[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




                        MONETARY POLICY AND THE
                      STATE OF THE ECONOMY, PART I

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 25, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 111-7














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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 25, 2009............................................     1
Appendix:
    February 25, 2009............................................    57

                               WITNESSES
                      Wednesday, February 25, 2009

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     7

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron...............................................    58
    Bernanke, Hon. Ben S.........................................    60

              Additional Material Submitted for the Record

Bernanke, Hon. Ben S.:
    Monetary Policy Report to the Congress, dated February 24, 
      2009.......................................................    70
    Written responses to questions submitted by Hon. J. Gresham 
      Barrett....................................................   126
    Written responses to questions submitted by Hon. Keith 
      Ellison....................................................   129
    Written responses to questions submitted by Hon. Bill Foster.   130
    Written responses to questions submitted by Hon. Erik Paulsen   134
    Additional information requested during the hearing by Hon. 
      Randy Neugebauer...........................................   136

 
                        MONETARY POLICY AND THE
                      STATE OF THE ECONOMY, PART I

                              ----------                              


                      Wednesday, February 25, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Velazquez, Watt, Ackerman, Sherman, Meeks, Moore of 
Kansas, Capuano, Hinojosa, Baca, Lynch, Miller of North 
Carolina, Scott, Green, Cleaver, Hodes, Ellison, Klein, Wilson, 
Perlmutter, Donnelly, Foster, Carson, Minnick, Adler, Kosmas; 
Bachus, Castle, Royce, Lucas, Paul, Manzullo, Biggert, Capito, 
Hensarling, Garrett, Barrett, Neugebauer, McHenry, Putnam, 
Marchant, McCotter, Posey, Jenkins, Lee, Paulsen, and Lance.
    The Chairman. This hearing of the Committee on Financial 
Services will come to order. Once again, we have with us the 
Chairman of the Federal Reserve.
    At this point, I want to take the trouble to express my 
appreciation to the Chairman of the Federal Reserve and to the 
members. We had a hearing a week ago on CEO pay, and that got a 
lot of attention. We had a hearing, which was at least as 
significant--and in terms of the importance of what is going on 
in the country, I think more so--the day before when the 
Chairman graciously spent a lot of time with us as members got 
to talk about the authority the Federal Reserve has been 
exercising under that very expansive statute.
    I would note again that I believe that once this crisis is 
behind us, we will have a collaborative effort to try to put 
some definition into the most open-ended statute I think I have 
ever seen. And while I admire the restraint and the care with 
which the Chairman has done this job, I don't think any of us 
think that it should be left that way. But I think also it is 
not the time to do it while we are dealing with the current 
crisis.
    So I want to thank him and to thank the members.
    Let me just say--I know a lot of us have had concerns. 
People have asked, well, what is going on with all the money 
that is being spent? I would urge people to get a look at that 
transcript. We have it on our Web site. I think it is important 
information for the country to know about.
    Now, as to today's hearing--and you can start running the 
clock. Well, before you run the clock, let me just say, I am 
going to try to hold members tightly to the 5-minute time 
limit. Again, the ranking member and I tried to shrink the 
committee, but we were overruled, so it is an unwieldy group. 
We have begun the process of using subcommittees more. I think 
that is working well, and we will continue to do that. We are 
constrained by the fact that we are such a large committee that 
our subcommittee room doesn't hold most of the subcommittees. 
But we are doing our best within that constraint.
    And the other thing I would say is, on the Democratic side, 
if we do not reach you today in the questioning, you will get 
priority the next time the Chairman comes, which will be later 
this year, and we will go first to you at that time. So there 
may be more interest.
    Does the ranking member have a comment he wants to make?
    Mr. Bachus. Chairman Bernanke, I just want to join with 
Chairman Frank in expressing my appreciation to you for your 
service under what have been extremely difficult times, and for 
your integrity and your insight. And I think the country is 
fortunate to have you at the helm of the Fed at this difficult 
time.
    The Chairman. I thank the gentleman.
    Now we will begin the remarks with the Chairman here. The 
protocol is 8 minutes on each side. I will begin with 5 minutes 
and then the chairman of the newly established Domestic 
Monetary Policy and Technology Subcommittee, Mr. Watt, will 
have a 3-minute statement.
    I want to talk about the context in which we operate. I was 
very pleased that the President yesterday, I thought, very 
thoughtfully explained the dilemma we have; namely, that we 
have to get the credit system functioning again. And we do not 
have the option of sending all of the current people in that 
system to the gallows, as much as some people would like that 
to happen, or to simply say this system has been too flawed and 
must be junked, and let's start from scratch.
    We simply cannot start from scratch. To restore the credit 
system, which has been a bipartisan effort going back to the 
previous Administration--and this committee has worked, I 
think, fairly constructively, although with allowances for some 
differences, with both Administrations, with the Federal 
Reserve, which has been a point of continuity--there is no 
option obviously other than to work within the existing system. 
That has a political drawback, and we are in an electoral 
context.
    I have to say, when people tell me they don't want 
something to be done with political considerations, my response 
is that they should not ask 535 politicians to do it. That is 
inherent in the nature of our society; and it is a good thing, 
not a bad thing, the fact that we bring to these deliberations 
the concerns of the people we represent, their angers, their 
fears, their optimism, whatever.
    That is what makes this the country what it is. And none of 
us, I think, want to apologize for that or retreat from it. 
There are more and less responsible ways to deal with that, but 
it is a good fact of our system.
    We have an unhappiness on the part of a lot of citizens who 
are suffering deeply from the consequences of mistakes which 
most of them didn't make. Some did. There are people who took 
out loans they shouldn't have taken out. There are people who 
have been irresponsible in other ways. But, fundamentally, 
people are now being victimized for things for which they are 
not to blame. And they see us--by ``us,'' I mean the Federal 
Government, the Bush Administration, the Obama Administration, 
Members of Congress--doing things from time to time that appear 
to be benefiting precisely the people at whom they are angry 
because they made mistakes. And the point, of course, is that 
you cannot reconstitute a system without doing some things that 
will go down to the benefit of the people in that system,
    Now, efforts are being made to minimize the unnecessary 
benefit. The consensus appears to exist on both sides about 
restraining the compensation and lavish expenditures. There was 
a large degree of agreement--not quite as broad, a consensus--
that something should be done to reduce foreclosures. There is 
a requirement that I think--again, we want to more broadly 
share that we want to urge people who receive Federal help to 
relend and to lend in certain sectors. But the President made 
the point yesterday, very thoughtfully, that anger has to be 
channeled, and we have to express the anger in ways that put 
some restraints on some of the actions, but do not prevent us 
from working to get the current system back on its feet,
    Now, there is one aspect that I want to address; it is not 
the main subject of this hearing perhaps, but we do have the 
Humphrey-Hawkins bill before us. I think it is clear that one 
of the factors that contributes to the political difficulties 
in the broader sense, in the sense that it is democracy, you 
have to have electoral--you have to have popular support. One 
of the things that contributes to this difficulty is the 
absence of a social safety net and the perceived and, I 
believe, real unfairness of the distribution of our wealth.
    It has most recently come up in the form of people at the 
top of the economic pyramid being very critical of 
protectionism. We have had lectures that we should not give in 
to the instinct to try to favor American-made products and 
American jobs. I have to say to my friends who argue that, that 
those arguments, by themselves, will not work very much in the 
absence of a broader social safety net. As long as the American 
people feel that they do not fairly participate on the whole in 
the benefits of trade, for example, and that people in the 
lower end and middle end, that they don't fully participate in 
the benefits, you cannot talk them out of their opposition.
    If people really want to help us get to a situation in 
which we can go forward with trade properly conducted, which I 
agree is very good for the economy, then help us get a health 
care system, as the President talks about. If we do not do a 
better job of seeing that both the benefits and the costs of 
this sort of economic change and globalization--if that is not 
more fairly shared on both the positive and negative sides, the 
opposition that people are decrying to a number of things going 
forward will increase.
    The gentleman from Alabama is recognized, I believe, for 2 
minutes.
    Mr. Bachus. Mr. Paul for 2 minutes.
    The Chairman. I am sorry. The gentleman from Texas, Mr. 
Paul, is recognized for 2 minutes.
    Dr. Paul. Thank you, Mr. Chairman.
    Yesterday, a report came out that said that the consumer 
confidence index was down to 25; sometimes I think that might 
be overly optimistic. But nevertheless I think that vote of 
confidence really is a reflection on our financial system, our 
monetary policy, our spending policies here in Congress; and 
then they see it in the economy.
    But it is fundamental for us to understand this, because if 
we think we can patch up a system that failed, it is not going 
to work. We have to come to the realization that there is a sea 
change in what is happening, this is an end of an era, and that 
we can't reinflate the bubble.
    Just as we devised a new system at Bretton Woods in 1944, 
which was doomed to fail--it failed in 1971, and then we came 
up with the dollar reserve standard, which was a paper 
standard--it was doomed to fail, and we have to recognize that 
it has failed.
    And if we think we can reinflate this bubble by 
artificially creating credit out of thin air and calling it 
capital, believe me, we don't have a prayer of solving these 
problems. We have a total misunderstanding of what credit is 
versus capital. Capital can't come from the thin air creation 
by a Federal Reserve system; capital has to come from savings. 
We have to work hard, produce, live within our means, and what 
is left over is called ``capital.''
    This whole idea that we can recapitalize markets by merely 
turning on the printing presses and increasing credit is a 
total fallacy. So the sooner we wake up to realize that a new 
system has to be devised, the better.
    Right now, I think the central bankers of the world realize 
exactly what I am talking about and they are planning. But they 
are planning another system that goes one step further to 
internationalize regulations, internationalize the printing 
press, give up on the dollar standard. But we have to be very 
much aware that system will be no more viable. We have to have 
a system which encourages people to work and to save.
    What do we do now? We are telling consumers to spend and 
continue the old process. It won't work.
    The Chairman. The gentleman from Delaware, Mr. Castle, is 
recognized for 2 minutes.
    Mr. Castle. Thank you, Mr. Chairman, and Ranking Member 
Bachus. I want to thank you for holding today's hearing and to 
thank Chairman Bernanke for once again providing his expertise 
for this panel.
    Since the onset of the economic downturn, the Federal 
Reserve and the Treasury have provided enormous amounts of 
financial assistance, $1.4 trillion and $350 billion 
respectively, in an effort to stabilize our financial system 
while theoretically freeing up credit for small business, car 
buyers, home buyers, and even students. However, reports have 
highlighted that financial institutions are still troubled and 
that access has not trickled down to consumers in need.
    Although the Fed recently launched a Web site providing a 
detailed description of the tools they have employed in an 
effort to restore our economy, I remain interested in knowing 
how the liquidity provided by the Fed is, in turn, being used 
by the institutions in need of this assistance. Are we reaching 
the goal of freeing up credit? Are the institutions more 
stable? Is the credit card industry facing the same turmoil as 
a result?
    A lack of understanding of exactly how these funds are used 
is just one of the problems that arises as a result of the lack 
of oversight and checks and balances over the Federal Reserve's 
recent extraordinary activities.
    I believe more attention to this issue is necessary to 
fully understand the effectiveness of the Federal Government's 
efforts in reducing the economic crisis. And I believe these 
questions should be answered before the Federal Reserve is 
vetted for any future role as a systemic risk regulator.
    I yield back the balance of my time.
    The Chairman. The gentleman from North Carolina, the 
chairman of the Domestic Monetary Policy and Technology 
Subcommittee, is recognized for 3 minutes. Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    In ordinary times during my tenure on this committee, this 
semiannual hearing has focused almost exclusively on the Fed's 
use of interest rate changes to impact economic activity, 
stimulate job creation, and control inflation. However, these 
are not ordinary times, and it is obvious that short-term 
concerns about inflation have largely given way to some concern 
about the prospect of deflation and to short, intermediate, 
even long-term concerns about employment and job growth.
    The Act mandates the Fed to take steps to achieve maximum 
employment. While some economists subscribe to the notion that 
there is a ``natural rate of unemployment'' of around 4.5 
percent--and it always stunned me to hear former Fed Chairman 
Greenspan profess that unemployment of less than 5.5 to 6 
percent would almost surely lead to inflation--I daresay that 
there are no economists who are not concerned when they see the 
national unemployment rate meet and exceed the rate that has 
long been so prevalent in many minority communities. These are 
clearly perilous times.
    It is important to remember that beyond the headlines of 
mass layoffs and rising unemployment rates, real people are 
impacted. These are people who have real hopes, dreams, and 
aspirations to provide for their families and contribute to 
their communities. They can't reach these aspirations without 
jobs.
    Against this backdrop, the sole question I really want 
addressed today is, what additional tools does the Fed have to 
stop escalating unemployment and to spur new jobs and the 
creation of new jobs?
    In his February 18th speech, Chairman Bernanke vowed to 
take strong and aggressive action to halt the economic slide 
and improve job growth. Today, I hope to hear specifics on the 
Fed's plans and on whether there is anything else Congress can 
and should be doing to help.
    I look forward to the Chairman's testimony to address these 
difficult questions, and I yield back.
    The Chairman. The gentleman from Texas, Mr. Hensarling, is 
recognized for 2 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    To state the obvious, our countrymen are hurting and the 
latest unemployment figures are alarming. Last night, our 
President said, ``We must understand how we arrived at this 
moment. Our country is in economic turmoil principally because 
of Federal policies, undoubtedly noble in intent, that 
incented, cajoled, blessed or mandated the financial 
institutions lend money to people to buy homes that they could 
not afford to keep. Instead of lifting up the economic 
opportunities of the borrower, Federal policy helped bring down 
the lending standards of lenders. For those who wanted to roll 
the dice of the government duopoly, Fannie and Freddie, Lady 
Luck left the building, and too many Americans lost their homes 
and lost their dreams.''
    Now, Congress, as part of an ill-fated remedy, has passed 
the single most expensive spending bill in our Nation's history 
and will vote on yet another bloated spending bill today. 
Together, at a time when American families are struggling to 
pay their bills, these two legislative bills will cost the 
average American household over $13,000 apiece and place our 
Nation deeper into unconscionable debt.
    History shows that no nation can borrow and spend its way 
into prosperity. A previous Secretary of Treasury said, ``We 
are spending more money than we have ever spent before, and it 
does not work. After 8 years, we have just as much unemployment 
as when we started and an enormous debt to boot.'' That quote, 
of course, is from President Franklin Roosevelt's Treasury 
Secretary, Henry Morgenthau, Jr.; his words were spoken in May 
of 1939.
    When Japan experienced a real estate meltdown similar to 
ours in the early 1990's, its government enacted 10 stimulus 
bills, raising their per capita debt to the highest level of 
any industrialized nation. For their efforts, they experienced 
a lost decade. No economic growth, no new jobs, an economy 
dependent on the central government in Tokyo, and the human 
misery associated with going from the second highest per capita 
income in the world to the tenth.
    I hope that we in Congress can learn from these examples. I 
yield back the balance of my time.
    The Chairman. The gentleman from New Jersey, Mr. Garrett, 
for the final 2 minutes.
    Mr. Garrett. Thank you, Chairman Frank. I also thank you 
for your comments with regard to addressing the current crisis 
first and then looking at the Federal Reserve situation.
    I join my colleagues and certainly understand the depths of 
the financial economic crisis facing this country. But I am 
also concerned about the unintended consequences of some of the 
recently enacted and proposed policy responses. For example, 
President Obama recently announced a $75 billion foreclosure 
prevention plan. A lot of folks out there, including more than 
90 percent who are current on their mortgages, are wondering 
why their tax dollars should go to help someone else's mortgage 
when they are stretching their dollars as best they can just to 
pay their own bills.
    But beyond those fundamental fairness concerns, I am also 
concerned about the effectiveness of these proposals. It was 
Professor Robert Shiller who was the coauthor of the Case-
Shiller Housing Index, and he was someone who actually pointed 
out the housing bubble before many others were talking about 
it. He has said in recent days that although housing prices 
have fallen about 25 percent from their peak, they are still 
way too high when compared to their historical levels, the fact 
that they have fallen only a little more than halfway back to 
their historical trend.
    If that is the case, I am worried that the Administration 
proposals will only delay the inevitable, full correction of 
the marketplace while saddling future generations with tens of 
billions of dollars of additional debt.
    Delaying the onset of the true bottom, it seems to me, has 
other unintended consequences. Not until we reach the bottom 
will we begin to provide certainty on the value of so-called 
``toxic mortgages'' found on the balance sheets. This 
uncertainty surrounding the value of these assets is one of the 
main contributors to the downward spiral, so the sooner we 
reach a certainty, the better.
    I can anticipate the response from some would be that we 
don't want to have an overreaction, an overcorrection in the 
marketplace. Well, my response to that response will be that 
various actions may well do just that by negatively affecting 
credit availability, capital infusion, and pricing mechanisms 
as well.
    So I would be curious to hear your response to that. And I 
look forward to the rest of your testimony.
    I yield back.
    The Chairman. Mr. Chairman, you may proceed. Take whatever 
time you need. And obviously, any supporting documents will be 
made a part of the record. We take note of the submission of 
the Monetary Policy Report, which is part of the record here. 
Please go ahead.

