[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
MONETARY POLICY AND THE
STATE OF THE ECONOMY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JULY 21, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-64
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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
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Page
Hearing held on:
July 21, 2009................................................ 1
Appendix:
July 21, 2009................................................ 61
WITNESSES
Tuesday, July 21, 2009
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 7
APPENDIX
Prepared statements:
Bachmann, Hon. Michele....................................... 62
McCarthy, Hon. Carolyn....................................... 63
Paul, Hon. Ron............................................... 64
Watt, Hon. Melvin............................................ 65
Bernanke, Hon. Ben S......................................... 68
Additional Material Submitted for the Record
Bachus, Hon. Spencer:
``Consensus Principle-Based Policy Statement''............... 79
Bernanke, Hon. Ben S.:
Monetary Policy Report to the Congress, dated July 21, 2009.. 82
Written responses to questions submitted by Representative
Green...................................................... 135
MONETARY POLICY AND THE
STATE OF THE ECONOMY
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Tuesday, July 21, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Watt, Meeks, Moore of Kansas, Baca, Lynch, Scott,
Green, Cleaver, Moore of Wisconsin, Hodes, Ellison, Klein,
Wilson, Perlmutter, Donnelly, Foster, Carson, Speier, Minnick,
Adler, Kilroy, Kosmas, Grayson, Himes, Maffei; Bachus, Castle,
Royce, Lucas, Paul, Biggert, Miller of California, Capito,
Hensarling, Garrett, Barrett, Neugebauer, Price, McHenry,
Campbell, Putnam, Bachmann, Marchant, McCotter, McCarthy,
Posey, Jenkins, Lee, Paulsen, and Lance.
The Chairman. The hearing will come to order.
This is the second semiannual hearing that the Financial
Services Committee holds according to the Humphrey Hawkins Act.
We alternate with the Senate committee as to which committee
goes first. This time, it is this committee's responsibility to
lead off, and we will be doing that.
I just want to announce to my Democratic members as a
housekeeping matter that given the large size of this
committee, we have a problem with who gets to ask questions.
Those members who asked questions of Mr. Bernanke at the first
hearing, with the exception of the subcommittee chairman, Mr.
Watt, will not be called on today until we have gone to others
who did not get a chance to ask questions. We hope to go--well,
we may have some votes.
A very important event will take place at 2:00 p.m.;
America is waiting for it; Internet sites throughout the
country are on edge, for the congressional class picture that
will be taken at 2:00 p.m. and instantly distributed across the
country. So we do know we will be breaking then, and they want
to have votes before that on the assumption that not everybody
is dying to be in that picture and votes are needed to get
people there. So we will go until sometime after 1:00 with the
Chairman, and then we will have votes and we will break. We
have another hearing at 2:00 p.m.
One other announcement--I received a letter from the
Republican side asking for a postponement of the markup on
executive compensation. They make the valid point that we have
a very heavy schedule of hearings this week. And, for a variety
of reasons, I put aside several markup days for the end of this
year. We will not be needing all of them. So we are going to
postpone that markup. Maybe it will be next Tuesday or next
Thursday, but we will at least have a few more days for members
to--really, it is not a long bill, and some of it is familiar,
but it is still a reasonable point with all the hearings.
With that--
Mr. Bachus. Mr. Chairman, you are not delivering your
opening statement?
The Chairman. No.
Mr. Bachus. Let me say this in response. I want to express
my appreciation to you for postponing that markup. We have
simply been overwhelmed with the health care matters, with just
literally such substantial issues under consideration. I think
the membership is simply overwhelmed. Because many of these are
unprecedented, and there are proposals, they are complex, the
ramifications are hard to gauge. And I believe that slowing
this whole process down would be in the best interest of not
only this committee but also our country as we consider these
very weighty matters.
The Chairman. I appreciate it. And I will acknowledge that
when I set the schedule, I was aware that it was on the heavy
side. It did seem to me that the aspiration of moving was going
to help us move more quickly. But there is no harm if we delay.
It has also been the case that when I was originally
talking about this, I was anticipating we might be on the Floor
with some issues, but the appropriations bills are taking up
the Floor time.
I was told by my leadership a couple of weeks ago that none
of what we are talking about in the financial regulatory
restructuring would hit the Floor before September, and I have
taken that into account.
And let me, while we are at it, also announce, for that
reason, at the request of a lot of members, the markup for this
will occupy the day that the consumer agency would have taken.
I was informed that we weren't going to go to the Floor,
anyway. And, given that, we will be having hearings on the
consumer agency, but the markup on that will wait until
September.
We still have to finish the markup on the voucher bill, and
we will have that markup to conclude, although I think we are
in a fairly well-structured situation where one major vote will
decide a set of issues outstanding. And then, among other
things, we will have the hearings. We will continue, I think,
at a pretty heavy pace, and we definitely will be marking up
the exec comp bill before we leave.
With that, I will now begin the hearing on substance.
I welcome the Chairman, and I think it is very important
and I was pleased to see his article in the Wall Street Journal
about a question that is very much on people's minds. The
United States Government, including the Federal Reserve,
indeed, with the Federal Reserve in the lead for a variety of
reasons, mostly not of its choosing, the Federal Government is
deeply engaged in increasing liquidity, i.e., putting money out
into the economy particularly to replace a constriction of
credit. And there are people who are concerned that this will
be inflationary.
I think the Chairman has shown consistently, as have
Secretaries of the Treasury Paulson and Geithner, an awareness
of this; and they are prepared to deal with it. But it is an
important question, because when you are talking about
inflation, you are talking not just about a reality, but about
perception. If people think there is going to be inflation,
that is inflationary; and it is very important that the
Chairman address, as he has been doing in a very
straightforward way, these concerns.
I am persuaded by the Chairman and others that we are able
in an orderly way to undo what we had to do so that there will
not be that inflationary impact. I also believe that the
inflation danger is not the current most important one, but it
is I think a very good opportunity for the Chairman to address
it.
But I also want to talk about another matter here, and I
want to make a confession apparently of the ravages of age.
Apparently, my vision is deteriorating more rapidly than I
hoped it would be. I have looked carefully at the deliberations
we have seen about the Bank of America-Merrill Lynch issue, and
our colleagues on the Government Reform Committee have had a
number of hearings on that. I must say, one of the most
interesting and potentially instructive things that came out of
it was Secretary Paulson's explaining that he could not produce
e-mails because he has never sent them. That is a practice I
recommend to many others, along with myself.
But as I studied all of this, here is my problem. I cannot
find a villain. Now, many of my colleagues have found various
villains. They tend to be private sector or public sector,
depending on the ideology of the finder. But as I look at what
happened, what I see is a very difficult situation that
threatens further severe damage to an economy already damaged,
a repetition of the attack on the credit system which is so
central to the functioning of our economy which we had seen in
earlier failures, and I believe we had people faced with a
difficult situation.
I have to say to some of my Democratic friends who have
been very critical of Bank of America, as I have been in other
areas, they have not done what they should in modifying
mortgages. I will have plenty of criticism to make of our
friends in the financial industry and the rest of them as well.
But people have said, well, why was he not focused entirely
on the shareholders? Many of my colleagues who have made that
criticism have also said they don't want private-sector people
looking only at the narrowest interests of the shareholders,
but they do want to take into account the broader impact of
what they do, probably on the grounds that a terrible credit
crunch would hurt their shareholders.
As to the Chairman of the Federal Reserve and the Secretary
of the Treasury, I think they had a very important
responsibility not to see a repetition of what happened when
Lehman Brothers failed, and the collapse of Merrill Lynch by
Bank of America walking away I think would have had very
negative consequence.
I think there is one thing that people need to remember:
Solutions cannot be qualitatively more elegant than the
problems they seek to resolve. When you have a terrible mess,
it is unlikely that those who try to alleviate the danger of
that mess will come out looking clean.
Not for the first time as an elected official, I envy
economists. Economists have available to them in an analytical
approach the counterfactual. Economists can explain that a
given decision was the best one that could be made, because
they can show what would have happened in the counterfactual
situation. They can contrast what happened to what would have
happened. No one has ever gotten re-elected with a bumper
sticker that said, ``It Would Have Been Worse Without Me.'' You
probably get tenure with that, but you can't win office.
I understand that reality, but we should not let it distort
us. And it would not I think hurt us every so often to admit
that not every action by every public official was a bad thing,
and sometimes we should give people credit for trying to cope
with an unpleasant reality the best they can.
The gentleman from Alabama.
Mr. Bachus. I thank the chairman.
Chairman Bernanke, thank you for appearing before the
committee today, for your professionalism, and your service to
our country. All of us in Congress appreciate your willingness
to make yourself available on countless numbers of occasions,
both to congressional committees and the individual members, as
we have confronted this crisis. So I thank you.
Over the past year, we have witnessed unprecedented
government involvement in the financial markets, for sometimes
Republicans on this committee have expressed a growing unease
over the magnitude of Federal Government involvement and
manipulations of our economy. Trillions of dollars of capital
commitments, guarantees, loans have been extended. What started
out last year as a large but temporary stabilization effort to
prevent a financial collapse has evolved month by month into
seemingly a permanent government intervention regime. This
included ad hoc bailouts of institutions deemed too-big-to-
fail. Many of the competitors of those too-big-to-fail
corporations deemed too-small-to-save are no longer in
business.
Today, I read with interest your op-ed in the Wall Street
Journal acknowledging the need for an exit strategy, something
Republicans have called for since last fall.
Simultaneously, the Obama Administration has been spending
a staggering amount of money to fund an economic recovery and
stimulus that is slow in coming. It has been almost half a year
since Congress passed a $787 billion so-called stimulus bill,
and yet we continue to see record job losses. Unemployment has
spiked at 9.5 percent and seems headed higher. Your testimony
predicts that the elevated unemployment will last through not
only this year but next year, confirming that; and that is
despite the Administration's assurances that if we passed a
stimulus package, unemployment would peak at 8 percent.
Other Federal Government interventions have failed as well.
The Administration's $75 billion foreclosure prevention
initiative, intended to keep 3 to 4 million homeowners in their
homes, has so far offered only 220 trial loan modifications. At
the same time, the private sector and private efforts have
resulted in millions of homeowners staying in their homes. The
American people can be forgiven for increasingly asking tough
questions about these enormous government outlays and
interventions because so far, Mr. Chairman, there has been very
little bang for the taxpayers' buck.
It is not only these past expenditures that give us pause,
but it is the multitude of new proposals coming from the Obama
Administration and their allies in Congress calling for more
government control and management from health care to energy to
financial services. One of the central questions the committee
needs to answer as it considers reforms to our financial
regulatory system is whether regulatory powers should be
centralized in the Federal Reserve at a time when our country
is facing unparalleled fiscal and monetary challenges.
The Fed made some big mistakes, and historically the Board
has done a poor job of identifying and addressing systemic
risks before they become crises. A prime example of this is
troubled lender CIT, which was allowed to convert to a bank
holding company last December and was placed under the Fed's
supervision only after the Fed declared it was adequately
capitalized. This inability to assess risk once again threatens
to undermine our fragile economy and erase the $2.5 billion in
taxpayer funds provided CIT under TARP.
The Obama Administration has proposed a regulatory
restructuring plan that would make the Fed responsible for
first identifying and then regulating those financial firms
that, in the Fed's view, are systemically significant and for
preventing systemic shocks. Republicans believe that the Fed's
core mission, the conduct of monetary policy, will be seriously
undermined if its regulatory responsibilities are expanded in
this way.
Let me conclude by saying, at a time when our economy faces
serious structural problems and the threat of inflation if we
maintain our current fiscal course and spending patterns, a
distracted and overextended central bank subject to potential
political interference is a luxury we cannot afford.
Republicans believe that relieving the Federal Reserve of its
current regulatory responsibilities and focusing it on the core
monetary policy mission would enhance the Fed's ability to
execute an effective exit strategy and ensure it sets interest
rates that greatly affect both individuals and small businesses
with a single goal in mind: sound monetary policy. With the
proper conduct, the monetary policy is the best way the Fed can
serve the American people. Asking the Fed to serve as a
systemic regulator is just inviting a false sense of security
that inevitably will be shattered at the expense of the
taxpayer.
Thank you, Mr. Chairman.
The Chairman. The gentleman from North Carolina is
recognized for 3 minutes.
Mr. Watt. Chairman Bernanke, I look forward to your
discussion of the status of monetary policy and the economy.
It is good news that many experts are saying that the
economy has improved since the last time you were before this
committee in February. To the extent that is true, the Federal
Reserve certainly deserves some of the credit.
Unfortunately, my constituents are not yet feeling it.
Growing unemployment, foreclosures all around, and the lack of
much, if any, rebound in the value of their investments
continue to feed their sense of anxiety and uncertainty about
whether we have in fact turned the corner.
But the Fed has been a sturdy, methodical hand. More public
exposure of what the Fed does has also stimulated discussions
about some other things that a lot of people had taken for
granted: the level of independence from political influence by
the Legislative and the Executive Branches of government that
is appropriate for the Fed to have in order to achieve its
long-term policy goals; the extent to which the Fed's
operation, even its monetary policy discussions and decisions,
should be subject to regular audit; the extent to which the
various parts of an operation of the Fed should be subject to
more transparency; whether the Fed, having failed, along with
other financial regulators, to pay equivalent attention to its
consumer protection responsibilities as it did to other
responsibilities, should be stripped of these responsibilities
in favor of a new consumer protection agency focused solely on
consumer protection; and, whether, as proposed by the Obama
Administration, the Fed should be delegated even more powers
and responsibilities for systemic risk regulation.
This certainly is a critical juncture for the Fed, and I
want to assure my colleagues on the full committee that our
Subcommittee on Domestic Monetary Policy, which I chair, with
the knowledgeable input of Ranking Member Ron Paul, has been
grappling seriously and consistently with all of these issues.
For a change, we have even had some members who are not on our
subcommittee showing up at our subcommittee hearings. Imagine
that.
In the wake of the Great Depression, Congress drafted rules
that served us well for 75 years. We are facing another once-
in-a-generation opportunity to fashion rules that should serve
us well for the next 75 years, and Chairman Bernanke's
testimony today is yet another step in arming us with the
knowledge and information we need to address these important
issues.
I welcome the Chairman, and I yield back the balance of my
time.
The Chairman. The gentleman from Texas.
There are 2 minutes remaining on the Republican side. We
will make it 2\1/2\ minutes.
Dr. Paul. Thank you, Mr. Chairman.
Good morning, Chairman Bernanke.
The Federal Reserve, in collaboration with the giant banks,
has created the greatest financial crisis the world has ever
seen. The foolish notion that unlimited amounts of money and
credit created out of thin air can provide sustained economic
growth has delivered this crisis to us. Instead of economic
growth and stable prices, it has given us a system of
government and finance that now threatens the world's financial
and political institutions.
Real unemployment is now 20 percent, and there has not been
any economic growth since the onset of the crisis in the year
2000, according to nongovernment statistics. Pyramiding debt
and credit expansion over the past 38 years has come to an
abrupt end, as predicted by free market economists. Pursuing
the same policy of excessive spending, debt expansion, and
monetary inflation can only compound the problems and prevent
the required corrections. Doubling the money supply didn't
work. Quadrupling it won't work either.
The problem with debt must be addressed. Expanding debt
when it was a principal cause of the crisis is foolhardy.
Excessive government and private debt is a consequence of loose
Federal Reserve monetary policy.
Once a debt crisis hits, the solution must be paying it off
or liquidating it. We are doing neither. Net U.S. debt is now
372 percent of GDP, and in the crisis of the 1930's, it peaked
at 301 percent. Household debt services require 14 percent of
disposable income, at an historic high. Between 2000 and 2007,
credit debt expanded 5 times as fast as GDP.
