chairman Bernanke, I represent Missouri, and in my district 
over the last few years, we have experienced tremendous job 
losses, most notable among them being the losses associated 
with the demise of Arthur Anderson, the moving of the Ford 
automobile assembly plant, a transfer of over 2,000 white-
collar jobs due to the BRAC realignment, and there are many 
more examples. And the repercussions of the housing crisis are 
beginning to be catastrophic. As a result of these factors, we 
have many families who work more hours than before for less 
money, and their liabilities did not change.
    We have an economic stimulus package that is to be put in 
effect in the near future. What is being done and what can we 
realistically expect in the matter of job creation during and 
beyond the dispersement of the stimulus package? And what can 
we do to gain back the jobs lost over the last decade?
    Mr. Bernanke. Well, there are two separate issues here. 
First, there's the issue of the unemployment rate as it varies 
over the business cycle, and we project some increase in that 
unemployment rate as the economy has slowed down. The Federal 
Reserve is trying to balance off its various mandates, 
including full employment, and that will certainly be one of 
the things we're trying to achieve. We hope that any 
unemployment generated by the current episode will be 
transitory and we project that it will come back down over the 
next couple of years.
    The other set of issues has to do with structural changes 
arising from trade and technology and all kinds of other 
changes that our economy has. Frankly, I think that we have to 
be careful about trying to prevent change. That's part of a 
growing, dynamic economy to have change and development.
    The best solution over the longer term really, I would say, 
is two-fold. The first is skills, having a skilled work force 
that is adaptable and can find opportunities wherever they may 
be. And secondly, ways to make it easier for people to move 
between jobs or deal with temporary periods of unemployment. 
For example, helping to make health insurance or pensions 
portable between jobs, or otherwise helping people make those 
transitions.
    So I think what we want to do is, on the one hand, preserve 
a dynamic economy, but on the other hand, we want to help 
people adapt and be prepared for that dynamic economy.
    Mr. Clay. Do you see much promise in green technology and 
the creation of jobs in that sector?
    Mr. Bernanke. Well, green technology will no doubt create 
jobs, but I think the right considerations are: Is this a cost-
effective way of achieving the environmental objectives that 
society has? And we don't want to undertake projects that are 
not very beneficial just to create jobs. We want to look for 
projects that are effective at achieving their objectives.
    Mr. Clay. Yes, but haven't we learned that a robust economy 
only for the wealthiest 2 to 10 percent isn't good for the 
country, and that we ought to be looking at ways to turn the 
economy around by creating jobs?
    Mr. Bernanke. I have talked about inequality and the 
concerns that raises, and there are a number of ways to address 
that. But I think the most important is through skill 
development.
    Mr. Clay. And so you would go through skill development 
other than assisting new technology and assisting new 
industries in getting on line?
    Mr. Bernanke. Well, there's a case for the government to 
support very basic research, but in the case of applied 
research, generally speaking companies have plenty of 
incentives to undertake that.
    Mr. Clay. Okay. Thank you so much.
    The Chairman. The gentleman from Connecticut.
    Mr. Shays. Thank you, Mr. Bernanke. I'd like to cover three 
areas if I could: Rating agencies; denomination of oil; and the 
spread of interest and you're lowering rates and interest rates 
for homeowners going up.
    First off, have the rating agencies made themselves 
irrelevant? Have they destroyed their brand? And are they going 
to be an organization we listen to in the future?
    Mr. Bernanke. The rating agencies perform a very important 
function, and clearly there have been problems in the last few 
years. They are doing internal reviews and reforms, but we are 
also looking at it--in fact, on an international basis--to 
figure out ways to make that work better.
    Mr. Shays. Is there a concern that in order to gain 
credibility, that they're going to overstate the future 
liabilities and just accelerate the reduction of wealth by 
their looking and devaluing holdings?
    Mr. Bernanke. Do I think they're going to be too aggressive 
in terms of downgrading?
    Mr. Shays. Yes.
