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

                        MONETARY POLICY AND THE 
                          STATE OF THE ECONOMY 



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                             JULY 16, 2008


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-128

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                 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
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois                KENNY MARCHANT, Texas
ANDRE CARSON, Indiana                THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California            KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana              DEAN HELLER, Nevada

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    July 16, 2008................................................     1
    July 16, 2008................................................    51

                        Wednesday, July 16, 2008

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


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, July 15, 2008''....    63
    Written responses to questions from Hon. J. Gresham Barrett..   111
    Written responses to questions from Hon. John Campbell.......   116
    Written responses to questions from Hon. Adam Putnam.........   120

                        MONETARY POLICY AND THE
                          STATE OF THE ECONOMY


                        Wednesday, July 16, 2008

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Maloney, 
Gutierrez, Velazquez, Watt, Sherman, Capuano, McCarthy of New 
York, Baca, Miller of North Carolina, Scott, Cleaver, Moore of 
Wisconsin, Davis of Tennessee, Hodes, Ellison, Klein, Wilson, 
Perlmutter, Donnelly, Foster, Carson, Speier, Childers; Bachus, 
Pryce, Castle, Royce, Paul, Manzullo, Biggert, Shays, Miller of 
California, Capito, Hensarling, Garrett, Brown-Waite, Barrett, 
Neugebauer, Davis of Kentucky, McHenry, Campbell, Putnam, 
Bachmann, Roskam, Marchant, McCarthy of California, and Heller.
    The Chairman. The hearing will come to order. This is a 
hearing pursuant to law on monetary policy and the state of the 
economy. It is one of two hearings we have every year according 
to statute on the state of the economy under the Humphrey-
Hawkins Act.
    Let me say preliminarily before we get into the opening 
statements that there was a good deal of interest in the recent 
proposal from the Bush Administration involving some standby 
financial authority for dealing with the situation in Fannie 
Mae and Freddie Mac. Obviously, Members are free to ask 
whatever they wish. I intend to focus here on the macroeconomy. 
We did, of course, have the Chairman before us last week on the 
Board of Regulatory Authorities. Members are free to ask, 
obviously, whatever they wish. I would note that the official 
subject is the macroeconomy, and that is what I intend to 
discuss. Members will use their time as they wish.
    We will have four opening statements; two 5-minute 
statements by myself and the ranking member, and two 3-minute 
statements from the chairman and the ranking member of the 
subcommittee. I will begin my statement now, so we can start 
the clock.
    I am sorry; kill the clock for a minute.
    Let me also explain that on the Democratic side--I take 
from the ranking member the order in which questions are asked 
on their side--we have been following the procedure of going 
first in this hearing to members who did not get reached when 
we did the questioning in the first hearing this year. So we 
will begin with those members who did not get a chance to ask 
questions during the first round.
    With that, we will start the clock, and I will begin my 
    I want to focus on the very difficult situation facing a 
great majority of Americans, people who work for other people 
for a living. Unemployment this year has become a serious 
problem. If you look at the numbers for the unemployment 
figures, if the second half of this year is not better 
economically than the first half, and I don't see any reasons 
to believe that it will be, although we obviously hope it will 
be, but if the numbers on unemployment in the second half are 
no better than the first half, we are on track to lose nearly 1 
million jobs this year, which means 1 million fewer people on 
the official employment rolls than at the beginning of the 
    It is not only a case of jobs being lost. There is also a 
continued erosion in the real earnings per hour of working 
people. We had a debate in this country, in this committee, for 
several years about whether that was true or not. It is now 
conceded that even in those periods when we were generating 
wealth, and this continues to be a wealthy country with a great 
capacity to generate wealth through our free markets, the 
distribution was badly skewed. No one expects equality. 
Equality is not a good thing, and you can't have an economy 
that works if everything is equal. But too much inequality also 
has negative consequences.
    Former Commerce Secretary Don Evans, a close friend of the 
President, commissioned a study which showed how the 
overwhelming majority of the wealth generated in the good times 
went to a handful of people.
    Here is the report of the Federal Reserve, the Monetary 
Policy Report to the Congress, dated yesterday, when Chairman 
Bernanke testified first before the Senate. On page 20, the 
section begins: ``Productivity and Labor Compensation. Gains in 
labor productivity have moved up significantly.''
    Let me go to page 21. People who wonder about the state of 
people's feelings are those who think that the American people 
are just whiners and that the troubles are all in their mind. 
For those who wonder why we have resistance to further 
globalization without changes in the basic policies of this 
country, this sentence should help them understand it. This is 
a direct quote from the Monetary Report on page 21: ``Broad 
measures of hourly labor compensation have not kept pace with 
the rapid increases in both overall consumer prices and labor 
productivity, despite a labor market that, until recently, had 
been generally tight.''
    I want to emphasize, hourly labor compensation has not kept 
pace either with consumer prices or with productivity.
    People who worry about inflation should understand from 
this that no part of the blame for inflation, if it comes, can 
be put on workers, because, as the Chairman has acknowledged 
previously, and as economists understand, wages which rise 
along with productivity at the same level are not inflationary.
    We have increased productivity and compensation lagging 
productivity. Working Americans are producing more wealth for 
this country than they are being allowed to share, and that has 
been exacerbated by the fact that prices are going up. So the 
situation, according to the report of the Federal Reserve, is 
one in which workers have increased their productivity, in 
cooperation with the employers, and have failed to be 
compensated either to keep up with the productivity or to keep 
up with prices.
    The point to the business community is very clear. How can 
you understand this, how can you look at our being on track to 
lose nearly a million jobs this year, how can you note that 
workers are getting less compensation than they are earning for 
the economy and less than is needed to come up with prices, and 
wonder why you can't get trade bills through, wonder why there 
is resistance to outsourcing?
    I believe that full participation in the global economy is 
a good thing, but if it continues to go forward on terms which 
give a disproportionate share of the benefits to a relatively 
small number, and the great majority are not simply even--even 
here, they are falling behind, despite increased productivity, 
then we have to stop and get our own house in order before we 
go further.
    I now recognize the gentleman from Alabama.
    Mr. Bachus. I thank the chairman.
    Chairman Frank, I am going to follow your lead and restrict 
my remarks to the real economy, which is the purpose of this 
hearing, and not some of the recent developments in the past 
week or two.
    Chairman Bernanke, looking at the economy, we had an 
overextension of credit. We had too easy of credit, it wasn't 
properly underwritten, and the risks were not taken into 
account. As a result of that, we have had, I think, massive 
debt accumulation in this country, and we are going through 
what is inevitable when people borrow more than they can repay.
    I think a second factor, and it may be in your remarks or 
questions, you can address this, but a tremendous amount of 
leverage and risk-taking and other risky and speculative 
investment practices and a lot of fortunes were made on the way 
up, but there is pain on the way down. As I see it, it is not 
an easy thing to go through, but it is a part of a market 
    The third factor, and this is a factor that I think is the 
most important, is the high commodity prices, and particularly 
energy prices that have been a particular hardship on importing 
nations, and we are obviously an importing Nation. It has been 
a financial windfall to exporting countries.
    I have been to Abu Dhabi and Dubai, and the fabulous wealth 
that has been created out of really a desert society there in 
the past 40 years is just almost beyond belief. I think T. 
Boone Pickens, he is running a commercial right now, and he 
calls this, I think rightly so, the largest transfer of wealth 
in the history of the world.
    That, to me, and the effect it is having on Americans day-
to-day, is our biggest problem. I believe it is the largest 
source of instability in our financial markets. I think that 
the consumers are stressed, they are paying high gas prices, 
high diesel prices, and they can't pay their other bills. They 
are even having trouble putting food on their tables.
    Finally, while we require the American people to live 
within their budget, we had deficit spending here, and have for 
some time, and there is a tremendous lack, I think, in 
Washington of financial discipline. The Federal Government has 
more obligations than it can fund today, but it continues to 
obligate itself, it continues to expand and create new 
programs, and it continues to assume responsibility for funding 
services that were traditionally in the province of local or 
State governments or families themselves.
    Obviously, all of these problems, the problem of tremendous 
mushrooming of extension of credit and debt accumulation, of 
overleveraging and risk-taking, of high energy costs, high food 
costs, high gas prices, and then a Federal Government that 
spent beyond its means, obviously there is no single approach 
we can take to getting ourselves out of this.
    I think the banks have repriced for risk. There has been a 
lot of--they have raised capital. I will state right here that 
I know there is a debate in this country on the overall 
financial stability of our financial system, but I, for one, 
think that we are well on our way to recovery in the financial 
    I think the present stock prices of our banks don't 
accurately reflect the value of those banks. I think the stock 
prices are too low. The banks are sound, they are solid. I 
think the stock prices, right now you may have--I think there 
is a real--it is just a confidence factor.
    Anyway, we have had a retrenching and a correction, and I 
do worry about some attempts that we are doing to short-circuit 
the correction and the period of adjustment. I think long term 
they can deepen the damage.
    But, in contrast, there is something that I think we should 
do, and we can do now, and that is to address high energy 
prices. High energy prices mean higher production and 
transportation costs. Those increases are passed on to the 
consumers, and we saw that this morning, causing inflationary 
pressures. Particularly hard hit are those Americans, a 
million-and-a-half Americans, whose adjustable-rate mortgages 
are adjusting. Those families are facing a double whammy.
    To sum up, what I believe is needed now is a concerted 
bipartisan effort by Congress and the Administration to develop 
and implement a comprehensive energy and conservation 
initiative. It needs to be done now. It should have been last 
year or the year before that. I believe until we get a handle 
on our dependency on foreign oil, we are going to continue to 
have real severe problems.
    Thank you.
    The Chairman. The gentleman from Illinois.
    Mr. Gutierrez. Thank you, Mr. Chairman.
    Welcome back, Chairman Bernanke.
    There is a lot of debate about whether or not we are in the 
midst of a recession, but to most people out there, it is 
really a moot question as they look at their bank accounts. And 
we all know IndyMac went under, and everybody else is really 
worried. There are a lot of calls at the office, should I check 
my savings account, my bank account, is it insured, do they 
have enough money? Then there is word that there might be 
another 90 banks. Some people say they are small. We don't 
know. Nobody is ever going to really tell us.
    So, recession? When gasoline pops up to $4.50 in Chicago, 
and your real earnings haven't increased, it seems like a 
recession to them.
    Most folks say, well, I wasn't in the stock market. Most 
folks, because we have done so much good work at purchasing 
homes, have lost a lot of their net value. Their house isn't 
worth what it was worth last year. It seems like a recession to 
    GM is on the verge of bankruptcy. Let's hope it doesn't go 
under. I don't want to be a pessimist, but things are not good. 
Tens of thousands of retirees heard from GM yesterday that it 
is so bad that their health care insurance is being canceled 
after 35 or 40 years of working at GM.
    It is bad. I don't know if we are in a recession, but if 
you came out to my district and saw the foreclosure signs, 
literally the foreclosure signs everywhere. They say it is 
really worse on the east or the west coast. I think it is worse 
in those neighborhoods where people were finally getting a leg 
under and finally moving forward.
    So I hope today, as we look at gas prices and food prices 
and what they really mean, and I know a lot of this is very 
familiar to you, I would like to know your thoughts on 
inflation in the current environment. With stagnant wages, we 
are not entering into a wage spiral, and inflation is running 
high when measured by personal consumption expenditures, and 
with gasoline and consumer energies even higher, inflation 
seems to be a real threat in the near term.
    I understand the markets need to grow, and that means lower 
interest rates, but at the same time, specifically with the 
sharp increases in commodity prices, inflation has had to play 
a larger role in Federal Reserve decisionmaking.
    So, Mr. Bernanke, in the past you have discussed inflation 
targets, and I would like to know if you think such targets 
might be appropriate in this environment.
    I am also concerned about the weak dollar. We went to the 
Middle East on a congressional delegation to look into 
sovereign wealth funds, and it was suggested by some of these 
sovereign wealth managers, and I guess they would know since 
they have so much oil and the petrodollars, they say about 25 
percent of it is due to the weakening of the dollar.
    So I look forward--and I do want to close by saying thank 
you for allowing the GSEs access to the discount window. I was 
really happy to read and hear about the decisions you made in 
terms of stopping predatory lending. I specifically ask you for 
that as we move forward.
    Thank you so much, Chairman Bernanke.
    The Chairman. The gentleman from Texas.
    Dr. Paul. I ask unanimous consent to submit a written 
statement at this time.
    The Chairman. Without objection, it is so ordered.
    Dr. Paul. Thank you, Mr. Chairman.
    The Chairman. The Federal Reserve doesn't get to object.
    Dr. Paul. I think everybody recognizes today that our 
financial markets are in a big mess, and I have complained for 
many years about the Federal Reserve System. But I would have 
to say that Chairman Bernanke himself is not responsible for 
this mess. Not that I think he has the answers in this deeply 
flawed monetary system, but obviously the seeds of this mess 
have been planted over a long period of time. It is more a 
reflection of the system rather than that of one individual.
    It is amazing how panicky people have been getting, and how 
everybody is wringing their hands, and yet our government tells 
us, well, there is no recession, so things must be all right. A 
lot of people are very angry. Yet we know there is something 
seriously wrong, with all the mess that we have in the 
financial markets. And now we see this morning that inflation 
is roaring back, yet it is still way below what the private 
economists are saying about what inflation is really doing. But 
the consumer knows all about it.
    It seems like around here, whether it is from Treasury or 
the Federal Reserve or even in the Congress, all we need now is 
to have a world-class regulator that is going to solve all our 
problems, and I think that is so simplistic. From my viewpoint, 
what we need is a world-class dollar, a dollar that is sound, 
not a dollar that continues to depreciate, and not a system 
where we perpetually just resort to inflation and deficit 
financing to bail out everybody. This is what we have been 
doing. It hasn't been just with this crisis, but an ongoing 
crisis. We have been able to pull ourselves out of these 
nosedives quite frequently. One of the worst with the dollar 
was in 1979. We patched it together.
    I think the handwriting on the wall is there is a limit to 
how many times we can bail the dollar out, because conditions 
are so much worse today than they have ever been.
    We talk a lot about predatory lending, but I see the 
predatory lending coming from the Federal Reserve. Interest at 
1 percent, overnight rates, loaning to banks, encouraging the 
banks and investors to do the wrong things causes all the 
malinvestment. These conditions were predictable. They were 
predicted by the Austrian free market economists. It should 
surprise nobody, yet nobody resorts to looking to those 
individuals who are absolutely right about what was coming and 
what we should have done.
    Even as early as 7 years ago, I introduced legislation that 
would have removed the line of credit to the Treasury, which 
was encouraging the moral hazard and the malinvestment. Here, 
it looks like now we are going to need $300 billion of new 
    So we need to look at the monetary system and its basic 
fundamental flaws that exist there, and then we might get to 
the bottom of these problems we are facing today.
    The Chairman. Now, Mr. Chairman, I did want to join the 
chairman of the subcommittee in thanking you for the action you 
took on Monday, a very important set of steps with regard to 
the subprime. With that, let me welcome you again to your 
alternate office and invite you to proceed.


    Mr. Bernanke. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee. I am pleased to present 
the Federal Reserve's Monetary Report to the Congress.
    The U.S. economy and financial system have confronted some 
significant challenges thus far in 2008. The contraction in 
housing activity that began in 2006 and the associated 
deterioration in mortgage markets that became evident last year 
have led to sizable losses at financial institutions and a 
sharp tightening in overall credit conditions. The effects of 
the housing contraction and of the financial headwinds on 
spending and economic activity have been compounded by rapid 
increases in the price of energy and other commodities, which 
have zapped household purchasing power even as they have 
boosted inflation. Against this backdrop, economic activity has 
advanced at a sluggish pace during the first half of this year, 
while inflation has remained elevated.
    Following a significant reduction in its policy rate over 
the second half of 2007, the Federal Open Market Committee 
eased policy considerably further through the spring to counter 
actual and expected weakness in economic growth and to mitigate 
downside risks to economic activity.