With no restraint on spending, and revenues dropping due to
the weak economy, raising taxes will be poison to the economy.
Buying up the bad debt of privileged institutions and dumping
worthless assets on the American people is morally wrong and
economically futile. Monetizing government debt, as the Fed is
currently doing, is destined to do great harm.
In the past 12 months, the national debt has risen over $2
trillion. Future entitlement obligations are now reaching $100
trillion. U.S. foreign indebtedness is $6 trillion. Foreign
purchase of U.S. securities in May were $7.4 billion, down from
a monthly peak of $95 billion in 2006. The fact that the Fed
had to buy $38 billion worth of government securities last week
indicates that it will continue its complicity with Congress to
monetize the rapidly expanding deficit. The policy is used to
pay for the socialization of America and for the maintenance of
an unwise American foreign policy and to make up for the
diminished appetite of foreigners for our debt.
Since the attack on the dollar will continue, I would
suggest that the problems we have faced so far are nothing
compared to what it will be like when the world not only
rejects our debt but our dollar as well. That is when we will
witness political turmoil, which will be to no one's benefit.
The Chairman. The time for opening statements has expired
and, for once, I think not before the patience of the audience.
The Chairman of the Federal Reserve is now recognized for
his statement.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Mr. Chairman.
Chairman Frank, Ranking Member Bachus, and other members of
the committee, I am pleased to present the Federal Reserve's
semiannual Monetary Policy Report to the Congress.
Aggressive policy actions taken around the world last fall
may well have averted the collapse of the global financial
system, an event that would have had extremely adverse and
protracted consequences for the world economy. Even so, the
financial shocks that hit the global economy in September and
October were the worst since the 1930's; and they helped push
the global economy into the deepest recession since World War
II.
The U.S. economy contracted sharply in the fourth quarter
of last year and the first quarter of this year. More recently,
the pace of decline appears to have slowed significantly; and
final demand and production have shown tentative signs of
stabilization. The labor market, however, has continued to
weaken. Consumer price inflation, which fell to low levels late
last year, remain subdued in the first 6 months of 2009.
To promote economic recovery and foster price stability,
the Federal Open Market Committee last year brought its target
for the Federal funds rate to a historically low range of zero
to one-quarter percent, where it remains today. The FOMC
anticipates that economic conditions are likely to warrant
maintaining the Federal funds rate at exceptionally low levels
for an extended period.
At the time of our February report, financial markets at
home and abroad were under intense strains, with equity prices
at multiyear lows, risk spreads for private borrowers at very
elevated levels, and some important financial markets
essentially shut. Today, financial conditions remain stressed,
and many households and businesses are finding credit difficult
to obtain.
Nonetheless, on net, the past few months have seen some
notable improvements. For example, interest rate spreads and
short-term money markets, such as the interbank market and the
commercial paper market, have continued to narrow. The extreme
risk aversion of last fall has eased somewhat, and investors
are returning to private credit markets.
Reflecting this greater investor receptivity, corporate
bond issuance has been strong. Many markets are functioning
more normally, with increased liquidity and lower bid-asked
spreads. Equity prices, which hit a low point in March, have
recovered to roughly their levels at the end of last year; and
banks have raised significant amounts of new capital.
Many of the improvements in financial conditions can be
traced in part to policy actions taken by the Federal Reserve
to encourage the flow of credit. For example, the decline in
interbank lending rates and spreads was facilitated by the
actions of the Federal Reserve and other central banks to
ensure that financial institutions have adequate access to
short-term liquidity, which in turn has increased the stability
of the banking system and the ability of banks to lend.
Interest rates and spreads on commercial paper dropped
significantly as a result of the backstop liquidity facilities
that the Federal Reserve introduced last fall for that market.
Our purchases of agency mortgage-backed securities and other
longer-term assets have helped to lower conforming fixed
mortgage rates. And the Term Asset-Backed Securities Loan
Facility, or TALF, which was implemented this year, has helped
to restart the securitization markets for various classes of
consumer and small business credit.
Earlier this year, the Federal Reserve and other Federal
banking regulatory agencies undertook the Supervisory Capital
Assessment Program (SCARP), popularly known as the stress test,
to determine the capital needs of our largest financial
institutions. The results of the SCAP were reported in May, and
they appear to increase investor confidence in the U.S. banking
system. Subsequently, the great majority of institutions that
underwent the assessment have raised equity in public markets;
and, on June 17th, 10 of the largest U.S. bank holding
companies, all but one of which participated in the SCAP,
repaid a total of nearly $70 billion to the Treasury.
Better conditions in financial markets have been
accompanied by some improvements in economic prospects.
Consumer spending has been relatively stable so far this year,
and the decline in housing activity appears to have moderated.
Businesses have continued to cut capital spending and liquidate
inventories, but the likely slowdown in the pace of inventory
liquidation in coming quarters represents another factor that
may support a turnaround in activity. Although the recession in
the rest of the world led to a steep drop in the demand for
U.S. exports, this drag on our economy also appears to be
waning as many of our trading partners are also seeing signs of
stabilization.
Despite these positive signs, the rate of job loss remains
high, and the unemployment rate has continued its steep rise.
Job insecurity, together with declines in home values and tight
credit, is likely to limit gains in consumer spending. The
possibility that the recent stabilization in household spending
will prove transient is an important downside risk to the
outlook.
In conjunction with the June FOMC meeting, Board members
and Reserve Bank presidents prepared economic projections
covering the years 2009 through 2011. FOMC participants
generally expect that, after declining in the first half of
this year, output will increase slightly over the remainder of
2009. The recovery is expected to be gradual in 2010, with some
acceleration in activity in 2011. Although the unemployment
rate is projected to peak at the end of this year, the
projected declines in 2010 and 2011 would still leave
unemployment well above FOMC participants' views of the longer-
run sustainable rate. All participants expect that inflation
will be somewhat lower than recent years, and most expect it to
remain subdued over the next 2 years.
In light of the substantial economic slack and limited
inflation pressures, monetary policy remains focused on
fostering economic recovery. Accordingly, as I mentioned
earlier, the FOMC believes that a highly accommodative stance
of monetary policy will be appropriate for an extended period.
However, we also believe that it is important to assure the
public and the markets that the extraordinary policy measures
we have taken in response to the financial crisis and the
recession can be withdrawn in a smooth and timely manner as
needed, thereby avoiding the risk that policy stimulus could
lead to a future rise in inflation. The FOMC has been devoting
considerable attention to issues relating to its exit strategy,
and we are confident that we have the necessary tools to
implement that strategy when appropriate.
To some extent, our policy measures will unwind
automatically as the economy recovers and financial strains
ease, because most of our extraordinary liquidity facilities
are priced at a premium over normal interest rate spreads.
Indeed, total Federal Reserve credit extended to banks and
other market participants has declined from roughly $1.5
trillion at the end of 2008 to less than $600 billion,
reflecting the improvement in financial conditions that has
already occurred. In addition, bank reserves held at the Fed
will decline as the longer-term assets that we own mature or
are prepaid.
Nevertheless, should economic conditions warrant a
tightening of monetary policy before this process of unwinding
is complete, we have a number of tools that will enable us to
raise market interest rates as needed.
Perhaps the most important such tool is the authority that
the Congress granted the Federal Reserve last fall to pay
interest on balances held at the Fed by depository
institutions. Raising the rate of interest paid on reserve
balances will give us substantial leverage over the Federal
funds rate and other short-term market interest rates, because
banks generally will not supply funds to the market at an
interest rate significantly lower than they can earn risk-free
by holding balances at the Federal Reserve. Indeed, many
foreign central banks use the ability to pay interest on
reserves to help set a floor on market interest rates. The
attraction of this to banks of leaving their excess reserve
balances with the Federal Reserve can be further increased by
offering banks a choice of maturities for their deposits.
But interest on reserves is by no means the only tool we
have to influence market rates. For example, we can drain
liquidity from the system by conducting reverse repurchase
agreements, in which we sell securities from our portfolio with
an agreement to buy them back at later dates. Reverse
repurchase agreements, which can be executed with primary
dealers, Government-Sponsored Enterprises, and a range of other
counterparties, are a traditional and well-understood method of
managing the level of bank reserves.
If necessary, another means of tightening policy is
outright sales of our holdings of longer term securities. Not
only would such sales drain reserves and raise short-term
interest rates, but they could also put upward pressure on
longer-term rates by expanding the supply of longer-term
assets.
In sum, we are confident that we have the tools to raise
interest rates when that becomes necessary to achieve our
objectives of maximum employment and price stability. Our
economy and financial markets have faced extraordinary near-
term challenges, and strong and timely actions to respond to
those challenges have been necessary and appropriate.
I have discussed some of the measures taken by the Federal
Reserve to promote economic growth and financial stability. The
Congress also has taken substantial actions, including the
passage of a fiscal stimulus package. Nevertheless, even as
important steps have been taken to address the recession and
the intense threats to financial stability, maintaining the
confidence of the public and financial markets requires that
policymakers begin planning now for the restoration of fiscal
balance. Prompt attention to questions of fiscal sustainability
is particularly critical because of the coming budgetary and
economic challenges associated with the retirement of the baby
boom generation and the continued increases in the costs of
Medicare and Medicaid.
Addressing the country's fiscal problems will require
difficult choices, but postponing those choices will only make
them more difficult. Moreover, agreeing on a sustainable long-
run fiscal path now could yield considerable near-term economic
benefits in the form of lower long-term interest rates and
increased consumer and business confidence. Unless we
demonstrate a strong commitment to fiscal sustainability, we
risk having neither financial stability nor durable economic
growth.
A clear lesson of the recent financial turmoil is that we
must make our system of financial supervision and regulation
more effective, both in the United States and abroad.
In my view, comprehensive reform should include at least
the following key elements: a prudential approach that focuses
on the stability of the financial system as a whole and not
just the safety and soundness of individual institutions, and
that includes formal mechanisms for identifying and dealing
with emerging systemic risks; stronger capital and liquidity
standards for financial firms, with more stringent standards
for large, complex, and financially interconnected firms; the
extension and enhancement of supervisory oversight, including
effective consolidated supervision to all financial
organizations that could pose a significant risk to the overall
financial system; an enhanced bankruptcy or resolution regime,
modeled on the current system for depository institutions, that
would allow financially troubled, systemically important
nonbank financial institutions to be wound down without broad
disruption to the financial institution's system and to the
economy; enhanced protections for consumers and investors in
their financial dealings; measures to ensure that critical
payment, clearing, and settlement arrangements are resilient to
financial shocks, and that practices related to the trading and
clearing of derivatives and other financial instruments do not
pose risk to the financial system as a whole; and, finally,
improved coordination across countries in the development of
regulations and in the supervision of internationally active
firms.
The Federal Reserve has taken and will continue to take
important steps to strengthen supervision, improve the
resiliency of the financial system, and to increase the
macroprudential orientation of our oversight. For example, we
are expanding our use of horizontal reviews of financial firms
to provide more comprehensive understanding of practices and
risks in the financial system.
The Federal Reserve also remains strongly committed to
effectively carrying out our responsibilities for consumer
protection. Over the past 3 years, the Federal Reserve has
written rules providing strong protections for mortgage
borrowers and credit card users, among many other substantive
actions. Later this week, the Board will issue a proposal using
our authority under the Truth in Lending Act, which will
include new, consumer-tested disclosures as well as rule
changes applying to mortgages and home equity lines of credit.
In addition, the proposal includes new rules governing the
compensation of mortgage originators.
We are expanding our supervisory activities to include
risk-focused reviews of consumer compliance in nonbank
subsidiaries of holding companies. Our community affairs and
research areas have provided support and assistance for
organizations specializing in foreclosure mitigation, and we
have worked with nonprofit groups on strategies for
neighborhood stabilization. The Federal Reserve's combination
of expertise in financial markets, payment systems, and
supervision positions us well to protect the interests of
consumers and their financial transactions. We look forward to
discussing with the Congress ways to formalize our
institution's strong commitment to consumer protection.
The Congress and the American people have a right to know
how the Federal Reserve is carrying out its responsibilities
and how we are using taxpayer resources. The Federal Reserve is
committed to transparency and accountability in its operations.
We report on our activities in a variety of ways, including
reports like the one I am presenting to Congress today, other
testimonies, and speeches. The FOMC releases a statement
immediately after each regularly scheduled meeting and detailed
minutes of each meeting on a timely basis. We have increased
the frequency and scope of the published economic forecast of
FOMC participants. We provide the public with detailed annual
reports on the financial activities of the Federal Reserve
System that are audited by an independent public accounting
firm. We also publish a complete balance sheet each week.
We have recently taken additional steps to better inform
the public about the programs we have instituted to combat the
financial crisis. We expanded our Web site this year to bring
together already available information as well as considerable
new information on our policy programs and financial
activities. In June, we initiated a monthly report to the
Congress that provides even more information on Federal Reserve
liquidity programs, including breakdowns of our lending, the
associated collateral, and other facets of programs established
to address the financial crisis. These steps should help the
public understand the efforts that we have taken to protect the
taxpayer as we supply liquidity to the financial system and
support the functioning of key credit markets.
The Congress has recently discussed proposals to expand the
audit authority of the GAO over the Federal Reserve. As you
know, the Federal Reserve is already subject to frequent
reviews by the GAO. The GAO has broad authority to audit our
operations and functions. The Congress recently granted the GAO
new authority to conduct audits of the credit facilities
extended by the Federal Reserve to ``single and specific''
companies under the authority provided by section 13(3) of the
Federal Reserve Act, including the loan facilities provided to,
or created for, AIG or Bear Stearns. The GAO and the Special
Inspector General have the right to audit our TALF program,
which uses funds from the Troubled Asset Relief Program.
The Congress, however, purposefully--and for good reason--
excluded from the scope of potential GAO reviews some highly
sensitive areas, notably monetary policy deliberations and
operations, including open market and discount window
operations. In doing so, the Congress carefully balanced the
need for public accountability with the strong public policy
benefits that flow from maintaining an appropriate degree of
independence for the central bank in the making and execution
of monetary policy. Financial markets, in particular, likely
would see a grant of review authority in these areas to the GAO
as a serious weakening of monetary policy independence. Because
GAO reviews may be initiated at the request of Members of
Congress, reviews or the threat of reviews in these areas could
be seen as efforts to try to influence monetary policy
decisions. A perceived loss of monetary policy independence
could raise fears about future inflation and lead to higher
long-term interest rates and reduced economic and financial
stability. We will continue to work with the Congress to
provide the information it needs to oversee our activities
effectively, yet in a way that does not compromise monetary
policy independence.
Thank you, Mr. Chairman.
[The prepared statement of Chairman Bernanke can be found
on page 68 of the appendix.]
The Chairman. Thank you, Mr. Chairman.
Let me begin with one question, because I am pleased that
you, as I said, responded to the fears of inflation, because I
think you are well capable of holding them under control. And I
also think it is important that they not be invoked prematurely
when the greater problem I believe the Federal Reserve
economists think is still further on the negative side, and one
looming threat which we hear about a lot is the commercial real
estate issue.
There is a great deal of fear that there will be in
commercial real estate a series of failures, that some of the
economic problems of the home mortgage will be reproduced. I
know we have discussed this. What is your current posture? Do
you expect there to be problems? And how are you and other
elements of the government ready to respond to them?