    Mr. Bernanke. I hope that they don't do that, because that 
would be unconstructive. I hope that they make fair evaluations 
and try to address the actual credit risk associated with each 
asset. But there is a bit of risk there, I agree.
    Mr. Shays. Okay. Let me just ask you in regards to--I look 
at OPEC and I see $100 a barrel, but then I realize that from 
their standpoint, it's like we're at $50 or $60. Is there a 
concern that you have that they will go to look at the Euro to 
value their oil per barrel, and if so, what would be its 
impact?
    Mr. Bernanke. The price of oil is set in a global market 
and responds very quickly to changes in supply/demand as well 
as currency changes. I'm not aware of any imminent plan to 
change the currency denomination of oil, but I don't think it 
would make a major difference to the U.S. economy.
    Mr. Shays. What I used to look at, though, is I would say, 
you know, OPEC, the price is so high that they are causing 
tremendous dislocation throughout the world. But from their 
standpoint, they're saying, you know, we're not getting that 
much more. And I'm wondering, have you had dialogue with OPEC 
about this issue, or with folks indirectly about this issue 
from overseas?
    Mr. Bernanke. Whether they price it in dollars, euros, or 
something else, the exchange rate is known, and so they can 
always calculate the value. I don't think they misunderstand 
the fact that they are getting a very high price for their oil.
    Mr. Shays. Let me just ask you, in regards to, you've 
already talked about the spread, the Fed rate, and banks which 
are private institutions setting mortgages higher--we had a 
hearing yesterday that was rather depressing and made me want 
to buy gold--and the bottom line was: We increased the supply 
of housing exceeding demand, which really accelerated our just 
trying to have people buy homes, who shouldn't have. And the 
question is: Does this incredible excess supply of housing 
negate what you're trying to do in lowering interest rates?
    Mr. Bernanke. Well, the housing market is correcting for 
that reason, and house prices are declining. But at some point 
the market will stabilize, and demand will come back into the 
market. Construction, which is already down more than half, 
will begin to stabilize, and then subsequently prices will 
begin to stabilize. That's what we're looking forward to.
    Mr. Shays. Well, when do think they will stabilize?
    Mr. Bernanke. It is very difficult to know and we have been 
wrong before. But given how much construction has come down 
already, I imagine that by later this year, housing will stop 
being such a big drag directly on GDP. Prices may decline into 
next year, but we don't really know. The useful thing to 
appreciate, I guess, is that as house prices fall, they are 
self-correcting in a way because part of the reason that prices 
peaked and began to come down was that housing had become 
unaffordable. The median family couldn't afford a median home.
    As prices come down and incomes go up, you get more 
affordability and therefore more people come into the market.
    Mr. Shays. Thank you very much. Thanks for your generosity 
and for spending time here.
    Mr. Bernanke. Thank you.
    Mr. Miller of North Carolina. [presiding] The gentleman 
from Massachusetts, Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman, and Chairman Bernanke. 
I want to go back for just a second. I know that Mr. Meeks 
asked you about these sovereign wealth funds, and I appreciate 
your response that currently right now it's not a big number. 
Although I think there are reports that there are about $3 
trillion in assets right now in these sovereign wealth funds, 
probably more than the hedge funds and private equity funds 
combined.
    And notwithstanding some of the help, as you have noted, 
they have given in terms of stabilizing some of the effects of 
the subprime fallout, there is a growing concern, not only here 
in this Congress on both sides of the aisle, and also hearing 
it from the EU commissioner, President Sarkozy, that number 
one, there's very little transparency in terms of the operation 
of these government-controlled funds.
    Number two, there is the fear, unrealized thus far, that 
these government-controlled funds could invest for political 
purposes instead of a straight return on investment. And what 
I'm hearing from my colleagues and what we're hearing from the 
EU and some others is that a sort of protectionist response is 
coming forward, and I don't necessarily think that is a good 
thing in the long term in terms of a response to this type of 
investment by sovereign wealth funds. But you've been dealing, 
from your testimony, you've been dealing with some of these 
central banks. We're having a hearing on this next week, but we 
won't have the benefit of your counsel. What do you think in 
terms of your dealings with these central banks, might be an 
appropriate response that could head off some of the, I think, 
short-view, narrow-view protectionist responses to the 
sovereign wealth funds activities?