    In addition, the Federal Reserve expanded some of the 
special liquidity programs that were established last year and 
implemented additional facilities to support the functioning of 
financial markets and foster financial stability.
    Although these policy actions have had positive effects, 
the economy continues to face numerous difficulties, including 
ongoing strains in financial markets, declining house prices, a 
softening labor market, and rising prices of oil, food, and 
some other commodities.
    Let me now turn to a more detailed discussion of some of 
these issues. Developments in financial markets and their 
implications to the macroeconomic outlook have been a focus of 
monetary policymakers over the past year. In the second half of 
2007, the deteriorating performance of subprime mortgages in 
the United States triggered turbulence in domestic and 
international financial markets as investors became markedly 
less willing to bear credit risk of any type.
    In the first quarter of 2008, reports of further losses and 
write-downs in financial institutions intensified investor 
concerns and resulted in further sharp reductions in market 
liquidity. By March, many dealers and other institutions, even 
those that had relied heavily on short-term secured financing, 
were facing much more stringent borrowing conditions.
    In mid-March, a major investment bank, The Bear Stearns 
Companies, Inc., was pushed to the brink of failure after 
suddenly losing access to short-term financing markets. The 
Federal Reserve judged that a disorderly failure of Bear 
Stearns would pose a serious threat to overall financial 
stability and would most likely have significant adverse 
implications for the U.S. economy.
    After discussions with the Securities and Exchange 
Commission, and in consultation with the Treasury, we invoked 
emergency authorities to provide special financing to 
facilitate the acquisition of Bear Stearns by JPMorgan Chase & 
Company. In addition, the Federal Reserve used emergency 
authorities to establish two new facilities to provide backstop 
liquidity to primary dealers, with the goals of stabilizing 
financial conditions and increasing the availability of credit 
to the broader economy.
    We have also taken additional steps to address liquidity 
pressures in the banking system, including a further easing of 
the terms for bank borrowing at the discount window and 
increases in the amount of credit made available to banks 
through the Term Auction Facility. The FOMC also authorized 
expansion of its currency swap arrangements with the European 
Central Bank and the Swiss National Bank to facilitate 
increased dollar lending by those institutions to banks in 
their jurisdictions.
    These steps to address liquidity pressures, coupled with 
monetary easing, seem to have been helpful in mitigating some 
market strains. During the second quarter, credit spreads 
generally narrowed, liquidity pressures ebbed, and a number of 
new financial institutions raised new capital. However, as 
events in recent weeks have demonstrated, many financial 
markets and institutions remain under considerable stress in 
part because of the outlook for the economy and thus for credit 
quality, which remains uncertain.
    In recent days, investors became particularly concerned 
about the financial condition of the Government-Sponsored 
Enterprises (GSEs) Fannie Mae and Freddie Mac. In view of this 
development, and given the importance of these firms to the 
mortgage market, the Treasury announced a legislative proposal 
to bolster their capital, access to liquidity, and regulatory 
oversight. As a supplemental to the Treasury's existing 
authority to lend to the GSEs, and as a bridge to the time when 
Congress decides how to proceed on these matters, the Board of 
Governors authorized the Federal Reserve Bank of New York to 
lend to Fannie Mae and Freddie Mac, should that become 
necessary. Any lending would be collateralized by U.S. 
Government and Federal agency securities.
    In general, healthy economic growth depends on well-
functioning financial markets. Consequently, helping the 
financial markets to return to more normal functioning will 
continue to be a top priority of the Federal Reserve.
    I turn now to current economic developments and prospects. 
The economy has continued to expand, but at a subdued pace. In 
the labor market, private payroll employment has declined, 
falling at an average pace of 94,000 jobs per month through 
June. Employment in the construction and manufacturing sectors 
has been particularly hard hit, although employment declines in 
a number of other sectors are evident as well. The unemployment 
rate has risen and now stands at 5\1/2\ percent.
    In the housing sector, activity continues to weaken. 
Although sales of existing homes have been about unchanged this 
year, sales of new homes have continued to fall, and 
inventories of unsold new homes remain high. In response, 
homebuilders continue to scale back the pace of housing starts. 
Home prices are falling, particularly in regions that 
experienced the largest price increases earlier this decade. 
The declines in home prices have contributed to the rising tide 
of foreclosures. By adding to the stock of vacant homes for 
sale, these foreclosures have in turn intensified the downward 
pressure on home prices in some areas.
    Personal consumption expenditures have advanced at a modest 
pace so far this year, generally holding up somewhat better 
than might have been expected, given the array of forces 
weighing on households and attitudes. In particular, with the 
labor market softening and consumer price inflation elevated, 
real earnings have been stagnant so far this year. Declining 
values in equities have taken their toll on household balance 
sheets, credit conditions have tightened, and indicators of 
consumer sentiment have fallen sharply. More positively, the 
fiscal stimulus package is providing some timely support to 
household incomes. Overall, consumption spending seems to be 
constrained over coming quarters.
    In the business sector, real outlays for equipment and 
software were about flat in the first quarter of the year, and 
construction of nonresidential structures slowed appreciably. 
In the second quarter, the available data suggests that 
business fixed investment appears to have expanded moderately. 
Nevertheless, surveys of capital spending plans indicate that 
firms remain concerned about the economic and financial 
environment, including sharply rising cost of inputs and 
indications of tightening credit, and they are likely to be 
cautious with spending in the second half of this year. 
However, strong export growth continues to be a significant 
boon to many U.S. companies.
    In conjunction with the June FOMC meeting, Board Members 
and Reserve Bank Presidents prepared economic projections 
covering the years 2008 through 2010. On balance, most FOMC 
participants expected that over the remainder of this year, 
output would expand at a pace appreciably below its trend rate, 
primarily because of continued weakness in housing markets, 
elevated energy prices, and tight credit conditions. Growth is 
projected to pick up gradually over the next 2 years as 
residential construction bottoms out and begins a slow 
recovery, and as credit conditions gradually improve. However, 
FOMC participants indicated that considerable uncertainty 
surrounded their outlook for economic growth and viewed the 
risks to their forecasts as skewed to the downside.
    Inflation has remained high, running at nearly a 3\1/2\ 
percent annual rate over the first 5 months of this year as 
measured by the price index for personal consumption 
expenditures. And with gasoline and other consumer energy 
prices rising in recent weeks, inflation seems likely to move 
temporarily higher in the near term.
    The elevated level of overall consumer inflation largely 
reflects a continued sharp run-up in the prices of many 
commodities, especially oil, but also certain crops and metals. 
The spot price of West Texas intermediate crude oil soared 
about 60 percent in 2007, and thus far this year has climbed an 
additional 50 percent or so. The price of oil currently stands 
at about 5 times its level toward the beginning of this decade. 
Our best judgment is that the surge has been driven 
predominantly by strong growth in underlying demand and tight 
supply conditions in global oil markets.
    Over the past several years, the world economy has expanded 
its fastest pace in decades, leading to substantial increases 
in the demand for oil. Moreover, growth has been concentrated 
in developing and emerging market economies, where energy 
consumption has been further stimulated by rapid 
industrialization and by government subsidies that hold down 
the price of energy faced by ultimate users.
    On the supply side, despite sharp increases in prices, the 
production of oil has risen only slightly in the past few 
years. Much of the subdued supply response reflects inadequate 
investment and production shortfalls in politically volatile 
regions where large portions of the oil reserves are located.
    Additionally, many governments have been tightening their 
control over oil resources, impeding foreign investment and 
hindering efforts to boost capacity and production.
    Finally, sustainable rates of production in some of the 
more accessible oil fields, such as those in the North Sea, 
have been declining.
    In view of these factors, estimates of long-term oil 
supplies have been marked down in recent months. Long-dated oil 
futures prices have risen, along with spot prices, suggesting 
that market participants also see oil supply conditions 
remaining tight for years to come.
    The decline in the foreign exchange value of the dollar has 
also contributed somewhat to the increase in oil prices. The 
precise size of this effect is difficult to ascertain, as the 
causal relationships between oil prices and the dollar are 
complex and run in both directions. However, the price of oil 
has risen significantly in terms of all major currencies, 
suggesting that factors other than the dollar, notably shifts 
in the underlying global demand for and the supply of oil, have 
been the principal drivers of the increase in prices.
    Another concern that has been raised is that financial 
speculation has added markedly to upward pressures on oil 
prices. Certainly, investor interest in oil and other 
commodities has increased substantially of late. However, if 
financial speculation were pushing above the levels consistent 
with the fundamentals of supply and demand, we would expect 
inventories of crude oil and petroleum products to increase as 
supply rose and demand fell. But, in fact, available data on 
oil inventories show notable declines over the past year.
    This is not to say that useful steps could not be taken to 
improve the transparency and functioning of futures markets, 
only that such steps are unlikely to substantially affect the 
prices of oil or other commodities in the longer term.
    Although the inflationary effect of rising oil and 
agricultural commodity prices is evident in the retail prices 
of energy and food, the extent to which the high prices of oil 
and other raw materials have been passed through to the prices 
of nonenergy, nonfood finished goods and services seems thus 
far to have been limited. But with businesses facing 
persistently higher input prices, they may attempt to pass 
through such costs into final goods and services more 
aggressively than they have so far.
    Moreover, as the foreign exchange value of the dollar has 
declined, rises in import prices have been greater upward 
pressure on business costs and consumer prices. In their 
economic projections for the June FOMC meeting, monetary 
policymakers marked-up their forecast for inflation during 2008 
as a whole. FOMC participants continue to expect inflation to 
moderate in 2009 and 2010, as slower global growth leads to a 
cooling of commodity markets, as pressures on resource 
utilization decline, and as longer-term inflation expectations 
remain reasonably well-anchored.
    However, in light of the persistent escalation of commodity 
prices in recent quarters, FOMC participants viewed the 
inflation outlook as unusually uncertain and cited the 
possibility that commodity prices will continue to rise as an 
important risk to the inflation forecast.
    Moreover, the currently high levels of inflation, if 
sustained, might lead the public to revise up its expectations 
for longer-term inflation. If that were to occur, and those 
revised expectations were to become embedded in the domestic 
wage and price-setting process, we would see an unwelcome rise 
in actual inflation over the longer term.
    A critical responsibility of monetary policymakers is to 
prevent that process from taking hold. At present, accurately 
assessing and appropriately balancing the risks to the outlook 
for growth and inflation is a significant challenge for 
monetary policymakers. The possibility of higher energy prices, 
tighter credit conditions, and a still deeper contraction in 
housing markets all represent significant downside risks to the 
outlook for growth. At the same time, upside risks to the 
inflation outlook have intensified lately as the rising prices 
of energy and some other commodities have led to a sharp pickup 
in inflation, and some measures of inflation expectations have 
moved higher.
    Given the high degree of uncertainty, monetary policymakers 
will need to carefully assess incoming information bearing on 
the outlook for both inflation and growth. In light of the 
increase in upside inflation risk, we must be particularly 
alert to any indications, such as an erosion of longer-term 
expectations, that the inflationary impulses are becoming 
embedded in the domestic wage and price-setting process.
    I would like to conclude my remarks by providing a brief 
update on some of the Federal Reserve's actions in the area of 
consumer protection. At the time of our report last February, I 
described the Board's proposal to adopt comprehensive new 
regulations to prohibit unfair or deceptive practices in the 
mortgage market, using our authority under the Home Ownership 
and Equity Protection Act of 1994.
    After reviewing the more than 4,500 comment letters we 
received under the proposed rules, the Board approved the final 
rules on Monday. The new rules apply to all types of mortgage 
lenders and will establish lending standards aimed at curbing 
abuses, while preserving subprime lending and sustainable 
    The final rules prohibit lenders from making higher-priced 
loans without due regard for consumers' ability to make the 
scheduled payments, and require lenders to verify the income 
and assets on which they rely when making the credit decision. 
Also, for higher-priced loans lenders now will be required to 
establish escrow accounts so that property taxes and insurance 
costs will be included in consumers' regularly monthly 
    The final rules also prohibit prepayment penalty for 
higher-priced loans in cases in which the consumer's payment 
can increase during the first few years and restrict prepayment 
penalties or other higher-priced loans. Other measures address 
coercion of appraisers, servicer practices, and other issues. 
We believe the new rules will help to restore confidence in the 
mortgage market.
    In May, working jointly with the Office of Thrift 
Supervision and the National Credit Union Administration, the 
Board issued proposed rules under the Federal Trade Commission 
Act to address unfair or deceptive practices for credit card 
accounts and overdraft protection plans. Credit cards provide a 
convenient source of credit for many consumers, but the terms 
of credit cards loans have become more complex, which has 
reduced transparency.
    Our consumer testing has persuaded us that disclosures 
alone cannot solve this problem. Thus, the Board's proposed 
rules would require card issuers to alter their practices in 
ways that will allow consumers to better understand how their 
own decisions and actions will affect their costs.
    Card issuers will be prohibited from increasing interest 
rates retroactively to cover prior purchases except under very 
limited circumstances. For accounts having multiple interest 
rates, when consumers seek to pay down their balance by paying 
more than the minimum, card issuers will be prohibited from 
maximizing interest charges by applying excess payments to the 
lowest rate balance first.
    The proposed rules dealing with bank overdraft services 
seek to give consumers greater control by ensuring that they 
have ample opportunity to opt out of automatic payments of 
overdrafts. The Board has already received more than 20,000 
comment letters in response to these proposed rules.
    Thank you. I have would be very pleased to take your 
    The Chairman. Thank you.
    [The prepared statement of Chairman Bernanke can be found 
on page 53 of the appendix.]
    The Chairman. We will put the clock back on.
    I want to repeat again my appreciation of the very 
thoughtful steps you are taking with regard to consumer 
protection. They haven't done everything we would do, but they 
go very far in that direction. I think they are very important. 
They don't totally obviate the need for legislation, but I did 
want to acknowledge that. I have to say if the Federal Reserve 
Board, before you became the Chair, had promulgated the rules 
that you promulgated on Monday, I do not think we would be in 
this dire situation we are in now.
    Now, on the macroeconomy, on the job situation, and you 
note this in the report, the total report of jobs lost for the 
first 6 months is well over 400,000; 438,000, but you also note 
private sector job loss is 564,000. In other words, the public 
sector has mitigated job loss this year, and that is very 
relevant because one of the things that we will be considering, 
and I think conditions clearly call for, is a second stimulus. 
In fact, I think the argument for a stimulus is somewhat 
reinforced by your presentation because we have depended a 
great deal on monetary easing to help the economy, but whatever 
people think, it does seem to be clear we have reached a limit 
on monetary easing, at least according to what the Federal 
Reserve Board is willing to do. I believe further attention to 
a very lagging economy is necessary, and it is going to have to 
come on the fiscal side.
    One of the arguments that I think is supported by these 
numbers is that we should be giving aid to State and local 
governments. Aid to State and local governments has a twofold 
benefit. It improves the quality of life. They provide police 
services and fire services, education, sanitation, and quality-
of-life improvements. They also are, as the numbers show, a 
significant source of employment.
    Now, the problem is that the subprime crisis has eroded the 
ability of State and local government to carry out that 
function. Property taxes in many parts of this country have 
been impinged by the foreclosure process and by the drop in 
house prices.
    So there are several arguments that combine to say that aid 
to municipalities and States is very important. We believe aid 
to help them buy up foreclosed property is an important part of 
that. But I think the numbers clearly show that.
    I want to get to the whole question of the constraints on 
monetary policy. You say here that you have this dilemma, and 
you do, where there are both inflationary fears and still some 
downside risks to the economy. Without reference to the current 
situation, I think an important point comes out of this 
conversation. There is an argument for monetary policy 
increasing restraint, both to deal with inflation and to deal 
with the drop in the dollar, which contributes directly to 
energy prices.
    I should note that at the request of the ranking members of 
the full committee and the subcommittee, we are scheduling a 
hearing to talk about the relationship of the low currency to 
oil prices and energy prices. That hearing is going to go 
forward in the last week that we are here.
    But here is the problem: Your European counterparts have 
been able to be much more rigorous in raising interest rates. 