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

    Mr. Bernanke. Thank you, Mr. Chairman.
    Chairman Frank, Representative Bachus, and members of the 
committee, I appreciate the opportunity to discuss monetary 
policy and the economic situation, and to present the Federal 
Reserve's Monetary Report to the Congress.
    As you are aware, the U.S. economy is undergoing a severe 
contraction. Employment has fallen steeply since last autumn, 
and the unemployment rate has moved up to 7.6 percent. The 
deteriorating job market, considerable losses of equity in 
housing wealth, and tight lending conditions have weighed down 
consumer sentiment and spending. In addition, businesses have 
cut back capital outlays in response to the softening outlook 
for sales as well as the difficulty of obtaining credit.
    In contrast to the first half of last year when robust 
foreign demand for U.S. goods and services provided some offset 
to weakness in domestic spending, exports slumped in the second 
half as our major trading partners fell into recession, and 
some measures of global growth turned negative for the first 
time in more than 25 years. In all, U.S. real gross domestic 
product declined slightly in the third quarter of 2008 and that 
decline steepened considerably in the fourth quarter.
    The sharp contraction in economic activity appears to have 
continued into the first quarter of 2009. The substantial 
declines in the prices of energy and other commodities last 
year and the growing margin of economic slack have contributed 
to a substantial lessening of inflation pressures. Indeed, 
overall consumer price inflation measured on a 12-month basis 
was close to zero last month. Core inflation, which excludes 
the direct effects of food and energy prices, also has declined 
significantly.
    The principal cause of the economic slowdown was the 
collapse of the global credit boom and the ensuing financial 
crisis, which has affected asset values, credit conditions, and 
consumer and business confidence around the world. The 
immediate trigger of the crisis was the end of the housing 
booms in the United States and other countries and the 
associated problems in mortgage markets, notably the collapse 
of the U.S. subprime mortgage market.
    Conditions in housing and mortgage markets have proved a 
serious drag on the broader economy, both directly through 
their impact on residential construction and related industries 
and on household wealth and indirectly through the effects of 
rising mortgage delinquencies on the health of financial 
institutions. Recent data show that residential construction 
and sales continue to be very weak. House prices continue to 
fall, and foreclosure starts remain at very high levels.
    The financial crisis intensified significantly in September 
and October. In September, the Treasury and the Federal Housing 
Finance Agency placed the government-sponsored enterprises 
Fannie Mae and Freddie Mac into conservatorship, and Lehman 
Brothers Holdings filed for bankruptcy. In the following week, 
several other large financial industries failed, came to the 
brink of failure, or were acquired by competitors under 
distressed circumstances.
    Losses at a prominent money market mutual fund prompted 
investors who had traditionally considered money market mutual 
funds to be virtually risk free to withdraw large amounts from 
such funds. The resulting outflows threatened the stability of 
short-term funding markets, particularly the commercial paper 
market upon which corporations rely heavily for their short-
term borrowing needs.
    Concerns about potential losses also undermine confidence 
in wholesale bank funding markets, leading to further increases 
in bank borrowing costs and a tightening of credit availability 
from banks. Recognizing the critical importance of the 
provision of credit to businesses and households from financial 
institutions, the Congress passed the Emergency Economic 
Stabilization Act last fall. Under the authority granted by 
this Act, the Treasury purchased preferred shares in a broad 
range of depository institutions to shore up their capital 
bases.
    During this period, the FDIC introduced its temporary 
liquidity guarantee program which expanded its guarantees of 
bank liabilities to include selected senior unsecured 
obligations and all noninterest-bearing transactions deposits. 
The Treasury, in concert with the Federal Reserve and the FDIC, 
provided packages of loans and guarantees to ensure the 
continued stability of Citigroup and Bank of America, two of 
the world's largest banks.
    Over this period, governments in many foreign countries 
also announced plans to stabilize their financial institutions, 
including through large-scale capital injections, expansions of 
deposit insurance, and guarantees of some forms of bank debt.
    Faced with a significant deterioration of financial market 
conditions and a substantial worsening of the economic outlook, 
the Federal Open Market Committee (FOMC) continued to ease 
monetary policy aggressively in the final months of 2008, 
including a rate cut coordinated with five other major central 
banks.
    In December, the FOMC brought its target for the Federal 
funds rate to a historically low range of zero to 0.25 percent, 
where it remains today. The FOMC anticipates that economic 
conditions are likely to warrant exceptionally low levels of 
the Federal funds rate for some time.
    With the Federal funds rate near its floor, the Federal 
Reserve has taken additional steps to ease credit conditions. 
To support housing markets and economic activity more broadly, 
and to improve mortgage market functioning, the Federal Reserve 
has begun to purchase large amounts of agency debt and agency 
mortgage-backed securities. Since the announcement of this 
program last November, the conforming fixed mortgage rate has 
fallen nearly 1 percentage point.
    The Federal Reserve has also established new lending 
facilities and expanded existing facilities to enhance the flow 
of credit to businesses and households. In response to 
heightened stress in bank funding markets, we increased the 
size of the term auction facility to help ensure that banks 
could obtain the funds they need to provide credit to their 
customers, and we expanded our network of swap lines with 
foreign central banks to ease conditions in interconnected 
dollar funding markets at home and abroad.
    We also established new lending facilities to support the 
functioning of the commercial paper market and to ease 
pressures on money market mutual funds.
    In an effort to restart securitization markets to support 
the extension of credit to consumers and small businesses, we 
joined with the Treasury to announce the Term Asset-Backed 
Securities Loan Facility, or TALF. The TALF is expected to 
begin extending loans soon.
    The measures taken by the Federal Reserve, other U.S. 
Government entities, and foreign governments in September have 
helped to restore a degree of stability to some financial 
markets. In particular, strains in short-term funding markets 
have eased notably since the fall, and LIBOR rates upon which 
borrowing costs for many households and businesses are based, 
have decreased sharply.
    Conditions in the commercial paper market also have 
improved, even for lower-rated borrowers. And the sharp 
outflows from money market mutual funds seen in September have 
been replaced by modest inflows.
    Corporate risk spreads have declined somewhat from 
extraordinarily high levels, although these spreads remain 
elevated by historical standards. Likely spurred by the 
improvements in pricing liquidity, issuance of investment-grade 
corporate bonds has been strong, and speculative grade 
issuance, which was near zero in the fourth quarter, has picked 
up somewhat. As I mentioned earlier, conforming fixed mortgage 
rates for households have declined.
    Nevertheless, despite these favorable developments, 
significant stresses persist in many markets. Notably, most 
securitization markets remain shut other than for conforming 
mortgages, and some financial institutions remain under 
pressure. In light of ongoing concerns over the health of 
financial institutions, the Secretary of the Treasury recently 
announced a plan for further actions. This plan includes four 
principal elements.
    First, a new capital assistance program will be established 
to ensure that banks have adequate buffers of high-quality 
capital, based on the results of comprehensive stress tests to 
be conducted by the financial regulators, including the Federal 
Reserve.
    Second is a public-private investment fund in which private 
capital will be leveraged with public funds to purchase legacy 
assets from financial institutions.
    Third, the Federal Reserve, using capital provided by the 
Treasury, plans to expand the size and scope of the TALF to 
include securities backed by commercial real estate loans and, 
potentially, other types of asset-backed securities as well.
    And fourth, the plan includes a range of measures to help 
prevent unnecessary foreclosures. Together, over time, these 
initiatives should further stabilize our financial institutions 
and markets, improving confidence and helping to restore the 
flow of credit needed to promote economic recovery.
    The Federal Reserve is committed to keeping the Congress 
and the public informed about its lending programs and balance 
sheet. For example, we continue to add to the information shown 
in the Fed's H.4.1 statistical release, which provides weekly 
detail on the balance sheet and the amounts outstanding for 
each of the Federal Reserve's lending facilities. Extensive 
additional information about each of the Federal Reserve's 
lending programs is available online.
    The Fed also provides bimonthly reports to the Congress on 
each of its programs that rely on the Section 13(3) 
authorities. Generally our disclosure policies reflect the 
current best practices of major central banks around the world.
    In addition, the Federal Reserve's internal controls and 
management practices are closely monitored by an independent 
inspector general, outside private sector auditors, and 
internal management and operations divisions and through 
periodic reviews by the Government Accountability Office.
    All that said, we recognize that recent developments have 
led to a substantial increase in the public's interest in the 
Fed's programs and balance sheet. For this reason, we at the 
Fed have begun a thorough review of our disclosure policies and 
the effectiveness of our communication.
    Today, I would like to highlight two initiatives. First, to 
improve public access to information concerning Fed policies 
and programs, we recently unveiled a new section of our Web 
site that brings together in a systematic and comprehensive way 
the full range of information that the Federal Reserve already 
makes available, supplemented by explanations, discussions, and 
analyses. We will use that Web site as one means of keeping the 
public and the Congress fully informed about Fed programs.
    Second, at my request, Board Vice Chairman Donald Kohn is 
leading a committee that will review our current publications 
and disclosure policies relating to the Fed's balance sheet and 
lending policies. The presumption of the committee will be that 
the public has the right to know and that the nondisclosure of 
information must be affirmatively justified by clearly 
articulated criteria for confidentiality based on factors such 
as reasonable claims to privacy, the confidentiality of 
supervisory information, and the need to ensure the 
effectiveness of policy.
    In their economic projections for the January FOMC meeting, 
monetary policymakers substantially marked down their forecast 
for real GDP this year relative to the forecast they prepared 
in October. The central tendency of their most recent 
projections for real GDP implies a decline of 0.5 percent to 
1.25 percent over the 4 quarters of 2009. These projections 
reflect an expected significant contraction in the first half 
of this year combined with an anticipated gradual resumption of 
growth in the second half.
    The central tendency for the unemployment rate in the 4th 
quarter of 2009 was marked up to a range of 8.5 percent to 8.75 
percent. Federal Reserve policymakers continue to expect 
moderate expansion next year with a central tendency of 2.5 
percent to 3.25 percent growth of real GDP, and a decline in 
the unemployment rate by the end of 2010 to a central tendency 
of 8 percent to 8.25 percent.
    FOMC participants marked down their projections for overall 
inflation in 2009 to a central tendency of 0.25 percent to 1 
percent, reflecting expected weakness in commodity prices and 
the disinflationary effects of significant economic slack. The 
projections for core inflation also were marked down to a 
central tendency bracketing 1 percent. Both overall and core 
inflation are expected to remain low over the next 2 years.
    This outlook for economic activity is subject to 
considerable uncertainty, and I believe that overall the 
downside risks probably outweigh those on the upside.
    One risk arises from the global nature of the slowdown 
which could adversely affect U.S. exports and financial 
conditions to an even greater degree than currently expected. 
Another risk derives from the destructive power, the so-called 
``adverse feedback loop,'' in which weakening economic and 
financial conditions become mutually reinforcing. To break the 
adverse feedback loop, it is essential that we continue to 
complement fiscal stimulus with strong government action to 
stabilize financial institutions and financial markets.
    If actions taken by the Administration, the Congress, and 
the Federal Reserve are successful in restoring some measure of 
financial stability--and only if that is the case, in my view--
there is a reasonable prospect that the current recession will 
end in 2009, and that 2010 will be a year of recovery. If 
financial conditions improve, the economy will be increasingly 
supported by fiscal and monetary stimulus, the salutary effects 
of steep decline in energy prices since last summer and the 
better alignment of business inventories and final sales as 
well as the increased availability of credit.
    To further increase the information conveyed by the 
quarterly projections, FOMC participants agreed in January to 
begin publishing their estimates of the values to which they 
expect key economic variables to converge over the longer run, 
say, in a horizon of 5 or 6 years.
    Under the assumption of appropriate monetary policy and in 
the absence of new shocks to the economy, the central tendency 
for the participants' estimates of the longer-run growth rate 
of real GDP is 2.5 percent to 2.75 percent; the central 
tendency for the longer-run rate of unemployment is 4.75 
percent to 5 percent; and the central tendency for the longer-
run rate of inflation is 1.75 percent to 2 percent with the 
majority of participants looking for 2 percent inflation in the 
long run.
    These values are all notably different from the central 
tendencies of their projections for 2010 and 2011, reflecting 
the view of policymakers that a full recovery of the economy 
from the current recession is likely to take more than 2 or 3 
years. The longer-run projections for output growth and 
unemployment may be interpreted as the committee's estimates of 
the rate of growth of output and unemployment that are 
sustainable in the long run in the United States, taking into 
account important influences such as trend growth rates of 
productivity and the labor force improvements in worker 
education and skills, the efficiency of the labor market and 
matching workers in jobs, government policies affecting 
technological development or the labor market and other 
factors.
    The longer-run projections of inflation may be interpreted, 
in turn, as the rate of inflation that FOMC participants see as 
most consistent with the dual mandate given to it by the 
Congress; that is, the rate of inflation that promotes maximum 
sustainable employment, but also delivering reasonable price 
stability.
    This further extension of the quarterly projection should 
provide the public a clearer picture of the FOMC's policy 
strategy for promoting maximum employment and price stability 
over time. Also, increased clarity about the FOMC's views 
regarding longer-run inflation should help to better stabilize 
the public's inflation expectations, thus contributing to 
keeping actual inflation from rising too high or falling too 
low.
    At the time of our last Monetary Policy Report, the Federal 
Reserve was confronted with both high inflation and rising 
unemployment. Since that report, however, inflation pressures 
have receded dramatically while the rise in the unemployment 
rates have accelerated and financial conditions have 
deteriorated. In light of these developments, the Federal 
Reserve is committed to using all available tools to stimulate 
economic activity and to improve financial market functioning. 
Toward that end, we have reduced the target for the Federal 
funds rate close to zero, and we have established a number of 
programs to increase the flow of credit to key sectors of the 
economy.
    We believe that these actions, combined with the broad 
range of other fiscal and financial measures being put in 
place, will contribute to a gradual resumption of economic 
growth and improvement in labor market conditions in a context 
of low inflation. We will continue to work closely with the 
Congress and the Administration to explore means of fulfilling 
our mission of promoting maximum employment and price 
stability.
    Thank you, Mr. Chairman.
    [The prepared statement of Chairman Bernanke can be found 
on page 60 of the appendix.]
    The Chairman. Thank you, Mr. Chairman.
    At a future date, I will ask you if we can continue a very 
important discussion in public, which you reached at the end, 
which is the notion that the central tendency of these major 
statistics should be published. The question of the dual 
mandate, the question of whether or not we are well-served by 
more precision, or at least more specificity, those are 
important questions--and the question of inflation targeting 
and the dual mandate interrelation. And I want to thank you 
because I know there has been a lot of--the support for the 
notion I think what you have put forward here is a thoughtful 
advancement of this without fully broaching that issue, which 
remains to be talked about. This is not inflation targeting, 
but it is a sensible set of measures.
    In particular, one of the things I will be asking us to 
address--I think this is very important--you talk about the 
central tendency of unemployment, 4.75 to 5 percent. You also 
talk about the factors: growth rates of productivity; 
improvements in worker education skills; the efficiency of the 
labor market; government policies affecting technology of 
development in the labor market.
    I know you agree that these are factors that are within our 
control if we do them well. What that means is that if we got a 
focused set of policies, it is possible to bring down that 4.75 
to 5 percent unemployment rate without having an inflationary 
effect. And I say, that is I think one of our goals going 
forward is to talk about how we can improve the employment 
picture in noninflationary ways.
    But for now, I want to talk about, obviously, the current 
crisis. The question of foreclosures has come up, and I was 
struck by your point--you have made it before--that it was the 
granting of mortgages--particularly subprime mortgages that 
should not have been granted, that the borrower shouldn't have 
taken out and the lender shouldn't have made--that was the 
single most prominent cause of the current crisis. Is that a 
fair description?
    Mr. Bernanke. It was an important trigger, Mr. Chairman. 
There was a very broad-based credit boom that went through many 
different sectors. But the subprime crisis was the trigger that 
set things off.
    The Chairman. Why did we get this? To fix it in the future, 
we have to get some sense of why it happened. What led us to a 
situation where so many subprime loans were made that shouldn't 
have been made?
    Mr. Bernanke. Mr. Chairman, as I said, there was a broader 
credit boom, and the causes of that have been under much 
dispute. My own view is that an important factor was the 
tremendous flows of capital into the United States and other 
industrial countries, which gave financial institutions the 
feeling that money was essentially free and that the demand for 
credit products was very high; and it led them to a whole range 
of practices--
    The Chairman. Was a related aspect of that, Mr. Chairman, 
that you no longer needed to have primarily depositor funds to 
make these? Because depositor funds tend to be more carefully 
handled, it seems to me, in our system through regulation, and 
the new sources of capital you are talking about were less 
subject to those kinds of rules.
    Mr. Bernanke. That capital looked for different ways to 
find investment vehicles, and the originate-to-distribute 
model, which involved lending and then selling off the loans 
down the chain without sufficient checks and balances, was part 
of the problem. And at the front end of the subprime market, 
obviously there was very poor underwriting and excessive 
optimism about house prices.
    The Chairman. Thank you.
    So then the question is, you know, what should we do about 
it? There are arguments that say, we should not intervene to 
try and slow down the foreclosure rate through public policy. 
One of the arguments against that--and I know it is not the 
only one--is the moral hazard argument; that is, if you absolve 
people from the serious consequence of their own misjudgments, 
they may make those misjudgments again.
    One of the things I think people are overlooking is that 
when we talk about stopping this from repeating itself, we are 
not simply relying on people having had a bad feeling about it, 
but we are talking about rules and laws that will make it 
impossible.