    Mr. Bernanke. Well, I hope the sovereign wealth funds 
understand and appreciate that it is in their own interest, if 
they want to have access to advanced economies like the United 
States, that they be sufficiently transparent as to inspire 
confidence that their motives are economic and not political or 
otherwise.
    So we have been encouraging that in discussions and 
international meetings, for example. And their reply is, 
``Well, if you'll be open to us, we'll be open to you.'' And I 
think that's where we need to be heading.
    The international agencies, like the International Monetary 
Fund and the OECD, are working on developing codes of conduct 
that both the sovereign wealth funds and perhaps the recipients 
of sovereign wealth fund monies may wish to adopt, that 
determine the transparency, the governance, the behavior of 
these funds, and the behavior of the host countries. And I do 
think there is a mutual benefit for us to work together to make 
sure that, on the one hand, they are, in fact, investing on an 
economic basis, and, on the other hand, that we are receiving 
that investment in an open way.
    Mr. Lynch. And you're suggesting these would be--I know the 
discussion right now is voluntary codes of conduct, which would 
work on our side because we have a number of, I think, self-
governing aspects, but those aren't necessarily shared in a lot 
of these other central banks. Is there any proposition out 
there to have something that might have some teeth beyond the 
simple voluntary adoption?
    Mr. Bernanke. I think at this point we are making good 
progress with conversations and discussions, international 
meetings, and I'm hopeful that this will work itself out.
    Mr. Lynch. All right. Fair enough.
    Mr. Chairman, I know you have a shortage of time, so I am 
going to yield back.
    Mr. Miller of North Carolina. Thank you. The gentleman from 
New Jersey, Mr. Garrett.
    Mr. Garrett. I thank the gentleman for yielding, and I 
thank the Chairman for being here.
    I would like to preface my question to the Chairman today 
by first of all voicing my strong concerns with the plan that 
has been put out recently by the leadership of this committee 
and others, that would allow the Federal Housing Administration 
to purchase over 1 million homes over a 5-year period. The 
conservative cost projections in the committee's budget and the 
review's estimates that this would at the very least have the 
Federal Government in the house-buying business to the tune of 
$15 billion, and this is on top of another proposal that is 
being worked on right now that would provide as much as $20 
billion in the forms of loans and grants, maybe a combination 
of the two, for the purchase of foreclosed or abandoned homes 
at or below the market values.
    Now, there is some justification that has been put out on 
this in the press by them, that says that there's some public 
mention that a similar proposal to this was enacted back in the 
1930's during the Depression to help distressed homeowners and 
families. And I know we've heard testimony today and recently, 
experiencing the rough economic times and the slower-than-
expected economic growth, maybe even a recession now or in the 
future. But based on what I've read and heard, including the 
witnesses that have come before the committee, I haven't heard 
anyone saying that we're anywhere near a Depression.
    So this leads me, Chairman, to this question. If we're 
going to go and consider such Depression Era ideas as these 
during these economic downturns, what could we possibly 
consider if the economy grows even worse than it is today?
    Mr. Bernanke. Well, you surprised me there. I thought you 
were going to ask me about this particular program.
    Mr. Garrett. Well, I know your response usually when we ask 
for particular programs, what your response is.
    Mr. Bernanke. Well, it depends on the circumstances. It 
depends on why the economy is worsening and where the problem 
is. My attitude is that we need to be flexible and address the 
situation as it arises. It is very hard to conjecture in 
advance how you will respond to a situation that will have many 
dimensions to it.