They, in fact, have a different statute. You have a dual 
mandate, which is very important, to worry about unemployment 
and inflation. They are mandated to do inflation. Western 
Europe is not necessarily less socially conscious than we are. 
I don't expect extensive comments from you, but I think here is 
the problem.
    As you contemplate the possible need for raising interest 
rates to slow down the whole economy, you face a situation 
which the social consequences of that will be more negative 
than they would be in Europe; that is, the existence of better 
social safety nets in Europe, I think, gives monetary policy 
more political and social freedom than it has in the United 
    If you raise rates and slow down the economy, we have 
people who are going to lose health care. That doesn't happen 
in most European countries. There is a better provision of 
alternative income supports.
    So one of the things I think we should understand is the 
relative insufficiency of our social safety net vis-a-vis what 
you have in Western Europe constrains monetary policy unduly. 
No one wants to see people thrown out of work. There are times 
when an increase in interest rates is necessary from the 
standpoint of the currency, and the gap between the European 
interest rates and our rates have contributed to a 
deterioration of the currency, which contributes to the energy 
    So one of the things I recommend, and I have deliberately 
not asked you to comment because it goes beyond your mandate, I 
just want to note that to the extent that we improve the social 
safety net in this country, which is important on its own, I 
think we also give more flexibility to monetary policy, because 
the Federal Reserve would then be freer in times when it felt 
it was necessary for other reasons to slow down the economy in 
the knowledge that this would not have, as it has today, a 
disproportionately negative effect on a lot of the people who 
are more vulnerable economically.
    The gentleman from Alabama.
    Mr. Bachus. Thank you.
    Chairman Bernanke, you talked about the significant 
increase in the CPI this morning, and the challenge that high 
energy prices present to the Fed and to our economy. Would you 
agree that the failure of this country to develop a 
comprehensive and sustainable energy initiative to reduce our 
dependency on foreign sources of oil represents a major threat 
to our economy?
    Mr. Bernanke. I do think it is very important for us--and I 
agree with you, Congressman, that it would have been better to 
have addressed this some time ago. I think it is very important 
for us to have an energy strategy, and that would have multiple 
dimensions: government support for research and development; 
clarification of regulatory policy; and, of course, letting the 
market respond to these prices. The only silver lining to these 
high prices is that they do induce lots of incentives to 
conserve, incentives to provide alternatives, and incentives to 
find and develop other oil sources.
    So I agree with you absolutely that a more aggressive 
energy policy could be useful, and maybe even in the shorter 
term than one might guess, because these future markets are 
very forward-looking, and to the extent that there is a sense 
that the United States and other industrial countries are 
aggressively tackling their energy problems, it could sort of 
lessen concern about the long-term supply and demand balance in 
    Mr. Bachus. Representative Paul mentioned the weak dollar. 
Obviously, it is helping us with our exports, and it is moving 
some consumption inward. Obviously, our constituents are being 
terribly stressed by the high energy costs. I believe one 
factor may be the weak dollar. What is your policy regarding 
exchange rate intervention?
    Mr. Bernanke. Well, our principal policy toward the dollar 
is to have a strong economy. The Federal Reserve is mandated to 
provide strong growth and price stability. My belief is that if 
we work effectively to achieve that objective, the dollar 
strength in the medium term will reflect that healthy 
underlying economy.
    Market intervention is a policy that has been undertaken a 
few times. I think it is something that should be done only 
rarely, but there may be conditions where markets are 
disorderly where some temporary action might be justified.
    I think the dollar in the long term depends really on the 
fundamentals, and it is up to us to get the fundamentals right.
    Mr. Bachus. We talk about Bear Stearns and about the GSEs, 
about systemic risk because of large financial institutions. Is 
there a downside to the belief that I think is taking hold in 
the marketplace that the Federal Reserve and the Treasury will 
be lenders of last resort for the entire financial system? 
Don't we run the risk of a moral hazard? And when we do that, 
what do we do about where private investors participate in the 
profits? It seems that we are socializing the losses, or the 
public is assuming those losses.
    Could you comment on those two things?
    Mr. Bernanke. Certainly.
    The recent financial crisis, which has been quite severe, 
as you know, has revealed a number of weak points in our 
economy, in our financial system, and they have required 
attention because we need to have a stable, well-working 
financial system in order for the economy to recover. In the 
longer term, I agree that market discipline is the best source 
of strength in the financial system. We need to take action to 
make sure that moral hazard doesn't induce excessive risk-
    I spoke on this subject last week in a speech, and I 
indicated three directions forward that we could take to make 
sure that moral hazard is constrained in the future. The first 
is, now that the investment banks have received some support, 
in particular they have received access to, at least 
temporarily, to the discount window, I believe that we need to 
have legislated consolidated supervisory oversight over those 
firms that would ensure that they have adequate capital, 
adequate liquidity, and adequate risk management so they would 
not be taking advantage of any presumed backstop that they 
might otherwise see.
    Secondly, I talked about the need to strengthen our 
financial infrastructure. Part of the reason that it was a big 
concern to us when Bear Stearns came to the brink of failure 
was that we were concerned that there were various markets 
where the failure of a major counterparty would have created 
enormous strains on the financial system.
    One way to address the problem, and I discussed that at 
some length in my speech and I would be happy to talk more 
about it, is to make sure that the financial infrastructure, 
the systems through which lending and borrowing takes place, as 
well as the risk management of the lenders is strengthened to 
the point that the system could better withstand a failure, and 
therefore there would be less expectation of support in that 
    Finally, I think the issues we have approached like the 
investment banks, these circumstances were not contemplated in 
other areas like deposit-insured banks. There is a procedure, a 
set of rules, prompt corrective action, systemic risk, those 
sorts of things which tell the regulators how Congress wants 
them to proceed and create clarity in the market about under 
what circumstances assistance would be forthcoming.
    As Secretary Paulson has also indicated, I think we ought 
to be looking at clarifying the congressional expectations for 
how we would resolve--were the situation to arrive again, how 
to resolve such a problem.
    The Chairman. The gentleman from Massachusetts.
    Mr. Capuano. Chairman Bernanke, I have been listening to 
the GSE issue, and some people think this is nothing more than 
a crisis of confidence; maybe we should not do anything and let 
it wait. It amazes to me to hear this when I have an oil 
crisis, a food crisis, a Consumer Price Index going up through 
the roof, job losses all over the place, a trade deficit, a 
budget deficit going through the roof, corporate losses all 
across-the-board, and the stock market shaky every single day.
    I would argue very clearly that this is a little more than 
a crisis of confidence; I think we have a crisis of leadership. 
When I say that, I want to except you from that position. I say 
that because of the actions you have taken. They have been 
dramatic, bold, and courageous. That doesn't mean I agree with 
every little detail; I don't want to pretend that. But as far 
as I am concerned, you have been the leader in this Congress in 
proving that taking bold action, sometimes action that is a 
little bit on the edge, helps the economy. It is something that 
is necessary.
    I think you are following in the footsteps of some people 
who really saved this country from disaster in the 1930's. 
People tend to forget this. In the 1930's, there was no one 
action, no one silver bullet that pulled us out of the 
Depression. It was a series of actions, over a decade. Many of 
those actions were to correct prior actions that maybe they 
made a mistake on, maybe they acted too quickly and had to 
adjust it.
    I don't see that there is anything we can do, unless anyone 
has a single action that this Congress and this country should 
take. I think we need more action, and that includes Congress 
as well. I think we are going to try to do something in the 
next week or so. We need it from the regulators. I personally 
think we need more action from the SEC. I think we need faster 
action by everybody. I think we need more dramatic action by 
everybody. And I think we need more coordinated action by 
everybody. Right now, I think we have too many people running 
around on their own.
    All that being said, again, I want to thank you for what 
you have done thus far and to thank you for your bold and 
courageous moves, as I see it, most recently in the predatory 
lending area. I would just like to hear your opinion in 
general, not about the specific proposals we have. I guess I 
can't escape them right now when the GSE proposal is floating 
around in all its different iterations.
    In general, in the crisis that we are in, do you believe 
that government--that includes Congress, regulators, and 
everybody across-the-board--but that government should be 
acting relatively quickly, or do you think that we should 
simply sit back and say it is a confidence problem and people 
just need to get over it? Because, honestly, especially in the 
last day or so, I have been shocked at the number of people who 
have pretty much said that.
    I understand people differ as to what we should do. That is 
fair. That is what this is all about. But to imply or to state 
that no action is necessary, to me, is completely wrong, and I 
would just like to hear your opinion on that issue.
    Mr. Bernanke. Well, you want to take the right actions.
    Let me say a word about GSEs. The GSEs are adequately 
capitalized. They are in no danger of failing. However, the 
weakness in market confidence is having real effects as their 
stock prices fall. It is difficult for them to raise capital. 
If their debt spreads widen, it will increase the borrowing 
    As I said yesterday, I think the housing market is really 
the central element of this crisis, and anything we can do to 
strengthen the housing market or to strengthen mortgage finance 
would be beneficial. Therefore, I do think this is one area 
where Congress needs to think hard about how to restore 
confidence in the GSEs to make sure that they can carry out the 
function of supporting the mortgage market, which, right now, 
except for the FHA-Ginny Mae combination, they are the entire 
securitization market for mortgages. I think that is an area 
particularly where action is needed and justified.
    Mr. Capuano. With that, I yield back the rest of my time 
because that was the answer I wanted.
    The Chairman. The gentleman from Texas, who may not be 
quite so lucky in getting the answer that he wants.
    Dr. Paul. Thank you, Mr. Chairman.
    I want to address the subject of the inflation being 
actually a tax. Today, most of us who go home and talk to our 
constituents hear a major complaint, and that is the rising 
cost of living, especially the cost of gasoline, medical care, 
food, and education. Most economists from all fields, whether 
they are monetarists or Keynesians, they generally recognize 
that inflation is a monetary phenomenon. But it is interesting 
that once we get rising prices, very few people talk about the 
real source and the cause of the inflation, and they go to 
saying, well, it's the oil companies. They charge too much. 
That is inflation. Labor makes too much money, and it is a 
labor problem. Others just say, well, it's just pure 
speculation, if we didn't have the speculators, we wouldn't 
have the inflation.
    Yet, most people conclude not that we have too much money, 
but that we don't have enough. If we only had more money, we 
could pay all these bills, which I think is absolutely the 
wrong conclusion. What we need is more value in the money. In 
terms of gold and other commodities, prices aren't really going 
up. Sometimes they actually even go down. In terms of paper 
money worldwide, whether the euro or the dollar, the prices are 
going up.
    But I maintain really that inflation is a tax. If the 
Federal Reserve and you as Chairman have this authority to 
increase the money supply arbitrarily, you are probably the 
biggest taxer in the country. You are a bigger taxer than the 
Congress, because they are talking now about a bailout package 
of $300 billion, and we will have to raise the national debt to 
accommodate to take care of the housing crisis. But you as the 
Federal Reserve Chairman and the Federal Reserve Board and the 
system create hundreds of billions of dollars without even the 
appropriations process. Then this money gets circulated, and 
some people benefit--the people who get to use it first 
benefit, and the people who get to use it last suffer the 
consequence of the higher prices.
    So every time people go and complain about these higher 
prices, they should say to themselves, I am paying a tax. 
Because whether you are monetizing debt or whatever or catching 
up for buying up securities, we have had a free ride for all 
these years. We have been able to export our inflation. We have 
the Chinese buying up our securities. We haven't had to 
monetize it. But now it is coming home, and you have to buy 
these things to prop them up.
    So I maintain that inflation, as the increase in the supply 
of money for various reasons is a tax, it is an unfair tax, it 
is a regressive tax, it hurts the poor, it hurts the retired 
people more because labor never goes up and keeps up with 
inflation. We never keep up with the need for retired 
individuals to keep up with the cost of living.
    So I would like you to comment on this. Is this completely 
off base, or is there something really to this? Every time we 
see the cost of living going up, we indirectly are paying a 
    Mr. Bernanke. Congressman, I couldn't agree with you more 
that inflation is a tax and that inflation is currently too 
high, and it is a top priority of the Federal Reserve to run a 
policy that is going to bring inflation to an acceptable level 
consistent with price stability as we go forward.
    I would make one distinction, which is that what the 
Federal Reserve can control is the increase in prices on the 
average, over the overall basket of consumer goods and 
services. The enormous jumps in oil prices and other commodity 
prices are to some extent at least due to real factors out of 
the control of the Federal Reserve. The Federal Reserve cannot 
create another barrel of oil. It is the global supply and 
demand conditions which are affecting those particulars things 
to the most significant extent, but to the extent that the Fed 
does have influence on the overall inflation rate, you are 
absolutely right that it is very important to maintain price 
stability, and I take that very seriously.
    Dr. Paul. But if the oil prices were going up for another 
reason other than monetary reasons, other prices would have to 
come down because there would be a limit in the money supply. I 
think--and the prices are going up today, like I indicated in 
my opening statement, not necessarily because of the monetary 
policy of the last year but maybe for the last 15 or 20 years 
and the fact that we were able to export, so to speak, our 
inflation. Now it is coming home. Those people who have been 
holding these dollars are not wanting to buy them as readily. 
Fortunately, foreign central banks are still not dumping them 
but even the other central banks might not be as cooperative.
    So I still see tremendous pressure. I don't see any signs 
that you are able to do very much because all we hear about is 
more inflation. You know, it is not so much that they are too 
big to fail. It just means that everybody needs to be propped 
up. Congress participates in it. And all the pressure is put on 
the dollar. It is a dollar bubble. And I think what we are 
seeing is the unraveling of a dollar bubble that had been 
building for more than 35 years.
    The Chairman. The gentlewoman from New York.
    Mrs. McCarthy. Thank you. And again, I thank you for the 
work that you have been doing in the last couple of weeks. I 
imagine it has been very stressful. I want to just ask a couple 
of questions and see how prepared we are.
    When I think about the small community banks, the regional 
small banks, they are going under the same crunches as our, you 
know, what we are concerned about as far as the larger banks, 
Wall Street. And even my retirees or those of us who are 
thinking of retiring in the next 5 to 10 years who have put 
money away into our IRA, I don't think a lot of people realize 
that it is only back to $250,000. Is that going to put a lack 
of confidence in those who are putting money into the IRA? 
Because this is a country that does not save, and we have been 
trying to encourage people to save for their retirement. So 
those who put money into the IRA are now all of a sudden 
finding a lot of that money is gone again. Is there anything 
that Congress should be doing for the future? And what tools do 
you have to help the small regional banks that don't have the 
ability to go to the Fed for money to help make loans for those 
who can actually buy homes to get the housing market to go?
    Mr. Bernanke. Well, to the extent that your constituents 
have part of their IRA in the form of deposits, you know, they 
should understand what the limits are of the FDIC protection. 
Of course, one strategy if they have any concerns whatsoever 
would be to break up their money across banks or in different 
accounts and so on. There are obviously ways to get that 
protection, if that is what you are concerned about. And you 
know, I have complete confidence in the FDIC, as we all should, 
in that the deposits that are insured by the FDIC are 
completely safe and there is not even any break in time between 
if there were a problem, when you would be able to access your 
    So I think we all need to reassure the public that the FDIC 
is protecting deposits and that there is no need to be 
concerned about those deposits.
    With respect to borrowing, all banks can borrow from the 
discount window, including small banks. Normally they don't as 
much. They tend to be well-capitalized and strong and they 
sometimes come to the window. But if they want to, they 
certainly are free to do so.
    Mrs. McCarthy. So the school of banks do have the 
opportunity to go to the discount window?
    Mr. Bernanke. Yes, they do.
    Mrs. McCarthy. Okay. I didn't actually know that. So I 
thank you for that information. Thank you very much. I yield 
    The Chairman. The gentleman from Illinois.
    Mr. Manzullo. Thank you, Mr. Chairman. Chairman Bernanke, 
earlier this week you took an action to crack down on a range 
of shady lending practices that have hurt the Nation's riskiest 
subprime borrowers and also have caused a tremendous amount of 
economic distress in this country. Among other things, the Fed 
issued regulations that would prohibit lenders from lending 
without considering the borrower's ability to repay and also 
would require creditors to verify their income and assets at 
the time of the borrowing. These are pretty basic.