Mr. Bernanke. Mr. Chairman, we are watching that situation
very carefully. There are a lot of CRE loans which are coming
up for refinance, and the capacity to refinance them is
limited, which poses the possibility of foreclosures in the
commercial space, much as in the residential situation. We are
urging banks to continue to make loans to credit-worthy
borrowers, and our examiners are presenting a balanced view in
their discussions with banks.
The other step we have taken to try to address this
problem, Mr. Chairman, is that we have recently added to our
TALF program both new and legacy commercial mortgage-backed
securities. By doing that, we hope to open up the mortgage-
backed securities market, which is an important source of
funding and finance for the CRE market.
The Chairman. I am pleased with that, because I know there
are some who have been critical that you have been doing too
much. I don't share that. On the other hand, in some cases even
some of those same people have said, yes, but what about
commercial real estate? And the fact is that you are ready
there to do some more.
Let me ask you now--I was interested in reading the report.
On page 1, you note that consumer spending has been supported
recently by the boost of disposable income from the tax cuts
and increases in benefit payments that were part of the 2009
stimulus package. In regard to State and local borrowing, you
note: ``Interest rates on long-term municipal bonds declined in
April, as investors concerned about the credit quality appeared
to ease somewhat with the passage of the fiscal stimulus plan,
which included a substantial increase in the amount of Federal
grants to States and localities.''
Then in the discussion of the labor market there was
reference to the fact that, ironically, one of the things that
makes the rate go higher is that the participation rate has
gotten higher. And that is a good thing, in part, because you
note, the emergency unemployment insurance program introduced
last July has contributed to the higher participation rate.
I am pleased that these are three references by you to the
positive impact in reference to intervening in the economy, in
terms of boosting consumer spending and helping State and local
governments, both directly by revenue and then by that keeping
down their interest costs.
So I do want to ask you one of those counterfactuals that
you get to have fun with and I want to share a little of it.
We have problems--and I think, as I said, it is good to
know that you can unwind. I think a premature unwinding would
be a great mistake. But the counterfactual is, had we not
passed the economic recovery plan in February of this year,
would the economy be better or worse?
Mr. Bernanke. Mr. Chairman, as you described, we think that
income has affected consumer sums, and that the revenues to
State and local authorities may improve their situations
somewhat. So, in that respect, there has been some positive
impact. But I would withhold an overall judgment since we have
only seen a quarter or less of the money being disbursed. I
think there is still some time to wait and see how significant
the impact will be.
The Chairman. But the expectation would be then that the
disbursement would have a positive effect in this current
atmosphere?
Mr. Bernanke. You would expect that higher income would
tend to raise consumption. Yes.
The Chairman. I appreciate those two points that you have
mentioned.
Let me just ask one last question. If the resolving
authority--strange semantically. Resolve does appear to mean
dissolve. If that authority were vested in the appropriate
agencies of the Federal Government, would the AIG and Lehman
Brothers and Merrill Lynch situations have come out
differently?
Mr. Bernanke. Would they have--
The Chairman. Come out differently.
Mr. Bernanke. Yes. Of course.
The Chairman. Would the financial authorities have
responded differently?
Mr. Bernanke. It would not have been necessary for the Fed
or even the Treasury and the TARP to intervene in those
situations. With a good resolution authority, we could have
wound down those companies, had the creditors take losses to
eliminate or reduce the too-big-to-fail problem, while at the
same time avoiding the very destructive effects, particularly
in the case of Lehman, on the broader financial system.
The Chairman. Thank you.
The gentleman from Alabama.
Mr. Bachus. Thank you.
Chairman Bernanke, Chairman Frank asked you about the
commercial real estate market. You mentioned the TALF programs
for the new and legacy program. The new program has been in
operation about a month, is that right, taking loans?
Mr. Bernanke. Yes. That is right.
Mr. Bachus. And the legacy just about a week. Is that
right?
Mr. Bernanke. Yes, sir.
Mr. Bachus. I notice you are going to cut those off
December 31st?
Mr. Bernanke. The program, as of right now, is slated to
end at the end of the year, but we will be reviewing those
programs and others to assess whether or not they are needed
beyond that time.
Mr. Bachus. I noticed several others run through the end of
2010. So it is sort of--
Mr. Bernanke. We extended several, sir, to I think
February, 2010, not to the end of 2010.
Mr. Bachus. Okay. What is the state of the commercial real
estate market?
Mr. Bernanke. Well, for a good bit of the recent years the
commercial real estate market was actually pretty strong even
as the residential market was weakening. But as the recession
has gotten worse in the last 6 months or so, we are seeing
increased vacancy, declining rents, falling prices, and so more
pressure on commercial real estate which is raising the risk of
lending to commercial real estate. So that is certainly a
negative.
As I was mentioning to the chairman, the facilities for
refinancing commercial real estate, either through banks or
through the commercial mortgage-backed securities market, seem
more limited; and so we are somewhat concerned about that
sector and paying close attention to it. We are taking the
steps that we can through the banking system and through the
securitization markets to try to address it.
Mr. Bachus. I definitely think that may be the wild card. I
know Deutsche Bank this week came out with a report and Smith
Barney last week that obviously raised concerns.
You have talked about a resolution authority for nonbank
financial institutions, and you have referred to that as
expedited bankruptcy. Would it be within the Bankruptcy Code?
Would it be part of the bankruptcy regime?
Mr. Bernanke. It would be a special regime that would be
invoked only under circumstances of financial stress and would
be analogous to the laws we currently have for resolving
failing banks, which allow the regulators to intervene before
the actual bankruptcy occurs to avoid the negative impact of a
disorderly bankruptcy on the market. So, yes, it could be in
the broader bankruptcy regime, but it would be a special
category of bankruptcy that would be invoked only during
financial crisis.
Mr. Bachus. You know, Enron, WorldCom, Drexell worked very
well, the bankruptcy regime. Do you agree that it is very
important that you force creditors to internalize the cost of
their credit decisions?
Mr. Bernanke. Absolutely. Otherwise, you have a too-big-to-
fail institution, which doesn't have any discipline other than
the regulatory oversight.
Mr. Bachus. So this regime would totally reject the too-
big-to-fail? I mean, you would not be asking taxpayers to
guarantee or backstop losses?
Mr. Bernanke. Absolutely. I think too-big-to-fail is an
enormous problem. If we don't do anything else, we need to
solve that problem. This is a critical element in solving it,
because it would mean that creditors would take losses. If
there are resolution costs, the presumption is that they would
be paid by assessments on other financial companies.
Mr. Bachus. The Republicans have proposed--our financial
services regulatory reform proposal includes an expedited
bankruptcy within the Bankruptcy Code, and I would ask you to
pay particular attention to that.
One thing that I am also concerned about is even having the
financial system take those losses, or the taxpayers, and would
hope that we would preserve a true--if we call it expedited
bankruptcy, it in fact is expedited bankruptcy.
I think the Chairman for his testimony.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman.
Chairman Bernanke, let me inquire into two areas that I
just need a little more clarification on. On page 8 of your
testimony this morning, you say that you are expanding our
supervisory activities to include risk-focused reviews of
consumer compliance in nonbank subsidiaries of holding
companies.
What is the authority for that? I had been under the
impression that one of the reasons that was not done previously
is that the Fed didn't have that authority. Is there new
authority? Or under what authority are you acting there?
Mr. Bernanke. Well, the Gramm-Leach-Bliley law is a bit
vague. There is a presumption that you will defer to the
functional regulator in dealing with nonbank subs. In many
cases, the functional regulator would be either a State
regulator or the FTC, and we have done this in collaboration
with those bodies, particularly the State regulators.
The pilot program we ran to do examinations of nonbank subs
was done in collaboration with these other bodies, and we
believe that in the cooperative spirit and in looking at our
responsibilities to enforce these consumer laws, we believe a
somewhat proactive stance is justified.
That being said, I think that Congress ought to clarify the
presumption of the ability of the consolidated supervisor to
look into these subs.
Mr. Watt. But it is clear that the Fed had not been real
proactive in that area prior to this crisis. Is that right?
Mr. Bernanke. For nonbank subs, that is right.
Mr. Watt. All right, on page 5 of your testimony, you talk
about the payment of interest on reserve balances, which we
authorized last fall. Had the Fed not had that authority prior
to last fall at all?
Mr. Bernanke. No, we did not.
Mr. Watt. That seems to me to be a perhaps even more
powerful tool than the adjustment of the Fed fund interest
rates, and I guess I am a little surprised at why some central
banks had that authority previously and the Fed did not. Can
you just give us a little history lesson on that?
Mr. Bernanke. Certainly. Most central banks do have this
authority, and they set a Fed funds equivalent rate in the open
market, but they use the interest on reserves rate as sort of a
floor or backstop. The Fed's authorities go back to the 1930's,
and we are actually somewhat more limited on a number of these
areas than other central banks. Other central banks have
somewhat broader power to buy assets, to pay interest on
reserves, and to lend to financial institutions. For example,
we had to invoke the 13.3 authority to lend to the primary
dealers and the investment banks. Whereas in Europe, for
example, any financial institution can borrow from the central
bank.
Mr. Watt. Am I overstating the power of that as a potential
tool for the Fed to use, or do you perceive it in much the same
way?
Mr. Bernanke. Many central banks around the world use what
is called a corridor system, where they have an interest rate
on reserves as the floor and then a lending rate like the
discount window rate as the ceiling, and that keeps the market
interest rate between those two levels. A lot of banks use
that.
So, yes, it is a very powerful tool; and we would not have
been able to expand our balance sheet as we have if we had not
had that tool to help us with the exit.
Mr. Watt. So you are saying, until last fall, actually, the
Fed--the extent of the Fed's power before we granted this
authority was actually substantially less than a lot of Federal
banks--a lot of central banks around the world?
Mr. Bernanke. Yes, that is right.
Mr. Watt. Well, I guess that is a double-edged sword from
some of my colleagues on--that it gives the Fed more authority
that they would likely fear. Your assessment is that, as we
wind down these positions, that would be as important or more
important than the Fed fund rate?
Mr. Bernanke. Well, that interest on reserves rate will
help us control the Fed funds rate. They should be very closely
together. So they should be closely tied, and they should
affect longer-term interest rates. So they will be working
together.
Mr. Watt. Thank you, Mr. Chairman.
The Chairman. Let me just say--if I can have unanimous
consent for 30 seconds. The gentleman from Alabama reminded me
that the decision to grant the Fed power was wholly bipartisan;
and, in fact, it first passed the House when the Republicans
were in the majority. The gentleman from Alabama was the
chairman of the Appropriations Subcommittee. It did not pass
the Senate. There is a lot of that going around. And it then
came up again, and it was again passed. So that has been
broadly supported in this committee, although not unanimously.
Which brings me to the gentleman from Texas, Mr. Paul.
Dr. Paul. Thank you, Mr. Chairman.
In the past, most members of the Federal Reserve Board,
including your predecessor, when they come before the committee
they endorse in general the idea of transparency. They don't
just say we are against transparency. It is the definition that
really counts. Most members then would also argue for
independence, which generally means that they don't want the
Congress to know it is actually what they are doing.
But I saw the article today in the Wall Street Journal, not
your editorial but an article, and there were a few quotes
there that I wanted to ask you about. I do know that all of us
can get misquoted in the newspaper, but I want to clarify this,
because it is either misleading or somebody is confused, and I
want to see if I can figure this out.
The first one has to do with you saying that Mr. Paul's
bill, which is 1207, the transparency bill, would interfere
with the Fed's interest rate decision.
And since I wrote the bill, I know what the intentions are.
It has nothing to do with monetary policy or interest rate
manipulation. There is nobody in the Congress who is going to
be monitoring the Federal Open Market Committee. It is after
the fact that an audit can occur and find out what transpired.
There is no management.
So is that your position that this bill, if it were to be
passed, would interfere directly with interest rates, setting
interest rates?
Mr. Bernanke. Well, Congressman Paul, at some point, as you
know, we are going to have to start raising interest rates to
avoid inflation. And people have talked about the politics of
that and whether the Fed will be able to do that without
intervention or interference.
If we were to raise interest rates at a meeting and someone
in the Congress didn't like it and said, I want the GAO to
audit that decision, wouldn't that be viewed as an interference
or at least an ex post--
Dr. Paul. I wouldn't think so. This is just reviewing it.
And you can do what you want.
What about today? Interest rates are artificially low.
Could there be any political pressure to keep interest rates
artificially low?
Historically, that has been well known. It has been
documented and written about how other Federal Reserve
chairmen, you know, they are on the verge of reappointment, and
they know the President, and all of a sudden--so it is not like
it is not politicized now. Just the fact that they can issue a
lot of loans and special privileges to banks and corporations,
that is political. But this idea that it would be political
because we know what happened afterwards just doesn't seem to
add up.
Since time is short, I want to go on to the next quote,
which I find fascinating, because hopefully I can agree with
you on this one. This is an actual quote. It says, ``We
absolutely will not monetize the debt.'' Well, that is one of
the major reforms sometime in the distant future that would be
beautiful, because that would stop all this chaotic monetary
policy, inflations and depressions and recessions and all the
mess that we have. But you say you will not.
At the same time, you know, I quoted the $38 billion that
was bought last week and the plan to buy $300 billion of U.S.
securities. These securities are bought by dollars you create.
And if you are buying U.S. securities, what is that if it is
not--and besides, if the markets really believed that, that you
would absolutely not monetize debt, I think the markets would
get hysterical.
So it seems to me like--I would like to understand exactly
what you mean by that.
Mr. Bernanke. Well, the purpose of our limited program was
to address private credit markets, Congressman. When we
complete the $300 billion program that we announced, we will
have less treasuries on our balance sheet than we did 2 years
ago, because we sold off a lot of treasuries in order to make
room for these other things we were doing.
Secondly, after we complete that $300 billion, our share of
outstanding treasuries will be at one of the lowest points in
the post-war period. So we are not taking a significant portion
of U.S. Treasuries. And we are not actively intervening or
actively trying to make it easier for the government to issue
debt.
Dr. Paul. So you are saying, if you buy $300 billion worth
of U.S. Government debt, that is not inflationary. The true
definition of ``inflation'' is when you increase the money
supply. And the immediate consequence is it sends out false,
bad information to the marketplace. So whether it is when the
bubble is being formed or afterwards, all you are doing is
inflating constantly. You have doubled the money supply;
interest rates are artificial. People make mistakes.
So it seems to me that you are in the midst of massive
inflation. But I guess you have a different definition. When
you double the money supply, that is not inflation itself? Or
are you looking at only prices?
Mr. Bernanke. May I respond?
The Chairman. Briefly.
Mr. Bernanke. Inflation is the change in the consumer price
level, which is very stable right now. And there are various
measures of money, as you know. And the broad measures of
money, the measures of money in circulation like M1 and M2, are
not growing quickly.
The Chairman. The gentleman from California, Mr. Baca.
Mr. Baca. Thank you very much, Mr. Chairman.
First of all, I want to thank you and I want to thank the
ranking member for convening this hearing.
And I want to thank Chairman Bernanke for taking the time
to be here once again.
My first question is in reference to the regulatory reform
plan put forth by the Obama Administration. It puts a lot of
faith in the Federal Reserve's ability to oversee the largest,
most interconnected firm in the marketplace to prevent against
systemic failures.
I have a question related to the Financial Oversight
Council that will aid in this task. How do you envision the
role of the Financial Oversight Council taking shape? That is
one of the questions.
And then it is my understanding that the council will play
a purely advisory role, having no real power or weight in our
regulatory issues. And can you describe how the Federal Reserve
would work with the council under this proposed plan?