    In respect to the particular program you mentioned, I think 
it is worthwhile to be thinking about possible approaches one 
might take if the housing situation were to get much worse. At 
the moment, I think that the remedies I would support are 
expanded private-sector activities, FHA modernization, GSE 
reform.
    Mr. Garrett. But we don't have to go as far as this until 
that date comes when things get worse?
    Mr. Bernanke. I don't think we're at that point, but I do 
think it's worthwhile to keep thinking about those issues. I 
think that are a lot of difficulties, practical difficulties. 
How would you, for example, determine who to help? How would 
you ensure that the loans that you bought were not the bad 
apples in the barrel? There are a lot of difficult, technical 
problems.
    The Federal Reserve is working on issues like this just to 
try to understand how these things might work. Again, my 
attitude is that we need to be thinking about different 
alternatives and preparing for contingencies, but at the moment 
I am satisfied with the general approach that we're currently 
taking.
    Mr. Garrett. I appreciate that. You know, it sometimes 
seems like Congress is like that old axiom about old generals, 
that they're always just fighting the last war, as we go into 
the next battle. Is that the case with regard to regulations as 
well, that no one really predicted, most people didn't really 
predict where we are right now, a couple of years ago, or 2 or 
3 years ago? So could we get maybe the worst of both worlds if 
we go in this direction that some are talking about, that we 
get: (a) the regulations that will maybe tighten the credit 
market too much on the one hand; and (b) we're still not going 
to predict what the brilliant minds on Wall Street are going to 
come up some way to do an end-run around it anyway?
    Mr. Bernanke. Well, there is a certain tendency to fight 
the last war in all areas of effort. But, as this episode has 
found areas of weakness and problems, we need to do our best to 
address them, and do our best to be alert to new problems that 
might crop up in other unforeseen areas.
    Mr. Garrett. And just to close, the two gentlemen raised 
the issue about the dollar and the falling value there, the old 
axiom in there is, you know, inflation comes when too many 
dollars are chasing too few goods. So far, what we've done on 
the fiscal side of this is basically throw more dollars into it 
with a stimulus package, and my two questions to you are: One, 
does that do anything to actually change the mind set of 
creditors as far as their lending practice as a short-term 
lending like that? Does that really change their actual lending 
practices. And two, with the overall dollar value, there was an 
article in the Wall Street Journal today by David Ranson, I 
believe it is, which looks to say as far as the CPI and the way 
that we're evaluating the value of these things, that they're 
really backwards-looking and not forwards-looking, and that 
maybe we need to change the structure as to how we looked and 
measured the CPI and some of these valuations as well, in 
addition.
    Mr. Bernanke. Well, I think the Bureau of Labor Statistics 
does a reasonably good job of measuring consumer prices, and 
that's the index that we're looking at.
    What was your, sorry, your first question was?
    Mr. Garrett. Well, the first question is, you know, maybe 
we're looking at this again backwards-looking to some extent, 
by throwing more dollars into the system. One is--we do it one 
way by throwing dollars through fiscal. You do it the other way 
by loosening up credit. Isn't that just chasing more dollars 
after we're not producing any more goods?
    Mr. Bernanke. Again, the concern is that the economy will 
be producing less than its capacity, that there will be 
insufficient demand to use the existing capacity of the 
economy--that is the definition of economic slow-down. So, 
monetary policy and fiscal policy can be used to address that 
problem.
    I don't think it would change the practices of lenders, but 
it might make them somewhat more confident that the economy 
would be stronger and make them a little bit more willing to 
lend.
    Mr. Garrett. I appreciate it.
    Mr. Miller of North Carolina. The gentleman's time has 
expired.
    I now recognize myself. Mr. Chairman, I know that before 
you had this job, you were the CEO of the Princeton Economics 
Department.
    Mr. Bernanke. That's correct.