    Although hindsight is a 20/20 issue, and it is easy to sit 
here and say the Fed should have done this a long time ago, the 
evidence of this housing bubble has been going on for some 
time. And my question is, what took the Fed so long to act? And 
then the regulation you are coming out with is not going to be 
effective until October 1st of next year. Those are the issues 
just involving in the subprime borrowers. As to the regular 
borrowers, you came up with another landmark regulation that 
says, whenever a borrower gives a check to the bank that the 
bank has to credit it that day to the borrower's account. I 
mean, this shows knowledge of some very basic problems that 
have been wrong in the housing industry. But what took the Fed 
so long to act? And why wait 15 months before the regulations 
go into effect?
    Mr. Bernanke. Well, the regulatory process itself imposes 
certain time constraints. We obviously have to make sure the 
rules are consistent with existing law, including State as well 
as Federal law, that they take make sense economically, and so 
on. It does take some time to develop these proposals. They are 
quite elaborate.
    Mr. Manzullo. Sir, these are not elaborate proposals. These 
are very basic statements that say that nobody can take out a 
loan on a house unless he can afford to pay it. What is so 
elaborate about that statement?
    Mr. Bernanke. It raises issues according to what kinds of 
liabilities might be associated with that. Are there 
circumstances in which--say we have a long-time relationship 
between a bank and a customer where you don't go through the 
paperwork, those kinds of questions are still there.
    And I was just going to add that under any kind of 
circumstance, we have to have a comment period to get input 
from the public. We have to revise our regulations.
    Mr. Manzullo. But you didn't start until December.
    Mr. Bernanke. So there are two questions. What is the 
length of the regulatory process, which is basically what we 
have to do to follow congressional--
    Mr. Manzullo. The question is, why did you take so long? 
You didn't do anything until December of last year.
    Mr. Bernanke. I described in my testimony here in July that 
we were going to do a top-to-bottom review of all these issues 
and we were going to act as quickly and as effectively as 
possible. We began that process and we have supplemented it, as 
you know, with considerable work on the credit card side. We 
have worked also in--
    Mr. Manzullo. Chairman Bernanke, a lot of people in this 
country are losing their homes. The Fed has the responsibility 
and the authority. You could have moved a long time ago and 
stopped a lot of this. I mean why does it take months, if not 
years, to have a very simple statement that you can't buy this 
house unless you can afford to make the mortgage? These 
regulations are not that revealing. You talk about--you need a 
top-to-bottom review for something this simple? This is 
inexcusable on the part of the Fed. Notice that I said on the 
part of the Fed, not you.
    Mr. Bernanke. Well, at the current moment, as we all know, 
the subprime market is pretty moribund, and so these rules are 
important but they are not having much impact on the market. 
What we hope to do is have rules in place so that when the 
market comes back, as it some day will, that the lending will 
be done in a way that is prudent and also supportive of 
homeownership among people with a more modest means. That is 
our intention, and we have followed the regulatory principles 
in order to do that.
    Mr. Manzullo. And then with regard to regular loans, you 
have proof, do you not, that homeowners are making payments to 
lending institutions and the lending institutions are holding 
on to the checks while the interest grows on the loan and 
waiting days before applying that money to the principal 
balance of the mortgage, isn't that correct?
    Mr. Bernanke. We have addressed in our regulations some 
issues about servicers and how quickly they have to apply the 
money to make sure that it is fair and transparent.
    Mr. Manzullo. It simply says--
    The Chairman. The gentleman can't ask questions after the 
5-minute rule. We have a full, full rostrum.
    The gentlewoman from New York, I ask you to give me 15 
seconds. Chairman Bernanke, quickly, when did you become 
Chairman of the Federal Reserve?
    Mr. Bernanke. In the beginning of 2006.
    The Chairman. And when did you start working on these 
regulations that were just being discussed?
    Mr. Bernanke. In 2007.
    The Chairman. And when did Congress give the Fed the 
authority to do it?
    Mr. Bernanke. 1994.
    The Chairman. 1994. I don't think the delay is fairly laid 
at your doorstep given those numbers. The gentlewoman from New 
    Ms. Velazquez. Chairman Bernanke, thank you for being here. 
Since June of 2006, the Federal Reserve has acted consistently 
with a series of aggressive cuts to the Federal funds rate. 
However, with the rate now at 2 percent and with rising 
indicators of inflationary risk, what can the Fed do to support 
the U.S. economy and force the further decline in the markets?
    Mr. Bernanke. Congresswoman, as I indicated in my 
testimony, we at this point are balancing various risks to the 
economy. And as we go forward, my colleagues and I are going to 
have to, you know, see how the data come in and how the outlook 
is changing and try to find the policy that best balances those 
risks and best achieves our mandate of sustainable growth and 
price stability. So I don't know how to answer beyond that, 
other than to say that we are going to be responsive to 
conditions as they evolve. I noted today the importance of not 
letting inflation from commodities enter into a broader and 
more persistent and more pernicious inflation. That is 
certainly an important priority. But in general, we are going 
to have to just keep evaluating the new information and see how 
it affects the outlook.
    Monetary policy works with a lag. We can't look out the 
window and do something that will affect the economy today. So 
the best we can do is try to make forecasts and try to adjust 
our policy in a way that brings the forecast towards the 
desired outcome.
    Ms. Velazquez. Well, Mr. Chairman, I understand all the 
steps and actions taken by the Fed. But it seems to me that the 
lending tools are proving to be ineffective at this point. 
Doesn't this prove that the current economic conditions have 
moved beyond a liquidity crisis that can be mitigated through 
Federal lending and is now proven to be a capital crunch?
    Mr. Bernanke. Well, as the earlier questioner mentioned, 
dealing with these kinds of problems is multi-dimensional. 
Monetary policy is one element. Lending is one element. 
Regulatory policy, both initiated by the regulators and by 
Congress, is another element. I think we need to address the 
Fannie Mae/Freddie Mac situation to try to strengthen the 
mortgage markets. There are many other steps. We have done the 
fiscal stimulus package.
    So I absolutely agree that there is no single solution. If 
there were, of course we would have used it by now. What we 
need to do is have a sensible, coordinated, and proactive 
approach that is going to allow us to get through this 
difficult period and return to the strong underlying growth of 
this economy, in which I have great confidence.
    Ms. Velazquez. Okay. Many believe that the losses from the 
housing market could spill over into consumer and business 
credit, indicating that the worst may be yet to come. What is 
your take on that?
    Mr. Bernanke. Well, there has been a problem in that many 
banks that have suffered losses from mortgage credit and 
therefore have had their capital reduced, they either have to 
raise more capital or if they don't do that, they have to 
shrink their balance sheets or at least be reluctant to make 
new loans. So there is some risk of that, that it would spill 
over to other kinds of credit. In fact we have seen credit 
tightening in a number of dimensions. Of course there is 
another factor as well, which is as the economy slows it is 
natural for banks to be more cautious in their lending because 
with a slower economy, credit risks tend to rise.
    So that is a very important issue. We want to be sure that 
banks are sound and that they have enough capital so that they 
cannot just be safe and sound, which of course is critical, but 
beyond that so that they can expand credit in a safe and sound 
way to promote the recovery and strength of the economy.
    Ms. Velazquez. Mr. Chairman, every day we hear stories 
about small businesses being impacted by the credit crunch. And 
the Fed used to provide the Survey of Small Business Finances. 
And you have been critical to many policy decisions both at the 
Federal Reserve and here in Congress. If the survey is 
discontinued, what alternative sources of information will your 
agency use to make its report to Congress on the availability 
of credit to small businesses?
    Mr. Bernanke. Yes, we did cancel that survey for budgetary 
reasons. But we did so also in the understanding that we could 
get almost all the necessary information through other means. 
And we in fact discussed this with Congress. We discussed this 
with various groups of interest in this area. The most 
important alternative is the Survey of Consumer Finances, which 
is a Fed-managed product which surveys families periodically on 
all aspects of their balance sheets and income. That is an 
excellent survey instrument for asking small business owners 
what their situation is, do they have access to credit, what is 
their net worth, and so on.
    So what we have tried to do--and I believe this will be 
successful--is to integrate the key elements of that small 
business survey into the Survey of Consumer Finances that will 
allow us to recover most of the information. And then we have a 
variety of other sources of information that I think will make 
it possible for us to get a good picture of small business.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Nevada.
    Mr. Heller. Thank you, Mr. Chairman. I appreciate the 
opportunity to spend some time here with Chairman Bernanke. I 
will try to stay on some of the macro issues as you led us 
earlier in the hearing. I don't think there is a newspaper out 
there today that is not talking about the bad economic news 
that is out there--the Washington Post, the New York Times, the 
Wall Street Journal. You read them and it is talking about 
yesterday's hearings. I have a copy of USA Today in front of me 
that talks about the signs of growing crisis, the Dow being 
down, inflation being up, the U.S. dollar down, foreclosures 
being up. All of this, I think, was reflected in your testimony 
as you spoke with us earlier in this hearing. The only good 
news I am hearing out there is that by December 31st, the year 
should be over.
    I guess what I want to do is touch on a concept or a 
statement that I hear too often, and that is too big to fail 
and the systemic economic impact of these financial 
institutions and their ability to survive or not. And we have 
obviously recent examples--Bear Stearns, the Fed steps in; 
IndyMac, the Fed steps in; GSEs, the Fed steps in. I receive a 
lot of calls from constituents who are concerned about their 
deposits in other banks including Wachovia, Bank of America, 
and Wells Fargo. I guess the question I have--and I have heard 
you say in the past, correct me if I am wrong, that some of 
these financial institutions should be allowed to fail. I guess 
my question is, what is the threshold between a financial 
institution that the Fed should step in versus one that should 
be allowed to fail?
    Mr. Bernanke. Well, first of all, IndyMac did fail, and the 
Fed did not do anything about that. I would add to your 
constituents, as I mentioned earlier, that all insured deposits 
were available immediately and no insured depositor is going to 
take any loss from that.
    We have in this episode just been confronted with 
weaknesses and problems in the financial system that we didn't 
fully--we collectively, the regulators, the Congress, the 
economists did not fully anticipate. And in the interest of the 
broader financial system and particularly as always, always the 
ultimate objective is the strength of the economy and the 
conditions for--economic conditions for all Americans. We found 
weaknesses and we had to respond in crisis situations. I think 
that--while I certainly would defend the actions we have taken, 
I would much prefer in the future not to have to take such ad 
hoc actions and, as I described, I think to Ranking Member 
Bachus, the best solution is to have a set of rules that govern 
when a bank can be or other institution can be, you know, put 
through a special process. In particular, we already have such 
a process for depository institutions, which is a fiduciary 
process where the requirement is that the government resolve 
that bank at the least cost to the taxpayer unless a 
determination by a broad range of financial officials that a 
systemic risk exists, in which case other measures could be 
    So I think it wouldn't be appropriate for me to try to give 
you any guidelines right now. I think what we are doing right 
now is trying to do the best we can to make sure the financial 
markets continue to improve, and that they begin to function at 
a level which would be supportive of the economy. I think what 
is critical is as we go forward, we take stock from the lessons 
we have learned from this experience and try to set up a system 
that will be less prone to these kinds of difficult decisions 
that we have had to make.
    Mr. Heller. I appreciate your feedback. When we are talking 
about 1.5 million foreclosures last year, we are talking about 
2.5 million foreclosures in this calendar year. And one of the 
concerns that I get back--keep in mind that I am from Nevada 
and the impact that foreclosures are having on all of Nevada, 
especially southern Nevada, and their concern is that as the 
Fed is stepping in in the Bear Stearns issues, the IndyMacs, 
the GSEs and they don't feel like the Fed is stepping in enough 
for the 2.5 million people who are finding themselves without 
homes. Any comments or reflections on that?
    Mr. Bernanke. Well, on two dimensions, one is that, as I 
said, the actions we have taken--obviously it is not always 
crystal clear to the public. But we have always taken our 
actions with an eye to helping all Americans. And in 
particular, if--when we do take actions to try to promote 
stability in the financial system, we are thinking about the 
availability of credit, the safety of investments, mortgage 
credit, all those things which do affect people's lives. So for 
example, in these discussions of Fannie Mae and Freddie Mac, I 
have no particular concern about the companies per se but they 
are very critical right now to the U.S. mortgage markets and 
there are people out there who would want to get a mortgage, 
people out there who would hope the housing market can come 
back, and that can only happen if there is renewed interest and 
availability to buy homes. So these actions are intended to 
make our system work for the benefit of all Americans.
    Now with respect to foreclosures specifically, within our 
powers we have done what we can to try to address that. We 
have, for example, given guidance to banks that we encourage 
them to do workouts. I have talked about the need for loan 
modifications. When other more temporary measures do not 
succeed in avoiding foreclosure, the Federal Reserve has also 
been extraordinarily active at the local level. All of our 12 
reserve banks and collectively the entire system have been 
working closely with NeighborWorks and other institutions to 
try to assist locally in terms of training, in terms of helping 
communities deal with foreclosure clusters and the like. So 
wherever we can, given our national footprint, we have been 
involved in trying to help.
    So you know, I would argue that we are addressing this on 
two fronts. I am first of all trying to help the economy get 
stronger but also addressing this issue directly.
    Mr. Heller. Thank you very much.
    The Chairman. The gentleman from California, Mr. Baca. Then 
we will go to Mr. Sherman and Mr. Scott on our side. Mr. Baca.
    Mr. Baca. Thank you very much, Mr. Chairman. Mr. Chairman, 
a combination of declining wealth, a weak job market probably 
because of all of the outsourcing and its impact that it has 
had on working families, rising gas, food prices, and 
foreclosures have created a downward turn on the economy. To 
put it into perspective: 94,000 jobs have been lost each month 
this year; 8,500 families are in foreclosure each day; 2.5 
million foreclosures are expected in the year 2008; home prices 
have fallen, stripping away household wealth and equity; the 
value of the dollar has dropped between 20 to 30 percent; 
inflation is raising quickly; unemployment has risen to 5.5 
percent; and the real wages have fallen to the level of 2001 
    More importantly is the real impact these numbers have on 
families. I go back home and my constituents are asking me, 
what are you doing to bring down the gas prices and what are 
you doing to help stop the foreclosures? Families are 
struggling to make ends meet. They are forced to pick and 
choose between basic necessities that they can afford each 
month, food, house payments, child care or gas. You stated that 
the growth in the second half of this year would be well below 
the trend due to continued weakening in the house markets, 
elevated energy prices, and tight credit conditions. But you 
stopped short at predicting a recession.
    Question number one: Is the worst yet to come? And how 
would you explain to the average American and to the working 
families who are feeling the impact every day that we are not 
in a recession?
    Mr. Bernanke. Well, Congressman, first I would like to 
respond quickly to something about your initial statement. You 
talked about outsourcing and the like. Probably the key source 
of the job loss we have had is the decline in the housing 
market, which has laid off construction workers and has had 
spillover effects through the financial system and so on. At 
this moment, our trade sector is actually one of the bright 
spots in our economy that is creating new opportunities for 
exports and job growth.
    With respect to whether this is a recession or not, that is 
a technical determination that a group of economists will make 
at some point in the future. It has to do with the various 
criteria. I think I agree with the premise of your question, 
which whether it is a technical recession or not is not all 
that relevant. It is clearly the case that for a variety of 
reasons, families are facing hardships in terms of higher 
energy costs, declining wealth, and all of the things that you 
mentioned. So this is clearly a rough time. Whether it is a 
recession or not, as you point out, is not--
    Mr. Baca. Do you believe that we are in a recession?
    Mr. Bernanke. I don't know. And I don't know if the--in 
fact, I am quite confident that the people who officially will 
determine that don't know either. In the past--
    Mr. Baca. Do you feel like the people who are impacted feel 
like we are in a recession?