    Would you discuss briefly--in 1994, Congress gave the 
Federal Reserve authority, which went unused for a while, but 
which you invoked, I guess in 2007. Would you close by talking 
about the extent to which the policies you have put forward 
with regard to regulating some of this lending in the future 
alleviate the moral hazard issue?
    Mr. Bernanke. Yes, Mr. Chairman.
    As you know we have--under HOEPA, we have set up a set of 
rules for mortgage lending--
    The Chairman. HOEPA is a 1994 statute that applied to all 
lenders, not just bank lenders, and required certain standards 
of underwriting documentation, escrow, and other practices. We 
believe, if properly enforced--and we are working together with 
State authorities and others to make sure they will be 
enforced--our rules would be a very important check on bad 
lending practices.
    Mr. Bernanke. That is correct.
    The Chairman. Thank you.
    Let me just add for the information--this committee, as 
members know--actually, earlier, the gentleman from Alabama and 
I and others tried to work on something. We were not successful 
for a variety of reasons. But in 2007, this committee did pass 
a statute that would embody much of what you talk about. Many 
of us think that we should continue to do that.
    I would just let people know, it is my intention to have 
this committee mark-up such a bill before the April break, 
precisely along the lines the Chairman was talking about, 
probably going a little further in some areas.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman. I am going to yield my 
5 minutes to the gentleman from South Carolina, Mr. Barrett.
    Before I do, let me just simply say this, Mr. Chairman. I 
believe there is substantial private capital sitting on the 
sidelines. I think the challenge is to get that committed. And 
I believe because of some of the fits and starts in government 
policy, what seems to be the lack of consistency, it has 
created uncertainty. And I would just simply urge a greater 
certainty and consistency in what government policies and 
actions will be, going forward.
    I think that will be a tremendous help.
    Mr. Barrett. Thank you. I thank the gentleman for yielding.
    Welcome, Mr. Chairman. We are going to make you an honorary 
member--I don't know if you will like that or not--but as many 
times as you have been here. I want to pick up where the 
chairman left off in his line of questioning.
    You talked about, not necessarily the only factor, but one 
of the factors is a lot of these home loans were made to people 
who can't necessarily afford them; and we have gotten in a 
bind. There are some proposals going around now, Mr. Chairman, 
about judges rewriting these contracts. Give me some feedback 
on that. I mean, is this a bad thing?
    If you have people who can't make their payments initially, 
and we are going to rewrite them again, and they still can't 
afford them--give me your thoughts on these kinds of policies 
that are being batted around.
    Mr. Bernanke. Well, I can talk about them broadly in terms 
of effectiveness. But let me address the narrow question, the 
moral hazard question that you are concerned about.
    Mr. Barrett. Yes, sir.
    Mr. Bernanke. I think, as the chairman pointed out, part of 
the issue was mortgages that should not have been made and for 
which lenders did not exert sufficient responsibility. In that 
respect, there is some case, I think, to try to unwind the 
adverse effects of that on the borrowers. For some borrowers, 
presumably they knew what they were getting into. And that 
raises the issue that many Americans say, well, I was 
responsible in my mortgage. Why should I help somebody who was 
not?
    It is hard to know what the relative importance of those 
two factors is. But what I would say is, from a public policy 
point of view, that large numbers of foreclosures--and we are 
looking at 2.4 million foreclosure starts in 2008 or more--are 
detrimental not just to the borrower and the lender, but to the 
broader system. And we have seen, for example, the effects of 
clusters of foreclosures on communities that reduce asset 
values, that reduce tax revenues. It has much more broader 
socioeconomic effects, the effects on the housing market. And I 
do believe there is a risk.
    I understand very much the point Mr. Garrett made earlier 
about getting the housing values down to their fundamental 
prices, and I agree 100 percent that needs to be done. But the 
tremendous problems in the mortgage market, together with the 
supply of housing being put on the market by foreclosures, 
those two things together with psychological and other factors 
put us in real danger of driving house prices well below the 
fundamentals, which would be detrimental both to financial 
stability and to macroeconomic stability.
    So I think there is in many situations a case where we have 
to trade off the short-term moral hazard issues against the 
broader good and to think, going forward, in terms of 
regulation or other practices; and also private-sector 
practices, how we can avoid these problems in the future.
    Mr. Barrett. I know in your statement, Mr. Chairman, you 
talked about inflation, and you didn't seem to be too 
concerned. I am concerned. I think--the amount of money that 
the Fed has put into the money supply of the economy, I think 
sooner or later that is going to start to percolate a little 
bit.
    So tell me, forward thinking, what is your plan to take 
this money out, now, once things get going, so inflation 
doesn't become a problem?
    Mr. Bernanke. Yes, sir. As you point out, we don't expect 
inflation to be a problem for the immediate future--the next 
couple of years, at least--given the various conditions we are 
seeing.
    It is very important for us, once the economy begins to 
recover--and, as usual, the Fed would have to begin to tighten 
the policy. It is very important for us to unwind our monetary 
expansion. We have thought about that very carefully. We are 
spending a lot of time in our FOMC meetings thinking through 
how we would do that in each case. I won't go through all the 
details; I have talked about them in some length in some 
speeches recently.
    But many of our lending programs are very short term in 
nature. They can be quickly unwound. Some rely on our 13(3) 
authority, which is an emergency authority which must be 
unwound with conditions normalized. We also have other tools, 
such as our ability to pay interest on reserves, which will 
help us raise interest rates even if we don't get the amount of 
money outstanding back down as quickly as we otherwise would 
like. So we are quite confident that we can raise interest 
rates, reduce the money supply and do that all in a timely way 
to avoid any inflationary consequences.
    I would point out in terms of precedent that the Japanese, 
with their quantitative easing, tremendously increased their 
money supply for a long period, and they are still suffering 
from deflation.
    So there is no necessary connection; as long as policy is 
unwound at an appropriate time, which we are certain we can do, 
that will be a good guarantee against the inflation risk.
    Mr. Barrett. Very quickly, Mr. Chairman.
    The Chairman. I am sorry. We don't have time for another 
question. The time has expired.
    The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    Mr. Chairman, last night, of course, the President gave the 
State of the Union address; and I thought, for the first time 
he covered two major points that were important to my 
constituents and many of the people I talk to across the 
country. And I will give you the opportunity today perhaps to 
do the same thing.
    The President not only described the seriousness of the 
economic problem that we have, but he went on to address the 
solution to that problem. And it put it in context that people 
no longer should think, if they listened to his address last 
night, that this is just an ordinary recession or ordinary 
times.
    As you recounted in your opening statement, you talked 
about those fateful days in September. And--I remember them 
quite well, and there is a lot of misinformation and 
disinformation about what happened. And I think I remember 
either you or Secretary Paulson saying that when you stepped 
away from the precipice and you did not fall over, many people 
do not believe that you were in risk of falling over.
    But I think all of us know that that risk was very present 
between the 15th of September and, say, the 24th of September 
when you appeared before this committee and gave some of the 
descriptions of the problems.
    I think it would be very helpful if you could concentrate 
on describing those events of that fateful week--how close we 
came, what actions you recommended and this Congress took to 
avert that disaster that some of us called a ``meltdown'' or 
``destruction of our economic system''--so that the American 
people will begin to realize that you already have been 
victorious in some respects: that we didn't go over the edge, 
that you now have a plan, together with the Administration, 
over a long period of time--a year, 18 months or 2 years--that 
should bring about recovery.
    Would you take the opportunity to spell out that week and 
your success and Secretary Paulson's success?
    Mr. Bernanke. Mr. Kanjorski, the financial crisis 
intensified quite severely in September. It was sparked, in 
turn, to some extent by the weakening of the global economy. 
That crisis--
    The Chairman. All those pagers have a shutoff switch. 
Please use it.
    Go ahead.
    Mr. Bernanke. That crisis involved the increased pressure 
on a number of financial institutions including, as you know, 
Lehman Brothers, AIG, and others. And we were quite concerned 
that there was going to be a large number of failures that 
would be extraordinarily dangerous to the world financial 
system and to the world economy.
    Secretary Paulson and I came to the Congress, and we 
presented what at the time was viewed as being a very scary 
scenario about the potential risks to the world economy if the 
situation was allowed to get out of hand.
    In retrospect, I think in some ways we were a little bit 
too optimistic. The power of the financial crisis on global 
economic activity has been extraordinary. In my visits to 
emerging markets, they say, well, you know, on Tuesday things 
were fine; on Thursday, suddenly it was just a change in the 
atmosphere, and there was an enormous impact.
    So the financial crisis has had a very powerful impact on 
the world economy, and it is still continuing.
    Now, in September and October, we came very, very close to 
a global financial meltdown, a situation in which many of the 
largest institutions in the world would have failed, where the 
financial system would have shut down and, in my view, in which 
the economy would have fallen into a much deeper, much longer, 
and more protracted recession. Fortunately, the Congress acted 
very quickly and under a lot of political controversy, to 
provide the Troubled Asset Relief Program. That funding, 
together with the FDIC and the Fed actions, was able to 
stabilize our banking system. We have not had a major financial 
failure since Lehman in mid-September.
    Similar actions were taken around the world by the British, 
the Europeans, and many other countries to stabilize their 
banking systems.
    We have obviously had a very difficult time. The recession 
is serious. The financial conditions remained difficult, but I 
do quite seriously believe that we avoided in mid-October, 
through a global coordinated action and the wisdom and 
foresight of the Congress and providing the necessary funds, a 
collapse of the global financial system which would have led us 
into a truly deep and very protracted economic crisis.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    The Chairman. We will have to go vote. I plan to move this 
as quickly as possible. I may not make all the votes. We have a 
15-minute vote and two 5-minute votes. I would urge people, if 
you want to make a quick vote on the second, come back. We are 
going to keep this thing going.
    I will forgo the first one because we are going to have a 
later vote coming up, and I want to maximize members' chances 
to do this.
    The gentleman from Oklahoma, Mr. Lucas, is now recognized 
for 5 minutes.
    Oh, I am sorry. Mr. Paul for 5 minutes; I misread my chart 
here.
    Mr. Paul.
    Dr. Paul. Thank you. I have two quick points I want to 
make.
    I want to restate the point I made earlier about credit not 
really being capital. And I think that is an important point to 
make because we work on the illusion that if we can create 
credit units at the Federal Reserve System, and inject them 
into the banking system, we have capital. I maintain that 
capital can only come from hard work and savings, and I think 
that is an important distinction.
    The Chairman. Would the gentleman suspend?
    If members are leaving the room, please do it quietly out 
of consideration for the members who are asking questions. Let 
me repeat to my colleagues, on leaving the room, please hold 
your conversations until you leave.
    The gentleman may continue.
    Dr. Paul. Also, I wanted to make a point about the 
definition of inflation. You talked about inflation being under 
control. But to me and the free market economists believe 
inflation is increasing the supply of money and credit, and 
sometimes it leads to higher prices in an unpredictable 
fashion. And, therefore, if we concentrate on--only on the 
prices, then we don't look at the real culprit; and the culprit 
is the increase in the supply of money, of credit; and 
obviously that is sky high right now when you think about what 
has happened in the past year.
    If increasing the supply of money and credit and low 
interest rates were a panacea, we should have seen some 
results. But in the past year, we have done a lot to stimulate 
the economy and not much has happened. In the last 12 months, 
the national debt has gone up $1.5 trillion, and if you add up 
what we have spent in the Congress, plus what you have injected 
and guaranteed, it is over $9 trillion. And nothing seems to be 
helping.
    But I think our problems started a lot sooner than just 
last year. I believe they really started in the year 2000, when 
we were able to, with the help of the Federal Reserve and some 
housing programs, to reinject and to once again inflate the 
bubble. But the market really never recovered. True job growth 
never existed in the past 8 or 9 years.
    Now we are suffering the consequences because it is a 
failed policy, and it is not working at all. And we don't 
change anything. If we got into this trouble because we had low 
interest rates, getting businessmen and savers to do the wrong 
thing, just doing more of the wrong thing continuously, I can't 
see how this is going to be helpful.
    My question to you, Mr. Chairman, is this: What will it 
take for you to say to yourself, could I be wrong? You know, 
what if I am mistaken? How long is this going to go on, $9 
trillion?
    What if, say, 5 years from now we are in a deep, deep slump 
with your definition of inflation, what if we have high prices 
going and the economy is very, very weak and unemployment is 
high? Would you say to yourself then, boy, maybe I really 
messed up? Maybe I was on the wrong track? Maybe the free 
market people were right? Maybe Keynes was wrong?
    Would you ever consider that or are you absolutely locked 
into your position?
    Mr. Bernanke. I am always open to changing my mind when the 
facts change, absolutely.
    I will, first of all, agree with you about credit and 
liquidity. The Federal Reserve has the capacity to provide 
liquidity against short-term lending against collateral. We 
cannot provide capital. We understand the distinction, and that 
is why the TARP and these other programs have been important.
    Obviously, the best kind of capital is private capital, and 
the objective is to get the financial system in a condition 
where private capital would come back in. One very important 
mark of success would be that private capital is coming off the 
sidelines, as Congressman Bachus mentioned, and back into the 
financial system. In terms of the overall approach, I think I 
do have some historical evidence on my side. There have been 
many examples in the past of financial crises having very 
substantial negative effects on the economy. The economy has 
not recovered in many of those cases until the financial 
situation was stabilized.
    We know, broadly speaking, what is needed. We need clarity 
about the asset positions of the banks. We need sufficient 
capital. We need sufficient liquidity. We need to take other 
steps to ensure regulatory oversight, as appropriate. We are 
working along--we are not completely in the dark.
    We are working along a program that has been applied in 
various contexts--obviously, not identical contexts--in other 
countries at other times. We are not making it up. We know, 
broadly speaking, what needs to be done. Of course, if it 
doesn't work, we will have to ask ourselves why not and address 
it with other approaches.
    But we do have a plan here, and I think it is going to work 
if it is applied consistently.
    Dr. Paul. But you don't think there is any point where you 
might say, maybe we went the wrong direction? I mean, what 
would have to happen to do that? Is there anything?
    Mr. Bernanke. I am telling you, Congressman, I don't 
believe we will have an inflation problem in terms of consumer 
prices. If that turns out to be wrong, then I will concede 
that.
    Dr. Paul. Some people think the Depression ended when World 
War II started, and of course, others believe it never ended 
until the end of World War II, when all the bad debt and the 
mal-investment was liquidated and consumer demands returned. Do 
you adhere to the fact that the Depression ended--
    The Chairman. The gentleman's time has expired.
    Dr. Paul. You used up some of my time, remember?
    The Chairman. Who did?
    No, they start when you start. We will break for the votes. 
We will come back as soon as possible. Members who are in 
line--anybody who is back here--I will try to get back very 
quickly, and I will start recognizing members.
    [recess]
    The Chairman. The hearing will come to order.
    Mr. Chairman, thank you for putting up with this 
intermittency here.
    And we now go to the Democratic side. Mr. Scott, by virtue 
of being the only Democrat here besides me, is now recognized 
for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Bernanke, first, let me commend you on the excellent 
job you are doing in a turbulent time. I would like to start 
off--if you could talk about the nationalization issue of our 
banks and if you could update us on the status of the situation 
with Citigroup. Could you give us an assessment of where we are 
within the government's participation and investment in 
Citigroup? Could you share with us the situation that is 
developing in reference to preferred and common stock? And 
could you talk about it in reference to nationalization? Is 
this the start of it? What constitutes nationalization? Would 
we consider Citigroup as an example of nationalization as we 
need it now to move our financial system towards a greater 
stability? And is this a pattern of things to come within our 
banking industry?
    Mr. Bernanke. Congressman, let me talk about this in the 
context of the capital assistance plan that the Treasury has 
announced and the supervisory review, which we are about to 
begin undertaking. The purpose of that review is to ascertain 
whether banks--the 19 largest banks with assets over $100 
billion--have sufficient high-quality capital to meet the 
credit needs of their customers, even in a stressed scenario; 
that is, in an economic scenario which is worse than even the 
weak scenario that most private forecasters are currently 
anticipating. So we will be doing, along with the other 
regulators, an assessment of all these banks to figure out how 
much capital they would need to meet even that weaker scenario.
    The banks will be told how much capital they will need, if 
any. Some will not need any capital, but others will. And they 
will have an opportunity, up to 6 months, to go out and raise 
capital in the private sector, if they can. If they cannot, 
then the government will offer them a convertible preferred 
security, which begins life as a preferred stock, but does not 
have any voting rights. But as losses accrue and if it becomes 
necessary to maintain the quality of capital, then the banks 
would convert that preferred stock into common. Once it becomes 
common, then, of course, it has voting rights as other 
shareholders do. In the case of Citi, we will see how their 
test works out, and we will see what evolves. If they, in fact, 
have to convert even the existing preferred into common, then 
there could be a more substantial share of ownership of Citi by 
the U.S. Government. But what I would like to clarify--and I 
tried to say somewhat yesterday--is that this debate over 
nationalization misses the point.
    There are really two parts to the government program. The 
first is to ensure stability and ability to lend. And that 
involves supervisory review and providing enough quality 
capital so that the banks will have the capital bases they need 
to make loans. But the other part is to use the already very 
substantial powers that we have through the supervisory 
process, through the TARP, through any ownership there is 
through these shares, to make sure that banks do not misuse the 
capital or continue taking excessive risks. Instead they need 
to do whatever restructuring is needed--through a new board or 
new management if needed--and make whatever changes are needed 
to bring that bank into a condition of viability.
    So there is not, it seems to me, any need to do any radical 
change. Rather we can use the tools we have to make sure that 
those banks are behaving in a way which is both good for 
business in terms of long-term viability but is also supporting 
the economy in terms of lending going forward.
    Mr. Scott. So I want to get this straight. Are you saying 