    Mr. Miller of North Carolina. And I wanted to pursue a 
question that Mr. Moore of Kansas asked you. He said that there 
was legislation now pending that would treat home mortgages and 
bankruptcy the same way credit card debt was treated. I don't 
know of any legislation like that. There is, however, 
legislation pending in both the House and the Senate that would 
make the treatment of home loans and bankruptcy the same as any 
other form of secure debt, including debt on investment 
property, mortgages on investment property, mortgages on 
vacation property, car loans, boat loans, loans on a washer and 
a dryer, or debt secured by any other asset.
    You said that you thought one result might be changing the 
bankruptcy law, higher interest rates. And in fact the 
opponents of that legislation have made some pretty dire 
predictions that no lender would lend with less than 20 percent 
equity, that they would make more than an 80 percent loan and 
the interest rates would go up a point and a half or two 
points, two and a half points. But they have not produced any 
kind of economic analysis to support that. I know one member 
who has said that they offered to let him see--they had an 
analysis, they'd let him see it privately, which sounded more 
the way you got offered to look at dirty pictures in the old 
days, not how you looked at economic analysis.
    A couple of weeks ago, there was a Georgetown study by a 
fellow named Levitan, that compared the terms of availability 
of mortgage lending in places in the United States at the same 
time that had different laws in effect. Between 1978 and 1994, 
the courts in different parts of the country interpreted the 
bankruptcy laws differently, interpreted whether mortgages 
could be modified differently, so in some parts of the country 
they're being modified fairly freely, in some not at all.
    And the result of that study was that there was no real 
difference in the terms of availability of credit, and 
estimated that if there was any real difference at all, it 
might be 0.1 percent of an interest rate. Are you familiar with 
any economic study--and again, I assume that I'm correct that 
the way economists do things is they publish, they let others 
look at their factual assumptions, follow their logic, and how 
they reach their conclusions; I think at the Ph.D. level that's 
called ``peer review``; in 8th-grade math class we called that 
``showing your work.'' It's the same concept. Are you familiar 
with any economic analysis that shows a substantial difference 
in the availability or terms of credit, based upon how 
mortgages are treated in bankruptcy?
    Mr. Bernanke. Well, elementary analysis would suggest that 
if the security or the collateralization was less, there would 
be more of a risk premium of some kind, although it is hard to 
judge how much. I am not familiar with the study you mentioned, 
but I would be really interested to see it.
    Mr. Miller of North Carolina. Okay. Does that sound like a 
valid basis for a study for a prediction is if one part of the 
country had in effect the law as legislation would make it, 
another part of the country had law in effect at the same time 
as what the law is now to compare the terms of availability of 
credit in those two areas?
    Mr. Bernanke. That is an interesting approach. I think you 
would have to make sure that you were controlling for other 
factors, like regional and other differences, that might also 
be affecting the rates.
    Mr. Miller of North Carolina. Okay. I also asked the 
Congressional Research Service to look at--before 1978 the law, 
bankruptcy law is treated, secured or mortgages on investment 
property and mortgages on homes exactly the same. Neither one 
could be modified in bankruptcy.
    After that, at least in some parts of the country, they 
could not--it remained the same for home mortgages, and it 
became--it could be modified as to investment properties.
    I asked them to look at terms of availability of credit 
before and after 1978 for investment property versus home 
mortgages. And the conclusion was that if anything credit 
became more available for investment properties after 1978. 
There was an increase in mortgage lending, above that for home 
lending and the terms and credit, the terms and availability, 
the term seemed to be about the same.
    But it concluded that it was probably not the result of 
changes in the law, it was that there were so many forces in 
effect that it was almost impossible to identify any change. 
Does that sound correct?
    Mr. Bernanke. I don't know that study either. I think it 
would be interesting to see the difference in terms and 
availability between primary residences and investment 
properties today. I think there probably would be some 
difference at this point. But it would be worth evaluating that 
more carefully.
    Mr. Miller of North Carolina. Okay. But there are several 
times when the law has changed, and the law has been different 
in one place or another. Another difference is the State law is 
on anti-deficiency, on deficiency judgements. Several States, 
including the world's 5th largest--in California have anti-
deficiency statues.