    Mr. Bernanke. Again, I think I would not put much weight on 
this technical terminology. I mean, I think it is clear that 
growth has been slow, and that the labor market is weak. And so 
conditions are tough on families. I have no doubt whether it is 
technically a recession or not, and I don't see how that makes 
a great deal of difference.
    As far as the projection is concerned, we see continued 
growth, positive growth but weak for the rest of the year. 
Looking at the housing market, it is beginning to stabilize, at 
some point around the end of the year, early next year. And 
with the hope that we can continue to strengthen the financial 
system, we would hope to see recovery back to more normal 
levels of growth in 2009. But like all economic forecasting, 
there are uncertainties in both directions. But with respect to 
the current situation, again, whether it is a recession or not 
doesn't really play in our policy decisions.
    Mr. Baca. Well, let me ask you the other question before my 
time runs out. You mentioned the housing sector together with 
the oil is the heart of the current economic uncertainty. How 
would we eliminate the uncertainty and cause people to have a 
greater degree of confidence? And should we do something to 
address the market speculation in oil to help drive down the 
gas prices?
    Mr. Bernanke. Well, let me address the oil price situation. 
I discussed this a bit in my testimony. There are multiple 
causes, no doubt, for energy price increases. But the most 
important cause is the global supply and demand balance. The 
fact that oil, for whatever reason and there are a number of 
reasons, has not kept up with--oil production has not kept up 
with the growth in demand for oil particularly in emerging 
countries which are growing quickly and industrializing. So 
that suggests that probably the best thing we as a country can 
do about this is to--perhaps working with other countries, is 
to promote conservation, alternatives, new energy exploration, 
all the measures that will help bring us to a more sustainable 
situation as far as energy is concerned.
    On speculation, I also discussed this in my testimony. The 
Federal Reserve is working as part of a task force with the 
CFTC to look at these issues empirically. But my sense, based 
on the information I have at this point, is that speculation 
or, more properly defined, manipulation is not a major cause of 
oil price increases at this juncture.
    Mr. Baca. Thank you very much, Mr. Chairman.
    The Chairman. The gentlewoman from Ohio.
    Ms. Pryce. Thank you, Mr. Chairman. And I want to thank 
you, Chairman Bernanke, for being with us today. Thank you for 
your activity over the last several months. It has certainly 
been a tumultuous few months. My concern is that we as a 
Nation, you as the Fed, the Administration, and the Congress 
seems to be working in a reactionary mode, in crisis mode, that 
everything that has happened as a result of events. Now I know 
that you have no crystal ball any more than we have a crystal 
ball. But we as a committee have responsibility for oversight 
of the safety and soundness of our financial system. And I just 
want to ask a very simple question because I just haven't found 
an answer for it yet. And that is, why did such sophisticated 
market participants misjudge so badly the risk in the U.S. 
housing market? Is there an answer that you can impart to the 
committee to help us understand why we blinked and missed this 
    Mr. Bernanke. Well, as we look back on it, we see that 
there were just some serious failures in the management of 
risks. There were many firms that had exposure to the housing 
market in a variety of ways across the firm, including holding 
mortgages and other ways. And they didn't fully appreciate that 
in the contingency that the housing boom would turn around, 
that house prices would begin to drop; they didn't fully 
appreciate their exposure to that situation.
    The regulators bear some responsibility on that. It is our 
job to make sure that they measure and manage their risks 
appropriately. We have been working on that for a number of 
years related to bank supervision initiatives like the Basel 
Initiative, for example, and so on. But it is clear that we 
need to redouble our efforts to make sure that the risk 
management is sound, that the underwriting is sound, and that 
we don't get ourselves into this kind of situation again.
    Ms. Pryce. Well, you mentioned Basel. Are there further 
risks ahead to our system and therefore the overall economy 
that might arise, and the new capital adequacy standards in 
Basel? You know, if we are trying to have this happen 
simultaneously, could that create new risk to the system? 
Effects of a crisis in any overseas market, could that affect 
our system in a negative way? Further decline in the dollar. 
There is a list of many things that could potentially happen.
    One of the things I would like your comment on is the 
commercial real estate market. You know, many banks astutely 
avoided the subprime lending, and they instead expanded their 
commercial real estate lending. So everywhere we turn we see 
increased vacancy signs and downward pressure on rents. And do 
we expect another wave of pressure from that market? And are we 
planning ahead as a country to address these things as opposed 
to, you know, being reactionary as it seems that we have had to 
be of late?
    Mr. Bernanke. Well, on commercial real estate, this was an 
area where the Federal Reserve and other Federal bank 
regulators issued guidance several years ago requiring banks 
that held very high concentrations of commercial real estate to 
make sure that they were underwriting properly, that they had 
good risk management. And I believe that guidance, which some 
people complained about at the time, I think that is going to 
help us in the near term as we face the situation.
    Certainly as the economy weakens there is going to be a 
somewhat weaker performance of commercial real estate. But to 
this point, we are not seeing anything remotely like, you know, 
what we have seen in the mortgage market. But it is obviously 
something we are going to have to keep our eye on.
    Ms. Pryce. Can you comment on anything that is happening at 
the Fed in terms of future planning out for other 
contingencies? You know what I mean. So that we have less of, 
you know, a reactionary mode in the future?
    Mr. Bernanke. Well, we are working with our international 
counterparts in trying to strengthen the regulatory system. You 
mentioned my mention of Basel. Clearly we learned some of these 
in this last year and the Basel Committee is looking at places 
where they should strengthen capital requirements, strengthen 
liquidity management requirements, and so on. So as that 
becomes rolled in over time, it will reflect what we have 
learned from the past year. So even as we are trying to manage 
the current difficulties, we are also working with other 
regulators and with Congress to try to make sure that our 
system would be stronger and that we will emerge from this with 
a system that is a lot more resilient than we saw in the last 
    The Chairman. The gentleman from California.
    Mr. Sherman. Thank you. First, a few comments. I would like 
to join the chairman with regard to his comments on your 
consumer protection efforts. Your statements say that the new 
rules will apply to all types of mortgage lenders. So for the 
record I will ask you to refine that a little bit. I can't 
imagine that those rules will apply to individuals who make 
loans in order to sell their homes or whatever.
    I would also note that in your statement you say that 
despite a sharp increase in prices, production of oil has risen 
only slightly. And then you go on a couple pages to go on to 
explain why oil production has only risen slightly. I would add 
to that--and I am surprised that you didn't mention the fact 
that OPEC exists for the exact purpose of preventing increases 
in supply and that the Saudis have oil fields ready to go. They 
could turn on the spigot and they have refused to do so. 
Talking about oil prices, there is a lot of talk here in 
Congress about, well, what can we do to decrease demand by 
10,000 barrels a day? Or how can we go drill and get 500,000 
barrels a day?
    There is a worldwide price for oil. And what level of 
production, or in the case of the SPRO not acquiring for 
reserves, how many barrels a day would the United States have 
to deal with in order to really affect the world price of oil? 
And in contrast, there is a North American price for natural 
gas. What percentage increase or decrease in supply or demand 
of natural gas would it take to have a perceptible effect on 
the prices consumers pay?
    Mr. Bernanke. Well, first on the lending rules, the Federal 
Reserve normally issues guidance and rules for the banks that 
it supervises. But of course as the mortgage market has 
evolved, more and more mortgage lending took place in nonbank 
companies, various kinds of mortgage companies, brokers and the 
like. And our rules will apply to all of those types of 
companies. In some cases, when they are outside of our 
enforcement authority, we have to rely on State and other 
regulators to enforce the rules. And therefore, as part of this 
effort, we are working closely with them, doing some joint 
examination exercises, and so on, to try to help them ensure 
that they will enforce these rules.
    You made a good point, that the global oil market, about 84 
million barrels a day, is large. And so it takes--you know, 
that very small change in oil supply and demand would not 
necessarily have a big effect. But I would make a couple of 
comments on that. One is that the fact that we have to import 
most of our oil hurts our trade balance, forces us to send 
money overseas, so to speak. It would be better for the dollar 
and better for our economic prosperity here at home if we had 
more sources of energy domestically.
    So that is one consideration. The other consideration is 
that--and we can see this in the tremendous movements in oil 
prices up and down, over a short-term period even though there 
is a large market, the elasticity of supply and demand, the 
ability of suppliers or demanders to change their behavior in 
the short run is quite limited. So sometimes relatively small 
events like a strike or political unrest in a given country can 
have a big effect on the price because there is so little spare 
capacity. So to the extent that that spare capacity could be 
enlarged and have more flexibility, that could have--
    Mr. Sherman. Is there any way to give a numerical answer? 
Would half a million barrels a day affect the price, a quarter 
    Mr. Bernanke. Well, any--
    Mr. Sherman. Can you give me figures on natural gas?
    Mr. Bernanke. But the short-term elasticity is sort of that 
a 1 percent increase in supply could lower prices as much as 10 
    Mr. Sherman. Is that your natural gas answer or does that 
answer apply to oil as well?
    Mr. Bernanke. I assume natural gas is similar. Natural gas 
has more flexibility to use it in electricity generation and so 
on. So I am not sure it is quite the same.
    Mr. Sherman. Okay. Now a question for the record relating 
to Bear Stearns. The rules of capitalism which are applied with 
a vengeance on Main Street would have said that in a situation 
like that, the shareholders and the subordinated debt holders 
should take the losses long before anybody else. But in the 
deal that was worked out, not only did the shareholders get $10 
a share, which I realize is far less than they had hoped for, 
but the subordinated debt holders are going to get every penny 
with interest. And I wonder whether giving you the right to 
demand the conservatorship immediately would put us in a 
position where we could impose the risks and costs not on the 
taxpayer but on those who are supposed to bear them.
    Mr. Bernanke. I agree. We need some kind of resolution 
regime that will help us do this in a more orderly and 
predictable way.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman. And Chairman Bernanke, 
I am going to talk about something else that you mentioned that 
concerns me in terms of our economic future. At the very end of 
your testimony, you mentioned that the Board worked with the 
Office of Thrift Supervision and the National Credit Union 
Administration to issue proposed rules under the Federal Trade 
Commission Act to address unfair deceptive practices for credit 
card accounts and overdraft protection plans. You suggested 
credit card issuers should alter their current practices. You 
also note that the Fed has received over 20,000 comments on the 
proposed UDAP rules.
    I hope the Fed will be deliberate and take time to closely 
scrutinize these comments. I presume you share my concern that 
while we want to protect consumers, we likewise want to 
maintain a competitive credit card market, and not further 
damage the standing of the financial services industry.
    Any comments you have beyond that I would appreciate.
    Mr. Bernanke. Only to agree with you that both in our 
mortgage rules and in the credit card rules we want to strike 
an appropriate balance between increasing clarity and 
eliminating bad practices on the one hand versus making sure 
the credit is still available on the other. And that has always 
been our balance and has always been our concern.
    With respect to credit cards, we have been using consumer 
testing quite a bit to see what people could understand, what 
they do understand about their statements and about the 
provisions of their contract. And we find that there are some 
elements that it is just very difficult to explain, like double 
cycle billing for example. And you know markets work best when 
people understand what they are buying. And so there may be 
some circumstances where the market will actually work better 
and produce more credit in situations where there is not so 
much distrust and confusion about what it is exactly that is in 
the contract. And that is the kind of thing we have been trying 
to tackle.
    Mr. Castle. Thank you. On another subject, Mr. Ackerman and 
I have introduced legislation which was numbered H.R. 6482 to 
determine what kind of structured finance investments are 
eligible to receive ratings from National Recognized 
Statistical Rating Organizations. We feel measures like these 
would contribute to restoring confidence in financial markets.
    Would you agree that small steps like this one could 
contribute to the overall stability of our market or any other 
comments you may have concerning the credit rating agencies and 
their role, particularly in the housing circumstance?
    Mr. Bernanke. Well, the SEC has been quite active in this 
area with support from us and the President's working group and 
international regulatory agencies. There is a wide variety of 
steps that they have taken, including looking out for potential 
conflicts of interest, providing guidelines for increasing 
transparency to investors so they can better know how to use 
the credit ratings; discussing the idea of making credit 
ratings for different types of instruments, corporate bonds 
versus structured credit versus municipals; having different 
rating schemes and so on.
    So we recognize, as I said earlier, this episode has shown 
a lot of areas where our financial system wasn't as effective 
and strong as we thought it was. And this is one of those 
areas. And you know I think there is a lot of activity underway 
to strengthen the credit rating agencies.
    At the same time I think we have learned--and this is true 
both in a regulatory context as well as in an investor 
context--that there really is no substitute for direct due 
diligence. The investor has to do their own work, and that 
includes more than just looking at the credit rating.
    Mr. Castle. Well, not to argue with you or to beg the 
question, I would agree with you except it is very hard and 
complex for many investors to do that. And I am thinking of the 
pension funds and others who are making relatively big 
decisions as well as individuals. So it concerns me a little 
bit. There is a dependency on the credit rating agencies' 
reports, I believe.
    Mr. Bernanke. Then you can have a fiduciary or an 
investment manager that can provide advice.
    Mr. Castle. One final area, and I just read this in the 
papers today, but the whole question of the GSEs and their 
future. I have read what your recommendations are and obviously 
we need to consider that with respect to loans or 
capitalization or whatever. But a further question is, are they 
sound at this point? I mean, are they well-capitalized? Should 
we consider a privatization or nationalization of these 
entities? Are we going in the right direction with respect to 
Fannie Mae/Freddie Mac in particular?
    Mr. Bernanke. Well, they are adequately capitalized at this 
point. And you know the OHFEO says that they are fine and they 
can continue to operate and there is nothing about to happen. 
But we want these firms not just to be, you know, solvent, 
which is of course is critical, but beyond that we want them to 
play an active role in strengthening and stabilizing our 
mortgage market because they really are a big part of what is 
going on in mortgage markets right now. And to the extent 
that--even if regulatory criteria are met, to the extent that 
markets have lost confidence and shares have come down and 
spreads widen, we need to restore that confidence so they can 
have the financial strength they need to not only be solvent, 
which they are, but to go ahead and be more proactive in 
strengthening our mortgage markets.
    On the broad issue, you know based on the discussions I 
have had and my own thinking, it looks like the best solution 
at this point is to maintain their current form but to increase 
the supervisory oversight, make it much stronger, which is part 
of the bill that has been looked at in both the House and the 
Senate, and to take whatever steps are needed to try to restore 
confidence in the markets, that these are in fact strong 
institutions going forward.
    Mr. Castle. Thank you.
    The Chairman. The gentleman from Georgia, I would just ask 
him for 10 seconds to say that yes, that is exactly right. The 
bill this House passed in April of last year gives all of those 
new powers to the regular Fannie Mae and Freddie Mac, including 
the right to put them in a conservatorship. All the powers of 
the gentleman, that the Chairman has asked for with regard to 
being able to resolve other issues, they are in the bill that 
we hope to pass soon and send to the President regarding the 
    The gentleman from Georgia.
    Mr. Scott. Thank you, Mr. Chairman. Chairman Bernanke, let 
me first start by complimenting you as well. I think you have 
done a remarkable job in responding. Your views, your tools 
very wisely of the rate cuts and your action to protect our 
Fannie and Freddie are very, very important to send a signal to 
the world that we are going to keep our markets as stable as we 
    Let me just assure you that this economy is deeply in a 
recession certainly, and in many parts of our country they are 
hovering around the elements of a depression. Many American 
families are just basically hanging on by their fingernails. 
And you touched on two major areas of concern to that, which of 
course are housing and energy.
    Let me start with a series of questions. First of all, I 
believe strongly--you have touched very excellently on the oil 
and the energy concerns that we have, especially our 
overwhelming dependency on oil, which I was very delighted to 
hear you say we need to wean ourselves off of. But we are not 
doing that quickly enough, Chairman Bernanke. And one area in 
which we are failing miserably is in the area of quickly, the 
most effective way I believe we can bring down immediately the 
cost of gasoline, and that is what the American people want. 
They want immediate answers now. Drilling is not that answer. 
None of that is our answer. What is our answer is getting some 
alternatives on the market quickly that will cut our demand on 
foreign oil. And nowhere is that more precise than in ethanol.