that what we are doing with Citigroup and what will come let's 
say by the end of this week or the beginning of next week and 
we look at Citigroup as it is next week this time, would that 
be an example, an illustration, of nationalization of a bank?
    Mr. Bernanke. I don't think so.
    Nationalization to my mind is when the government seizes 
the bank, zeroes out the shareholders, and begins to run the 
bank. And we don't plan anything like that.
    It may be the case that the government will have a 
substantial minority share in Citi or other banks. But, again, 
we have the tools between supervisory oversight, shareholder 
rights, and other tools to make sure that we get the good 
results we want in terms of improved performance without all 
the negative impacts of going through a bankruptcy process or 
some kind of seizure, which would be, I think, disruptive to 
the markets.
    The Chairman. The gentleman from Oklahoma.
    Mr. Lucas. Thank you, Mr. Chairman.
    Chairman Bernanke, most of the focus of the credit crisis 
has been centered on the Nation's largest banks and biggest 
businesses. But there is a whole segment of the financial 
industry out there that has not received that much attention. 
That is rural America, where literally we have hundreds of 
thousands of farms and ranches and small businesses that are 
located out in the countryside in small towns and small cities, 
communities.
    While the major banks have been a presence in rural 
America, some kind of define them as a fair-weather friend. In 
fact, it is the small independent community banks who are the 
center of credit availability in most of these communities. 
Would you touch for a moment on the health of and the status of 
these institutions? Are they suffering some of the same 
problems as the major facilities? Are they in a different set 
of circumstances? Would you expand on that for just a moment?
    Mr. Bernanke. Certainly. The Federal Reserve, of course, 
supervises many small banks. So we have a lot of knowledge and 
a lot of experience with these banks. We have always valued the 
contribution that they make. What the small bank and what the 
community bank has is the local knowledge, the local contacts, 
the local information, and they build the local relationships 
that allow them to make loans that a large bank may not be able 
to make and to support small business and agriculture and other 
activities. So we think the small banks and community banks are 
critical to our system. We are very happy that they are there. 
We believe they will continue to be important to the system.
    Some of them clearly will suffer in this crisis. It depends 
very much on the decisions they have made. It is true that 
small banks didn't get involved for the most part in subprime 
lending, for example. Some do hold, though, concentrations of 
commercial real estate and other types of real estate assets 
which may lose value under the current circumstances. So some 
will be in stress. And we have had some closures, as you know.
    But on the other hand, there is, as you point out, an 
opportunity--to the extent that large banks are withdrawing 
from some of these communities and they are reserving credit 
availability to the large customers--for some of these banks to 
re-establish relationships and to come back in and support the 
local economy. So I am glad they are there, and I think they 
will be very constructive.
    Mr. Lucas. Is it fair to say that by the very nature of 
what their asset base is made up of, deposits, that they have 
not suffered from some of the same credit seizure problems 
perhaps as the bigger institutions? And I know that with the 
downturn in the economy, you have to have a demand for loans, 
as well as the ability to make loans for the transactions to be 
consummated.
    Mr. Bernanke. Generally speaking, the small banks are very 
well capitalized. They typically have higher capital ratios 
than the large money center banks. That is standing them in 
good stead. And many of them are in very good condition. And as 
I said, I expect them to be very helpful in providing credit to 
local communities. There are some small banks that are under 
stress, having to do mostly with their real estate loans in 
distressed areas. So I can't say that the entire sector is 
completely without problems but certainly many of the banks are 
very well capitalized and healthy. Some have taken TARP funds; 
some have not. But whatever the case, they do have, I think, 
the resources to play a very constructive role in helping the 
local economies get through this period.
    Mr. Lucas. Because I think it is fair to say from my 
perspective, of course, that those financial institutions that 
have been prudent, cautious, have a different makeup in their 
balance sheet, certainly as we address the needs and the 
challenges of the institutions that need the attention and 
focus across the country, let us hopefully not craft, either in 
Congress or by policy at regulatory institutions, let us not 
craft policies that penalize the 6,000 or 7,000 who have been 
very good stewards in the name of straightening out the 
problems that do exist.
    Just an observation, Mr. Chairman.
    Mr. Bernanke. I agree.
    Mr. Lucas. Thank you, Mr. Chairman.
    I yield back.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Let me thank Mr. Bernanke for being here today.
    Mr. Bernanke, you have indicated in your testimony that you 
have done a number of things; you have taken a number of steps. 
First, you outline on page 2 that Congress passed the Emergency 
Economic Stabilization Act which created the TARP. And then you 
mention that during this period, the Federal Deposit Insurance 
Corporation introduced a temporary liquidity guarantee program 
which expanded its guarantees of bank liabilities. Then the 
Treasury, in concert with the Federal Reserve and the FDIC, 
provided packages of loans and guarantees to ensure the 
continued stability of Citigroup and Bank of America. You 
mention here that the Federal Open Market Committee basically 
eased the monetary policy very aggressively so that money is 
very cheap, zero to a quarter of a percent. Then you talk 
about, to support housing markets and economic activity more 
broadly, to improve market function, the Federal Reserve has 
began to purchase large amounts of agency debt and agency 
mortgage-backed securities. And then you talk about having 
established new lending facilities to support the functioning 
of the commercial paper market and to ease pressures on money 
market bonds. And then you go into a little discussion of the 
TALF.
    Let me just deal with your participation in all of this. 
How much money do you have the authority to spend, and where do 
you get it from?
    Mr. Bernanke. Well, we don't spend it. We lend it.
    Ms. Waters. However you get rid of it.
    Mr. Bernanke. Yes, and so our lending, I want to emphasize, 
is very short term. It is collateralized, and generally 
speaking, it makes a profit that we return to the Treasury.
    Ms. Waters. Yes, I just want to know, how much do you have 
authority to deal with? Where does it come from?
    Mr. Bernanke. The authority comes with our ability to do 
open-market operations. For example--GSE purchases, take that 
for an example. Our open-market operation authority allows us 
to buy and sell agency securities. If we go out and buy agency 
securities for $1 billion, say, that $1 billion becomes an 
asset on our balance sheet. To pay for that, we credit the bank 
of the seller with a billion dollar deposit at the Fed. So the 
supply--both the assets and the liabilities of the Fed go up by 
a billion dollars. So essentially what we are doing is creating 
bank reserves, and the bank reserves provide the cash needed to 
make those loans.
    Ms. Waters. How much have you injected in all of this 
limited description that you gave us since September and 
October?
    Mr. Bernanke. Well, before the crisis began, our balance 
sheet was about $900 billion, and now it is--
    Ms. Waters. I can't hear you. How much?
    Mr. Bernanke. Before the crisis began, our balance sheet 
was about $900 billion, and now it is about $1.9 trillion. So 
we have injected about a trillion in cash lent to mostly 
financial institutions on a short-term basis but also to the 
commercial paper market.
    Ms. Waters. So this is money in addition to the TARP and 
the guarantees that were given by FDIC, etc., etc., etc.?
    Mr. Bernanke. It is an addition, but it is not an 
expenditure, and it is returned with interest.
    Ms. Waters. Who has returned money with interest so far 
based on the money that you have lent since September and 
October?
    Mr. Bernanke. As you know, about 5 percent of our balance 
sheet is involved in the rescues that involved AIG, for 
example. Let me put that to the side for just a moment. The 
other 95 percent of it is the short-term lending, 
collateralized lending for the most part, to financial 
institutions, commercial paper issuers, and others.
    Ms. Waters. So how much interest have you received since 
September and October?
    Mr. Bernanke. I don't have a number, but we give to the 
Treasury every year tens of billions of dollars.
    Ms. Waters. So you are about to introduce a lot more money 
under the TALF, is that right?
    Mr. Bernanke. That is correct.
    Ms. Waters. And how do you determine whether or not this 
money has been effective? You kind of allude to having 
stabilized some of these markets, but we don't have any proof 
of it. How are you going to get more proof? How are you going 
to come to us and say, this is effective?
    Mr. Bernanke. There is a good bit of evidence, ma'am. In 
the case that you are referring to, the TALF, which is intended 
to try to free up asset-backed securities markets, we haven't 
lent a single dollar yet. But in anticipation of that, we have 
already seen the interest rates on auto loans and credit cards 
and other asset-backed securities come in, and we are having an 
impact. We have seen the mortgage rates--
    Ms. Waters. What do you mean the interest rates on credit 
cards?
    The Chairman. You don't have time for another question.
    Let the gentleman finish the answer.
    Mr. Bernanke. I am sorry. The cost of financing auto loans, 
credit cards, consumer loans, student loans, all of those 
things, have already begun to improve and that should be passed 
through to consumers to help expand the economy.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman.
    Chairman Bernanke, sort of following up on that same line 
of questioning, I am also very concerned--if you listen to the 
speeches on either side of the aisle here, you know that we are 
all concerned about this money getting to Main Street and not 
Wall Street so to speak, and everyone is concerned about the 
banks. And obviously, you have done a lot of lending to major 
financial institutions, as well as major banking institutions, 
as well as other financial institutions.
    But in dealing with, say, Citigroup and Bank of America, 
maybe the JPMorgan Chase-Bear Stearns connection, do you 
actually track or have a methodology for tracking how that 
money is being used? Not just the actual lending, etc., but 
what is happening to those banking institutions? I have heard 
you say--you said it in answer to the previous questions, that 
you see greater activity in terms of car loans and mortgages 
and etc. Is there a true methodology for this that you at the 
Fed have? And if so, is that being issued publicly? To me, we 
need good news out there about money going out to Main Street, 
and I haven't necessarily seen it. It doesn't mean it is not 
happening. I am just wondering what, if anything, you are doing 
or planning to do in that area.
    Mr. Bernanke. Certainly. Well, I mentioned this Web site. 
And we are providing more and more analysis information. I 
think I need to once again distinguish very strongly between 
the rescue efforts like Bear Stearns and the other 95 percent 
of what we do.
    On the rescue efforts, as Congressman Kanjorski indicated 
before, I believe that by taking those necessary steps, we 
avoided a much more serious financial meltdown and catastrophic 
consequences for the global economy. I would want to say, 
though, that it was with great reluctance and great 
unwillingness that we got involved in those things. In other 
countries, the government has been able to do it without the 
central bank's involvement. We would much prefer to have a 
system in the United States, a resolution regime or some other 
sets of rules by which the government can intervene, where 
necessary, under financially unstable conditions to stop the 
collapse of systemically critical firms without the involvement 
of the central bank or with limited involvement. So we did what 
we had to do there because we felt it was necessary for 
stability, but we are very happy, if we can find a way, not to 
be doing that anymore.
    On the lending side, as I said, we do evaluate the effects. 
We look at the functioning of the markets. We look at volumes. 
We look at maturities. We look at interest rates. And the 
simple indicators all suggest that these methods have gone 
beyond the normal monetary policy and are effective.
    You know, the--
    Mr. Castle. Is that being made public? Would the Web site 
do that, or is it--
    Mr. Bernanke. Well, certainly. And I talked about it in my 
testimony. We have seen sharp declines in LIBOR, which affects 
the rates that people with adjustable rate mortgages pay. We 
have seen sharp declines in commercial paper rates, which 
affect both high-quality and medium-quality commercial 
borrowers. We have seen stability in money market mutual funds, 
which many people have investments in. And we have seen, even 
without the issuance of any loans yet, we have seen 
improvements in the funding costs for credit cards and consumer 
loans, student loans and small business loans. So we do believe 
that we are having a benefit--it used to be the view that once 
you got the interest rate to zero, the Fed was stuck. But we 
have found ways to go beyond that and to improve the economy, 
strengthen the economy for average people with new methods.
    The Chairman. The gentleman will suspend.
    Please freeze the clock. I am going to stay here. Members 
can go vote. We are going to keep going. It is a motion to 
proceed. I will not characterize its importance, but we are 
going to keep going. So I would advise members to go and come 
back. I would like to keep going.
    So we will now resume with Mr. Castle. Anybody who goes and 
votes, if you are back here, we will call you in that order.
    Mr. Castle, resume with the full amount of time remaining 
for you.
    Mr. Castle. Thank you.
    Chairman Bernanke, I am also concerned about the toxic 
assets. I mean, that was the original premise under which we 
created and voted for the TARP program, and yet nothing seems 
to have fundamentally happened in that area. Is there a plan to 
deal with that? Should it have been done sooner? Where does all 
that stand at this point?
    Mr. Bernanke. Yes, sir, that is a very good question. I do 
believe that taking toxic assets off the base balance sheets is 
an important component of creating the clarity needed for 
private capital to come back into the banks. It is true that 
TARP 1 did not do that mostly because of the crisis that 
Congressman Kanjorski talked about that required the immediate 
injections of capital to stabilize the system.
    However, the current Treasury plan unveiled by Secretary 
Geithner has an explicit component which will use public-
private partnerships to buy assets in specific categories. And 
so that will be part of the multipronged plan to provide 
capital, to provide supervisory clarity and to take assets off 
balance sheets. So that is very much under way, and I 
anticipate that the Treasury will be providing more detail in 
the coming days and weeks.
    Mr. Castle. Thank you, Mr. Chairman.
    And I yield back the balance of my time, Mr. Chairman.
    The Chairman. The gentlewoman from New York, Mrs. Maloney.
    Again, members go vote, come back; we will still be here. 
There is only one vote.
    Mrs. Maloney. Thank you very much, Mr. Chairman, for your 
testimony and your superb work during this financial crisis.
    Last night during President Obama's address to the Joint 
Session of Congress, one of his statements that got great 
support from both sides of the aisle was when he said that the 
bank bailout program is not about helping banks; it is not 
about--I am dead. It is not about helping banks.
    The Chairman. You may have kicked it out. Move to that 
microphone.
    Mrs. Maloney. It is not about--I am just going to talk. It 
is not about helping banks--
    The Chairman. That is not fair to the recorder. Please move 
to that chair. We have a recorder who is listening on the tape.
    An extra 15 seconds. Go ahead.
    Mrs. Maloney. One of his comments that got a great deal of 
support on both sides of the aisle was that the bank bailout 
was not about helping banks; it was about helping people. And I 
would like to hear your best case on that statement.
    Also, since time is limited, I would like to place in the 
record and give you a series of letters that have come to me 
with questions on certain aspects, systemic risk, exactly where 
the TARP money is going, whether or not it is addressing 
systemic risk, but one in particular from economist and noble 
laureate Joseph Stiglitz. He says that we have to devise clear 
rules about when we will bail out institutions and when we will 
not. And I would like to ask you, at what point does a 
financial institution move from too big to fail to too big to 
save?
    And many of your statements yesterday before the Senate 
were reassuring to many, but you testified that you did not 
feel that any institutions needed to be nationalized, financial 
institutions in our country, that they were--that they were 
stable and economically viable. Some of my constituents wrote 
and asked exactly what is your definition of nationalization. 
And again, what is the marker or guidelines between too big to 
save and too big to fail?
    The Chairman. Without objection, the documents the 
gentlewoman alluded to will be made a part of the record.
    The Chairman. Mr. Bernanke.
    Mr. Bernanke. Thank you.
    So the point about the need to protect banks in order to 
protect the public, I think, is a very good one. We have 
enormous experience with banking crises and we know that there 
are effects on the real economy that we have just seen can be 
very bad. Unfortunately, as someone put it, you can't save the 
banking system without saving banks. So we do have to intervene 
to try to stabilize the banks, and that is critical to do.
    As I have already discussed, I think that the intervention 
in October prevented a collapse of the global banking system 
which would have had extremely severe effects on the global 
economy, and it would have taken it a very, very long time and 
much more money to get out of. So I think the first 
accomplishment of the Congress's approval of the TARP funding 
was to avoid that absolutely catastrophic situation.
    Beyond that, the capital that has been distributed to banks 
has been reducing the pace of deleveraging, of selling off 
loans and allowing them to stabilize their credit extensions. 
And as we go forward, particularly as the Fed begins to work on 
nonbank credit sources like asset-backed securities, we will 
see improving loan availability.
    The Treasury plan includes a number of ideas about regular 
reports, baselines, analyses that the banks receiving TARP 
funds will have to provide to give some indication that, in 
fact, they are using the extra capital they have to support new 
lending. So we will be getting evidence on that as best we can, 
although it is always going to be difficult to get a very 
precise reading.
    I think, with respect to nationalization, I think of 
nationalization as being a takeover of the banking system or 
banks by the government.
    Mrs. Maloney. 100 percent?
    Mr. Bernanke. 100 percent, zeroing out stockholders and 
then putting the government in charge of running the 
institution. I don't think we want to do that. I don't think we 
need to do that.
    We may have government ownership shares in some of the 
banks, and we will, of course, as government owns shares. But 
as I have said before, I do not in any way support letting the 
banks do what they want or continuing as zombies or just not 
doing their appropriate role in the economy. But I think we 
have the tools, short of those Draconian measures, to make sure 
that banks return to viability and to extending credit to the 
public.
    With respect to choosing when to prevent the failure of a 
systemically critical institution, we are making those 
judgments as we go along. Obviously, we are in the middle of a 
financial crisis. The bar is going to be lower today than other 
times. I am very much in favor of creating a systematic regime 
for making those determinations and for addressing those 
situations in the future.
    The Chairman. The gentleman from California.
    Mr. Royce. Thank you, Mr. Chairman.
    I would like to ask you, Chairman Bernanke, as we have seen 
in recent months, institutions posing a systemic risk can come 
from any number of sectors within our economy. They can come 
from investment banks or commercial banks or the insurance 
sector or government-sponsored enterprises.
    As you know, with respect to the insurance sector, we 
presently have a regulatory structure comprised of 55 
individual State regulators without any Federal oversight. And 
I would like to ask, in your opinion, is someone likely to be 
integrally involved in mitigating that systemic risk as we go 
forward? Is it logical for us to have a newly created macro 
credential regulator coordinating with 55 individual 
regulators, or should the systemic risk regulator have a 
Federal companion to work with as they do in banking or in 
securities?
    Mr. Bernanke. Well, the issue of the option of a Federal 
charter for insurance is a complex one, and there are a lot of 
issues involved. But to cut to the bottom line, I think that it 