Mr. Bernanke. Yes, sir. There is, I think, a
misapprehension that somehow this plan makes the Federal
Reserve a super-regulator with untrammeled powers to go
wherever it likes. In fact, there are multiple components, as
you point out.
A critical component is the council, which will oversee the
overall strategy. It will look for emerging risks and advise
regulators on what steps to take. And so, in particular, this
issue about which large institutions the Fed would oversee, I
think that would be appropriate for the council to make that
determination, and not the Federal Reserve, for example.
So the Federal Reserve will work closely with this council,
which, again, would have broad-based ability to gather
information, identify emerging risks, and look for gaps and
problems in the regulatory system.
Another major portion, by the way, of course, would be this
resolution regime, which would not be administered by the Fed
either. That would be the Treasury, the FDIC. That is very
critical to winding down systemically relevant firms.
The Fed's role, as envisioned by the Administration, is a
modest reorientation of our current system. Under our current
system, the Federal Reserve is the umbrella supervisor of all
bank holding companies and financial holding companies. So we
are already the umbrella supervisor of essentially all the
firms that would likely be identified as Tier 1 firms under the
Administration's proposal.
So the main differences would be that we would have some
additional authorities to add capital and liquidity
requirements based on the systemic relevance of those firms and
perhaps some stronger ability to look at nonbank subs, as we
were discussing before, vis-a-vis Gramm-Leach-Bliley.
The biggest challenge would be on our part, which would be
to take a more macro-prudential approach. Rather than looking
at each firm individually, the intellectual challenge for us
would be to ask the question, not only is this firm safe in its
own situation, but does its failure threaten other firms and
other markets? And, if so, how should you adjust capital and
other requirements to accommodate that?
So it would be a challenging thing for us to do, but it
does not radically reorient our set of powers.
Mr. Baca. As a follow-up question, would you then be in
favor of increasing the authority of the council? Or are you
confident that the collaboration of the Fed and the council
would work as stated in the white paper?
Mr. Bernanke. I am very open to discussing the role of the
council. I think a very important role is to coordinate
regulators, to oversee the system, to identify risks and so on.
But there may be situations where the council can have
authority to harmonize different practices or to identify
problems and to take action. So I think the Congress should
discuss what powers the council should have.
Mr. Baca. Well, I hope we do in Congress here.
But let me refer back to an article that appeared in the
Wall Street Journal. This is July 20th. In here, you start out,
``The depth of the global recession has required highly
accommodative monetary policies,'' and you go on and go on. And
then it says, ``We have greatly expanded the size of the Fed
balance sheet through the purchase of long-term security
through targeted lending programs aimed at restarting the flow
of credit.''
What do you mean by this?
Mr. Bernanke. Congressman, our policies, using our balance
sheet, have been to try to improve the functioning of credit
markets, which have been disrupted by the financial crisis. So,
for example, we have been purchasing mortgage-backed
securities, which has lowered mortgage rates for everyday
Americans down to about 5 percent. We have opened up a program
that is called the TALF, which has helped increase funding and
reduce rates on consumer loans like auto loans, student loans,
and small business loans. We have taken actions to improve the
function of the commercial paper market.
So all these various steps have tried to address the fact
that, during the crisis, many markets have become disrupted,
and our actions have been ways of trying to stimulate
improvements. And we have been fairly successful in doing that.
Mr. Baca. Okay. In the second paragraph, you state that,
``These actions have softened the economic impact of the
financial crisis. They have also improved the functioning of
key credits, including the market for interbank lending,
commercial papers, consumer, small lot, business credit,
residential mortgages.''
How does that impact, then, those whoe in foreclosure right
now?
The Chairman. Let me caution the members again. Your time
expiring is not a good time to ask your big question. The
chairman will have a few seconds to answer. But we can't just
extend it that way, in fairness to the other members.
Mr. Chairman?
Mr. Bernanke. I just want to say that, in those markets,
such as the mortgage market, consumer markets, interbank
markets, we have brought down interest rates, increased
availability, and improved the functioning of the markets in
those areas.
Mr. Baca. But how will it help those--
The Chairman. No, the gentleman's time has expired.
The gentleman from Texas?
Mr. Neugebauer. Thank you, Mr. Chairman.
Chairman Bernanke, way over here on the far right, your
left. There you go. Thank you.
One of the things that you mentioned in your testimony was
about regulatory reform. You had bullet points there, and one
of those bullet points was ``enhanced protection for consumers
and investors in financial dealings.''
And then on page 8, you said, ``We are expanding our
supervisory activities to include risk-focused reviews of
consumer compliance in non-bank subsidiaries of holding
companies.''
As you are aware, the Administration has laid out a
Blueprint for Regulatory Reform. The chairman also has a bill.
And one of the pieces of that is an interesting concept of
separating the consumer compliance from the primary regulators
and having a separate entity.
The first question I would have is, what do you think about
that structure?
Mr. Bernanke. Well, I understand the rationale and why
people would like to have that, and I am not going to criticize
it. But I just want to say that in my remarks, the point was
that the Fed has been doing a good job for the past 3 years or
so, and we are committed to doing it. And if you allow us to
continue to work in that area, we would be interested in doing
so.
Mr. Neugebauer. Are there some dangers of bifurcating the
regulatory process, where you have one entity looking at
consumer products and determining what products financial
institutions can offer and endorsing those and then having
another regulatory agency looking at safety and soundness? And
how does that work?
Mr. Bernanke. Well, there are some costs to it, in that you
would have double the exams. And there wouldn't be as much
coordination between the safety and soundness and consumer
protection issues. So there would be some issues related to
that separation.
Mr. Neugebauer. And so, at a time when I guess we are all
feeling like it is time to, kind of, tighten up the regulatory
structure, make sure we plug the holes, and, moving forward,
that if we had some places where we weren't actually able to
have the ability to or, in fact, doing our jobs, does
separating those make sense?
Mr. Bernanke. Well, the argument for doing it, I think, is
that those who believe that you need a separate agency that
will be committed to consumer protection will have the
institutional commitment outweigh some of these other costs.
And I simply am noting that the Federal Reserve is also
committed and wants to be committed to that goal.
Mr. Neugebauer. If you were writing the regulatory reform,
would you keep them the same and not separate them?
Mr. Bernanke. If I were writing it, I would keep the
consumer protection with the Federal banking agencies, with
additional measures to ensure a strong commitment.
Mr. Neugebauer. Thank you for that.
The second thing is, in some of your projections of looking
forward, what you think the economy is going to be like in 2009
and 2010 in relationship to jobs, for example, when you were
using the numbers and assumptions you were using, did you
assume that Congress would not continue this huge deficit
spending where we are on track to literally double the national
debt? Are your assumptions based on employment is going to get
better if Congress has better fiscal policy? Or are your job
assumptions based on continuing to spend money like drunken
sailors?
Mr. Bernanke. Our forecasts are based on our best
projections of what government spending is likely to be. And,
in particular, it includes the fiscal stimulus package.
Mr. Neugebauer. And were your assumptions, then, that this
would be the job situation assuming that Congress does not then
do something about the current level of spending?
Mr. Bernanke. If the fiscal stimulus package didn't exist,
for example, we would anticipate there would be higher
unemployment.
Mr. Neugebauer. We are not on the same page. I am not
talking--the stimulus package is already done. I am talking
about the fact that, for every dollar that this Congress is
spending right now, we are borrowing 50 cents.
If that trend continues in future appropriations, and some
people are talking Stimulus 2, would that alter your job
prediction down the road?
Mr. Bernanke. Down the road, it might. As I talked about in
my testimony, I do think it is very important that we look at
medium-term fiscal sustainability, that we have a plan for
getting back to reasonably low deficits and a sustainable debt-
to-GDP ratio. Otherwise, we might see interest rates rise,
which would be negative for the economy.
Mr. Neugebauer. So what you are saying is $2 trillion
deficits a year for the next 4 or 5 years is not a
sustainable--
Mr. Bernanke. No, sir, it is not.
Mr. Neugebauer. Thank you.
The Chairman. The gentleman from Missouri, Mr. Cleaver.
Mr. Cleaver. Mr. Chairman, thank you very much for being
here.
I read over the weekend that the unemployment rate in
California is above 11 percent. And The Hill reported last week
that the Federal Reserve reported that unemployment was between
9 and 10 percent and would continue to rise.
If this is, in fact, going to happen--and you look at
California, Ohio, Michigan, with already double digits--should
we expect another round of foreclosures? The chairman asked you
earlier about commercial. I mean, doesn't all of this almost
make for a perfect storm for another avalanche of foreclosures?
Mr. Bernanke. The combination of unemployment and falling
house prices, the double trigger does create a very high rate
of foreclosures.
Our assessment of the foreclosures is that it is likely to
be--it is likely to peak in the second half of 2009,
corresponding with the peak in the unemployment rate, and
perhaps be somewhat less in 2010. But, clearly, we are going to
have very high levels of foreclosures, and the unemployment
rate is a big reason for that.
Mr. Cleaver. This may be more theological or philosophical,
but if you look at--I mean, you and others in the Federal
Reserve and even in the Administration are saying that things
are stabilizing, we are making progress. That is not quite
compatible with what you hear with the talking heads on
television. And nobody can control those.
But our attitude toward the trouble may be more
problematical than the trouble. And I am wondering, you know,
what can we do to change the atmosphere in the country?
Consumers are loathe to go out and buy. Employers, even if they
are seeing things stabilize, are not inclined to go out and
begin to hire or rehire.
What can Congress do? What can be done to not just
stabilize the economy but to stabilize our attitudes?
Mr. Bernanke. I am not sure what to suggest there, except,
obviously, good leadership and good explanations help. But the
public has been responding to some signs, some glimmers, if you
will, of improvement. So consumer sentiment, for example, has
improved somewhat as the stock market has gone up and as the
outlook has looked better and as the job situation has at least
stopped deteriorating quite as quickly as it was.
But I want to be clear that we have a very long haul here,
because even if the economy begins to turn up in terms of
production, unemployment is going to stay high for quite a
while, and so it is not going to feel like a really strong
economy.
Mr. Cleaver. Thank you.
I yield back the balance of my time, Mr. Chairman.
The Chairman. The gentleman from Indiana. Oh, I am sorry,
Mr. Cleaver just finished.
Mr. Castle, I apologize, the gentleman from Delaware is
recognized.
Mr. Castle. Thank you, Mr. Chairman.
Chairman Bernanke, let me just say in praise of you,
because my questions may imply some negatives, I think you are
doing a good job on monetary policy. And I think that meets one
of the goals of the Humphrey-Hawkins Act. Just looking at that
Act, it outlines four goals for a strong economy: full
employment; growth in production; price stability; and balance
of trade and budget, of which I think price stability is the
one that sort of stands out now. And I think that has a lot to
do with what you do.
And maybe this is Government 101, but I am not 100 percent
sure what your role is with the Administration. We are watching
a circumstance in which we have deficits creating greatly. Debt
will go up over $10 trillion, according to the budget, in the
next 10 years or so. Appropriations are up dramatically, for
this year at least and the ones we have passed in the House so
far. The health care legislation that is being considered in
the House and the Senate doesn't seem to have any real cost
controls in it, some maybe passing wave at that, but that is
about the extent of it, and are probably in trouble because of
that.
My question to you is, does the Executive Branch of
government, the White House, consult with you about any of
these broader economic issues?
I mean, part of your responsibility under Humphrey-Hawkins
is to try to make progress towards these goals. And it seems to
me just setting monetary policy won't necessarily solve the
problems of the full employment, the growth of production, and
the balance of trade and budget. And I didn't know if that is
just off-bounds for you and for them or if there is any
consultation going on.
And, obviously, if you have any comments about your point
of view on some of these expenditures which are going on, I
would be interested in hearing them, as well.
Mr. Bernanke. Well, of course, the Federal Reserve is
nonpartisan and independent. I do speak to the President's
advisors periodically, as I speak to Members of Congress and
their staff.
In terms of my policy positions, because I am nonpartisan I
try not to get involved in the details of specific programs,
fiscal programs in particular. But I have spoken to the issue
of fiscal sustainability, which I did again today, and the
importance of when thinking about the programs that one is
undertaking, the time frames, the costs and so on, to think
about the implications for the Federal budget, to make sure
that we have a trajectory that will be sustainable in the
medium term.
And I have made that point several times, and I am sure
that the Administration, as well as the Congress, are quite
aware of that point. But achieving it, of course, requires some
effort.
Mr. Castle. Maybe we would be better served to let you go
right now and run back over to the White House and keep making
that point, based on what we have seen.
Following up on something the gentleman from Texas, Mr.
Neugebauer, asked on the financial protection agency that is
being proposed, did I hear you say--did I hear correctly,
perhaps, you saying that you would keep the consumer protection
functions that you have at the Federal Reserve there at the
Federal Reserve if you had your preference in that area?
Mr. Bernanke. As I have said, I am proud of the work we
have done. I think we are well-placed to do it. We have a lot
of talent. We have a wide range of people, in terms of
economists, financial specialists, payment specialists, as well
as lawyers and consumer specialists. There are some
complementarities with our supervisory activities.
So if the Congress decides to consider that option, we are
very interested in pursuing it ourselves.
Mr. Castle. And you indicated that--you said several new
rules you are working on, including rules on mortgage
originators and that area. Can you go through that list again
quickly?
Mr. Bernanke. We are having a meeting on Thursday where we
will announce some new rules that are being circulated for
comment. And they are primarily disclosure changes, consumer
tests and disclosure changes for mortgages, mortgage
originations, and for home equity lines of credit.
And we are also going to address in that rulemaking Yield
Spread Premiums, which is how brokers and other lenders are
paid for making mortgages. So that is an issue we will be
addressing as well.
Mr. Castle. Thank you.
At the governors conference which just took place, which is
Republicans and Democrats, down in Alabama, I believe--
Mississippi, I guess it was, actually--they indicated they were
not interested in a second stimulus. That is obviously
something that is a little bit hypothetical at this point.
Would you agree with that? I mean, I have heard your
reference to the fact that the first stimulus is still being
spent out there and has a long ways to go.
Mr. Bernanke. Yes, I think it is very early. Less than a
quarter of the first stimulus has been spent. We will have to
see how the economy evolves. So I think it is premature to make
any judgments about that.
Mr. Castle. And they also indicated that they were
concerned about a rush to a health care plan. They have
Medicaid costs and other things they are concerned about.
Do you have any--I am sorry, my time is up. I may submit a
question in writing to you. Thank you.
The Chairman. The gentleman from Indiana is next of those
who haven't questioned.
Is the gentleman ready?
Mr. Donnelly. Thank you, Mr. Chairman.
The Chairman. And we will then be going on the Democratic
side in seniority from then on, everybody who has questions.
Mr. Donnelly. Fed Chairman Bernanke, thank you for being
here.
Let me ask you a question. I come from an area that does a
lot of manufacturing and is reliant on credit. What would have
happened last fall if we had just walked away and had not
passed the program?
Mr. Bernanke. I think you would have had a very good chance
of a collapse of the credit system. Even what we did see after
the failure of Lehman was, for example, commercial paper rates
shot up and availability declined. Many other markets were
severely disrupted, including corporate bond markets. So even
with the rescue and even with the stabilization that we
achieved in October, there was a severe increase in stress in
financial markets.
My belief is that, if we had not had the money to address
the global banking crisis in October, we might very well have
had a collapse of the global banking system that would have
created a huge problem in financial markets and in the broad
economy that might have lasted many years.
Mr. Donnelly. And have we lost any of the funds that the
Fed has lent?
Mr. Bernanke. The Fed on book value is a little bit
underwater on the AIG, Bear Stearns interventions, which we
would very much not liked to have done, but we didn't have the
resolution regime.