    And with that, I would like to ask you why, for example, it 
would take a tremendous downward pressure and immediately lower 
the price of gasoline at the pump today if we would remove the 
54 cents per gallon tariff that we have on ethanol coming in 
from Brazil made from sugarcane, the most potent, the most 
effective form of ethanol. That would help immediately increase 
the available supply. If they are running the automobiles in 
Brazil, 90 percent of them off of ethanol made from sugarcane, 
and they have plenty of that, that would make a lot of sense 
for us to immediately lower that 54 cents and bring in as much 
of that ethanol as we can so it would offset this great need 
and gluttony that we have for this imported oil and would send 
a loud message over to OPEC.
    First of all, would you recommend that? Is that not a smart 
thing to do, to take that 54 cents a gallon tariff off of the 
imports of ethanol made from sugarcane from Brazil?
    Mr. Bernanke. Congressman, I do support free trade, and I 
think that would be a good step to take. I think it would be 
helpful. I wouldn't want to overstate it because of course 
Brazil is using a lot of its ethanol for its own country. And 
indeed they have been remarkably successful. They are 
essentially energy self-sufficient based on ethanol and their 
own oil sources and so on, which is a very different situation 
from where they were in the 1970's.
    Mr. Scott. Absolutely. Let me get to my other point. I am 
glad to hear you say that. And I think we should move to do 
    In other areas, in biodiesel fuel, for example, I have not 
heard any incentives, any cries from the Administration or 
anybody to increase the output of biodiesel fuel. We have 
advances being made, for example, in my own district in 
Georgia, in Clayton County. In Ellenwood, we have a biodiesel 
plant that is making biodiesel not from petroleum, not from 
oil, not from fossil material, but from the fatty parts of 
chicken and pork. And Chairman Bernanke, they are producing 18 
million gallons of it a year, going directly to the market, not 
on a world market, but going directly to the points of 
distribution in that area.
    Where are the incentives for biodiesel fuel when we have 
the mechanisms for that? If we have that one plant that is 
producing 18 million gallons going directly to the market, 
wouldn't it make sense to get behind this movement? It would 
create more jobs and help stimulate the economy.
    Before my time is out, I wanted to ask you another 
    The Chairman. Excuse me, gentleman. There won't be time to 
get an answer. I apologize. We have 5 minutes. If you can make 
it quick.
    Mr. Scott. I have two points. Your answer on the economic 
stimulus package, how good was it, is it good, and given the 
weakness of the economic forecast, wouldn't it make sense 
perhaps to extend another round of that economic stimulus 
package to get some checks more directly into the hands of the 
American people?
    The Chairman. The Chairman can answer that.
    Mr. Bernanke. First of all, what is the incentive for 
biofuels? The high price of oil is a pretty strong incentive. 
As long as there is regulatory clarity about what is involved, 
I think there will be plenty of market-driven movement in that 
    On the fiscal stimulus, I believe the one that was done is 
having some effects. But it is somewhat early to make that 
judgment. And so you know I certainly think that we should 
consider all options. At the moment I think it is a bit 
premature. With all due respect, what I suggest at this point 
is that the most pressing need is in the housing sector and the 
Fannie issue and in the housing measures, and that is where I 
would urge you to look now.
    The Chairman. The gentleman from California.
    Mr. Royce. Thank you, Mr. Chairman. Chairman Bernanke, for 
a better part of a decade there has been a push to improve what 
is a very weak regulator in OHFEO over Fannie and Freddie. And 
I remember the week after you took your position we talked 
about this issue. We were in agreement. Here on this committee 
I have raised this issue countless times. In 2003, I introduced 
the first legislation which sought to bring Fannie and Freddie 
and the Federal Home Loan Bank System under one strong 
regulator within the Federal Government.
    Back in 2005, I introduced an amendment on the House Floor 
to give the new regulator the authority to review and adjust 
the GSEs' retained portfolios in order to mitigate against 
systemic risks. This is the same thing we are trying to do now 
with an independent regulator. And we are now witnessing what 
the current weak regulator, without the ability to mitigate 
against systemic risk, means for these two institutions and our 
broader capital markets.
    I will just mention that the majority of my colleagues 
voted against that amendment on the Floor of the House. But as 
we go forward with an episode here that could have been 
prevented long ago had your counsel or the counsel of those of 
us pushing this had been taken, we move closer now to passing 
legislation to strengthen the regulator for Fannie and Freddie.
    And I must again express my sincerest opposition and 
frankly my amazement to the inclusion of a roughly $600 million 
affordable housing fund and a $300 billion bailout for lenders 
and speculators that has been put in the bill. And I said this 
since its inception, this affordable housing fund is straight 
out of Central Planning 101. It should not be accepted by my 
colleagues. It should not be accepted by this Administration. 
And much of this money, pushed for by certain NGOs, will most 
likely end up in the pockets of a group of radical activist 
organizations with history of both voter fraud and anti-free 
market advocacy nationwide.
    So even if the money is used to promote affordable housing, 
because it is fungible, the American taxpayers will be 
indirectly subsidizing the most egregious actions taken by 
certain radical groups. So unfortunately, the safeguards in the 
bill meant to prevent abuses are far from sufficient. As a 
recent Wall Street Journal editorial noted, if later 
investigations prove the taxpayer funds were misused, the bill 
provides that recipients can simply return the amount of the 
grant with no further financial penalty.
    And Chairman Bernanke, I know you are not an advocate for 
this fund. So I will spare you a line of questioning to address 
that part of the issue, but I would like to get your thoughts 
on an additional issue, and that has to be on stability in the 
economy. As we watch our capital markets, as we watch this 
economy struggle, I believe there is plenty Congress could do 
to help in the recovery. And I think if we are able, I believe 
we should provide certainty to the environment in which our 
companies operate. And part of that certainty, if we go back to 
a speech that you gave as Chairman of the Council of Economic 
Advisors, you mentioned the 2001 tax cuts. And you said, 
additional tax legislation passed in 2002 and 2003 provided 
incentives for businesses to expand their capital investments 
and reduce the cost of capital by lowering tax rates on 
dividends and capital gains.
    Well, with those cuts looking to expire in 2010, it would 
seem critical to give the markets the certainty necessary to 
recover fully in the coming months. So I would ask, Chairman 
Bernanke, do you still agree with your previous assessment of 
the impact of the 2002 and 2003 cuts on the economy? And what 
would be the effects of an increase in the capital gains and 
dividends rate of 20 percent or higher as being discussed, what 
would that effect be on our already weak capital markets, 
especially considering the much lower rates that exist around 
the world?
    That would be my question to you now.
    Mr. Bernanke. Thank you. First, let me just agree with you 
on the regulator. He fought a good fight. The Federal Reserve, 
my predecessor for many years raised these issues. And you 
know, it would have been helpful if we had been able to do 
that. I don't generally in my current capacity comment on tax 
policy, but I do think and I expect that the Congress as they 
think about all these things, all these packages, you know, 
will be looking--I am sure you will be looking at the cyclical 
situation and trying to see what impact that has along with any 
other fiscal steps you might be taking.
    Mr. Royce. Thank you, Chairman Bernanke.
    The Chairman. The gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. I have some curiosity 
about the radical groups my colleague was talking about, but I 
will suppress that and move on.
    Mr. Chairman, because our economy seems to have so many 
economic moving parts and with connections to the world 
economy, is it possible any more for us to bring forth a clear 
forecast? I mean, has forecasting just been tossed out of the 
    Mr. Bernanke. Forecasting is always very difficult, and it 
is extremely difficult when you have the kind of financial 
issues that we have had recently because it is just hard to 
know which way that is going to go.
    Unfortunately, for monetary policy purposes, because 
monetary policy works with a lag, even if our forecasts aren't 
very good, we have to take our best stab because we have to 
have a sense of where the economy will be when the monetary 
policy actions begin to take effect. So we have at the Federal 
Reserve just about the best team of forecasters anywhere, and 
they have done a very good job over the years. But they are 
facing a very, very tough environment both because of the 
global issues that you mentioned and because of the changes in 
financial situation.
    Mr. Cleaver. That question actually was a setup for the 
next question. And to some degree it may have been asked in 
various forms. Each night since this has started I have been 
taking piles of stuff home and reading it and essentially 
dropping a rock down in a well, and I have been waiting to hear 
the sound of a splash and I haven't. I am wondering if you 
have. I mean, is there a bottom? And if so, how long before we 
hear a splash? My concern, the airline industry is now 
hemorrhaging and crying. It appears as if, you know, one--we 
are having a domino effect. And you know I think as the cries 
go up, more and more people are becoming afraid. I used to say 
that we had a transportation-based economy. Now I am wondering 
if we have a confidence-based economy. Help us, please.
    Mr. Bernanke. Well, Congressman, it is the nature of my 
testimony. I am supposed to be reporting on the next 6 months 
and the immediate period ahead, so I tend to have a very short-
term focus. Obviously, we have a lot of challenges in the near 
    I can't predict precisely the contour of economic activity 
going forward, but I am personally very confident that we will 
return to a strong growth path. I think it is very striking 
that even during all that uproar, U.S. labor productivity has 
continued to grow faster than almost any other industrial 
country. It just shows how strong this economy is. We will work 
our way through these financial storms, we will work our way 
through this cyclical movement that we have, and the economy 
will return to good growth, but we just have a few things to 
work through on the way to doing that.
    Mr. Cleaver. This is a rhetorical question, I think. We 
need action immediately with regard to the housing bill that is 
in the hands now of our chairman and leadership.
    Mr. Bernanke. I would advise prompt action on housing 
issues, including Fannie and Freddie.
    Mr. Cleaver. Thank you, Mr. Chairman.
    The Chairman. If he would yield, the Chairman again said, 
and we should be proud of this, that American worker 
productivity is growing faster than anywhere else in the world. 
Worker compensation is failing to grow comparably, and that is 
a fundamental social and economic issue we have to address.
    The gentlewoman from Illinois.
    Let me say to people that we are going to have to vote 
soon, so I am prepared personally to miss the vote on the 
previous question on the intelligence bill, which will give us 
maybe 20 minutes from the time of the first vote. Anyone who 
wants to stay and continue to ask questions is welcome to do 
that. But there are a series of votes, so we will have to end 
it at that point. So about 20 minutes after the bell rings, we 
will have that amount of time.
    The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for being here. I would like 
to thank you for your work to update the regulations to protect 
consumers; in particular, thank you for taking action on the 
credit card regulations, Reg Z and UDAP, and recently 
finalizing the HOEPA regulations that protect consumers and I 
think restore confidence in the mortgage market.
    I think that you published on July 14th final rules 
amending Regulation C. When do you anticipate that the credit 
card regulations will be finalized?
    Mr. Bernanke. My understanding--and if I am mistaken, we 
will follow up--my understanding is that we aim to complete 
that this year, later this year. We are trying to coordinate 
our Reg Z disclosure package with the UDAP rules so that 
companies can implement all this at the same time. So those two 
things ought to be released at the same time. We are looking to 
do that, to my knowledge, this year.
    Mrs. Biggert. One aspect of the proposal would require 
creditors to provide transaction-specific mortgage loan 
disclosures, such as the APR and payment schedule for all home-
secured closed-end loans no later than 3 days after 
application. This proposal sounds very similar to HUD's efforts 
to reform RESPA. I just wondered if you had worked with HUD in 
preparing this regulation.
    Mr. Bernanke. We have worked with HUD on these issues, the 
mortgage disclosure issues, because we both have 
responsibilities in this area, and obviously the more 
coordinated we can be, the better off the public will be. So we 
have worked with HUD for a number of years as we have looked at 
their changes in their disclosures. But there is no joint 
approval process. This is our product.
    The Chairman. If the gentlelady would yield. She has asked 
two very important questions. But you are going to make a 
regulation so the HOEPA regulations and HUD's RESPA, we hope 
there can't be any conflict there.
    Mr. Bernanke. It has been our interest to do that for a 
number of years.
    The Chairman. When the gentlewoman asked about credit 
cards, and you said you would try to coordinate, is that true 
of the overdraft? Are they all going to be done at the same 
time? The credit cards and the overdraft, are they also on the 
same timeline?
    Mr. Bernanke. The overdraft is on the same timeline as far 
as comment is concerned. Frankly, I don't know whether there is 
a possibility of breaking that off and releasing that earlier.
    Mrs. Biggert. Thank you.
    When you were doing the disclosure rules, there was a real 
focus on the consumer testing. Was there similar consumer 
testing done as you put out the proposal on unfair and 
deceptive card practices?
    Mr. Bernanke. There was consumer testing, and it was 
precisely that consumer testing that led us to conclude that 
there were certain practices that could not be made adequately 
transparent through disclosures that did not have direct 
beneficial effects to consumers. That outweighed whatever 
problems that might arise. That was the reason that we, in some 
cases, chose prohibition over disclosure.
    Mrs. Biggert. There has always been this worry that this is 
going to limit credit, some of the regulations are, whether 
there was going to be legislation. Do you think that this will, 
the regulations will, result in a reduction of the credit that 
can be offered?
    Mr. Bernanke. We are going to monitor that closely. As I 
said before, we always want to try to balance availability of 
credit versus having a transparent marketplace. I do think that 
markets work better when the information is good. So even if 
the equilibrium amount of credit is a little different, maybe 
people will be getting products that are better for their needs 
and that they better understand. So it may be in some sense 
more effective and more helpful credit than we had before.
    Mrs. Biggert. So education is a big part.
    Mr. Bernanke. Education is very important, but I have 
become persuaded over time now that you need three things: 
education on the consumers' part; good, effective consumer-
tested disclosures; and as a last resort, when those two things 
do not adequately protect the consumer, then you need to use 
the ability to ban certain practices.
    Mrs. Biggert. Thank you.
    I yield back.
    The Chairman. The gentlewoman from Wisconsin.
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman.
    And thank you, Mr. Chairman, for all the work that you did 
over the weekend for sort of cooling out the housing crisis.
    I read through your testimony, and I was very interested in 
your comments regarding the commodities market. You say that 
you doubt that financial speculation is the cause, a causal 
factor, in the upward pressures on oil prices, but you find 
that you are baffled by what it could be. You say that ``this 
is not to say that useful steps could not be taken to improve 
the transparency and functioning of futures markets, only that 
such steps are unlikely to substantially affect the prices of 
oil and other commodities in the longer term.''
    I was curious. I would like for you to expand on that and 
explain that to me.
    Mr. Bernanke. About the possible steps?
    Ms. Moore of Wisconsin. Yes.
    Mr. Bernanke. Well, with respect to possible steps, as I 
indicated, the Federal Reserve is part of a task force being 
led by the CFTC, which is trying to get as much clarity as we 
can on exactly this question, and that includes right now we 
and the CFTC in particular has been gathering information from 
other petroleum futures exchanges like the ones in U.K., has 
been gathering information on the activities of swaps dealers 
and index traders who invest in these economies. We are trying 
to understand how these investments are made and how they 
relate to price movements, those sorts of things. So we are 
looking at that seriously.
    It is possible that the CFTC may decide, and, of course, it 
is their province to do so, that changes in the information 
requirements or in positions, limits or things of that sort 
might be justified under certain circumstances.
    There is a lot of evidence, though, on which I base my 
earlier statement in the testimony that makes it seem unlikely 
that speculation or, better termed, manipulation is driving up 
energy prices. I mentioned the absence of inventories. There 
are a number of other things. For example, there seems to be no 
empirical relationship between long, open positions by 
noncommercial traders and movements in prices. It is striking 
that there are many or at least some commodities which are not 
even traded on future markets which have had big price run-ups, 
like coal and iron ore, for example.
    So it doesn't seem to us to be the central issue. It does 
mean that energy prices in the very short run can respond quite 
sensitively to news that comes in because they begin to trade 
like a stock price, for example. But that is not necessarily a 
bad thing; that means that information is being incorporated 
into those prices, and that helps suppliers and demanders know 
how better to respond.
    Ms. Moore of Wisconsin. Mr. Chairman, thank you for that.
    Is the SEC a part of this committee that is looking at the 
commodities irregularities?