would be a useful idea to create a Federal option for insurance 
companies, particularly for large, systemically critical 
insurance companies. And in general, I believe that holding 
company-level supervision of large systemically critical 
institutions is very important. We do not have effective 
holding company supervision in some of the cases where we have 
had problems. So I do believe that an optional Federal charter 
would be a direction worth giving serious consideration.
    Mr. Royce. Thank you, Mr. Chairman.
    I have a second question, and that is, during the stimulus 
debate, the Congressional Budget Office projected that the 
Federal Government is going to need to issue $2 trillion worth 
of Treasury bonds in the coming months. Now, the bond market in 
the past has not seen anything like that over such a short 
period of time. And I guess the estimate is, during the next 2 
years, you might have $4.5 trillion of U.S. debt that would be 
issued. Foreign buyers today absorb, I think, about $200 
billion a year of the Treasuries that--you know, that is a 
useful contribution if the deficit is $459 billion. But if it 
climbs up towards $2 trillion, my question to you is, then, the 
annual purchases would be about a 10th, and would domestic 
investors be able to bridge that gap? It looks unlikely from 
what I have read on this. So who would be there to buy up the 
debt? And I would ask if you are concerned that those parties 
just won't be there in the future.
    This is part of my concern about the Japanese model in 
terms of trying to handle this through spending stimulus. I 
think they put about $1.3 trillion out there; and at the end of 
the day, they just accumulated more debt, but it cost them a 
decade of stagnant economic growth.
    Could I have your response on that, Mr. Chairman?
    Mr. Bernanke. Congressman, you are certainly right to be 
concerned about the debt and the deficits. In terms of the 
short term, the global market for U.S. debt seems to be 
accepting of this issuance; rates are not high, and liquidity 
is good. Generally speaking, even though there is greater 
supply, there is also greater demand because U.S. Treasuries 
are viewed as a safe investment in a world where there are not 
very many safe investments left.
    That being said, as I have emphasized and as the President 
emphasized last night, we certainly cannot continue to borrow 
at this rate or to run deficits at this rate. And it is going 
to be essential as the economy recovers, that we bring the 
deficit down and that we get ourselves back to a more fiscally 
balanced situation.
    Mr. Royce. Well, even if you were able to inverse the 
savings patterns of Americans and get it up to let us say 8 
percent instead of zero a year, that would probably only be 
about $800 billion right there of additional savings. So you 
would have to go elsewhere, wouldn't you, for the borrowing 
that we are talking about?
    Mr. Bernanke. Yes. But you have global financial markets on 
the order of $100 trillion, and there will be capacity in those 
markets to absorb debt in the short-run but only if investors 
believe that the United States is on a sustainable fiscal path, 
which obviously trillion dollar deficits as far as the eye can 
see would not be sustainable.
    Mr. Royce. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    Mr. Chairman, in these difficult times when my constituents 
are anxious and frustrated with the state of our economy, 
transparency is very important, and it is important to 
communicate what actions were taken to protect U.S. taxpayers. 
I appreciate the steps that the Fed recently announced and you 
mentioned in your testimony to increase transparency.
    Another important issue that came up at our O&I hearings 
yesterday was the potential oversight blind spot that may exist 
at the Fed. In particular, I have concern that there is a lack 
of oversight of TARP funds that passed through the Fed, and I 
understand that the Fed's TALF program will use TARP funds to 
lend up to $1 trillion to thaw consumer lending markets. The 
acting Comptroller General, Gene Dodaro, yesterday expressed 
concern of the GAO's ability to oversee TARP funds passing 
through the Fed. He said, ``There may be some limitations in 
our ability to provide that type of oversight,'' adding that is 
a concern of his.
    What oversight powers does the GAO and the SIGTARP have 
over TARP funds that pass through the Federal Reserve programs 
like TALF? Independence at the Federal Reserve is very 
important, and that is true. Independence is important for the 
Fed. But when the Fed invokes emergency powers through Section 
13.3 of the Federal Reserve Act and greatly expands its balance 
sheet, what are your thoughts about adding emergency oversight 
authorities of the Fed to better track the use of TARP funds?
    Mr. Bernanke. Congressman, I am frankly not aware of any 
limitations on the Inspector General or the GAO in terms of 
that evaluation. The issuers of the ABS that will be sold under 
the TALF are subject to the same compensation restrictions and 
all the other rules that apply to any TARP recipient. We have 
set up a system where firms have to certify and be audited to 
the effect that they are meeting both the rules of the TARP and 
that they are correctly representing the assets that they are 
putting into these ABS. We have taken a number of steps to 
safeguard the taxpayer, to protect both the Fed and the 
Treasury from credit risk in this program. And I don't want to 
take all your time, but I can certainly go through them. And in 
particular, we have addressed all the specific issues that the 
Inspector General raised.
    But if there are remaining issues, I have met with Mr. 
Barofsky in various contexts, and I would be very happy to go 
through it with him. Part of the reason we have delayed the 
initiation of this program is that we have wanted to make sure 
that all of our legal and procedural steps had been taken. And 
we are absolutely committed to making sure that we meet all the 
requirements that will protect the taxpayer.
    Mr. Moore of Kansas. Thank you very much, Mr. Chairman.
    Mr. Watt. [presiding] Mr. Hensarling is recognized.
    Mr. Hensarling. Thank you, Mr. Chairman.
    And, Chairman Bernanke, welcome once again. I would like to 
add my voice to that of the chairman and the ranking member and 
say that although it is our responsibility to ask you tough 
questions, it doesn't mean that we do not appreciate your 
service. It does not mean that we necessarily second guess your 
judgment in exigent circumstances where we don't have all the 
facts. But certainly as Members of Congress, we reserve the 
right to do so.
    The first question I have, Mr. Chairman, is, I have a very 
strong preference as we try as a nation to work out of our 
economic turmoil, I have a strong preference for the use of 
voluntary capital of investors over involuntary capital of 
taxpayers. Although I don't have any statistical evidence, I 
have spoken to many individuals and firms within the investment 
community. And the word that keeps on coming up over and over 
and over is certainty; we need certainty. We need certainty. We 
need certainty in legislation. We need certainty in regulation. 
I am under the impression there are billions, if not trillions, 
of dollars sitting on the sideline. But until policymakers in 
Congress put out a program and say, this is the program, people 
are still trying to figure out, am I going to get bailed out? 
Is my competitor going to get bailed out? Is my customer going 
to get bailed out?
    And I suppose in that vein, I would like for you to comment 
generally. Unfortunately, there is a two-part question here. 
But, specifically, I think you have embraced, at least in your 
testimony on the Senate side, you said something along the 
lines that the plan recently announced by Secretary Geithner 
would be quite helpful in stabilizing our economic situation. 
And I don't try to read too much into 1-day swings in the 
market, but it was a bad 1 day when that was announced because 
I think the market viewed it as a non-announcement. And I heard 
one critic call it $350 billion in search of a program.
    So the specific question would be, do you have details of 
the program that the rest of us do not have, or do you believe 
that the market simply doesn't understand the clarity with 
which and precision in which it was presented? So there is a 
general and a specific question somewhere in there, Mr. 
Chairman.
    Mr. Bernanke. Thank you, Congressman.
    On the uncertainty issue, I think we shouldn't lose sight 
of the fact that the fundamental source of the crisis is the 
collapse of the credit boom and the fact that banks and 
financial institutions are losing enormous amounts of money. 
Given the enormous losses, given the weakness of the economy, 
it would be surprising if investors felt that the situation was 
a safe one for them to be investing in.
    Having said that, I agree with you that more certainty in 
policy, the sooner, the better, will be good for bringing more 
private capital back into the system. And I do believe that the 
Treasury program is an important step in that it is a 
comprehensive program. It has different components that taken 
together and executed properly, I think, will be very helpful 
in stabilizing the banking system and making it more attractive 
for private capital to come in.
    Your question, though, was whether the plan that was 
announced a few weeks ago was a fully formed plan? Obviously it 
was not. It was a broad proposal, a conceptual proposal, which 
the Treasury put out to indicate the direction it wanted to go 
and to invite discussion with Congress and with the public. It 
was not entirely specific, obviously, and more details are 
being released as soon as the Treasury can do so.
    The Treasury, frankly, is understaffed and the Federal 
Reserve and other agencies have been working with them as best 
we can to try to get the details together. Obviously, I have 
been in many discussions, so I have some idea where these 
things are going, and I find the directions very promising. But 
I am not at this point able to tell you much because I am still 
waiting, obviously, for the final decisions and for the 
Treasury to make those announcements. But there is, of course, 
a great deal of work being done to flesh out the general ideas 
that were presented initially.
    Mr. Hensarling. Chairman Bernanke, we all know that those 
who do not learn the lessons of history are condemned to repeat 
them. And fortunately for the Nation, we know that you are an 
astute student of economic history, particularly our own 
Depression, but also Japan's lost decade.
    I have a copy of a speech that you gave before the Japanese 
Society of Monetary Economists back in May of 2003 where you 
talk about the economic principle of Ricardian equivalence. And 
in that speech, you said, ``In short, to strengthen the effects 
of fiscal policy would be helpful to break the link between 
expansionary fiscal actions today and increases in the taxes 
that people expect to pay tomorrow.''
    You also indicated that the government's annual deficits, 
speaking of Japan's government's annual deficit, is now 8 
percent of GDP and is a serious concern. Moreover, an aging 
Japanese population will add to these budgetary concerns.
    Are you in a position to comment on its application to our 
situation today?
    Mr. Watt. The gentleman's time has expired.
    Mr. Hensarling. Perhaps we could get that in writing at a 
later time, Mr. Chairman.
    Mr. Bernanke. The deficits have significant consequences. 
And one of the consequences is concerns about the future 
servicing costs of those deficits. I agree with that.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Watt. I will recognize myself for 5 minutes.
    I was going to skip over and go to Mr. Capuano, but I will 
follow along Mr. Hensarling's line because one of the things 
that I think is important for us to do is to focus on exactly 
what has been done as a means of the public and the markets 
understanding the totality of what has been done. And I note, 
on page 7 of your testimony, that you make the following 
statements: ``If the actions taken by the Administration, the 
Congress, and the Federal Reserve are successful in restoring 
some measure of financial stability, and only if that is the 
case in my view, there is a reasonable prospect that the 
current recession will end in 2009 and that 2010 will be a year 
of recovery.'' And you were quoted yesterday on the Senate side 
as saying something similar to that, although a lot more basic 
when it was reported in the newspaper.
    I take it that the totality of the congressional actions is 
TARP, the stimulus, the second tranche of TARP, what we are 
contemplating doing with bankruptcy reform. The 
Administration's role is how it actually administers the moneys 
that we have authorized and appropriated on the congressional 
side, and the Fed's role is the trillion or so dollars in 
increased assets on your balance sheet and the multiplier 
effect that is associated with that, because a lot of it is 
guarantees and allows lenders to do other things.
    I guess the question that I have is the same one that I 
asked in my opening statement: Are there other things that you 
contemplate that Congress can and should reasonably be 
considering at this point, not to comment on the merits or lack 
of merits? And except for fleshing out, as Mr. Hensarling has 
indicated, the specifics of the proposal, what other tools does 
the Administration have and what other tools does the Fed have, 
or is it sufficient in your view what has already been done at 
this point?
    Mr. Bernanke. In terms of the immediate crisis, I think 
that we are on the right track. We have taken a lot of 
constructive steps. I just asked for Congress to provide 
support, provide oversight. And as these programs go forward, 
if they need additional support, to consider that, but we don't 
know yet whether they will or not. So I think--
    Mr. Watt. It might be in the form of additional funds.
    Mr. Bernanke. Exactly. So I think that we are making good 
progress in terms of the immediate crisis. But there is a lot 
of work for Congress to do in terms of going forward. I think 
part of this is, we want a guarantee, at least to assure the 
public that this is not going to happen again and give some 
confidence that that is not going to happen again. So there is 
important work to be done.
    We talked several times today about a resolution regime for 
large, systemically critical firms, but regulatory reform that 
will begin immediately to try to improve risk management, to 
try to reduce systemic risks, I think those steps would be 
confidence-inspiring and I would advocate that Congress would 
begin looking at those very soon.
    The Treasury and the Federal Reserve would like to work 
with Congress on ways in which the Fed can better control the 
money supply, given the amount of lending it is doing. Those 
are issues we can talk about separately.
    But broadly speaking, I think support for the program that 
is currently going on to arrest the financial crisis and then 
address going forward the changes in the structure of the 
financial and regulatory systems that we are going to need to 
assure future stability.
    Mr. Watt. As far as you are concerned, the things that we 
have put in place already are the things that are reasonably 
appropriate to the severity of the situation right now?
    Mr. Bernanke. In terms of the immediate crisis, yes.
    Mr. Watt. Thank you.
    Ms. Biggert is recognized.
    Mrs. Biggert. Thank you, Mr. Chairman.
    And thank you, Chairman Bernanke, for being here. I 
understand that the Federal Reserve and the Treasury have 
announced that TALF will be extended to CMBS. And I have heard 
that many market participants have raised concerns that TALF 
only includes new and recently originated loans, when the CMBS 
has seen virtually no market activity in the last year and that 
institutions don't have the balance sheet capacity for new 
lending or refinancing to qualify under TALF. Given this 
reality, doesn't there need to be a catalyst, whether in or 
outside of TALF, to address the legacy assets, the outstanding 
issuance and balance sheet capacity issues before TALF can be 
truly effective?
    Mr. Bernanke. Congresswoman, we will be focusing on newly 
issued asset-backed securities, but they could be backed by 
refinances, for example. So they need not be loans to finance 
new construction. They could be loans to finance ongoing 
ownership or management of commercial real estate properties. 
So I do think we will address that problem in the sense that 
loans that are refinanced, for example, and then resecuritized 
would be eligible for the TALF.
    Mrs. Biggert. So let us say they don't have the balance 
sheet capacity or the certainty of a secondary market. Have you 
considered some form of bridge financing or guarantee 
assistance to give institutions a window to start commercial 
lending?
    Mr. Bernanke. Let me emphasize that we will be doing a lot 
of talking with market participants. We will hear all these 
issues, and we will listen and respond to them. I believe the 
TALF program, plus our measures to provide liquidity to 
financial institutions, are an important contribution towards 
stability in that market. But I would mention again that part 
of the Treasury program is an asset purchase facility that 
would buy even legacy assets which have not been recently 
issued or rated from institutions. So between those 2 things, I 
think we have a pretty comprehensive plan. But I just want to 
reassure you that, just as we did with the first round of TALF, 
we will consult closely with market participants, and we will 
make adjustments as needed to ensure that it is an effective 
program.
    Mrs. Biggert. But when there has been no market activity in 
the last year, how are they going to be--it would have to be 
the refinancing then. There wouldn't be any new or originated--
    Mr. Bernanke. Yes, it would be--there is market activity in 
terms of new construction and new projects still going on, but 
in addition, refinances and existing properties that are 
securitized would be, as I said, eligible.
    Mrs. Biggert. What I see is that CMBS lending went from 
$240 billion in 2007 to $12 billion in 2008, which is really 
historically low.
    Mr. Bernanke. It is practically zero now, and you put your 
finger on the problem. People talk a lot about credit 
availability, and part of it is the banking system certainly. 
But the biggest part of it is the drying up of the 
securitization markets, not just for CMBS, but for a whole 
variety of other types of credit. And the Fed has been focused 
on trying to get those markets going again, setting them up in 
such a way that when markets begin to recover, that the private 
sector will come back in. But for the time being, with no 
activity, the Fed wants to be there to try to help credit flow.
    Mrs. Biggert. And you are going to expand TALF to about, 
what, $1 trillion?
    Mr. Bernanke. This is a joint Treasury-Federal Reserve 
program, and our agreement was to move towards $1 trillion, 
considering CMBS and possibly other asset-backed securities 
following that, yes.
    Mrs. Biggert. Do you think that such loans would increase 
the percentage of risky assets that you hold, the Federal 
Reserve would hold?
    Mr. Bernanke. We have gone through a number of steps to 
ensure that we are well-protected financially, including 
keeping the assets simple, requiring that they be purchased by 
private sector parties who have a strong interest in making 
sure they are properly valued, putting on a haircut so that the 
amount we lend is 5 to 15 percent below what the purchaser paid 
for them and other protections including, of course, the 
capital being provided by the Treasury, which is the first loss 
position. But our anticipation is, from the Federal Reserve's 
point of view, that the credit risks are quite low.
    Mrs. Biggert. Thank you.
    I yield back.
    Mr. Watt. Mr. Ackerman.
    Mr. Ackerman. Thank you, Mr. Chairman.
    Thank you for providing leadership during these very 
perilous times, Mr. Chairman.
    I spent part of the break reading nursery rhymes to one of 
my three very young grandchildren. And I got to the page about, 
this little piggy went to market, and this little piggy stayed 
home. And before I started reading it, I was struck with fear. 
What if my grandsons thought of asking questions? Was it a good 
time for that little piggy to go to market? Was the little 
piggy who stayed home a lot smarter? What if he heard that, 
after they did away with the uptick rule, a bunch of other 
little piggies actually ate the market? And was there really a 
market to go to? And I figured you are the country's most 
important economist; maybe I would ask you some of those 
questions that I was afraid to answer before I turned to ``Mary 
Had a Little Lamb'' real quick.
    The uptick rule has wreaked havoc in the view of many of us 
should that not be restored. And the second question I would 
like to ask is about mark-to-market. If there is no market, how 
can you have mark-to-market? If the market is based on as much 
today as emotion, how can we put so many companies in peril of 
existing when there is no market to mark to and the market is 
so artificial relative to the real value of so many companies 
that are now jeopardized? And if so many of the structured 
packages that are out there in the financial community contain 
mixed products, some of which have to be mark-to-market and 
some of which don't, how does somebody make a decision as to 
whether or not to invest? I was hoping you could share some of 
your thoughts with us because I obviously think that mark-to-
market is a disaster, and that we have to restore the uptick 
rule.
    Mr. Bernanke. Well, those are very good questions and 
obviously very pertinent.
    On the uptick rule, obviously that is an SEC 
responsibility. I know that they have been looking at it and 
thinking about it. The traditional literature on this doesn't 