On all other lending and all other programs, which is more
than 95 percent of our balance sheet, we are making a nice
profit, which we are sharing with the Treasury.
Mr. Donnelly. In regards to the TALF program, which is an
area that we had hoped for some help on and that we had
discussed before, at the present time none of it has gone to
floor plan lending, as we discussed.
What other areas do you think can help open up floor plan
lending? We know the SBA has helped a little bit. What other
avenues, if any, are being explored or do you think are
available out there?
Mr. Bernanke. We are continuing to look at floor plan
lending, and there are several possibilities.
One in particular is we are doing a review right now of the
credit rating agencies, the nationally recognized rating
agencies, whose ratings we will accept and the criteria on
which we will accept those ratings. Depending on what that list
is and what views they have about floor plan lending, it may be
that some floor plan deals can get the AAA rating that they
need to be eligible for the TALF.
But we will be putting out rules very soon on the criteria
for choosing the rating agencies.
Mr. Donnelly. One of the other areas of concern on the TALF
for us is what is called the haircut rate. And on floor plan,
that is the highest of all. The reason for that? And is there a
review of that, that might come down the road?
Mr. Bernanke. The haircuts are set based upon evaluations
of the riskiness of the various assets.
I think there is a lot of uncertainty right now about floor
plans given the state of the industry and what is happening
with GM and Chrysler and so on. And my hope is that, in the
next few months, as the situation becomes somewhat clearer, it
could be that ratings will be upgraded and that we will see a
somewhat better situation.
But right now there is just a lot of murkiness, in terms of
the credit quality of the floor plan loans.
Mr. Donnelly. And we are looking at a December 31st
termination date as of now. But I think approximately $27
billion out of a potential $1 trillion has been lent out. Has
there been any look into extending that termination date?
Mr. Bernanke. We will extend it if conditions warrant. And
we will try to give the markets plenty of advance notice. We
are not going to necessarily try to hit any particular number.
We are going to have to make a judgment whether the conditions
in markets are still sufficiently disrupted that such an
intervention is necessary.
Remember, this is based on a determination that conditions
are unusual and exigent. And if markets normalize, we should no
longer be using that kind of program.
Mr. Donnelly. And one last question: The small businesses
in our area, they come up and say, ``You know, we just can't
get the credit we need. We can't get the help we need.'' And I
am not talking about the loans that shouldn't have been made,
but the loans to good businesses that aren't being made.
Approximately what timeframe do you think these small-
business owners will be able to see the same kind of credit
availability they had before?
We have had so many credit organizations just walk away,
can't make loans anymore, don't want to.
Mr. Bernanke. In terms of having the same terms and
conditions that they had before the crisis, maybe that will
never come back, because credit is sort of permanently
tightened up in that respect.
I am hopeful that as banks stabilize--and we are seeing
some improvements in the banking system--and as the economy
stabilizes to give more confidence to lenders, that we will see
better credit flows.
Mr. Donnelly. Thank you, Mr. Chairman.
The Chairman. The gentleman from Florida, Mr. Putnam.
Mr. Putnam. Thank you, Mr. Chairman.
I want to thank Chairman Bernanke for his leadership. For
all the criticisms about transparency and the Fed, many of
which I share, you have always been a very plainspoken
representative of the Fed, certainly much more clear and candid
than your predecessor, who made the Oracle of Delphi seem
downright verbose.
To that end, in listening to the previous questions, you
have referred to my friend, Mr. Cleaver, that it is not going
to feel like a recovery. And we have talked about some of these
issues, which begs the question: The last two recoveries, which
admittedly were much more minor, more shallow recessions than
what we are in now, they were characterized as jobless.
Do you believe that this will be a jobless recovery, as
well? And given the answer either way, what shape do you
believe that recovery will take?
Mr. Bernanke. We expect a gradual recovery--I don't know
what letter that corresponds to--which will be picking up steam
over time, perhaps well above the potential rate of growth by
2011.
We do expect to see positive job creation near the end of
this year, early next year. But it is going to take a while,
given the pace of growth, for the unemployment rate to come
back down to levels that, you know, we would be more
comfortable with. So, in that respect, it should take some time
for the labor market to return to normal.
Mr. Putnam. In your op-ed in today's Journal and in your
testimony, you spend a great deal of time talking about the
preparations that the Fed is making in terms of the exit
strategy. What metric or metrics are most compelling that allow
you to read a recovery?
And, in your testimony, there is a correlation between
inflationary fears and your prediction of when the recovery
begins; essentially, when that velocity kicks in in the money
supply, that the recovery and the inflationary pressure are
concurrent. So what metrics do you evaluate that allow you to
get ahead of that curve when the knock on the Fed has always
been that they are too late reading the trends?
Mr. Bernanke. It is a very difficult problem. And even
though we have these unusual circumstances, it is really the
same problem we always face, which you just pointed out, which
is picking the right moment to begin to tighten and picking the
appropriate pace of tightening.
Since monetary policy takes time to work, the only way we
can do that is by trying to make a forecast, make a projection.
And we use large amounts of information, including qualitative
information, anecdotes we receive, formal models, a whole range
of techniques, to try to estimate where the economy is likely
to be a year or a year and a half from now. It is a very
uncertain business, but it is really all we can do. And based
on that, we try to judge the right moment to begin to raise
rates.
So we will be looking to see more evidence of a sustained
recovery that will begin to close the output gap and begin to
improve labor markets. And we will be looking for signs of
inflation or inflation expectations that would cause us to
respond, as well.
Mr. Putnam. Given the debate about overhauling regulatory
reform structures and the role that you have played in that, as
well as others, you are having to carve out a separate approach
to these new non-bank financial institutions, which, to me,
sort of raises the question, which is probably going to be one
for historians to resolve: Should the barriers between banking
and investments have ever been torn down?
In other words, was Glass-Steagall the right approach after
the Depression? Was Gramm-Leach-Bliley the wrong approach? Has
enough time elapsed to have a good answer to that question, as
we move forward with setting up an entirely new regime?
Mr. Bernanke. I don't think that Glass-Steagall, if it had
been enforced, would have prevented the crisis. We saw plenty
of situations where a commercial bank on its own or an
investment bank on its own got into significant problems
without cross-effects between those two categories.
On the other hand, I think that we do need to be looking at
the complexity and scale of these firms and asking whether they
pose a risk to the overall system? And if that risk is too
great, is there reason or scope to limit certain activities?
And I think that might be something we should look at.
But I think the investment banking versus commercial
banking distinction probably would not have been that helpful
in this particular crisis.
Mr. Putnam. Thank you, Mr. Chairman.
The Chairman. The gentleman from Colorado?
Mr. Perlmutter. Thanks.
And I appreciate Mr. Putnam's question, because that is
exactly what I was going to ask, you know, whether or not we
can unring the bell, whether or not we should unring the bell
of mixing trading and banking and whether that was, you know,
part of what caused that--you know, I have been looking at all
your charts in this, and some of them are really pretty
shocking as to what happened in the fall and has occurred.
But I guess what you are saying is, no, we have to look at
it as a whole in terms of the financial industry and just try
to increase their margins or their capital when we see them in
riskier products or getting very big. Is that sort of the
bottom line for you?
Mr. Bernanke. That is generally right. But it could be that
a company has too many lines of business that it can't manage
properly, that it can't manage the risk appropriately. And, in
that case, I think the supervisors would be justified in
saying, ``You have to get rid of this,'' or ``You have to cut
that back.'' Capital is not the only thing. You also have to
have management and risk controls, as well as a buffer of
capital.
Mr. Perlmutter. Okay.
Some of my friends on the other side of the aisle have sort
of been questioning the value of the stimulus and what is
happening, but, in looking through your report, I mean, I see
some things that really look pretty positive.
First of all, in 2005, we had a negative savings rate; now
we have a very positive savings rate. Now, it happened almost
overnight. But, at some point, how do you gauge the savings
that is going on in the country right now? Is it positive or
too much?
Mr. Bernanke. Well, families are, with good reason, saving
more. They have lost wealth. Their house value is down, and so
they can't use the house as an ATM, as people did. They are
more concerned about the future, and so they are putting more
money aside in a precautionary way.
Interestingly, the private saving has increased so much in
this country that, despite the big increase in the government
deficit, total national borrowing from abroad is actually lower
now than it was the last few years.
So there has been a big change in behavior in the private
sector. And that is fine. It creates problems in the macro
economy because, without consumer spending, the economy doesn't
grow as fast. But I wouldn't advise families to worry about
that. I think people need to get their balance sheets in order
and their budgets in order. And that is a positive that will
come out of this whole crisis.
Mr. Perlmutter. And going along with that savings, there
was a statement in your report at page 7, ``The recent
stimulus-induced jump in real disposable income and the
improvement in equity wealth since this spring apparently has
helped lift consumer sentiment somewhat from its very low
levels at the end of the year.''
And I am looking at today's Wall Street Journal. Everybody
keeps talking about the Wall Street Journal. They are showing
the vital signs and a marked increase in 10 economic and
financial indicators over the course of the last 2 or 3 months,
showing real positive signs within the economy.
And I appreciate you sitting there as the Chairman of the
Federal Reserve, having to temper statements that you might
make. But, within your report, we see the savings rate
improved. There was really a sharp increase or--your chart
number 25, on page 15, shows unemployment just falling off a
cliff and then really a dramatic bounce back in the right
direction beginning in April and May of this year. So, again,
another positive sign.
The charts also show that the gap that we have had in terms
of our trade balances has really shrunk. I mean, part of what
has been going on here is we sent so much money overseas that
we haven't been a real productive society. But you can see
production personally and as a Nation improving.
Am I misreading your reports?
Mr. Bernanke. No. The economy has improved--the outlook has
certainly improved since March, and we can see it--the stock
market is up considerably since March. And, as I was mentioning
before, the fact that we are saving more means we can borrow
less from abroad. And that is exactly the decline in the
current account that you were noticing.
Mr. Perlmutter. My last question is on section 13(3) of the
Act, which was used, I think, in a pretty dramatic way with
Bear Stearns and then again in September.
I mean, is there any--have you all talked about whether
there should be some limitation on that, or is that mostly
coming from us?
And, with that, I would yield back and just ask him to
answer the question.
Mr. Bernanke. First, I would say that in every usage of
13(3), we have consulted closely with the Treasury, and we have
also apprised Congress whenever possible.
I think if a resolution regime is created that would allow
an orderly wind-down of a Bear Stearns or an AIG, our 13(3)
authority ought to be subordinated to that and only used if the
wind-down authority requests that the Fed participate in some
way.
Mr. Perlmutter. Okay. Thank you.
The Chairman. The gentleman from New Jersey, Mr. Lance.
Mr. Lance. Thank you very much, Mr. Chairman.
Thank you, Chairman Bernanke.
On page 6 of your testimony, you have indicated that we do
have to worry about fiscal balance. And Mr. Neugebauer and Mr.
Castle have asked you questions, and I would like to follow up,
if I might.
You indicate, ``Maintaining the confidence of the public
and financial markets requires that policymakers begin planning
now for the restoration of fiscal balance.''
Given the fact that we have, I would imagine, an almost $2
trillion deficit this year--I think the projection at the
moment is $1.8 trillion, and we are in the last quarter of the
fiscal year; my own judgment is that it may be as high as $2
trillion--and my own judgment is that next year's annual
deficit may be as high as $1.5 trillion, what would you suggest
that we do now regarding trying to achieve a restoration of
fiscal balance?
Mr. Bernanke. Well, I don't think there is much that can be
done about this year's deficit and probably not too much about
next year's deficit. But the Congress needs to develop a broad
plan, which encompasses all the spending plans and taxation
plans, that shows a moderation of the deficit over time to
something sustainable, which I would guess would be something
on the order of 2 or 3 percent of GDP.
Mr. Lance. Two or 3 percent of GDP. And, of course, we are
well, well above that at the moment.
Mr. Bernanke. That is right.
Mr. Lance. And I concede the point that we will be unable
to do anything for this fiscal year, obviously, since it ends
in fewer than 3 months.
I am not trying yet to completely throw in the towel
regarding next year. Obviously, if unemployment remains high--
and your testimony is that, while it may get better, it is
certainly not going to be where we are--that would further
depress tax revenues, I presume. I see nothing that the
Administration has done so far regarding restoration of fiscal
balance.
What would your view be after next year? You would like to
get back to 2 to 3 percent by the fiscal year after next year,
Mr. Chairman?
Mr. Bernanke. I don't have an exact number. I think
``medium-term'' means sort of 3 to 5 years, something in that
range. But we need to show that we have a plan for getting back
to a more sustainable level.
Mr. Lance. Thank you. My view is that the Administration
ought to work with us in Congress on trying to show greater
progress next year, beginning on the 1st of October.
You have indicated that your purchase of T bills is a plan
that will end, I believe, in this fiscal year, the $300 billion
purchase. The completion of that will be at the end of
September? Is that accurate, Mr. Chairman?
Mr. Bernanke. That is right.
Mr. Lance. And do you currently anticipate that you will be
continuing to purchase at this level beginning in the new
fiscal year?
Mr. Bernanke. That is really a decision that the FOMC, the
Federal Open Market Committee, needs to make, because it has
implications for monetary policy in general. But we will be
talking about that as we go forward.
Mr. Lance. And, obviously, we do not favor monetizing the
debt. I understand your point that you do not believe you are
doing that. But we do have concerns in that regard; I have
concerns in that regard. And I certainly look forward to
working with you in that area.
And, finally, Mr. Chairman--and then I will yield back the
balance of my time after your response--how much, at the
moment, are we in the hole regarding AIG and what you have done
regarding AIG?
Mr. Bernanke. We have currently about $45 billion that we
have lent directly to AIG, which I believe is well-secured. And
we have less than $40 billion that has been lent to two Maiden
Lane facilities which are holding securities which are
underwater. And I don't know the exact number, but it is
several billion dollars.
Mr. Lance. Thank you. If you could get back to us through
the chairman, I would appreciate it.
Mr. Bernanke. Certainly.
Mr. Lance. Thank you, Mr. Chairman. I yield back the
balance of my time.
The Chairman. Next--I have to apologize, I forgot that the
seniority system here was designed by the choreographer of the
Bunny Hop, and it goes this way. And I made a mistake. I told
you I was getting old. So I am now at the gentlewoman from
Wisconsin.
Ms. Moore of Wisconsin. Thank you, Mr. Chairman.
And thank you.
I was really pleased to see in your testimony, under the
regulatory reform section, that you realize that systemic risk
is not just too-big-to-fail institutions, but activities and
practices that provide systemic risk.
Many of us--and, certainly, this article was given to me by
Congresswoman Maxine Waters--have been reading the recent
Rolling Stone article by Matt Taibbi, ``The Great American
Bubble Machine.'' And while it is very critical of a particular
firm, I think there are things that we all notice with respect
to the housing bubble and the dot-com bubble and the oil bubble
that all seem to be activities that seem to be systemic risks.
For example, allowing an entity to sort of manipulate the price
of an entity, of the housing prices, to ratchet the prices up
and then just sort of hedge against their own products.
So I guess I would like to ask your opinion about credit
default swaps and also the practice of spinning, where
executive compensation seems to be a systemic risk factor, as
well. So can you tell us what we can do in our regulatory
reform to prevent the creation of these bubbles?
Mr. Bernanke. Well, on the credit default swaps, there are
a number of measures that have been proposed. One important
step would be to get the majority of them standardized and
traded on a central counterparty or an exchange, which would
eliminate the risk that the seller of the CDS would not be able
to make good, which is what happened with AIG, for example. So
that is an example there.