    Mr. Bernanke. I believe so. Yes.
    Ms. Moore of Wisconsin. All right. I know that the CFTC and 
the SEC have been having talks. Do you think--this committee, 
by the way, doesn't have jurisdiction over the CFTC, and I 
think most of the questions have been related to commodities. 
Do you think that we need to modernize our regulatory system by 
having these commodities come under the same jurisdiction as 
the SEC? I know the CFTC and SEC have been talking about such a 
collaboration or merger, and I am wondering, do you think there 
would be any benefit in that?
    Mr. Bernanke. I know that they work very closely, and there 
are areas where there is some overlap of responsibility and 
jurisdiction. The Treasury Blueprint for reform envisions that 
we would merge at some point. I don't really have a 
recommendation to make on that. I think it would depend in part 
on the overall plan for regulatory reform if, in fact, that 
takes place in the context of that broader plan.
    Ms. Moore of Wisconsin. Well, I just only say that because 
so many of these commodities are paper transactions and futures 
contracts versus bringing your hog to the marketplace to sell. 
It seems to me that the modern thing would be to bring these 
together and have perhaps a better regulatory framework.
    I yield back.
    The Chairman. I will say in the 10 seconds I will borrow 
from the gentlelady, my jurisdiction proposal is we leave with 
the Agriculture Committee jurisdiction over all those futures 
and things you can eat, and we get the rest.
    The gentleman from California.
    Mr. Miller of California. Thank you, Mr. Chairman.
    I kind of enjoyed the comments that the Federal Reserve is 
getting blamed for not dealing with the predatory issue as it 
applies to subprime. But I recall 5 years ago, I repeatedly 
tried to introduce language to effectively define what 
predatory was versus subprime and included the issues you have 
dealt with finally. So I feel guilty blaming you for something 
5 years ago we should have done and didn't.
    The purpose and intent of the GSEs was to inject liquidity 
into the marketplace, which we have done. If you look at the 
amount of loans that are out there, I think it has proven to be 
very beneficial to the housing market.
    Having been a developer for over 35 years, I have been 
through the 1970's recession, 1980's, 1990's. Any time you see 
a housing boom, you know eventually there is a going to be a 
housing recession occurs. It has happened repeatedly. This one 
is a little different, but every one I have been through has 
been somewhat different.
    In the stimulus package we passed recently, I think the 
most important part on the economy was increasing conforming 
loan limits for FHA and GSEs. Sending people a check, yes, 
there is a benefit to that. But the main reason I think for the 
situation the economy is in today is because of the housing 
recession we have gone through. I think raising conforming loan 
limits in high-cost areas has gone a long way to mitigating an 
impact that could have been worse than it was. Especially in 
California and other areas there are many lenders that will not 
make a loan today if it is not conforming because they don't 
have the assets basically to tie their capital up if they can't 
make the loan and sell the loan off.
    Now, there has been discussion about after December 31st, 
we are going to be dropping those limits down to much lower 
levels. I believe that is going to have a major detrimental 
impact on the housing market because it sends--even the 
discussion and debate about doing that sends a message that we 
are not going to be committed in the future to trying to create 
liquidity in these high-cost areas.
    I would like to have your opinion on that issue.
    Mr. Bernanke. First, you are correct about the centrality 
of the housing market. The issue you raise should be predicated 
on Fannie and Freddie being strong and effective and having 
good supervisors. I think that is really the first step.
    I recognize that there is disagreement about where the loan 
limits should be. I think in the near term that there is some 
benefit to having a bit more scope, but I recognize there is 
disagreement about that. So my main hope is that you will come 
to a good consensus and get legislation out.
    Mr. Miller of California. Let me rephrase my question so 
maybe you can answer it then. The reality is that many lenders 
in areas will only make loans that are conforming because they 
lack liquidity of their own because of the market requirements 
placed on them, and that they are making loans today that, and 
am I not correct, if GSEs are out of the marketplace, those 
loans otherwise could not be made? Is that a fair assumption?
    Mr. Bernanke. Not a universally fair assumption because 
there are lenders that make loans and hold them on their 
balance sheets. Where you are correct is that the normal 
securitization function whereby a lender would make a loan, a 
jumbo loan, and then sell it to be securitized, that that 
securitization function for loans that don't conform to Fannie 
and Freddie has broken down, and it is a reason why there is a 
fairly unusually high premium or a differential in the mortgage 
rates on jumbo loans relative to conforming loans.
    Mr. Miller of California. Now, when GSEs and FHA got into 
the marketplace in the stimulus, rates dropped 400 percent 
basis points below what they were. The way I see it, in the 
economy where a housing market is depressed to begin with, we 
are going and making loans in areas that the housing market has 
actually declined in value, which are actually safer loans, but 
the individuals are saving a tremendous amount of money on 
their payments because the GSE loan is at a much lesser 
interest rate than a normal jumbo loan. Do you not see that as 
a benefit to turning the housing market as it exists today?
    Mr. Bernanke. The Fannie and Freddie function of 
securitizing mortgages and getting them into the secondary 
market, providing a new source of capital for mortgage lending, 
is clearly the most valuable thing that they do. I am not quite 
sure I understood all of your question, but I do want to 
reiterate my support for making it possible for them to 
continue to do that on an expansive scale.
    Mr. Miller of California. My goal is to say that the more 
liquidity we can inject into the marketplace will create a 
higher percentage of--higher possibility that the marketplace 
will turn much more rapidly and create more stability, and 
should we do things to create less liquidity in the marketplace 
that will also have the opposite effect?
    Mr. Bernanke. Providing mortgage credit to all qualified 
borrowers by itself will not necessarily turn the housing 
market around, because there are a lot of other fundamental 
issues. But to the extent we can make mortgage credit available 
to those who want to buy homes and who are credit-qualified, I 
think that is something we should try to do.
    Mr. Miller of California. Thank you.
    The Chairman. The gentleman from Tennessee.
    Mr. Davis of Tennessee. Mr. Chairman, thank you very much.
    Chairman Bernanke, thank you for being here. This is the 
second day, I understand, that you have been on the Hill. It 
would be my hope, and I think all of us on this committee and 
certainly on the other side, that you could solve our problems 
overnight with these 2 days of hearings. But thank you for 
being here and offering and being willing to make suggestions, 
and for your leadership with the Fed.
    Our country is readjusting to living in the world with far 
less available credit and high energy prices. Either would be a 
problem, but both at the same time guarantees a long period, in 
my opinion, of uncertainty as business adapts. The evidence is 
increasingly clear that the economy fell into a near recession 
in January, which set off a significant contraction in lending. 
Our hopes that the tax rebates here in Congress would spur a 
recovery by midyear have been dashed, in my opinion, at the 
feet of $150-a-barrel oil.
    Now, new signs of problems that lenders, large and small, 
are beginning to surface despite very wide interest margins. 
The failure of inflation to spill over into wages has left 
consumers stripped of buying power. By the combination of the 
credit crunch and oil prices, businesses are becoming 
increasingly cost-conscious in the face of weak volume growth 
and inability to pass on oil inflation. The result is weaker 
jobs in the district I represent, job growth, more defaults, 
tighter credit, and a growing spiral of economic weakness and, 
in my opinion, not inflation.
    As you noted earlier, we have seen payroll employment fall 
62,000 jobs in June, with downward revisions for another 52,000 
for the 2 previous months. This was the 6th consecutive month 
with declining jobs.
    While I understand that it is politically more expedient 
for you to keep emphasizing inflation concerns, while watching 
the data as it develops in coming months, this is a clear 
signal from the job market that the U.S. economy is slowing to 
stalled speed, and that the risk is not just inflation, but 
rather of a slide into a full-blown recession.
    The inflation hogs constantly reinforce the argument that 
maintaining a low and stable inflation rate is the best way to 
achieve maximum sustainable growth. Yet, to the man on the 
street, the rising unemployment rate, in my opinion, is the key 
indicator. I think we need to start adjusting so we are 
thinking about inflation as being the major problem that we 
have today.
    The question I want to ask--and I want to make a statement 
basically about what happened to the Nikkei average in 1989 and 
1990. We saw reluctance of lenders and a reluctance of the 
National Bank of Japan to address, I think, the main issue 
there was over-inflated prices of homes, mortgages, high 
interest rates. When you look at the value of the land around 
the Emperor's palace, some folks said it actually brought in 
currency more than the entire appraised value, tax-assessed 
value, of the State of California.
    When you study and other economists study the almost near 
collapse of the Nikkei average from up 40,000, down to roughly 
8,000, an 80 percent drop, as you have looked at that, have you 
also studied the regulatory authorities demanded by the 
Government of Japan to be sure that never happened again? And 
have we put in place and are you recommending that some of 
those regulatory authorities be established here in the United 
    Mr. Bernanke. That was a very difficult episode for Japan 
when the bubbles in both the stock market and in property 
prices collapsed at the same time. I think the key lesson that 
we learned from that experience was that in Japan, banks had 
very wide holdings in land and equity and other assets whose 
values came down, and so the banks were in very, very bad 
financial condition, but they were not required to disclose or 
inform the public about what their actual condition was.
    For many, many years they kind of limped along. The same 
with the companies they lent to. They didn't call those loans 
because they knew they couldn't be paid. So it was a situation 
in which there was a reluctance to act and in which 
transparency was quite limited.
    I think one benefit of our current system here in the 
United States is that as painful as it is to see the losses 
that financial institutions are suffering, at least they are 
getting that out, they are providing that information to the 
public, and they have been proactive in raising capital to 
replace those losses. In order to avoid a prolonged stagnation, 
as in Japan, it is important for us to get through this period 
of loss and readjustment and get back to a point where the 
financial system can again support good, strong, stable growth 
for the United States.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you.
    Chairman Bernanke, last week on Thursday when you were 
before our committee, I asked you a question about the criteria 
by which the Fed chooses to open the discount window to 
nondepository institutions. As part of your answer you said, 
``I don't want to do it again.'' But clearly, 4 days later you 
did. So it hadn't happened in 70 years. It has now happened 
twice, I guess, in the last 3 to 4 months. So I have a couple 
of questions related to that.
    One, I am very concerned on where does the moral hazard 
end. And to, I guess, capture a phrase of our ranking member, I 
think there is the danger of us adopting nationally a system 
where if you are big enough, if you are interconnected enough, 
if somehow the interplanetary economic stars align just right, 
you are in a position to privatize your profits, but socialize 
your losses to where the taxpayers end up picking up the tab.
    My theory is that we could have even greater S&L debacles, 
greater Fannie and Freddie debacles. I know since I have been 
here for almost 6 years, people have been raising a hue and 
cry, including myself, about how big these institutions are 
getting, how they are increasing their risk profile. Your 
predecessor spoke fervently about the systemic risk, yet we 
find ourselves here today.
    So I guess my question is it is still somewhat unclear to 
me what is the criteria by which you open this discount window 
to nondepository institutions. I think I heard in a response to 
the gentleman from Nevada, it sounded like either one objective 
criteria doesn't exist today, and it is done on an ad hoc 
basis, or perhaps you are being purposely ambiguous in hopes 
that the institutions will not feel that they qualify, in the 
hopes that we don't have the moral hazard problem.
    So if you could give me further illumination as of today, 
this moment in time, what is the criteria for which the 
discount window is open to nondepository institutions?
    Mr. Bernanke. In the case of Fannie and Freddie, our 
attention was very, very limited. The Treasury Secretary had a 
bunch of proposals to ask Congress to take steps to restore 
market confidence in Fannie and Freddie. Our intention was to 
just provide a bit of bridge to the point where Congress could 
make its decision about how to restructure those firms.
    Mr. Hensarling. Mr. Chairman, let me interrupt. Did 
representatives of either Fannie or Freddie approach you to 
have the discount window open?
    Mr. Bernanke. No.
    Mr. Hensarling. So they did not request this, to the best 
of your knowledge.
    Mr. Bernanke. Not to my recollection, no.
    Mr. Hensarling. Thank you. Continue on.
    Mr. Bernanke. So we have used it very sparingly in our 
history. We have done so in this current episode in situations 
where we thought it was helpful to the broad financial 
stability of the economy.
    I agree with you 100 percent about moral hazard, but I 
think the time to think about that is in advance. We need to 
take steps going forward to clarify exactly when the Congress 
wants us to take these kind of actions and under what 
circumstances that would eliminate moral hazard.
    I mentioned previously the importance of strong, 
consolidated supervision of the investment banks, of 
strengthening the infrastructure, of developing resolution 
regime. The reason the savings and loans crisis went the way it 
did is because there was a forbearance, regulatory forbearance. 
There were no guidance or rules or laws about how the 
regulators ought to treat companies that were under water.
    Mr. Hensarling. Mr. Chairman, at this time if we can't say 
precisely who would qualify for the discount window, I suppose 
the converse is true as well, we can't say who doesn't qualify. 
I mean, for example, would Anheuser-Busch qualify? Many 
Americans might consider them more mission-critical to the 
Nation than Fannie and Freddie.
    Mr. Bernanke. We have to make findings of unusual and 
exigent circumstances. I think our criterion has been--and, 
again, despite what I said last week, I will say again, I hope 
we don't ever have to do this anymore--my criterion would be to 
provide liquidity and support in circumstances where we thought 
there were concerns about the systemic risks associated.
    Mr. Hensarling. Speaking of not having to do this again 
today, nobody wants to see Fannie and Freddie fail. They are 
too big to fail today, but I want to ensure they are not too 
big to fail tomorrow on the taxpayer dime or perhaps, more 
precisely, the taxpayers' $5 trillion. In your professional 
opinion, is there anything inherent about the secondary 
mortgage market that would prevent Congress from considering 
reconstituting these companies as part of the quid pro quo for 
their charters, from perhaps busting them up into a dozen 
different companies or over a 3- to 5-year period totally 
privatizing them?
    Mr. Bernanke. There are certainly a number of different 
possibilities ranging from outright nationalization, to 
privatization, to breaking them up. In the near term, thinking 
about the needs of the housing market, I think the right 
solution is to keep them in their current form, but to provide 
very strong oversight that will assure adequate capital going 
    Mr. Hensarling. Thank you.
    The Chairman. The gentleman from Minnesota.
    Mr. Ellison. Mr. Bernanke, can you tell what you think 30 
years of wage stagnation, how that contributes to the current 
burgeoning debt that consumers are carrying today?
    Mr. Bernanke. Well, I don't think it is accurate there has 
been 30 years of wage stagnation. There has been a pretty 
substantial increase in real wages and in consumption over the 
last 30 years or so. Clearly, in the most recent past, energy 
prices, a slowing economy, and other factors have caused wages 
to stagnate, which is a serious problem.
    Mr. Ellison. Wages didn't stagnate in the late 1990's, but 
in the 1980's and 1970's.
    Mr. Bernanke. If we compare today to 1978, 30 years ago, 
you would see some significant rises, particularly if you look 
at a particular individual or family as opposed to the fact 
that you always have a shift and change.
    Mr. Ellison. What about average hourly wage? What did those 
numbers look like over the past, say, 30 years?
    Mr. Bernanke. I wouldn't want to take a wild guess.
    Mr. Ellison. You don't have to guess, because I think they 
have been pretty stagnant.
    Mr. Bernanke. They are not static. They have risen 
considerably over the last 30 years.
    Mr. Perlmutter. Would the gentleman yield for 1 second?
    Mr. Ellison. Go ahead.
    Mr. Perlmutter. You have a lot of very interesting graphs 
in your report, and one of these is on page 9, which shows the 
personal savings rate. I think that falls right in line with 
what the gentleman from Minnesota has been talking about, the 
fact that wages have been fairly steady, things have been going 
up, and people can't save.
    Mr. Chairman, my question to you is how are we going to get 
people to start saving?
    Mr. Ellison. Reclaiming my time, that is where I am going 
with it. The fact is we have had recorded negative savings 
rates, and I believe that the stagnancy of wages--will you 
grant me 2000, will you agree with that, stagnant wages since 
then--I think that helps to explain part of the problem that 
Americans are having right now. That is why we are doing the 
refis, the payday loans, the credit cards, things like that.