seem to find much effect of the uptick rule. But I have to 
concede that in the kinds of environment we have seen more 
recently, that if it had been in effect, it might have had some 
benefit. So the SEC is looking at that.
    Mr. Ackerman. Restoring it would have some benefit?
    Mr. Bernanke. Restoring it. That is my understanding. But, 
obviously, that is their decision, and they will have to make a 
determination as to whether it is beneficial.
    Mr. Ackerman. The reason I am asking is, you are a smart 
guy. And we need smart people to weigh in and give us some 
guidance. Some of us have legislation, and we are asking a lot 
of smart people what they think of the notion.
    Mr. Bernanke. Well, the SEC is, of course, responsible for 
this, and they have a lot of experts, and they are looking at 
it very carefully. My sense is that it is worth looking at, and 
I would say that to the new Chairwoman if she asked me about 
it.
    The second is the mark-to-market issue. It is a very 
difficult question. Of course, I think, in principle, we always 
want to make sure that firms are valued as accurately as 
possible. It is good for investor confidence that they think 
they are seeing the true value of the underlying firm. And 
certainly for many assets, which are actively traded, for 
example, we want to know what the market value is as opposed to 
some historical or book value. And that is what mark-to-market 
accounting was about.
    However, it is absolutely the case that under certain 
circumstances, when you have markets where the asset is not 
traded or is very thinly traded, then it is very difficult to 
use market information to adjudge what the appropriate value 
is. And that makes the mark-to-market approach very difficult 
to execute in a sensible way. And I don't have any answers for 
you. I don't think we should junk the system. I think we do 
need to do what we can to provide good transparent information 
to investors, but I would also support the efforts that SEC and 
FASB are doing to look at mark-to-market and to try to provide 
reasonable advice about how to value assets where there is no 
market.
    Mr. Ackerman. Let me just finally--if I might just finally 
say, Mr. Chairman, that there--some of these little piggies are 
big piggies, and they weren't investors. And the uptick rule is 
connected to the mark-to-market and that these people out of 
sheer greed--
    Mr. Watt. The gentleman's time has expired.
    Mr. Ackerman. Driving down the real value of the companies 
in the market, but the value of the company was there, creating 
a completely artificial system which is going to ruin our whole 
financial system and investors' confidence.
    Mr. Watt. Mr. Garrett is recognized for 5 minutes.
    Mr. Garrett. Thank you, Mr. Chairman.
    I thank the Chairman as well.
    Before I begin, I would just reiterate a point that I 
raised the last time you were here, and that was to your point 
of transparency, we would like to get as much information as 
possible. Back in the first week of December, we sent a letter 
to you listing a number of questions to be answered. And I just 
bring that to your attention again. We need to move on some of 
these issues. You say we need to look to regulatory reform and 
the like. We need all the information as possible. If you could 
just check with your office.
    Mr. Bernanke. You have not received the reply?
    Mr. Garrett. No.
    Mr. Bernanke. After some concerns about this, I have asked 
the staff to try to put a 1-month limit on reply times, and so 
clearly that has not been met in this case, and I will check up 
on the situation.
    Mr. Garrett. I see your staff shaking their heads. Do they 
think that we received a reply? They think we did. If we did? 
Okay. If not, I would appreciate it. I appreciate the gentleman 
from New York raising the questions I was about to ask. So I 
will just give a sliver on that question on mark-to-market.
    The folks who support mark-to-market would say we already 
have that provision in the law right now that allows for the 
flexibility to make these determinations, but what we know is, 
in practice, it just does not occur. And so that is why we need 
probably more push, if you will, in order for them to change 
the--not just the advice, but the actual practice to get to a 
sound judgment rule.
    Let me go to what was in my opening comment, which you 
touched upon. I appreciate that. The pushback always is on this 
issue, when we say, well, foreclosure is the problem; why 
should my homeowners subsidize the guy across the street? And 
the answer always is, as you alluded to as well, because his 
foreclosure is going to affect me and my street as well. Well, 
if you look to--I mentioned Professor Shiller's comment--study 
on this. He said in his study that the impact of foreclosures 
on prices while negative and significant, can be significant, 
it is quite small in magnitude. In other words, we are 
referring to the fact, as you well know, that this foreclosure 
problem that we have nationally is really centered in four or 
perhaps five States.
    He says even under extremely pessimistic scenarios, house 
prices likely would decline only slightly or remain essentially 
flat in response to foreclosures like those predicted in 2008 
and 2009. This suggests that home prices are quite sticky.
    And in an article written by--give credit where credit is 
due--Alan Reynolds, they make a point of the fact that 
foreclosure can be a personal crisis, but it is not a national 
crisis. Meaning that, for example, foreclosures on the mean 
average is 1 home in every 466; but in the State of Vermont, 
for example, it is 1 in 51,906. All of this suggests that maybe 
what I am doing in my State of New Jersey is basically 
subsidizing those people in the other States and that it is not 
something that we should be asking everyone to support. Can you 
respond?
    Mr. Bernanke. Well, the evidence on the effect of 
foreclosures on national home prices is somewhat contentious, 
but there are certainly good economists, including Mr. Shiller 
and others, who think that the effect on national home prices 
is not very large. The example you gave of being across the 
street, though, there is very strong evidence that the 
neighborhood is affected, if not the entire economy.
    Mr. Garrett. Well, actually, I would like to interrupt 
there. Something that I just heard from an expert the other day 
on that point is it is not necessarily foreclosures on your 
street but abandoned properties on your street which will have 
the more significant impact.
    Mr. Bernanke. True, true.
    Another issue which we have confronted is that we often see 
that the foreclosure decision is made by a servicer rather than 
the original lender. And the servicer's incentives may often be 
to proceed to foreclosure, even if in some broad economic sense 
there may be an efficiency gain from negotiating some kind of 
restructuring agreement. So that is another possible area where 
there may be an inefficiency in the market's arrangements.
    But I agree, that there is controversy on these issues.
    Mr. Garrett. And the one area that the President seems to 
focus on is those properties that are underwater and that they 
are having the most difficulty to go into. And the notes from 
sort of Mr. Alan's article is that over the other 40 States 
have a below average percentage of homes that are less than 
their mortgages are under water. So, again, when we talk about 
these things in the larger picture, it sounds like a national 
crisis, but we really have to pin them down.
    One last point, just totally off this page, what the 
definition of nationalization is, I appreciate what your answer 
is on that. You had previously said we would have substantial 
influence as a minority holder in this, which I guess could go 
to executive compensation, perhaps.
    Mr. Bernanke. Yes.
    Mr. Garrett. Dividend distribution, I presume--
    Mr. Bernanke. Let me just be clear. We can make strong 
suggestions about dividends, for example, just from a 
supervisory perspective.
    Mr. Garrett. Right. How about other aspects? Hiring 
practices, can that be something that you would be able to use 
in your powers to address?
    Mr. Bernanke. The supervisors, the TARP, the ownership 
would allow the government to require policies of various kinds 
relating to compensation, relating to hiring and so on. I think 
it is very, very important--I think you would agree with me on 
this--that we don't want the government involved at levels of 
business operations, making loans, making those kinds of 
decisions. But at the level of overall business planning, 
dividends, things of that sort, I think, as a shareholder and 
as a supervisor, there is a legitimate basis for that.
    The Chairman. Because the time has expired and because we 
are at a point of agreement between you and the gentleman from 
New Jersey, I think it is propitious to move on.
    The gentleman from California.
    Mr. Sherman. Thank you, Mr. Chairman.
    I would want to pick up on what Mr. Ackerman said. We do 
need the uptick rule. And as to mark to market, does it make 
sense to mark to market once marketable securities that are no 
longer marketable while refusing to ever mark to market those 
loans that have never been marketable? To mark to market that 
which is no longer marketable while not marking to mark up that 
which has never been marketable seems paradoxical at best.
    As to what Maxine Waters was talking about, you do have 
under section 13-3 unlimited power to lend money--an unlimited 
quantity of money that you can lend on security that the Fed 
finds adequate. You have indicated that so far you have 
expanded your balance sheet only $1 trillion. But I hope you 
would provide for the record a list of the commitments that the 
Fed has made that could go well beyond that and the guarantees 
the Fed has issued in addition to amounts loaned.
    The New York Times, for one, is saying that government 
actions, chiefly the Fed, add up to over $8 trillion. And it 
would be interesting to be able to compare their reports with 
your analysis of the risks the Fed has taken and the loans the 
Fed has made or anticipates making.
    As to nationalization, it seems like the ghost of Eugene 
Debs is amongst us. Until you actually look, nationalization is 
probably a term that would be used for what we are going to do 
for those banks that would otherwise be in bankruptcy or 
receivership.
    Now with regular bankruptcy or receivership, only FDIC 
deposits are made safe by the government. In contrast, 
nationalization seems to be a code word for bailing out the 
bondholders, which would cost hundreds of billions or trillions 
of dollars. And, in that way, nationalization is a slogan that 
could be used to say, oh, my God, we on Wall Street hate it. It 
is terrible. It is left wing. But it is really a way to bail 
out the bondholders of those banks that have failed so badly 
that we have given up on bailing out the shareholders.
    I would hope that anything approaching nationalization 
means that we go through receivership, and then we give--you 
know, there is the reductions of the unsecured creditors; and 
then maybe we take over the bank or maybe we don't. But the 
idea of using the term nationalization to justify bailing out 
bondholders seems counterintuitive and probably a mistake.
    As to AIG, there are reports that they have a fourth 
quarter loss. I would like you to answer for the record how 
certain you are that the Fed has not lost any money on the AIG 
transactions you have engaged in so far. And then do you think 
that there is adequate security somewhere in AIG to allow you 
to make relatively risk-free additional advances to that 
entity?
    As to the stress test, I hope that you would respond for 
the record why you are going to use tangible equity capital, 
rather than tier one capital. And more importantly, given the 
severity of the economic problems that we have had over the 
last--more than a year, I think, why was this stress test not 
something being done by the bank regulators? Why is it 
something that the new Administration is doing? I would think 
stress testing is what you do every day.
    I hope that we have time for an oral response to my last 
question, relates to your efforts to urge the banks not to pay 
dividends. Congress, Treasury, and the Fed have all begged and 
implored the banks on the issues of compensation, perks, and 
dividends; and the issue is then why are we begging? Why are we 
imploring? Why are we embarrassing them? Why aren't we telling 
them what to do?
    Are you prepared to go beyond asking the banks not to pay 
dividends, to say that you will not engage in future 
transactions with banks that have Federal money and then still 
pay dividends? And when I say transactions, I mean the new 
transactions of this post-September world, not the ordinary 
business you were doing in 2007.
    Mr. Bernanke. The regulators jointly issued in November a 
statement on lending to creditworthy borrowers which addressed 
a number of these issues, including dividends, and we said that 
we would be reviewing policies about dividends with respect to 
capital adequacy and the like.
    I think your point is very well taken. The firms that 
particularly need government assistance or are short capital 
you know should be paying little or no dividends, and that is 
certainly an appropriate policy. We will be looking at that 
very seriously.
    The Chairman. The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I want to cover a couple of bases here. First of all, on 
your swap lines, is that number about half-a-trillion now? Is 
that pretty close?
    Mr. Bernanke. That is about right, yes.
    Mr. Neugebauer. Could you furnish me a list of the 
countries that you are involved in swap lines with?
    Mr. Bernanke. Yes. It was in a recent testimony that I gave 
that list. But yes.
    Mr. Neugebauer. Is Ukraine one of those countries?
    Mr. Bernanke. Which?
    Mr. Neugebauer. Ukraine.
    Mr. Bernanke. No.
    Mr. Neugebauer. Because a number of these countries, 
obviously you know their creditworthiness is falling. And are 
you concerned in any way that the U.S. arrangement with these 
entities could be in jeopardy where you could lose money?
    Mr. Bernanke. We are not. We have not been involved with 
wide numbers. We have dealt mostly with industrial countries in 
which we have a lot of confidence.
    Mr. Neugebauer. Thank you for that. And I will look forward 
to that list.
    [The list referred to above can be found on page 136 of the 
appendix.]
    Mr. Neugebauer. It has been publicized that this--you are 
going to go in and do a stress test on the banks, and some 
people are talking about what will be the best way to evaluate 
the conditions of these banks. And the tangible common equity 
seems to be coming up is maybe that is a better indication.
    One of the things that I have done today is dropped a bill 
that would preclude the Treasury or the Fed from buying common 
stock. Now if we are going to put taxpayers at risk, they 
should be in a preferred equity position and not be diluted by 
being made a common shareholder. But I understand that there is 
some discussion where there is some thinking that you would 
actually--for example, in Citibank, that you are thinking about 
buying common shares there. How do you justify that?
    Mr. Bernanke. The Federal Reserve has no authority, and it 
is not going to be buying any common shares.
    Mr. Neugebauer. But as a part of the TARP program, is the 
Treasury--
    Mr. Bernanke. The Treasury has already discussed this in 
their initial rollout, which is that they propose to be issuing 
convertible preferred securities, which are initially 
preferred. But if the stress tests shows or as time goes by and 
losses accumulate and the bank needs more common equity as part 
of its overall common structure that those preferred shares 
would be converted into common.
    Mr. Neugebauer. Why would we do that?
    Mr. Bernanke. Well, on the one hand, we need that to 
strengthen the banking system so that they will be able to make 
loans and support the economy.
    In terms of government protections of taxpayers, obviously, 
the terms in which they are converted--and there are other 
aspects of that, including voting rights--will be relevant to 
that. The Treasury, I believe, is working on features that will 
make the shares attractive from an investment perspective as 
well as from a financial stabilization perspective.
    Mr. Neugebauer. But I don't understand why we would put the 
American taxpayers' dollars at the bottom of the food chain. In 
other words, if we are going to beef-up the capital and we have 
made substantial capital infusions into these entities, why we 
would now move away from some of the protection that is enjoyed 
by the preferred to a common entity. I am having trouble 
following that logic.
    Mr. Bernanke. Well, it is simply the concern that the 
preferred equity shares have reached their limit and usefulness 
and that in order to provide enough ``high-quality capital,'' 
these companies need more common equity.
    Mr. Neugebauer. I think the question is, depending on what 
standard that you are using and if you are using a standard 
that is not giving those entities credit for the equity that we 
have already put into those entities, isn't that somewhat self-
defeating?
    Mr. Bernanke. No. Our regulatory standards include the 
preferred stocks from the government as tier one capital. But 
there are two considerations. One is that our rules also 
specify that ``the preponderance of tier one capital should be 
common.'' That is one consideration that is in our existing 
rules.
    But, secondly, the markets have also shown a very strong 
preference for common in terms of trusting the capital bases of 
these banks. So those two considerations have played into these 
determinations, but I leave it to the Treasury to further 
explain and explain how they are going to provide protections.
    Mr. Neugebauer. Here is the problem. If you go in and you 
do a stress test on a large bank and you have a determination 
this bank fails the stress test and you go and put taxpayers' 
money in as additional common equity, how in the world do you 
think they are ever going to attract any additional capital?
    Mr. Bernanke. Because the amount of capital that goes in 
will, first of all, be enough to make the bank well 
capitalized, not only well capitalized but have enough capital 
that they will be able to stay well capitalized even in a more 
adverse economic scenario than is currently expected by private 
forecasters. So that is the first thing.
    The second thing, once banks are stabilized, then other 
measures, including, for example, the asset purchase program, 
will take some of these hard-to-asset values off their value 
sheets.
    Those two things together ought to make banks more 
attractive to private investment. As the private investment 
comes in, there are provisions which will allow the public 
investment to be replaced by the private investment.
    The Chairman. The gentleman's time has expired.
    The gentleman from New York.
    Mr. Meeks. Thank you, Mr. Chairman.
    For the purpose of asking a question, I yield 30 seconds to 
Mr. Adler.
    Mr. Adler. I thank the gentleman.
    With respect to TALF 2, do you anticipate including 
commercial auto fleet leasing in the TALF 2? I am sure you are 
aware that there may be 900,000 cars and light trucks that are 
included in this sort of fleet leasing arrangement. I think it 
is a critical part of our economy.
    Mr. Bernanke. I don't know the answer to that. We can 
certainly look at that.
    Mr. Adler. I appreciate it very much.
    I yield back my time.
    Mr. Meeks. Thank you.
    Mr. Chairman, let me just ask you a quick question on 
international monetary policy for a second. Who do you think 
should be responsible for providing supervisors of systemic 
risk for the international economy?
    Mr. Bernanke. Well, we have international institutions like 
the IMF, for example, which has expertise in financial matters, 
which does, for example, what is called an FSAP, a financial 
stability assessment program. It goes to different countries 
and tries to assess the strength of their financial systems, 
regulatory systems and the like. The United States is currently 
about ready to undergo one of those FSAP programs.
    In addition, we have a number of international 
organizations like the Financial Stability Forum and the Basel 
Committee where supervisors and regulators from around the 
world come together and discuss international issues, 
international regulatory issues and so on. But even though 
there is a great deal of international cooperation and 
coordination, certainly we don't have any kind of central 
authority that has the ability to require a country to make 
specific changes. It is more of a cooperative attempt to come 
together on certain principles.
    Mr. Meeks. I note that in the fall the G20 meeting 
delegated most of our guests to the Financial Stability Forum. 
And I think the IMF should play a role with the various 
institutions, looking at maybe a division of labor, with each 
institution having some responsibility, something that comes 
through, even if it is informal. Because the key is to have 
some kind of an international regulation. Otherwise, even what 
we do here, our markets could be affected unless there is some 
kind of cooperation.
    Mr. Bernanke. That is a very good point. And everything we 
do, as Congress goes forward and looks at our regulatory reform 
in the United States, we have to be sure that it is consistent 
and coherent and matches up with international regulations if 
only because our firms are international, our markets are 
international.
    The Financial Stability Forum, the IMF, and other 
international bodies had been very useful in doing evaluations 
of the crisis, diagnosis of the crisis, and at a minimum, we 
should look at their recommendations as we make our own 
decisions.
    Mr. Meeks. I think you have mentioned in prior speeches 
that the United States could benefit from expanding the Fed's 
oversight authority to include nonbank financial entities. And 