On executive compensation, I should let you know that the
Federal Reserve is going to be proposing later this year
guidance on executive compensation which will attempt to
clarify that compensation packages should be structured in such
a way as to tie reward to performance and to be such that they
don't create excessive amounts of risk for the firm.
Ms. Moore of Wisconsin. Thank you.
With respect to standardizing, we are told by the smartest
of these people that we just have to have customized the
products, that it is just really going to be harmful in the
marketplace if everything has to be standardized. What would be
your advice on that criticism?
Mr. Bernanke. There are probably some products that, to be
useful, need to be customized. But we should make sure that
dealers or banks hold sufficient capital against them to make
it attractive to move them onto exchanges and to standardize
them whenever possible.
Ms. Moore of Wisconsin. Okay. Thank you.
With respect to what we can't unscramble, many of my
colleagues have already talked about Gramm-Leach-Bliley and the
CFTC reform. And here we are talking about too-big-to-fail, all
these institutions that are allowed to perform several
functions.
What, in your opinion, can we not unscramble in order to
continue to be innovative and profitable? What cannot be
unscrambled?
Mr. Bernanke. Well, I don't think I would break firms down
to their elementary components; you know, commercial banks can
only loan and take deposits, for example. There are lots of
benefits to having multiple services provided by one
institution, or global services provided by one institution.
But I do think we need to take considerable care that we are
not creating institutions which are imposing risks on the broad
financial system.
Ms. Moore of Wisconsin. Okay. So I have just one more
question. Many of my Republican colleagues are critical and
concerned about the Fed taking on the role of the systemic risk
regulator, and then there are people like me who are undecided.
And when I looked at the last page of your testimony and
you say that you don't want as much auditing of the Fed because
it may interfere with your independence, I have to ask you why
you think, then, that you should be able to perform the tasks
of monetary policy and how that will not compromise your policy
independence. I mean, you know--
The Chairman. If the gentlewoman wants an answer--
Mr. Bernanke. Yes, independence varies. We have been
supervisors for a long time, and we have all the same
examinations, all the same oversight that the other supervisors
have.
Monetary policy is a special area which I would just put on
the side here. But in terms of our systemic oversight and
supervision, we would have exactly the same oversight that any
other supervisor would have.
The Chairman. The gentleman from California, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman.
Chairman Bernanke, the last time that you appeared we had
an opportunity to talk about the budget deficit. And one of the
things you said, which I think was very impactful to me, you
said in response to a question I asked, ``Certainly, trillion-
dollar deficits as far as the eye can see would not be
sustainable.''
And we had the CBO Director, Mr. Elmendorf, he came out
with his own analysis, which you are familiar with, sort of
sounding the alarm. And he had a couple of observations. One,
he said with respect to the growing expanse of the government
at the expense of the private sector, he made some observations
in terms of squeezing out in the future economic growth on the
private-sector side.
And then he said about the costs--for example, the health
care bill that is moving, he said that legislation
significantly expands the Federal responsibility for health
care costs. He said, ``The way I would put it is that the cost
curve is being raised.'' And he went on to express his
concerns.
I think one of them is, in the middle of a recession, we
see the government shifting. We have a government-run economy,
basically, or we are beginning to move in that direction, and
the deficits are appreciably higher. You know, perhaps the
deficits could reach as high as $2 trillion for the short term.
Earlier this year, the CBO projected that the Federal
Government would need to go out with $2 trillion in treasuries
in order to fund the deficit. And that was the short run. If
you combine short and long term, they were talking $4.5
trillion over the next 2 years.
The bond market has never seen such a large bond issuance
in such a short period of time. So I was going to ask you about
your perception on the ability of the bond market. Can we float
that much, $4.5 trillion over the next 2 years? What will the
results be on that?
And do you have a concern with the pace at which government
is growing relative to the private sector here and the added
responsibilities on the public purse that Congress is in the
process of enacting?
Mr. Bernanke. I think the ability to float large amounts in
the short to medium term depends on the credibility of a
longer-term plan that brings the deficits down. If the markets
don't think that you are on a sustainable path, then they will
bring forward in time their concern about future deficits. So
it is important to have, as I said before, a medium-term
sustainability plan.
I must say one thing about health care costs, which is that
is the most important determinant right now of our long-run
fiscal situation. And even under the status quo, we have a very
serious problem, and so, we do need to address that problem in
some way. Because, given the aging of our population, the
increases in medical costs are going to be a huge burden on our
fiscal balance.
Mr. Royce. Well, on that very subject, here is what the
head of the CBO said about that. He said, ``As a result of
those deficits, Federal debt held by the public is going to
soar from 41 percent of GDP to 60 percent at the end of the
fiscal year 2010. This higher debt results in permanently
higher spending to pay interest on that debt. Federal interest
payments already amount to more than 1 percent of GDP. Unless
current law changes, that share will rise to 2.5 percent by
2020.''
And he says, ``The Federal budget is on an unsustainable
path because Federal debt is going to continue to grow much
faster than the economy over the long run, and large budget
deficits would reduce national saving, leading to more
borrowing from abroad and less domestic investment, which, in
turn, would depress economic growth in the United States. Over
time, accumulating debt would cause substantial harm to the
economy.''
``Substantial harm.'' Do you agree with the CBO's estimate
on that subject of accumulating that amount of debt?
Mr. Bernanke. If fiscal policy stays on an unsustainable
path, I do agree with it, yes.
Mr. Royce. Thank you very much, Chairman Bernanke. I
appreciate your testimony here today.
Thank you, Mr. Chairman.
The Chairman. The gentleman from Florida.
Mr. Klein. Thank you, Mr. Chairman.
And thank you, Mr. Chairman, for being with us today.
I am going to bring the conversation back to what I
continue to believe are the most current issues, and that is
home foreclosures and lending to businesses.
I have been a believer from the beginning that, when we
started this process on dealing with the recession and dealing
with the banking crisis, I think you and others said we need to
deal with both, you can't do one without the other, can't make
the investment in the recovery without making liquidity
available to businesses, and you can't fix the banks without
stimulating and getting things moving on the private side.
What I also believe, and I support your position, is that
we are going to have a slow, maybe a little bumpy recovery, but
it is probably moving in the right direction. And what our
goal, of course, as people in the public and private side, is
to mitigate or reduce the amount of time it takes for the
natural cycles to work their way through.
That being said, I am from Florida, as you and I have
talked about, and we are in a very precarious time. The banks
are overexposed, in many ways. The residential markets are
overexposed. And we do not see enough activity, movement. And
that is speaking to Realtors on short sales and workouts and
things like that on the residential side; and on the business
side, real estate and/or business, the lending practices.
And there is a lot of frustration out there, maybe
justified, maybe not justified, but certainly intuitively
justified, that banks that received Federal assistance--and
maybe they are in a separate category--but that they have a
higher responsibility to work out this scenario. Nobody is
pushing them to make unreasonable and unjustified underwriting
decisions. But they really are not part of the process of
solving the problem.
Specifically on the foreclosure area, I think it was the
Federal Reserve of Boston, did a paper that talked about 3
percent of the serious delinquent loans have been resolved
since the 2007 period of time. That obviously is not working in
any successful way.
Can you share with us, whether it is the Federal Reserve or
whether just your general experience, what we can do to deal
with the foreclosure--what can we do to stimulate the banks to
help work this out on a much more efficient, much more quick
basis?
Mr. Bernanke. Well, we have a couple of government programs
in place, as you know, the Making Homes Affordable Program
using the TARP money, and the HOPE for Homeowners Program,
which are different principles. One reduces payments; the other
addresses the principal. Those programs are slowly ramping up.
So I think it would be important to try to get that moving as
quickly as possible.
The bank regulators have been pushing the banks to expand
their staffs and to be more responsive. We have heard from many
consumer groups, for example, that banks are sometimes very
slow in responding to requests for short sales or requests for
modifications.
So I think it is very important that the banks increase
their capacity and move as quickly as possible to take
advantage of these programs or other ways of working out
borrowers and avoiding preventable foreclosures.
Mr. Klein. I agree. But what can the Federal Reserve do, if
anything, or through your relationships with FDIC or others?
Mr. Bernanke. Well, the Federal Reserve doesn't oversee
many of the big servicers who have large numbers of these
mortgages. But we are working with our fellow bank regulators.
We issued a statement in November, and we are working with the
Federal bank regulators to try to push the banks to move more
quickly and expand their capacity to work out loans. So I think
that is very important.
The Fed is also working with communities. We have some
projects to try to stabilize neighborhoods that are suffering
from large numbers of foreclosures. But I think it is very
important that the banks which are the servicers get involved
as quickly as possible to work with these borrowers.
Mr. Klein. You know, on the short sale issue, that is
something that we had been told a while back there was going to
be a streamlined process, which, you know, banks would have a
uniform process, uniform documentation, could move a lot
quicker. And I just wrote a letter to follow up on this. It
doesn't seem to be happening.
So I guess I would just ask, as we move forward--and I
understand we have programs out there, and they are working
marginally. We just have to ramp this up in terms of voice,
substance, and effort, and do that.
Secondly, in the small business area, again, small
businesses, particularly in my area and south Florida and other
parts of the country, drive the train. And they will be
probably the quickest ones to be able to respond.
We understand unemployment lags, but there is this
timeframe which is a cash-flow issue to work through a slow
period. In Florida, we have a non-season point in time, where
businesses need that ability to get through. And, again, they
are having a difficult time, even what I would consider
creditworthy people. Their ability to pay is there and
otherwise.
So if you could just quickly comment on that.
Mr. Bernanke. No, I agree. And we are working on that. We
have in our TALF program a Small Business Administration loan
program which is trying to provide funding for those loans,
trying to help in that way.
The Chairman. The gentleman's time has expired.
The gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Chairman Bernanke, welcome.
In Chairman Frank's questioning of you earlier, he asked
about the positive aspects of the stimulus bill that was passed
early in February. I believe what I heard you say is that you
believed it had some marginal improvement on State and local
tax revenues and some marginal improvement on consumer
spending, but you were reserving judgment.
Is that a fair assessment of what you told this committee?
Mr. Bernanke. We are still pretty early in the execution of
this program.
The Chairman. Would the gentleman yield?
Mr. Hensarling. I would be happy to yield to the gentleman.
The Chairman. The word ``marginal'' was never uttered. He
didn't say ``marginal.'' The gentleman can read the report. It
doesn't say ``marginal.''
Mr. Bernanke. It has had some effect, we believe.
Mr. Hensarling. Okay. It has had some effect. Okay. Well,
the chairman has said ``some.'' So I appreciate the chairman's
distinction.
Clearly, what you didn't mention, as far as positive
impacts, was employment. We know that, since this legislation
has passed, that unemployment is now at a quarter-of-a-century
high, that 2 million jobs have been lost. Some believe that
there is cause and effect on adding $1.1 trillion to the
national debt.
And on page 6 of your testimony, again you state, ``Unless
we demonstrate a strong commitment to fiscal sustainability, we
risk having neither financial stability nor durable economic
growth.''
I have noticed, and please tell me if I am incorrect, the
latest FOMC report indicates or estimates that we are looking
at 9 to 10 percent unemployment not only for the rest of this
year, but for the rest of next year, as well.
Did I read that report correctly?
Mr. Bernanke. That is right.
Mr. Hensarling. Okay. So, 9 to 10 percent unemployment. And
this estimate is up from your earlier report. Is that also
correct?
Mr. Bernanke. That is right, the one that was made in
January.
Mr. Hensarling. Okay. I guess, Mr. Chairman, then the
question is, yes, I would hope that if one committed $1.1
trillion, when you add in debt service, some good would come
from it. Now, clearly, it hasn't happened on the employment
front.
But I am also concerned that, no matter what the positive
aspects are, without the strong commitment to fiscal
sustainability, might it be possible that whatever short-term
good comes out of that legislation is going to be outweighed by
long-term damage, as many economists believe?
Mr. Bernanke. The deficit is obviously an issue. We have to
worry about the long-term debt ratio, certainly.
Mr. Hensarling. In that regard, Mr. Chairman, as you know,
Capitol Hill, Congress is considering health care legislation.
Clearly, I think all Americans agree that the status quo is
unsustainable over the long term.
The legislation that is presently before Congress, CBO
Director Elmendorf has said, ``We do not see the sort of
fundamental changes that would be necessary to reduce the
trajectory of Federal health spending by a significant amount.
And, on the contrary, the legislation significantly expands the
Federal responsibility for health care costs.'' He goes on to
estimate essentially the table stakes cost of the program, if
you will, at $1 trillion.
Now, again, I would hope that some benefit would come from
that program. But, one, do you agree with Director Elmendorf's
assessment, if you have looked at the cost of that legislation?
If you haven't, assuming he is correct, would you be concerned
about the impact that this would have on our Nation's
commitment to fiscal sustainability?
Mr. Bernanke. I have not done an independent evaluation of
the cost. I think, as I said earlier, that a critical element
of fiscal sustainability in the long term is the cost of health
care and the fiscal share in health care costs. So whether we
adopt a new program of reform or whether we stick with the
status quo, I do think we need to address that 2.5 percent
faster than per capita income growth and per capita health care
costs.
Mr. Hensarling. Mr. Chairman, in your most recent survey of
small businesses finances, I believe the Federal Reserve
indicated that approximately 77 percent of small business
owners use credit cards. A recent report in USA Today has
indicated that in the first 4 months of this year alone, we
have seen a 38 percent drop in the issuance of new credit
cards. Now, presently Congress is considering legislation aimed
at consumer financial products. But given that a large number
of small business owners use credit cards for business
purposes, might an unintended consequence of the wrong
legislation lead to a further contraction of credit to small
business?
Mr. Bernanke. Well, I hope that small business can move to
somewhat less costly forms of credit over time.
The Chairman. The gentleman from Illinois.
Mr. Foster. The title of this hearing involves monetary
policy, but the subject seems to be the overall health of the
economy. And I am struck by the underemphasis in this
discussion of the importance of the real estate market, which I
believe was the dominant driving force in this economic
downturn. Much more wealth has been destroyed by the drop in
real estate values than in the stock market or the near
collapse of our banking system. And the same was also true of
the Great Depression, where more wealth was destroyed in the
real estate bust following the stock market crash than the
stock market crash itself. And so I have sort of two questions
along these lines.
First, do you think it might be appropriate to have more
information in future releases of this about the real estate
market and projections? And also, if you could say a little bit
about what the Fed does in terms of projecting. How much
manpower do you put into looking forward projections of the
real estate market, given what I believe is of extreme
importance to future economic conditions.
Mr. Bernanke. No. I agree it is very important, and I am
surprised that we don't have much coverage. I think we
certainly do put a lot of resources into projecting
construction, house prices, land prices, and the like. And I
agree, it is very important.
Mr. Foster. And the second point is, do you think that the
Fed is necessarily helpless to mitigate future real estate
bubbles? For example, in this week's Economist Magazine, they
discuss China's response. And of course, as you know, they are
pushing very heavily on monetary policy and credit availability
and so on, but at the same time, to avoid reinflating a real
estate bubble they are turning up the mortgage origination
requirements. You now have to put 40 percent down and so on,
and so that they are independently operating both of those.
Do you think that actually there is a reasonable role for
the Fed or some other regulator to try to make this happen?
Mr. Bernanke. I think that could be addressed under the
systemic risk regulation rubric that we have been discussing
with the Council or with the Fed overseeing large financial
institutions, that when you have an asset whose prices is
rising quickly, you could require greater capital against it,
for example, or greater downpayments. So even if you don't know
there is a bubble or not, that still might be a prudent thing
to do. So I do think that looking at asset price fluctuations
in a supervisory context could be very helpful.