    All the evidence is that the terms and availability of 
credit is really no different. Does that suggest, is that a 
valid basis to conclude that there is not a substantial change 
in the terms of availability of credit from changes in the 
bankruptcy laws?
    Mr. Bernanke. Well first of all, I think that taking this 
empirical approach is very worthwhile. This is the kind of 
thing that can be useful in providing information, but I really 
can't comment on the quality of the studies you mentioned 
without looking at--
    Mr. Miller of North Carolina. Right, well I know that you 
haven't seen the study. It was a Georgetown University study. 
It was, it had foundation funding. It looked like an academic 
study, it had footnotes, it had charts. It had all those things 
that you expect of academic studies.
    And I understand that you haven't reviewed it, but does the 
basis of the analysis sound like a legitimate basis generally?
    Mr. Bernanke. It is an interesting approach to the issue.
    Mr. Miller of North Carolina. And you don't know of any 
study that shows that there is a basis for conclusion that 
there is a substantial point and a half difference in interest 
rates?
    Mr. Bernanke. I have not reviewed any, no.
    Mr. Miller of North Carolina. Okay. The gentleman from 
Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I thank the 
chairman and ranking member for holding this hearing. Chairman 
Bernanke, it is good to see you again. You have had a very 
difficult job, and because time is of the essence, I will have 
but one question that may have a follow-up or two to it.
    There has been much talk about freezing interest rates for 
some period of time; one notion is freezing them for 
approximately 5 years. Would you give us please your thoughts 
on what the results will be, freezing the interest rates for 
some period of time, approximately 5 years. My suspicion is 
that you might cover whether this would cause a shift in 
investment to other areas, if you would please.
    Mr. Bernanke. Well, the idea of the freeze is to find a 
strategy by which lenders can work out larger numbers of loans. 
They are facing an unusual situation. Usually each loan, each 
foreclosure, each delinquency, is different; it depends on 
personal circumstances.
    Here we have a situation where literally hundreds of 
thousands of families or individuals may be facing foreclosure 
based on broad macroeconomic phenomenon--basically the decline 
in house prices and concerns with subprime lending. And the 
issue is, are there ways to be more efficient in working out 
loans and at larger scale?
    A freeze, which is what has been suggested by the HOPE NOW 
approach, is one way to do that. That could be a way to get 
more time to work out those loans. Again, it is a voluntary 
approach that they have come to through discussion. It doesn't 
address by any means all people in this situation. For example, 
there are a lot of loans that default even before the interest 
rate resets.
    Mr. Green. Let me intercede for just a moment. If we had a 
mandatory freeze, what would be the impact, please?
    Mr. Bernanke. I don't know what the quantitative impact 
would be, frankly. Again, it would help some people. There are 
others who are delinquent even prior to the reset or who have 
other reasons to be delinquent.
    Mr. Green. Without talking about, if we can, the persons 
who might benefit directly from the freeze, let's talk about 
investors. Would it create any sort of shift in investments 
from mortgages to some other form of investments?
    Mr. Bernanke. Well, this goes back to the question I was 
asked earlier about contracts, and I think that it would be a 
fairly substantive step to re-write the existing contracts. And 
Congress would have to give that very serious consideration, 
because it would affect the valuation of the mortgages and 
behavior of investors.
    Mr. Green. Thank you very much, Mr. Chairman. I yield back 
so that you may leave in a timely manner.
    Mr. Miller of North Carolina. Thank you, Mr. Green, and 
thank you, Mr. Chairman. I think Chairman Frank promised to 
have you out by 1 p.m. You are getting 40 seconds extra, and if 
we both stay in our jobs for a really, really long time, I may 
sit here some time for your future testimony.
    Mr. Bernanke. Thank you.
    Mr. Miller of North Carolina. We stand adjourned.
    [Whereupon, at 1:00 p.m., the hearing was adjourned.]




                            A P P E N D I X



                           February 27, 2008


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