my question then, what are the pros and cons of creating a 
microprudential supervisor for the United States?
    Mr. Bernanke. First, I think it should be a very high 
priority for the Congress as we go forward to make sure that a 
financial crisis like this never happens again, and there are a 
number of things that can be done in that direction. That 
includes, for example, improving our regulatory oversight of 
the largest, most systemically relevant institutions. It 
includes strengthening our financial infrastructure, the ways--
the methods by which CDS and other derivatives are traded. It 
involves improving our regulation to reduce procyclicality 
inherent in our capital regulation, perhaps in our accounting 
rules, as some members have already discussed.
    So there are a number of things we can do to try to reduce 
the exposure of the system to a crisis in the future absent 
what you are talking about, a macroprudential regulator. And I 
think we should do all those things.
    That being said, I think there is some benefit to moving in 
a direction whereby somebody or a group of bodies would have an 
ability to look at the system as a whole instead of only 
looking at each individual institution in isolation to try to 
establish or determine emerging threats or risks that might be 
a problem for the system as a whole. So I think there is a 
reason to be looking at that.
    The Federal Reserve has a long-standing role in financial 
crisis management. And I think we would very likely want to be 
involved in some way in that process, but specifically how that 
would be structured or who would be doing it, those are issues 
I think the Congress needs to address.
    Mr. Meeks. Would there be any countries, for example, that 
we could look to or you would look to as models for the reform?
    Mr. Bernanke. Well, a number of countries have taken steps 
in that direction. Just to give one simple example, the Spanish 
banking supervisors instituted a bank capital system which 
allows for more accumulation of capital during good times to 
have it be available to run down during bad times. And that 
seems to have helped their banking system throughout this 
crisis.
    So there are a number of different steps that have been 
modelled by different countries that we could look at. There is 
not to my knowledge any country that has a full-fledged 
macroprudential supervisor. But there has been a great deal of 
discussion about what that would involve and what are the 
components of such a system.
    Thank you.
    The Chairman. We are going to go until the next vote. The 
Chairman had agreed to actually stay until 2:00. There is 
probably another vote about 10 after or 15 after, and it would 
not make sense to stay after that. We will go until the first 
vote. Everybody here should be able to get a question in, at 
least 5 minutes.
    The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you for coming to visit with us 
and inform us. I think I can understand your likely frustration 
when you hear that people want to nationalize the banking 
system. I have heard from a lot of small community bankers 
calling in this morning and wanting some clarification. So I 
say that, in most cases, they don't redefine nationalization, 
which can be tricky and maybe we can discuss that.
    But let me go back to history and say that, in 1933, in the 
wake of the 1929 stock market crash, and during the nationwide 
commercial bank failure in the Great Depression, the President 
signed into law the Glass-Steagall Act. That Act separated 
investment entities and commercial banking activities. At the 
time, improper banking activity or what was considered 
overzealous commercial bank involvement in stock market 
investment was deemed the main culprit of the financial crisis 
of that time. According to that reasoning, it seems to me, 
commercial banks took on too much risk with depositors' money. 
Additional and sometimes nonrelated explanations for the Great 
Depression evolved over the years, and many questioned whether 
that Glass-Steagall Act hindered the establishment of financial 
services firms that can equally compete against each other.
    When Congress passed Gramm-Leach-Bliley, it negated the 
Glass-Steagall Act by allowing banking and securities and 
insurance companies to operate in affiliation with each other 
under the organizational form of financial holding companies. 
That Act permitted financial holding companies, like financial 
subsidiaries of banks, to engage in a variety of activities not 
previously allowed to banks or companies owning banks. Under 
the Act, you and the Treasury Department, which contains the 
Office of the Comptroller of the Currency, have authority to 
issue regulations expanding activities for financial holding 
companies and the financial services entities respectively.
    So that leads me then to my question to you, Chairman 
Bernanke. In light of the current financial crisis which we are 
in, in which numerous banks have received considerable capital 
infusion from the government, would you agree that we need to 
revisit Gramm-Leach-Bliley to determine if we should reinstate 
the Glass-Steagall separation of banking and commerce?
    Mr. Bernanke. Congressman, I would first observe 
tangentially that there were separate standing investment banks 
in this crisis which didn't do very well. It was in some ways 
fortuitous that they were able to become bank holding 
companies, become part of banking and more consolidated 
systems.
    I think that we need to look very hard at our system, and I 
think everything should be on the table. We should talk about 
all these issues. My own sense, though, is that the holding 
company structure can be made to work, but we do need to take 
more seriously than we have the idea of a consolidated holding 
company supervisor. Although that position was there in 
practice, in principle and the Federal Reserve had that 
responsibility for bank holding companies, we need a stronger 
oversight from the top that looks at the overall firm, looks at 
the risks being taken by the overall firm and not just a firm-
by-firm type of analysis.
    So I guess my bottom line is, yes, let's look at 
everything.
    Second, I think that holding company form can be made to 
work. But, third, if we do that, we need to make sure that we 
have strong holding company supervisors who are looking at the 
entire firm and are aware of the risks to the entire firm.
    Mr. Hinojosa. In the calls that I received this morning 
from commercial bankers, or whether or not commercial but what 
we call community banks, those that have less than $25 billion 
in assets are saying that some of them took money that was 
available here in that first batch of money that we lent out 
but that the vast majority of it went to the 25 megasized 
banks. So they simply feel that people like you and our 
chairman need to speak up for community banks so that they are 
not thrown into the same big mess that the big megabanks have 
gotten into.
    Thank you.
    Mr. Bernanke. I understand.
    The Chairman. The gentleman from Michigan, Mr. McCotter.
    Mr. McCotter. Thank you, Mr. Chairman.
    I would like to pick up where my colleague from Michigan, 
Mr. Peters, had raised the issue of the TALF and how it would 
or would not help the American auto industry.
    I guess that there is some concern because the AAA credit 
rating standard that you are trying to apply to people who 
qualify under the TALF, that the automakers might not. I was 
wondering if you could assuage me of many concerns that I may 
have that auto financing may not be covered by that.
    Mr. Bernanke. The first portion of the TALF, which is going 
into operation very soon, includes certain auto loan, asset-
backed securities, and also floor plan loans for dealers. I am 
not sure about this auto leasing question that was asked. We do 
require AAA securities, but remember that a AAA security can be 
a senior traunch of a security which has different layers of 
seniority. So it should still provide substantial support to 
auto loans and therefore to help the customers of the auto 
companies to be able to purchase vehicles.
    So it is our belief that through this program we will be 
helping the automobile industries by providing credit to 
customers. But we will, obviously, look at that again, if 
necessary.
    I would mention also in our commercial paper program that 
we have an A1/P1 top credit rating requirement. But our 
intervention in that market, at least, has occurred at the same 
time as a significant improvement in commercial paper rates for 
even A2/P2 borrowers. So that there, too, I think some help is 
being given.
    Mr. McCotter. Yes, I appreciate that. Because the concern 
is with the financing. The dealers get to purchase the cars 
from the manufacturers. And so I just want to be clear with the 
TALF going forward, because I don't want to sandbag you with an 
article you might not have been able to read yet.
    But The Wall Street Journal article today has caused grave 
concern back home in Michigan and amongst the auto industry 
that the TALF would not help dealers to refinance, to be able 
to purchase, get credit to go purchase the cars from the 
manufacturers, which, as you know, at the time that the Federal 
Government outside of the Reserve is trying to deal with the 
bridge loans to the auto industry would be a death knell to 
them. So I just want to make sure that in the process that I am 
hearing is that we with the Fed would be doing everything we 
can to assist the extension of credit to both consumers and the 
dealers.
    Mr. Bernanke. Let me assure you that what we have been 
doing, as I mentioned before, is consulting closely with the 
participants in these markets. And where we have found that 
there are barriers to participation that we could do something 
about, we have done so. We will look at this again as well.
    Mr. McCotter. I appreciate that.
    And, finally, so the AAA credit rating that has been 
reported as being required, which is a requirement that you 
would impose as the Federal Reserve, is one of those obstacles 
that could be removed.
    Mr. Bernanke. Well, given the concerns of some of your 
colleagues about credit risk, I am not sure about that. But I 
would like to point out that, again, you don't have to have all 
AAA underlying assets to get a AAA credit rating if you take, 
say, a more senior traunch of the asset-backed securities. So 
it does not rule out making loans even to weaker credit 
histories.
    Mr. McCotter. I appreciate that. I just want to make sure 
that we are aware of the obstacle that we are concerned about.
    And as for credit risks, I understand that, too. And the 
worst thing we could do for any type of credit is to increase 
the foreclosure crisis by putting a whole lot of men and women 
who are working in the auto industry out of their jobs and out 
of their homes. So it seemed to me that I have registered with 
you my concern that you do everything you can to remove any 
obstacles to the auto industry's survival through the TALF 
program.
    The Chairman. The gentleman from Massachusetts, Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman, and thank you, Chairman 
Bernanke.
    We learned in the February report from the top oversight 
panel that the banks that had received TARP money in exchange 
for their assets had actually overstated the value of those 
assets that they held and it sold in return for TARP money by 
about a third. The total was about $78 billion that the 
American taxpayer overpaid for what the banks said they had.
    And this goes to a number of issues. It goes to the mark to 
market or mark to make believe argument, if we are going to 
allow these banks to value their own assets according to their 
own model; and it also goes to the reassurances that we are 
hearing from you to a certain degree and also from Sheila Bair 
that these banks are adequately capitalized.
    Obviously, if the assets they hold are not worth what they 
say, it is going to affect their capitalization rate. And if 
the assets were proven to be, like in this previous report from 
the Oversight Committee, valued at far less than what they 
stated, then those banks, if it is as big a spread as 33 
percent as we are seeing here, that would affect whether or not 
these banks are indeed adequately capitalized.
    I am just wondering, in your assessment, are you accepting 
the banks' own opinions of the values of these assets? Or are 
we digging through, like Mr. Barofsky and Mr. Dodaro and Ms. 
Warren are on the oversight panel, going through there and 
digging and looking at these exotic derivatives, CDOs, whatever 
they are holding there as assets, in order to get a firm sense 
of what the values are? Are we doing that?
    Mr. Bernanke. Of course we are doing that.
    But, first, let me address that question about the $78 
billion. That was not a purchase of assets. There were no 
overvalued assets being sold.
    What happened, of course, was that the government made 
preferred stock investments in the banks. And we know what we 
have. There are investments in the banks that pay a reasonable 
dividend.
    Now that calculation was based on the following analysis: 
if the government had matched the same terms as the best deal 
that anybody had gotten in recent weeks or months, then how 
much better a deal could the government have gotten? And they 
concluded that if the government had negotiated like Warren 
Buffett, maybe they could have gotten a better deal. In that 
sense, the government didn't get all it could.
    But as that report also acknowledged, the government's 
program wasn't just about making the best possible financial 
deal. It was also about having a broad-based program that would 
be accessible to a lot of banks that would bring financial 
stability that would be easy to get out of when the time came. 
So the idea that there is some kind of fraud here is--I think 
is entirely wrong.
    Mr. Lynch. Well, you need to take that up with the 
Oversight Committee, sir. Because I spoke to them all 
yesterday--I sit on another committee, the Oversight Committee, 
and the direct and straight assessment that they made in that 
report and confirmed yesterday was that the taxpayer had indeed 
overpaid and that the assessed value by these banks of those 
assets was overstated. And that is the way--and I tested them 
on this, and they did nothing to dissuade me from believing 
that.
    Mr. Bernanke. Their own report says that there were other 
issues to be considered which they did not take into account in 
making that evaluation. But let's just leave that.
    Mr. Lynch. Let's leave that aside.
    Mr. Bernanke. On the other issue, obviously, we have to 
rely to some extent on bank systems and information in 
evaluating their asset values. There is no way around that. But 
we certainly test very hard their methodologies. We do sample 
testing of different assets. So we are doing all we can to make 
sure their evaluations are accurate. And, of course, besides 
the supervisors, they have auditors and others who are looking 
at their analysis.
    And one of the purposes of this supervisory review that we 
are undertaking right now is not only to make sure that we have 
a tough evaluation of asset positions both under the main-line 
scenario and under the stress scenario but to make a special 
effort to make sure that the different regulatory agencies are 
valuing in a consistent way so there won't be any distinction 
between those who are more aggressive and those who are less 
aggressive in marking down their assets.
    Mr. Lynch. In closing, I just want to say, Mr. Chairman, I 
appreciate you coming here. But from the sound of President 
Obama's remarks last night, it sounds like the financial 
services industry is coming back for more money. And the risk 
appetite here, based on what we have seen in this last round, 
is not very high. So, you know, credibility means a lot here.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman.
    Chairman Bernanke, I appreciate your perseverance and also 
your candor, and I want to thank you for the service that you 
are lending to our country at this very difficult time.
    I have a dry erase board in my office where I have 
identified seven choke points on the flow of credit, getting it 
through to the hands of the consumers. And some of those are 
involved with even overnight money from large banks to 
community banks where they out charging larger fees and 
requiring collateral that was never required before. FHA and VA 
now require their members' FICO scores, which were never 
required before. It was otherwise based upon good lending 
standards.
    The people who put out the FICO scores, the three 
companies, if there is an error, it can take 60 to 90 days to 
correct the error, if at all. And it is one problem after the 
other.
    And now we have community banks who are experts at lending 
in the community, have taken a look at whether or not they 
should take TARP money. But the requirements are so onerous and 
so restrictive that they have ready, willing, eligible people 
willing to lend to that they are not going to take the TARP 
money.
    I have met this past week with a retailer. Assets are four 
to one. And the regular bank says that is it. We no longer do 
asset-based lending. I have a manufacturing company with orders 
that wants to expand, and the money can't get through.
    So we have all these choke points where it is being forced 
from the back to the large banks and now to some community 
banks. But it is not breaking loose, Chairman. And I know that 
is what you want to do, and I don't know where to start on 
this. But we are asking your advice because now we are way down 
to the consumer end on it. Have you taken a look at the FICO 
score errors and, for example, how that's keeping people from 
otherwise qualifying?
    Mr. Bernanke. On the errors, no, that is not really our 
domain.
    Mr. Manzullo. I know. But it is a plug to the work that you 
are doing.
    Mr. Bernanke. As I have talked about today, we are working 
at all levels to try to free up the credit stream from cutting 
interest rates to working on the ABS markets to lending to 
banks to our examination process to try to make sure that there 
is an appropriate balance between caution and lending to 
creditworthy borrowers. Some of this, frankly, is the rebound 
from a period where credit standards were too loose, and we 
have seen some tightening, but, obviously, we need to make sure 
credit is available or the economy is not going to recover.
    Mr. Manzullo. The other question is, community banks back 
home are really complaining over a tightening of lending 
standards by the regulators to long, long-time customers, 
people that have never been in default. And what we see is a 
whole new group of people are really being injured--the people 
who never had the problems in the first place. Have you ever 
thought about meeting with the regulators, including yourself, 
to see if there is a reason why there is--maybe there is too 
much and unreasonable regulations going on at that end?
    Mr. Bernanke. There has always been a problem in downturns 
that examiners want to be cautious. They don't want to allow 
risky loans because they are afraid, you know, that the bank 
would lose money. But at the same time that cuts off credit 
that could otherwise be flowing.
    Mr. Manzullo. They are being overcautious.
    Mr. Bernanke. Overcautious.
    Mr. Manzullo. The money is not coming through.
    Mr. Bernanke. We have taken explicit action on this front. 
In November, there was a joint statement by the four Federal 
regulators about lending to creditworthy borrowers and 
emphasizing that the safety and soundness of the banking system 
depends on long-term profitability as well as on short-term 
caution. And long-term profitability includes maintaining good 
credit relationships with creditworthy borrowers and supporting 
the broad economy so that it will be healthy and produce a good 
economic environment for the banks.
    We have talked to all of our supervisory staff. We are 
communicating with our examiners. I urged feedback if this is 
happening, because we are determined that the examiners should 
do a fair balance between appropriate caution, safety and 
soundness, which is essential, of course, but not to deny 
unreasonably credit to good, creditworthy borrowers, 
particularly long-standing customers.
    The Chairman. The gentleman from Massachusetts. We will be 
able to fit everybody in because we have a vote. The gentleman 
from Massachusetts.
    Mr. Capuano. Thank you, Mr. Chairman.
    Chairman Bernanke, first of all, thank you for doing this 
all day. I apologize for coming in and out. I haven't heard all 
the questions, so some of my questions may be redundant.
    I would love to go back to actually the beginning of the 
hearing when you talked about what caused--what was the 
trigger, I think was the term you used. And I agree with you. 
Borrowers who borrowed more than they should, lenders who gave 
it.
    But I also want to add one more thing that I actually 
think, in the final analysis, the people who were put there to 
prevent that very thing from happening, namely, the regulators 
across the board, fell down. If the regulators had done their 
job, in my opinion, they would have been able to choke off most 
of the funding that was made available through these incredibly 
leveraged and highly complex financing mechanisms. They could 
have done something about the credit rating agencies basically 
lying. They could have done something about the accounting 
mechanisms that were made up. They could have done something to 
stop banks from creating these subsidiary corporations that 
didn't exist on their books somehow.
    So I agree with you that the borrowers and the lenders were 
both responsible, but so were the regulators. They weren't 
anyplace to be seen.
    A few weeks ago, you were here on some other issues. We 
talked about your marriage to the Treasury Department. And I 
will tell you that, right now, the marriage doesn't seem to be 
going so well from my end of the world for the very simple 