Mr. Foster. Thank you. I yield back.
The Chairman. If the gentleman would yield to me, I did
want to then continue a couple of points.
One, I would ask you, Mr. Chairman, on page 16 you
mentioned that the emergency unemployment that we adopted last
year has ironically contributed to a higher unemployment number
in terms of the rate because it has increased the participation
rate. I think people ought to be clear about that. The
unemployment rate goes up when more people are trying to find
jobs. Would it be possible to get an estimate of the extent to
which that was statistically a factor?
Mr. Bernanke. We can send it to you. My recollection is
about a half a percentage point.
The Chairman. That is interesting, a half percent of the
9.5 percent.
Secondly, I did just want to reiterate. Our friend from
Texas said in two cases, said there were marginal improvements.
The word ``marginal'' doesn't appear even in the margins here.
It is certainly not in the text.
So on page 1 of the first column there is an unqualified
statement that consumer spending has been supported by the 2009
stimulus. On page 13 it says interest rates have declined
because investors concerned about credit quality eased with the
passage of the stimulus plan. It then did say that, in addition
to that, it aided the finances somewhat. So, or it is somewhat.
If the gentleman wants the time of the gentleman from
Illinois.
Mr. Bachus. Oh.
The Chairman. The gentleman from Illinois yielded me his
time.
So those are both cases. I also remember in response to a
question of the gentleman from Texas, sometimes you get answers
you don't want. The Chairman said that the passage of the
stimulus bill had reduced unemployment. So obviously it is not
totally the answer, but I don't think it is trivial to object
to the insertion of ``marginal'' when it was never there in the
entry point.
The other point I want to make is this. The Chairman talked
about the recommendations they are preparing on executive
compensation. I would just note that those will dovetail with
the legislation I hope this committee will be adopting next
week, because we will be empowering the SEC statutorily to
enact certain rules. And so the information and the
recommendation of the Federal Reserve, frankly my sense is that
absent our statute there wouldn't be the statutory authority to
put all those in effect. So these work very well together. We
will be giving the SEC the statutory authority, I hope, before
the end of the year to incorporate those recommendations.
The gentleman from New Jersey.
Mr. Garrett. Before I begin, let the record therefore
reflect that there is a significant difference between the
definition of ``marginal'' and ``somewhat.'' I take away from
that.
Thank you, Mr. Chairman. We have some charts which sort of
go to this point as far as looking at the economic issues and
the stimulus issues and how you sort of judge these things. As
you know, the President's Economic Policy Advisor has suggested
that, as soon as this passed, that, quote, it will start adding
jobs rather than losing them. Majority Leader Hoyer said there
will be an immediate jolt.
And so if you look up, I know it is hard from where you are
sitting--great. It is even easier then. This is what the
original projections were. With the recovery plan is the dark
line on the bottom. But if you don't do anything, things would
be worse, the top line above there. And that is why, of course,
we borrowed $800-plus billion to try to fix it.
Now, the next slide, slide two, shows what really happened.
The two other lines are still there, but now you see where the
unemployment numbers actually were in March of 2009 and April
of 2009. And we don't have this on the little screen but we do
have it on a board to show where it went after March, April. I
guess it goes up to May and June, if I am not mistaken. I don't
seen it here. Basically, what that tells me, not as an
economist, just as a layman, that they, as the Vice President
said, misread the economy and their projections in regard to
where things would happen if we did nothing or if we had spent
$800 billion. And things are actually worse than they
projected, and we would have been better off, if their original
charts were right, to have done absolutely nothing.
So your comment on that--and also, I understand your
earlier comment when I stepped out of the room was that it is
too early to tell. When will we be able to tell? And if their
focus was on job creation, and that was the entire focus in all
their comments on this was job creation, isn't that an
indicator that we should be able to look at here approximately
a half a dozen months later?
Mr. Bernanke. Well, as Chairman Frank mentioned earlier,
the economist's fallback is always the counterfactual: Where
would we be without the program? And it is difficult to know.
Clearly, the forecast that was made in January of this year
was too optimistic. And then the question is, where would we be
without the program? And it is very hard to know. Some sense of
the uncertainty is given by the CBO's estimate, which has at
the end of 2010 the impact of the program being anywhere
between .6 of 1 percent unemployment to 1.9 percentage point of
unemployment. So it is likely that it would reduce
unemployment, but the scale is very hard to know. And we should
know better next year, but it is very early at this point.
Mr. Garrett. I fear then that the argument on the
counterfactual will always be the argument that will always be
thrown up to us to suggest that maybe there was a better way.
And even a year from now, or a year-and-a-half from now, when
we get into the last dollar going out the door, they will
always say it could have been worse. So how would you retort to
that argument?
Mr. Bernanke. You have to use the best analysis that you
can get. To the extent that you are seeing outcomes unrelated
to unemployment that are worse that you expected, that is
indicative that the whole economy is worse than you expected.
But I am sympathetic to the fact that it is very hard to know
what the impact is.
Mr. Garrett. And so any discussion right now as far as
going forward with additional spending or additional stimulus
would also therefore be too early to make those suggestions as
well?
Mr. Bernanke. That is right.
Mr. Garrett. Let's change subjects and go to the issue of
monetary policy. I know in your report today and in your op ed
as well, and you have previously stated that you have concerns
about the independence of the Fed both on monetary policy and
your other regulatory roles as well; therefore, you do not like
the idea of audits and what have you, intrusive audits on
various other aspects of the Fed than it has right now. I would
just suggest that, in two areas, that maybe the Fed over its
history has not been as independent as some would suggest. In
the area of monetary policy, I know we have had this chairman
on at least a half a dozen occasions encourage that the Fed,
both the current Fed and the previous Chair, lower interest
rates to keep the economy going, what have you. And of course
you have heard a number of economists who make the argument
that it was the low interest rates that helped either cause or
at least exacerbate the problem. So there is one area where
Congress and at least the chairman is trying to weigh in and
influence the Fed. And certainly the other areas on the
regulatory role and the consumer protection area, for about 8
years under Republican leadership we took a position that was
not the appropriate position to try to better the economy.
Then, under 2 years of Democrat leadership and what some would
say is a pounding on the Fed in this area to go in that
direction, suddenly the Fed goes in that area.
So is it fair to say that the Fed may not be, even under
current constrictors, as totally independent that some would
suggest that it is? And do you think that it is helpful for the
Congress to weigh in on setting monetary policy and setting
consumer policy as well?
Mr. Bernanke. On monetary policy, we do not take political
considerations into account. We look only to the economy. You
have the transcripts 5 years later. You won't see any
discussion of politics. And I assure you that we make those
decisions based on the long run health of the economy.
On regulation, I think the rules are somewhat different in
the sense that Congress sets statutes, and those statutes
create presumptions for what the regulators are going to do.
With respect to regulatory policy, our independence is
important, but it is not to the extent that monetary policy
independence is. We have a similar relationship as other
supervisors and regulators do to the Congress.
The Chairman. The gentleman from Minnesota.
Mr. Ellison. Thank you, Mr. Chairman.
Thank you, Chairman Bernanke. I appreciate you being here
and your work.
If the Federal Reserve is given the authority to oversee
systemically significant firms, what additional powers would it
need to completely and successfully carry out those duties? For
example, what about the authority to review accounting
policies, particularly those who direct and potentially
procyclical implications on banks? And what about enhanced
authority to examine the safety and soundness of nonbank
subsidiaries within bank holding companies? And what about
oversight of credit rating agencies?
Mr. Bernanke. The Fed would need some authority perhaps in
conjunction with the council to add capital liquidity and other
requirements to make sure that the institutions were not only
safe and sound but did not pose a risk to the broader financial
system. As part of that, the Fed would need some enhanced
authority to look at nonbank subs, as you mentioned.
The other things that you mentioned, like accounting policy
and credit rating agencies, would not be part of this. Those
are the kind of things that the council would be responsible
for looking at.
Mr. Ellison. I introduced a bill that would give the
Federal Reserve oversight over credit rating agencies when they
analyzed the rating structure of financial products. This
authority would build upon powers that the Fed has already
assumed as part of the administration of the TALF program. Do
you have any reaction to that?
Mr. Bernanke. Well, currently the SEC has those
authorities, and I guess I would like to get your judgment
about why you would want to transfer them.
Mr. Ellison. Well, because they have an important--the Fed
does have, is looking to, perhaps would take on some
responsibility of systemic risk, and clearly credit rating
agencies have an important role to play in that regard. So my
thought would be if we are going to address, if we are going to
confer this authority with the Fed, don't they need all the
tools that would be necessary to achieve their ends?
Mr. Bernanke. As I indicated earlier, we are not asking
for, the Administration is not asking for, broad-based
authority over the entire system. It is a very specific limited
set of authorities over the systemically critical firms, which
is similar to our current umbrella supervision authority. So
the broad issues that you are referring to I think would be
better served by being looked at by a council of regulators.
Mr. Ellison. Do you believe that inflation concerns are
misguided, given the large quantity of excess reserves in the
banking industry?
Mr. Bernanke. I think they are misguided in the sense that
we, as I have described today and in various other contexts,
the Federal Reserve is able to draw those reserves out and
raise interest rates at an appropriate time to make sure that
we don't have an inflation problem.
Mr. Ellison. Should Congress consider setting a leverage
ratio?
Mr. Bernanke. That is something we should look at. I think
there is room here for the regulators, the Treasury and others,
the Congress, to think about our capital regulation plan and
see what changes might be made. But I wouldn't want to give an
offhand comment on that. Of course we already have a leverage
ratio, but the question is whether to raise it or change its
format in some way.
Mr. Ellison. I would like to ask you about consumer
protection issues. Ed Yingling of the American Bankers
Association indicated that consumer protection in the financial
system, safety and soundness are two sides of the same coin.
But I wonder sometimes if that coin sometimes is at odds within
itself, because it seems to me that if you take, for example--
and I used this example before--overdraft fees. I think a
safety and soundness regulator might not be distressed about
what I would call excessive overdraft fees, because that means
profitability and a stream of income for the bank, which would
make the bank more safe and sound. But from a consumer
standpoint, it could present some real issues. You know, $35
for a bounced check might--I think some consumer advocates
might find that excessive.
So then, and this is an example and I know that there are
many others in which the consumer, a consumer advocate and a
prudential regulator might see things very differently. Do you
see a conflict between, say, what a consumer advocate, a
consumer advocate might look at and feel is important and that
of a safety and soundness regulator?
Mr. Bernanke. On that particular example, the Fed has taken
a number of actions about overdraft fees, even though we are
also a safety and soundness regulator. I think there are also
examples where consumer protection and safety and soundness are
complementary. An example would be underwriting standards. Good
underwriting standards, well documented, making sure there is
enough income, those sorts of things, that is good for safety
and soundness and it is also good for the consumer. So there is
also situations where there they are complementary.
Mr. Ellison. And--
The Chairman. The red light means time is up. The
gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman.
Thank you for being here, Mr. Chairman. You talked a little
bit about the TALF program and said that it was off to a slow
start. What are the expectations and the benchmarks with the
TALF facility? Will it be sufficient and timely enough to
facilitating private investing and lending? Or are you
considering other programs?
Mr. Bernanke. The amount loaned is lower than we expected,
but I wouldn't say it is off to a slow start because it has
been very effective. We have consumer asset-backed
securitizations at almost the same levels they were before the
crisis and considerable improvement in the spreads in those
securities. We have just begun the commercial mortgage-backed
security program, so it is a little early to judge there. But
we have seen even in that category, we have seen the spreads
come in, the rates come down. So I do think that even though
the amounts loaned are not that enormous, there have been
benefits in the market. So I think we will continue to focus on
that instrument.
Mrs. Biggert. I think that with the securitized lending,
how do you plan to address the reality? I think that there have
been some that have flagged that the market experts and some of
the participants that the markets need to know now and not at
year's end whether the programs will be extended in order to
see any usefulness in the next several months. Would you agree
with that statement?
Mr. Bernanke. We will certainly want to give the markets
plenty of advanced warning. You are absolutely right there. And
we are looking at that and making a judgment.
Mrs. Biggert. And how do you address the commercial real
estate? You talked about that as being--
Mr. Bernanke. Well, one of the main problems with
commercial real estate finance is that commercial mortgage-
backed securitization was an important source of funding for
that commercial real estate, and that has completely shut down.
Our TALF program is now accepting both new and legacy CMBS. It
takes a bit of time to put those deals together, and so we
haven't quite yet seen the scale that we anticipate, but we are
hopeful that that will be at least one contributing factor to
improving the commercial real estate market.
Mrs. Biggert. So have you contemplated extending the TALF
program?
Mr. Bernanke. We are looking at some alternative assets,
but they are very complex, many of them, once you get beyond
the categories we have already included.
Mrs. Biggert. So if you go to that, then will you not
extend the TALF program, if you go to these others?
Mr. Bernanke. We may not. It depends on our judgment on
some of the alternative asset classes that we are currently
reviewing.
Mrs. Biggert. Thank you. Then it is my understanding that
we talk so much about small businesses as being the basis of
jobs and about 60 to 80 percent of the net new jobs according
to the CBA's Web site. If this is the case, what is going to be
the effect of requiring small businesses to pay for the health
care program? In other words, if they pay as individuals the
rates, how is this going to affect the health care for small
businesses? And shouldn't we be providing incentives for small
businesses to grow rather than to have to have a tax increase
in effect?
Mr. Bernanke. All else equal, if you raise taxes on a
particular kind of firm, that will be detrimental to the firm.
But I think, in fairness, you have to look at the overall
issue, which is how to provide broad-based health care. And
there is a problem, which is that a lot of small firms don't
offer health care. And then the question is, how do you provide
that? So there is an issue of financing that, and maybe there
are alternative ways to do that.
Mrs. Biggert. But isn't it going to be that the small
businesses would actually have much less chance to do it if
they are having to have increased taxes to pay, the amount of
money if they are making over--I don't know what it is now,
between $250,000 or $1 million, whatever is going to be the
amount.
Mr. Bernanke. If there are extra costs, that would be
obviously a cut into profits.
Mrs. Biggert. Thank you. Thank you for being here. I yield
back.
The Chairman. The gentlewoman from California, Ms. Speier.
Ms. Speier. Thank you, Mr. Chairman.
Mr. Chairman, thank you for your service. I know you have
spent a lot of time up here in a number of hearings in
Government Oversight among others, and we have been tough on
you. And I want you to know that even though we have been
tough, I truly respect what you have done over the last 12
months. I think you are a man of good will and good faith, and
we are indebted to you as the American people.
Let me ask you this question. Are we enduring the greatest
world depression right now?
Mr. Bernanke. This is the worst global recession in the
postwar period. It is not as great as the 1930's, but since
World War II, yes.
Ms. Speier. The $700 billion of TARP money, you indicated
that we are underwater with AIG and Bear Stearns. How much can
the taxpayers expect to have returned to them of the $700
billion?
Mr. Bernanke. I was referring to the Fed loans and not to
the TARP. But TARP is also underwater, probably, in AIG.
I don't know the answer. We have of course $70 billion just
paid back. It is much more complicated now because, as you
know, the TARP money is being used for a number of different
purposes, including foreclosure avoidance and the auto
companies and so on. So it is hard for me to make a judgment. I
would say that of the money put into, as capital into banks,
particularly through the capital purchase program, which is
money given out to healthy banks, I would say that virtually
all of that money will come back. For troubled firms like AIG,
it depends on how markets evolve and how the firm does going
forward.
