[House Hearing, 110 Congress] [From the U.S. Government Publishing Office] MONETARY POLICY AND THE STATE OF THE ECONOMY ======================================================================= HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES 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 ---------- U.S. GOVERNMENT PRINTING OFFICE 44-901 PDF WASHINGTON : 2008 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama MAXINE WATERS, California DEBORAH PRYCE, Ohio CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER T. KING, New York NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York RON PAUL, Texas BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts Carolina RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut CAROLYN McCARTHY, New York GARY G. MILLER, California JOE BACA, California SHELLEY MOORE CAPITO, West STEPHEN F. LYNCH, Massachusetts Virginia BRAD MILLER, North Carolina TOM FEENEY, Florida DAVID SCOTT, Georgia JEB HENSARLING, Texas AL GREEN, Texas SCOTT GARRETT, New Jersey EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas KEITH ELLISON, Minnesota TOM PRICE, Georgia RON KLEIN, Florida GEOFF DAVIS, Kentucky TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina CHARLES WILSON, Ohio JOHN CAMPBELL, California ED PERLMUTTER, Colorado ADAM PUTNAM, Florida CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois 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 TRAVIS CHILDERS, Mississippi Jeanne M. Roslanowick, Staff Director and Chief Counsel C O N T E N T S ---------- Page Hearing held on: July 16, 2008................................................ 1 Appendix: July 16, 2008................................................ 51 WITNESSES Wednesday, July 16, 2008 Bernanke, Hon. Ben S., Chairman, Board of Governors of the Federal Reserve System......................................... 6 APPENDIX Prepared statements: Paul, Hon. Ron............................................... 52 Bernanke, Hon. Ben S......................................... 53 Additional Material Submitted for the Record Bernanke, Hon. Ben S.: ``Monetary Policy Report to the Congress, 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 statement. 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 year. 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 cycle. 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 system. 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 them. 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 appropriations. 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. STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 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 homeownership. 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 payments. 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 questions. 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 States. 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 problem. 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 oil. 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- taking. 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 situation. 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 costs. 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 tax. 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 money. 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 back. 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 York. 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 taken. 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 value. 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 one? 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 year. 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 million? 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 percent. 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 GSEs. 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 can. 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 that. 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 question-- 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 direction. 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 window? 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 term. 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 States? 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 forward. 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 view? Mr. Bernanke. I think there are a lot of factors. Mr. Ellison. What role does stagnant wages play, Mr. Chairman? 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 movement? 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 income. 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 powers. 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 make. 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 section? 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 it. 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 market. Mr. Shays. Thank you for your graciousness and for being here. I thank the chairman for allowing me to ask these questions. 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 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]