    I just want to know from you to what degree does stagnant 
wages help contribute to the present situation even with 
regards to people getting into exotic mortgage products, credit 
cards, all of these loan products? Does it play a role, in your 
    Mr. Bernanke. I think there are a lot of factors.
    Mr. Ellison. What role does stagnant wages play, Mr. 
    Mr. Bernanke. Obviously it is more difficult to save if 
your family income is not rising, I agree with that.
    Mr. Ellison. Doesn't the Fed have a mandate to try to 
promote full employment and keep inflation down? I mean, is 
that part of your mandate?
    Mr. Bernanke. Absolutely.
    Mr. Ellison. What are we going to do to increase real wages 
for people so they have enough money to buy the things they 
need as opposed to borrowing the money?
    Mr. Bernanke. I think that--and I have expressed this in 
detail in another context--the only long-term solution is to 
help those people who are not getting appropriate training and 
skills because those are the people who are being left out of 
the globalized economy. People who have high levels of skills 
have lots of opportunities and potential for high wages. That 
is beyond the power of monetary policy to do that.
    Mr. Ellison. Are you familiar with the livable wage 
    Mr. Bernanke. Yes.
    Mr. Ellison. Does it have the power to help improve wages 
for average working people?
    Mr. Bernanke. Again, this is somewhat out of my department, 
but I think I would rely on markets, plus give the workers the 
tools, the skills, the education they need, plus, if necessary, 
some assistance in getting retrained if they are displaced.
    Mr. Ellison. What do we do to help people save more money?
    Mr. Bernanke. This has been a long-term issue. Part of the 
reason that people didn't save for awhile, it is not relevant 
now, but for awhile people were letting their houses do their 
saving for them because they were looking at appreciation. Now 
they are under pressure because house prices are no longer 
rising, and they need to find savings under their current 
    In terms of policy measures to help people save, there are 
very few, if any, magic bullets for that. There have been some 
suggestions about having people opt out of 401(k) plans. 
Suppose we allow for a more widespread access to tax-preferred 
retirement plans and ask people to opt out rather than to opt 
in. There is some evidence that that helps people save more. It 
gets them to participate more.
    The low saving problem, this is a low-saving country, and 
it is part of the reason we are borrowing a lot from abroad, it 
is a significant one, and I don't have an answer. Again, the 
Federal Reserve's mandate is to maintain employment, but we 
can't guarantee necessarily high-paying jobs. Those jobs have 
to come because--high-paying jobs have to come because workers 
have the skills, and the training, the education they need to 
get those kinds of jobs.
    The Chairman. The gentleman from New Jersey.
    Mr. Garrett. I thank the chairman.
    I thank you, Chairman Bernanke, for being with us today. I 
would like to begin by complimenting you for your foresight in 
warning this committee and actually all of Congress today, but 
your foresight in the past. You have been before this committee 
on numerous occasions speaking of the risk posed by the GSEs, 
by Fannie and Freddie. During those times, you spoke about 
their current form and their current regulatory framework, or 
maybe lack thereof, and the potential that that could bring 
somewhere down the road, potentially putting them at risk and 
also the taxpayer at risk as well. So I compliment you on that. 
And it was you and the President and the Secretary of Treasury 
has also emphasized this point repeatedly, and they have also 
emphasized the point that we have to move quickly as possible 
to address this issue of a comprehensive GSE reform.
    Maybe it is because of that knowledge that we need to do 
something that the chairman and others, when regulatory reform 
had been going through in the 110th Congress, had added on as 
some of us call extraneous measures to the legislation above 
and beyond just the basic regulatory framework; the housing 
fund, the $4 billion rehabilitation assistance. These add-ons 
have led to, I believe, the GSE reform legislation being slowed 
down not here in the House so much, but over in the Senate, 
where such extraneous matters sort of complicated the process 
of trying to get it through, when at the end of the day we 
simply wanted to have that proverbial world-class regulator in 
place. Some say if you had that done earlier on, maybe we 
wouldn't be having this discussion and other actions that we 
have done with this.
    The chairman says the GSEs are struggling due to a lack of 
investor confidence. I believe if that is the case, passing a 
strong stand-alone, world-class regulator would be the best 
thing in Congress to address that. For that reason, later today 
I will be actually dropping in a strong stand-alone piece of 
legislation, without anything else on it, basically taken from 
the Senate compromise that mirrors the compromise on the GSE 
reform language that doesn't have anything else on it.
    So my first question to you is, would that stand-alone 
bill, if we pass it through this week, since we have already 
passed that similar language and the Senate has as well--would 
that stand-alone, world-class regulator be important to get 
moving on this process to bring some relief to the GSEs and the 
overall economic market?
    Mr. Bernanke. Congressman, I really can't advise you on 
legislative tactics, but I would certainly say that getting a 
strong regulatory bill through in whatever context you can do 
it has always been important and now is particularly important, 
and I hope that you will act in an expeditious way.
    Mr. Garrett. One of the things that needs to be addressed 
through the regulator or however else is the capital 
requirements for the GSEs. As I understand it, it would be 
better had they begun to raise more capital. Fannie did, 
Freddie didn't, I guess, to some extent. But capital increase 
would be beneficial, correct, for the survivability of the 
GSEs? You are shaking your head yes.
    Mr. Bernanke. Yes.
    Mr. Garrett. Part of the issue, though, with the bills that 
we have that is going through potentially this week is that 
they have--some called it a tax, extraneous measures, whatever, 
that would potentially draw some of the revenue from the GSEs 
and use it for other purposes. My understanding--correct me if 
I am wrong--my understand would be that would impact 
potentially negatively upon their ability to do what is 
necessary, and that is to build their capital. Is that a 
correct understanding?
    Mr. Bernanke. Well, I have stayed away of this issue of the 
housing fund because it is part of the log-rolling process. I 
don't how exactly how it will play into the legislation. My 
main concern is the regulator be able to have bank-like capital 
    Mr. Garrett. I understand that. But if the regulators have 
all the powers, but some of the funds are being extracted from 
it to use it for other funds, could that have a detrimental 
effect on their ability to raise capital?
    Mr. Bernanke. It will affect their retained prospects, from 
that respect. Again, these are trade-offs that Congress has to 
    Mr. Garrett. On the political side, my last question, last 
week I sent one question to you that I didn't get the answer 
to, and that is with regard to your powers under section 13. 
Are there any limitations on your powers going forward? You 
told us last week that you hoped this wouldn't happen again, 
but, of course, it didn't.
    So would you use those powers in the future? Are there any 
limitations right now until we say don't do anything or put 
some restrictions on you to as to your powers under that 
    Mr. Bernanke. I can tell you what the legislation says. 
Under Section 13.3 of the Federal Reserve Act, we can lend to 
an individual partnership or corporation if conditions are 
unusual and exigent, and other credit accommodation is not 
available. So there are some conditions on that, on 13.3, 
somewhat less restrictive in that respect, but the collateral 
can only be treasuries or agencies.
    The Chairman. The gentleman from Colorado, I ask him to 
yield me 1 minute, if I can, because the gentleman from New 
Jersey's history is deeply flawed. The Affordable Housing Fund, 
which people are opposed to for philosophical reasons, for the 
slowing down of the GSEs, makes no historical sense. In the 
previous Congress, controlled by the Republicans, there was no 
Affordable Housing Fund attached to GSE reform, and the Senate 
didn't act on it. Any kind of historical experiment, you look 
for control. In fact, under the Republican Congress, GSE reform 
passed the House, it went to the Senate, and they didn't act on 
    By the way, the Senate bill, which the Senate Republicans 
put forward, did have an Affordable Housing Fund. They were 
prepared to accept it, and the bill didn't go forward. In fact, 
it is now under a Democratic Congress we are on the verge of 
passing legislation that the Republic Congress wouldn't pass. 
But to blame the Affordable Housing Fund ignores the history 
that in a previous Congress the House passed the bill, sent it 
to the Senate with an appropriate set of regulations, and the 
Senate didn't act on it under Republican rule, and it was not 
in any way, shape, or form the problem of the Affordable 
Housing Fund.
    I thank the gentlemen from California.
    Mr. Garrett. Would the gentleman yield since he referenced 
my motives?
    The Chairman. It is the gentleman from Colorado's time.
    Mr. Perlmutter. Ten seconds.
    Mr. Garrett. Thank you. Since the gentleman did indicate 
with respect to my motives because I am ideologically driven on 
this, I am not ideologically driven on this, I just want to set 
the record straight, and the bills did pass in the House 
previously in the last Congress. It went to the Senate and was 
held up there by the Democrat opposition. What we need to do 
now is move as expeditiously as possible.
    Mr. Perlmutter. I will take my time back.
    The Chairman. The Republicans controlled the Senate, they 
didn't pass the bill, and it was not because of the Affordable 
Housing Trust Fund.
    As to motives, I am surprised the gentleman takes exception 
to my noting that he is philosophically opposed to that.
    Mr. Perlmutter. First, Mr. Chairman, just thank you for the 
time that you have given to us. Thank you for rolling up your 
sleeves, working with the Secretary of the Treasury, and 
working with our chairman to try to deal with a lot of tough 
problems you have out there. There is no minimizing what those 
problems are.
    Like I said, I found a wealth of information in your 
report, some of it pretty disturbing. I don't know if you have 
it in front of you, but on page 25 of the report, there are 
several graphs there, and I just ask you about on the 
commercial paper it looks like everything is going along hunky-
dory, and then boom, there is an earthquake in the summer of 
2007. That same thing applies in the graph below it.
    What happened in the summer of 2007 that just has caused 
this tremendous upheaval right now?
    Mr. Bernanke. Well, the media trigger was the refusal of a 
bank to allow withdrawals from the hedge funds because it said 
it couldn't value the assets. Basically, more broadly, it was 
about that time that losses related to subprime mortgages and 
CDOs and other structured products became apparent, and there 
was a real change in risk perception and in risk attitude at 
that juncture last August.
    There were many off-balance-sheet vehicles, structured 
investment vehicles and so on that were holding CDOs, for 
example, that were financed by short-term money or commercial 
paper, creating a maturity mismatch. That was perceived to be 
fine as long as there was sufficient credit quality. Once the 
credit quality appeared to deteriorate, the overnight funders 
of those particular types of instruments withdrew, and they had 
either to be dissolved or taken off the balance sheet. So that 
whole class disappeared.
    You will notice that conventional commercial paper, 
unsecured or commercial paper, issued by corporations was much 
more stable because that wasn't the new part. The part that was 
proven to have some real flaws is once we began to see credit 
losses from subprime and other types of structured--
    Mr. Perlmutter. That was the time the market realized that 
housing prices weren't always going to go up. That is the way I 
would describe it. A lot of it was just based on increased 
housing prices over time.
    Mr. Bernanke. Partly also the recognition that those losses 
were going to be greater than expected, and that these 
complicated structured credit products did not have as much 
cushion, as much coverage as the investors thought they did.
    Mr. Perlmutter. Do you think we need more regulation within 
that market of creating these very complicated things?
    Mr. Bernanke. Certainly the kind of regulation we do have 
is at least two types. One is the bank regulators have been and 
already have considered increasing capital requirements and 
toughening up standards to allow these kind of vehicles. And 
then the accountants themselves also are looking at under what 
circumstances should you bring those things on the balance 
sheet, under what circumstances should they be kept separate.
    The Chairman. Will the gentleman yield?
    Mr. Perlmutter. I will yield.
    The Chairman. I am going to recognize the gentleman from 
Connecticut and, in an act of unprecedented bipartisanship, 
leave him in charge while I go vote.
    Mr. Shays. [presiding] You are safe, Mr. Chairman.
    First, I want to thank you, Mr. Chairman, and Senator Dodd, 
and our ranking members. The House and Senate and the White 
House, both you, Mr. Bernanke, and Mr. Paulson, you are all 
trying to work together because I think we know this is a very 
serious time. I have some pride in seeing how Republicans and 
Democrats, both Chambers, and the White House and Congress are 
trying to work together.
    I wrestle with, and I would like a fairly short answer, we 
keep talking about how we need to consume more. I just get the 
feeling like that is something we do too much of, and that we 
need to be investing and saving more. Just a quick comment 
about that.
    Mr. Bernanke. Certainly. There is a difference between the 
short run and the long run. In the short run, if consumption 
spending drops sharply, and there is no other type of demand to 
pick it up, then most of the saving will be dissipated because 
you will just have a slowing economy. What we need is an 
economy that is better balanced, less consumption, more 
investment, more exports. That should take place over time, but 
in a very short period of time, unless you get the other 
compensating sources of demand, you will just get a slowdown in 
the economy, which is part of what is happening.
    Mr. Shays. So in the short run, we need consumption up?
    Mr. Bernanke. We are, in fact, getting a lot of benefit now 
from trade and exports. As we shift from producing for domestic 
consumers and towards producing for exports, that is the kind 
of direction that will in the longer term get us where we want 
to go.
    Mr. Shays. When we dealt with Enron, it was clear what we 
were doing to countries that were under the 1933 and 1934 acts, 
but the GSEs weren't. Then there was an effort by me and others 
to put them under it. They voluntarily decided they would be 
under the 1934 act. Should they be under the 1933 act as well?
    Mr. Bernanke. I don't have a view on that as well. I leave 
that to the SEC.
    Mr. Shays. Let me ask you in regards to energy, I think you 
have voiced an opinion, but I would like to clarify it a little 
bit. There are many of us who have said that we need to 
conserve more, we need alternative fuels, but that when we did 
that, that we should also be looking to increase supply.
    You said that, I think, you favored a comprehensive 
approach. It is my sense then you want to see conservation, you 
want to see alternative fuels, and you want to see increased 
production, whether it is nuclear, whether it is some drilling 
offshore, maybe on land, but that you need to see the United 
States pick up its production and mining of oil. Would that be 
a fair statement?
    Mr. Bernanke. Congressman, there are always trade-offs 
Congress makes between environmental and other concerns and 
energy exploration. That is the prerogative of Congress to do 
that. But I think to the extent possible there is a 
multidimensional approach to this problem that high prices 
will, in fact, encourage those actions.
    Mr. Shays. If the market sees a comprehensive approach, do 
you think it would have an immediate impact on the speculators 
and what they think will happen in the future and what they 
will price oil today?
    Mr. Bernanke. It is hard to judge how much and how fast, 
but it is the case that there is a forward-looking element to 
the futures markets, obviously. And to the extent that traders 
become more optimistic about the long-term supply and demand 
balance, it should be helpful even in the near term.
    Mr. Shays. I am told that if we know when the bottom is to 
the housing market, there are plenty of resources that will 
come into it, but they need to know the bottom. There are some 
articles that I am starting to read that say we are getting 
very close to the bottom.
    Have you voiced an opinion when I was out of the committee 
about that issue; and if so, what would it be?
    Mr. Bernanke. It is difficult to judge with any certainty. 
It looks as though the construction activity will begin to stop 
falling, will begin to bottom out probably later this year or 
early next year. The more difficult judgment is how much 
further house prices might decline. There still are significant 
overhangs of inventories of unsold new homes.
    I agree absolutely, once there is some confidence that the 
market has found its level, that there will be considerable 
improvement in financial conditions and probably a stronger 
economy as well.
    Mr. Shays. One last point, and that is on the whole issue 
of loans to students. If students aren't able to get loans this 
fall, Congress is going to hear it big time. What do you think 
is the most important thing we can do to provide liquidity to 
that market?
    Mr. Bernanke. Well, my understanding is that Congress has 
addressed that to some extent by allowing direct lending or 
backup lending.
    Mr. Shays. I guess the question will be: Do you think it 
will work?
    Mr. Bernanke. That is a bit outside of my expertise, but I 
believe it is going to go a significant part of the way, and 
also some private-sector lenders will still participate in that 
    Mr. Shays. Thank you for your graciousness and for being 
here. I thank the chairman for allowing me to ask these 
    With that, we will adjourn this hearing. Thank you very 
much, Mr. Bernanke.
    [Whereupon, at 12:52 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             July 16, 2008