reason that, 3 weeks later, I still don't have a clue what they 
are talking about for their bad asset bank, whatever they are 
going to call it.
    I guess the new term now is--what--legacy assets? It is a 
good term. Whoever made it up, give them a raise. Because it 
sounds much better than toxic assets.
    But from what I understand, it is the same thing; and I 
would encourage you to go back and tell your partners, please, 
at some point maybe we should know what they are doing. Maybe 
America should know what they are doing. That might help, at 
least what they plan.
    The next issue, I want to talk about--and, again, I think 
you did talk about it with the others; and I apologize if it is 
redundant. But nonetheless, it is important to me.
    As I understand it, with this capital asset program there 
is some discussion now about swapping out what is currently our 
preferred position. That basically only puts us at risk if the 
bank completely goes sour, guaranteed income, etc., etc. First 
in line, swapping that out for a position with common voting 
stock?
    Now I am not sure I have any--there are no details that I 
am aware of, but these are all based on news reports and on 
your joint statement. But if that is true--and then on top of 
that, increasing our position to 40 percent position? If I 
understand that correct, that would put us in a weaker 
position, open taxpayers to a much riskier position without 
having the ability to then change management or to do anything. 
A minority position of 40 percent gives us nothing.
    And it strikes me that--if you want to put more capital 
into the bank, go ahead and do it. You already have the 
facilities to do it. You have done a great job creating new 
ones. But to swap us out for a common position I think runs 
counter to everything we have discussed here. And I am just 
wondering, am I missing something? And, if so, please clarify 
it.
    Mr. Bernanke. Well, first, the details of the instrument 
are still being worked on and should be available shortly. And 
that will describe what protections the taxpayer will be 
getting in this particular instrument. A lot depends on the 
details, obviously.
    In terms of the controls, though, as I have noted, even if 
there is 40 percent or less government ownership, we still have 
numerous tools to make sure that the banks are moving in the 
right direction in terms of taking necessary steps to return to 
viability and return to ability where they can lend.
    So, for example, you mentioned management. We already have 
considerable power as supervisors to insist that management or 
the board be changed if it is not performing well.
    Mr. Capuano. If we have to take a 40 percent position on a 
huge bank, please tell me what the definition of failed 
management is.
    Mr. Bernanke. If we had 40 percent position of a bank, we 
would obviously have a great deal of influence on management, 
on board, on policies, on structure, on capital structure, all 
those elements. So it will not be a case of ``give them the 
money and go away.'' It would be a case of--
    Mr. Capuano. At some point, if it is 40 percent--when does 
it make sense to either go to 51 percent--and I know the word 
nationalization nobody wants to talk about. And I actually 
think it is a misnomer, if you want the truth. It is not a word 
I am interested in using, because it doesn't mean anything to 
me. But at 49 percent, for the sake of discussion, isn't it 
just easier to have the FDIC come in and do what they do and 
have you do what you do in the normal course of events?
    At some point, it no longer becomes an investment. It 
becomes--you know, they are on life support. And that is, to 
me, strikes me as us, you, whoever for some reason just 
stopping short of what is necessary.
    Mr. Bernanke. Well, I don't think we want to let large 
institutions fail in this sort of way.
    Mr. Capuano. I agree.
    Mr. Bernanke. So we want to do it in a way, if we think 
that the firm can be strengthened and made viable and can 
become part of the recovery, part of the solution, I think that 
is what we ought to do.
    The difference between 49 percent and 51 percent is not 
that great, in my opinion. I think, in any case, with a 
minority ownership share, with the supervisory authority and 
the like, we can take strong steps to make the banks improve 
their situation.
    Mr. Capuano. Thank you, Mr. Chairman.
    The Chairman. Thank you. And as you work out the specifics 
of the marriage with Treasury, remember that my colleague, like 
me, is from Massachusetts. We give you more leeway in doing 
marriages than some other places.
    The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    You mentioned earlier, I think in your response to Mr. 
Lynch's questions, or spoke of a stake we got in Goldman and 
the appearance that Berkshire Hathaway, Warren Buffett did much 
better in his negotiations than we did. On its face, getting a 
40 percent stake in a common share of stake in a company for 
$45 billion when a company has a current market capitalization 
of $10 to $12 billion doesn't sound like a very good deal 
either. If there is an explanation for that, could I get that 
in writing, why it is really a much better deal than it appears 
on its face?
    Mr. Chairman, I am not reflexively antigovernment or 
promarket. I am a Democrat. I think there are some things that 
government does well that markets do poorly or don't do at all. 
Valuing securities is not one of those. That really is the core 
competency of markets, and it is something that government 
generally doesn't do at all.
    But one of the stated reasons, probably the principal 
stated reason, for the Paulson plan last September and October 
for buying troubled assets was establishing a market for them. 
Is that going to be part of the rationale for the public-
private partnership, to take troubled assets off books?
    Mr. Bernanke. Yes. Precisely. That is a difficult 
challenge, and we want to make sure that the prices of the 
assets that are purchased reflect true market values and are 
not overpaid. So the idea behind the public-private partnership 
would be that there would be both public and private money 
involved and the pricing decisions would be made by private 
sector specialists, not by public bureaucrats.
    Mr. Miller of North Carolina. What do we bring to that 
partnership other than just a contribution of capital? Are we 
going to be guaranteeing assets?
    Mr. Bernanke. No. One of the key contributions is that we 
are providing financing. So one of the problems today is that 
there may be many investors out there who say there are great 
bargains in terms of assets that I could buy, but nobody will 
give me money to buy these assets and hold them for a period of 
time until they recover. So if the government is willing to 
provide longer-term lending or leverage, then there are many 
investors who presumably would be willing to buy under those 
circumstances who are unwilling to buy without the credit, 
without the lending they need to finance those purchases.
    Mr. Miller of North Carolina. I look forward to hearing the 
details.
    There was a quick discussion of mark to market. The current 
mark to market rules if there is not--if there is an active 
market, we use that price to value assets. If there is not, 
there is a fair amount of leeway that we can use or a financial 
institution can use, computer models, can assume a hold until 
maturity. Isn't that essentially the same analysis that the 
stress test will do, projecting in different economic scenarios 
what happens to the bank? Isn't that the same--
    Mr. Bernanke. Well, the stress test will use the same GAAP 
accounting that all other evaluations use. That is, mark to 
market accounting for those mark to market assets, accrual 
accounting for accrual assets. What is unusual and different 
about the stress test is that it is a coordinated analysis 
across 19 major institutions at the same time which will look 
not only at the projected losses, the projected outcomes under 
the main line or baseline scenario but also at the outcomes 
under a so-called stress scenario or a situation where the 
macroenvironment is worse than anticipated to make sure that 
there is sufficient buffer for the banks to be able to lend 
even in that worse scenario.
    Mr. Miller of North Carolina. But that projection of 
different--what happens in different economic circumstances, 
isn't that exactly the same as a model with values assets?
    Mr. Bernanke. Well, it is part of it. It could be part of 
it. That is right. There are a lot of things that go into a 
model of valuing assets, including many details about the 
nature of the assets and where--
    Mr. Miller of North Carolina. The Fed is one of our leading 
safety and soundness regulators in addition--well, have that 
jurisdiction for all members of the Federal Reserve Board, 
which is pretty much every bank in America. In addition, you 
have taken $2 trillion in assets as security, as collateral. 
Are we not doing that already? Are we not doing that already as 
part of safety and soundness or as part of our looking at the 
value of the assets as collateral?
    Mr. Bernanke. Yes, of course we are valuing assets. What is 
new about the assessment process that we are undertaking here 
is primarily that we are doing it consistently across all of 
these institutions. So that investors will get a sense both of 
what these firms look like in the stress scenario but also a 
sense of comparing among firms and under a comparable scenario.
    Mr. Miller of North Carolina. If banks are insolvent, can 
you offer any argument, rationale based on economics or blunt 
ethics why shareholders or, rather, taxpayers should bear that 
loss instead of shareholders and creditors?
    Mr. Bernanke. It is a complicated question. But one problem 
is we don't have a bankruptcy system that will allow us to wind 
down a big global institution in a safe way that won't be 
incredibly disruptive to the financial markets and to the 
economy. So what we need to do is find a way to do it that can 
involve all the necessary restructuring, all the necessary 
steps but without the financial implications of a disorderly 
bankruptcy of a global financial institution.
    The Chairman. The gentleman from Indiana.
    Mr. Carson. Thank you, Mr. Chairman.
    Mr. Chairman, my colleagues and I hear from constituents 
every time we go home about the barriers our constituents face 
who are on the verge of foreclosure. They try to work out 
programs with servicers to modify their loans.
    In January, the Fed announced a program to modify mortgages 
obtained from JPMorgan, AIG, and Bear Stearns that are now held 
by the Federal Reserve. Under the details released, Mr. 
Chairman, the plan states that if the Federal Reserve holds the 
subordinate but not the senior mortgage, the Fed will work with 
the servicer of the senior mortgage to modify the loan.
    The question for me becomes two things, sir: How does the 
Fed anticipate working with servicers that have so far been 
unresponsive to constituents and even congressional offices who 
try to reach out on their behalf? And, secondly, what tools do 
you plan to use, sir, to bring about meaningful mortgage 
modifications on these subordinate mortgages for homeowners?
    Mr. Bernanke. Well, we have already been working, and we 
have already had some loans modified. We have been doing 
outreach for the borrowers, which is one of the big issues, and 
we have been contacting servicers--and when I say ``we,'' in 
many cases, it is our agent on our behalf because we don't 
directly manage the mortgages--to try to find solutions for 
delinquent borrowers. So we are addressing some of the same 
issues that every owner of mortgages is facing.
    I should say that if the Administration's plan is followed 
through, then there would be a uniform approach for all 
government-owned and other classes of mortgages that fall under 
that plan. So at the Federal Reserve we would conform to the 
Administration's set of rules and criteria.
    Among the elements of that plan are bonuses, money paid to 
the servicers to try to make sure they have enough manpower, 
resources to reach out to borrowers, to reach out to other 
lienholders and to undertake the work necessary to complete 
restructurings to avoid preventible foreclosures. So we would 
be going into the same program that the Administration has laid 
forth for the purpose of consistency. But we have instructed 
our agents to take those steps whenever possible, and we have 
had some early success in getting mortgages modified.
    Mr. Carson. I yield back the balance of my time, Mr. 
Chairman.
    The Chairman. The gentleman from Minnesota.
    Mr. Paulsen. Thank you, Mr. Chairman.
    Chairman Bernanke, I was just curious. I will ask this 
question. Recognizing that we and the market have been having 
difficulty valuing assets of major banks on the balance sheets, 
you know, my constituents and I certainly have heard a lot 
about the whole issue of mark to market accounting recently, 
about the suspension potentially of that accounting mechanism 
as a possible method of addressing the banking crisis. Could 
you discuss from your perspective some of the pros and the cons 
of why mark to market might be a good idea to suspend or 
regarding implementation of the policy for what period and just 
some thoughts on that?
    Mr. Bernanke. Certainly. As I discussed earlier, the basic 
idea of mark to market accounting is very attractive, the idea 
that wherever there are market values determined in free 
exchange that those market values should be used in valuing 
assets so that investors would have a more accurate sense of 
what the institution is worth. So that is the principle, and it 
is a good principle in general.
    Going back to the beginning of this change in the 
accounting rules, however, the Federal Reserve had reservations 
about the fact that some assets, such as individual C&I loans, 
for example, don't trade frequently in markets and therefore 
are much more difficult to value on a mark to market basis. 
This problem has become much more severe recently because many 
assets that were at one point traded in markets now no longer 
are because those markets have dried up, are illiquid or are 
not functioning in any serious way. So we have heard a lot of 
concern whether some assets are being misvalued too high or too 
low based on the use of mark to market modelling or mark to 
market asset valuations?
    There is no simple answer to that question. I don't think 
there is any real appetite among the accounting authorities, 
for example, for suspending mark to market accounting, because 
there is still a great deal of valuable information in the 
market values that is useful to investors.
    At the same time, the accounting authorities had recognized 
that the mark to market principles don't work very well for 
some assets in situations of illiquid assets, illiquid markets; 
and they have promised to issue guidance. They have issued some 
guidance about how to address those situations. So I think it 
is important for them to continue to think about appropriately 
advising banks about how to value assets that are not 
frequently traded and how those valuations ought to appear on 
the income and balance sheet statements of the banks.
    So there are some real challenges there, and I think the 
accounting authorities have a great deal of work to do to try 
to figure out how to deal with some of these assets which are 
not traded in liquid markets. But I don't see a suspension of 
the whole system as being constructive, because there is a 
great deal of information in valuing many of these assets 
according to market principles.
    Mr. Paulsen. Well, Mr. Chairman, that helps me from the 
perspective of someone who is a mathematics major and 
understands it is necessary for accounting purposes that it is 
a difficult situation if you did go back on it. And I think 
this is going to be a conundrum for the committee and for us as 
we continue to deal with new circumstances and the new 
situation. We are in an uncharted territory. I hope this is 
something this committee is going to be able to look at with 
thoughtfulness in terms of doing it in the right manner, in the 
right way so we will be more prospective looking down the road.
    Thank you very much.
    The Chairman. I thank the gentleman.
    Finally, Mr. Green. If any members are listening or staff 
is here, don't bother coming. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and thank you, Chairman 
Bernanke.
    I have been in and out today. I have the honor of also 
serving on Homeland Security, and Chairwoman Napolitano has 
appeared before Homeland today. So it has been an exciting day, 
to say the very least.
    I have a couple of questions. The first has to do with the 
stock market. For whatever reasons, the stock market seems to 
be the asset test for the strength of the American economy. I 
would like you, if you can, to tersely comment on this and tell 
me to what extent should we rely on the stock market, which is 
an international market? To what extent do you think we should 
rely on it as an asset test for the strength of the economy?
    Mr. Bernanke. Well, the stock market is one important 
financial indicator. It is not the only indicator. There are 
credit markets, for example, which are telling somewhat 
different stories in the stock market in some cases. I mean, 
some of them have shown some improvement in the last few 
months.
    With respect to the stock market, it is important because 
it does reflect the profit expectations of a large number of 
firms, and, therefore, it is closely tied to expectations about 
the economy. That being said, as you point out, a large share 
of the profits that are being reflected in stock prices are not 
U.S.-based. They are foreign-based. So that obscures the 
connection just a bit.
    And, secondly, the risk appetite of investors changes over 
time. And, right now, standard measures of the risk premium 
that investors are charging to hold stocks are at very high 
levels relative to anything we have seen in recent decades, 
suggesting that part of the reason the stock prices have fallen 
so much and are so low is that investors are just very skittish 
about holding any risky assets and have moved in a very 
substantial way towards the safest assets, like Treasury 
securities.
    So I think, at least in part, the stock values reflect not 
so much the fundamentals in the sense of the long-term 
profitability of the economy, but they also reflect investor 
attitudes about risk and uncertainty which right now are at 
very high levels.
    Mr. Green. Thank you.
    The next question has to do with credit default swaps. I 
know that we have made substantial investments in AIG, but the 
credit default swaps have not been dealt with in their 
entirety. Can you give me some indication as to where you think 
we are headed with the credit default swaps?
    Mr. Bernanke. Certainly. From our perspective and from the 
perspective of the financial system, one of the main concerns 
about credit default swaps was a counterparty risk, that you 
would sign one of these agreements with another party, think 
you had protection against some form of credit risk and then 
the counterparty would fail or be unable to make good on their 
promises. So that is a way in which failure in one company can 
be transmitted to failure in other companies and then you could 
have contagion in the financial system.
    So the Federal Reserve has been working for some time to 
strengthen the clearing and settlement trading systems under 
which CDS are traded. Going back to even before the crisis, the 
New York Fed was very much involved in trying to improve the 
efficiency of the trading process.
    Now going forward, though, I think it is very important 
that we, where possible, move CDS and some other over-the-
counter derivatives--not in all cases but where possible and 
where appropriate--to central counterparties, that is, to 
organizations that stand between the two sides of the bargain 
and control the credit risk so that if one side defaults, the 
collective of participants in the central counterparty make 
that good so we don't have the transmission of credit losses 
from one counterparty to the other.
    The Federal Reserve and the other regulators in the United 
States as well as European regulators have been very active on 
this front, and we have a number of firms in the United States 
which have proposed to open central counterparties for CDS as 
well as those in Europe, and we expect to have those in place 
very soon.
    Mr. Green. One final question, Mr. Chairman. This has to do 
with the mark to market.
    If we bifurcate the instruments into performing and 
nonperforming and mark to market those that are in default as 
well as those that are about to be sold, those that are not in 
default, not about to be sold, separate them and mark them to 
market only if they go to default or are about to be sold, does 
that help to resolve the question?
    Mr. Bernanke. It wouldn't in an accounting perspective. 
Because even if you have a large number of Alt-A mortgages, for 
example, your experience shows that a certain number of those 
will default after a certain period of time. And even if you 
have some which are relatively new and haven't defaulted yet, 
you know there is going to be some loss experience there. There 
is going to be some percentage that are going to go bad. And 
the usual practice would be to make some allowance in advance, 
even though if none of them have actually defaulted yet, you 
know some of them will. You take some provisions against that. 
So you don't want to assume zero loss just because you haven't 
had a default up till date.
    Mr. Green. Thank you, Mr. Chairman.
    The Chairman. The time has expired.
    The Chairman has been gracious with his time and his 
interruptions, and the hearing is adjourned.
    Mr. Bernanke. Thank you.
    [Whereupon, at 1:35 p.m., the hearing was adjourned.]




                            A P P E N D I X


                           February 25, 2009


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