Ms. Speier. You said earlier that you didn't really think
Glass-Steagall, if it were in place, would have protected us
from all that took place. However, it would have protected us
from the debacle at AIG, and the taxpayers would not have had
to put up $200 billion. That is true, is it not?
Mr. Bernanke. I don't think so. Glass-Steagall separates
commercial banking and investment banking. I don't think it
would have prevented AIG from--
Ms. Speier. Well, AIG is an insurance company. And the only
way it was able to then move into credit default swaps was by
purchasing a thrift in Delaware that then gave it the
opportunity to play in that marketplace.
Mr. Bernanke. I would have to check on the legalities. They
were treating, they were calling credit default swaps a form of
insurance. So maybe they would have argued it was a type of
insurance and therefore fell under their purview.
Ms. Speier. It wasn't regulated by insurance commissioners
around the country. It was really regulated through the Office
of Thrift Supervision, was thrift supervision, so therefore it
was the banking entity that was really the regulator for it.
There is a hearing we are going to have this afternoon on
what is too-big-to-fail, and one of the individuals who is
going to testify makes the statement that for companies that
are under $100 billion as a rough threshold, that we can allow
them to fail without it creating havoc in our financial
services industry. Would you agree with that?
Mr. Bernanke. I wouldn't want to give a single number. I
think it depends also on the complexity and interconnectedness
of the firm, and it also depends on what is happening in the
broader markets. There may be be times of stability when a firm
can fail and wouldn't cause broad problems, but during a period
of intense instability letting the firm fail would be a
problem. So I hesitate to give a single number.
Ms. Speier. But is that around the threshold, would you
say?
Mr. Bernanke. Again, I don't want to give a single number.
I think it is a multi-dimensional question. It depends on a
number of different things.
Ms. Speier. Now, Bank of America is $2.3 trillion in assets
now. It is too-big-to-fail, isn't it?
Mr. Bernanke. The government intervened, provided TARP
money in January.
Ms. Speier. Well, it is a definition of a company that is
too-big-to-fail, because we have injected much money into it.
Correct?
Mr. Bernanke. Yes. And, again, I think it is very important
for us to have a resolution regime that will avoid that problem
in the future.
Ms. Speier. So how do we make these financial institutions,
because there is a handful of them now because there has been
concentration in the marketplace because of the failures. How
do we make these companies smaller?
Mr. Bernanke. If you impose both the consolidated
supervision of the Fed or another authority over these firms
and make them bear the cost of their size through extra capital
liquidity and risk management requirements, first, and
secondly, if you have a resolution regime which allows the
possibility that creditors could lose money if the company
failed, then both of those things would tend to make being big
less attractive because, on the one hand, you have to bear more
capital requirements, and on the other hand, you don't get the
cheap financing that you get from being too-big-to-fail.
So those things would tend to make firms choose to be
smaller. And in addition, supervisors could choose to tell
firms that they needed to limit certain activities if they
thought it was a danger to the broad system.
Ms. Speier. My time has expired.
The Chairman. The gentleman from Texas, Mr. Marchant.
Mr. Marchant. Thank you, Mr. Chairman.
We have had an interesting phenomena where we had several
investment banks and broker-dealers that decided to become bank
holding companies and banks. Is there a possibility that these
bank holding companies and banks can make another decision to
go back to be only broker-dealers and investment banks? And
does the Fed have any control over their decision to do that?
And what would be the implications of that?
Mr. Bernanke. They could do that. And if they did, the Fed
would no longer be their supervisor. One of the benefits of the
idea of determining that a certain set of firms are so-called
Tier 1 firms is that if you were one of those firms you
couldn't escape. You would still be supervised by the Fed no
matter what your charter was.
Mr. Marchant. So that would be a very important part of the
reform package?
Mr. Bernanke. That is right, to avoid that problem. Yes.
Mr. Marchant. With the savings rate at 8 percent and going
possibly to 10 and the strong demand for treasuries, is it
possible that the Fed could make the decision to divest itself
of the treasuries and the government securities that it has
been buying as long as that savings rate and that demand for
treasuries remains high?
Mr. Bernanke. We don't have any near-term plans to divest
ourselves. The Fed normally has on its balance sheet a
considerable amount of treasuries. And, as I mentioned, the
purchases we are making right now will only bring us back to
somewhere where we were a few years ago.
Mr. Marchant. Is it possible that we would have treasury
rates low and interest rates low, and inflation raise its head,
and we could actually be in the place of having to raise
interest rates without there being any employment gains?
Mr. Bernanke. Well, one concern that we always have to pay
attention to is if there were for some reason a loss of
credibility, which might come about because of loss of
independence of the Fed, and inflation expectations rose for no
reason connected to the economy but just because of investors
thinking that inflation is going to be higher. That would pose
a serious problem for the Fed because it would require us to
respond to that to avoid its being transmitted into actual
inflation. And that could be happening at a time when the
economy had not yet recovered. So inflation expectations and
the credibility of the Fed are actually very important.
Mr. Marchant. Is there a time in financial history since
the Great Depression where you actually had consumer spending
and the savings rate go up simultaneously?
Mr. Bernanke. That is unusual but it is not impossible. If
income is rising fast enough, then you can both save more and
consume more. But normally when savings rates go up, people are
obviously cutting back on their spending.
Mr. Marchant. Thank you.
The Chairman. The gentleman from Idaho, Mr. Minnick.
Mr. Minnick. Mr. Chairman, I wanted to return to the next
shoe to drop and the chairman's concern about commercial real
estate. Would it be possible to provide a new assist providing
liquidity for lenders and a floor to deteriorating market
values by giving authority, statutory authority to Freddie Mac,
Fannie Mae, or perhaps a new agency to guarantee loans of
developed property, perhaps at 75 percent of the lower of
today's active market fair market value, or today's replacement
value using today's real estate and construction costs, and
perhaps a similar guarantee for yet to be developed property at
perhaps 50 percent of the lower of those two values? The
advantage of this would be to prevent bankruptcy of commercial
developers and commercial property owners who are unable to
secure, take out financing, or to get development loan
renewals, to reduce the downward pressure on rental rates of
commercial property by reducing the number and price of
distressed property sales, and to reduce failure rates of banks
and commercial lenders by reducing the size and number of
problem nonperforming commercial loans?
I would like your opinion with respect to whether this is
something we in the Congress should pursue.
Mr. Bernanke. I think you would have to make the balance
between helping out this market and the fact that would
probably involve some financial risk on the part of the Federal
Government/taxpayer. But you might make the determination that
it was beneficial on that, so you would have to balance those
two things off.
Mr. Minnick. But you would not as a matter of sound fiscal
and monetary policy think that an inappropriate step to take if
that were to be our judgment in the legislature?
Mr. Bernanke. I think it is really Congress' choice.
Mr. Minnick. Thank you, sir. I yield back.
The Chairman. The gentleman from California, Mr. Miller.
Mr. Miller of California. Thank you, Mr. Chairman.
Welcome, Mr. Chairman. I can't see you right now, but I
know you are behind the gentleman standing in the front row. I
wouldn't want your job for anything in the world right now. I
think, and I know what you have to say you have to be very
cautious about because anything you say could be misread or
applied inappropriately to the economy. But oftentimes we tend
to gloss over I think the real situation we are in today. I
hear some say that the economy seems to be improving. I think
we are in far worse shape than people want to recognize and
understand truly. I heard people say there are signs of
stabilization. You didn't mention that you think there has been
a peak in unemployment. I guess a peak that has gone from
680,000 a month down to 500,000 a month, we are losing jobs.
That is still significant. And I think as time goes on you are
going to lose fewer and fewer jobs each month because fewer
people are going to be able to be laid off.
But we have gone from the subprime debacle, and it seems
like now we are going through a second round in the
residential, and that is individuals who have had good loans.
They are losing their jobs or business. People are basically
running down their reserves and they are losing their homes
also. But it is an unusual situation. Banks aren't making
loans. And we can say, well, some are. But when you talk to
people in the private sector, they are having a very difficult
time getting loans. And I see a different situation in banks
also don't want deposits. You go to them with large CDs, and
they really don't want to take them. I think they generally
accept the liability.
Savings have increased. I think just because people realize
they can't replace the money today if they spend it. I think
there is a very cautious economy going on out there, and people
look at that and they are afraid to basically spend their
money, and I think a certain amount of money are being forced
in the stock market because you can't go to the bank and get
anything for your savings.
But there has been a comment about a perfect storm, and
there has been some mention about what the commercial real
estate market is going to be doing. I think I started saying
that about a year ago. You are looking at about a $6 trillion
market out there with loans in the commercial sector, and
default rates beginning this year were about a quarter of 1
percent. Today they are about 2 percent. I think in the next 30
days, and I know you probably don't want to talk about this,
there is going to be a spike in the next 3 years. It can go
between 12 and 15 percent. I don't know any lenders out there
today who want to make loans on commercial real estate.
Now, commercial mortgage-backed securities were about $240
billion in 2007 sold, last year was about $12 billion, and I
think you know today they are flat. There are zero mortgage-
backed securities and there isn't a credit flow.
This year there is about $400 billion worth of commercial
real estate that is due. By 2012, that increases to about $1
trillion. What honest projection do you see for this commercial
real estate market? Now, the economy has really been hit hard
with the residential, especially on the subprime. The second
round I think is hitting and you can see it now. Now, this is
going to be dumped on the back of the economy. And we have kind
of glossed over, but I think this is more severe than most
people are giving credibility to.
Could you address that a little?
Mr. Bernanke. No, I agree; it is a sector we are paying a
lot of attention to. The fundamentals are weakening and the
financing situation is very tough. So we will see some problems
there, I am sure. We are seeing some banks, if not making new
loans, working out old ones and trying to extend, for example,
the terms of those loans. And we also, as I mentioned, have
added the commercial mortgage-backed securities to our TALF
program. And it is too early to say how effective that will be,
but we have had some success in other types of securitizations.
So we are making some efforts in that direction, but,
again, I think that is a scenario we need to play close
attention to.
Mr. Miller of California. And what you said there is very
important, we are trying to work out loans. In February of last
year, I introduced an amendment on the bill to require the
Federal Reserve and the SEC to revise mark-to-market to try to
deal with that. The problem I think we are going to see in the
banking industry today, especially with regulators, is the cap
rate has gone from 7 percent in 2006 to about 10 percent today.
How are you going to deal with a builder or an individual who
owns a commercial center and owes $14 million on his first? All
of a sudden, based on mark-to-market, it is worth 7 and they
only will lend 5. How do you deal with that?
Mr. Bernanke. It is the same principle as with a borrower.
If it is cheaper to reduce the payments and to keep the money
coming in as opposed to getting a foreclosure, then it might be
worth working it out. So it really depends. If the borrower can
maintain a lower level of payments, then it might be in the
bank's interest to do it.
Mr. Miller of California. Are the regulators going to allow
that bank to extend the 5-year call when that note is due, to
extend that loan when the loan is 14 million, based on current
value the loan should be 5?
Mr. Bernanke. You take a loss on it. But we are working
with banks in the residential context to try not to create
accounting incentives to foreclose as opposed to work out. The
same principle ought to apply in commercial real estate.
Mr. Miller of California. But we are not starting where we
did with the banks where they had adequate liquidity
originally, when they got started to get hit with defaults. We
are talking about banks today that don't want to lend money.
They are trying to keep the reserves and they don't want
deposits. They don't have the reserves.
Mr. Bernanke. I agree, it is a problem.
Mr. Miller of California. Thank you.
The Chairman. The gentleman from New Jersey.
Mr. Adler. Thank you, Mr. Chairman.
Mr. Chairman, welcome back.
The Chairman. Let me just say, we will be able to
accommodate everybody who is here, and the staff is encouraged
to bar any member who tries to come in besides those who are
here.
The gentleman from New Jersey.
Mr. Adler. Thank you, Mr. Chairman.
First, I want to commend you. I think your work with TALF
in particular has been ingenious, I think very, very helpful in
creating markets where there was an absence of credit. So I
really give you enormous credit for trying to provide credit
through the Federal Government.
I know you have spoken with a couple of members this
morning about Federal spending and the potential looming threat
it poses to our economy longer term. I am hearing from many of
my constituents in Ocean County, New Jersey, that they are very
greatly concerned about that spending pattern, the trajectory
of spending we are on as a country, and that it may create
deficits and Federal debt that is sustainable long term, that
raises interest rates inevitably as the cost of government
financing becomes unbearable.
Can you revisit this topic with me? I know you have talked
to some other people about it, but maybe you could allay my
concerns that it is not a looming crisis facing our country.
Mr. Bernanke. I don't think I can allay your concerns. We
are going from about a 40 percent debt to GDP ratio before the
crisis to somewhere 60 or above by next year, and it will
probably continue to rise further.
Putting aside all the issues being discussed now about
health care reform and so on, just on the prior scenario the
Congressional Budget Office shows an unsustainable fiscal path
going out because under current law, there is something on the
order of $40 trillion of unfunded health care liabilities for
the U.S. Government and a significant amount also for pensions.
So, as I was saying earlier, reform is important. We need
to think about different ways to deliver health care and so on.
But we do need to think hard about finding ways to control the
costs, because the cost of health care is the single most
important determinant of the long-term fiscal situation and we
really need to address that. Otherwise, we are already in an
unsustainable situation. Forget about additional things we
might want to do.
Mr. Adler. Would you agree that cost containment concept
applies not just but in health care context but in the overall
government spending context, that we have to at some point
level off our amount of Federal spending to manage our Federal
debt and not have it balloon beyond what we can sustain?
Mr. Bernanke. Certainly. But health care is particularly
problematic because it is 15 percent of the economy, it is a
big portion of government spending, and because health care
costs have been rising now for many years at a very rapid rate,
much faster than the average income.
Mr. Adler. Frankly, I very deeply share your concern about
cost containment being the single most important feature of
health care reform. So I thank you for that.
You spoke with the gentleman from California a moment ago
about liquidity issues. I am aware from studies that we have
maybe as much as $1.2 trillion of private earnings sitting in
banks overseas, principally in Europe. I am wondering, knowing
that there are difficult political questions involving having
that money coming back in this country, what would you
recommend? And wouldn't you agree that having some of that
money come back in would improve balance sheets for banking
institutions in our own country and allow them to lend more
fully than they have been doing over the last number of months?
Mr. Bernanke. I would have to know more about the specific
proposal. I do know that there was a proposal, it was a law
passed recently that allowed for a period of time repatriation
at a tax favored rate, and a good bit of money was repatriated
under that rule.
Mr. Adler. Do you have any sense of how much money might be
out there that we could bring back in?
Mr. Bernanke. I don't have a number. I am sorry.
Mr. Adler. I thank you for your testimony. I yield back the
balance of my time.
The Chairman. The gentleman from Florida.
Mr. Posey. Thank you very much, Mr. Chairman.
Mr. Chairman, of all the testimony we hear in this
committee, I enjoy yours the most. You are always very
interesting. We have an awful lot of academics who come in here
and try to convince us that a circle is a square and vice
versa, and I appreciate your forthrightness.
I was a little bit perplexed today by your answers to the
first gentleman from Texas' questions. First, about inflation.
I heard you talk about how you use pricing as a reference, and
that purely printing more money doesn't cause inflation, which
was really new news to me. And I wonder if you would tell me
what you think causes inflation?
Mr. Bernanke. Well, let's be clear what is going on. The
Federal Reserve is not putting money out into the economy. What
we are doing is creating bank reserves. That is money that the
banks hold with the Fed. So it is just sitting there idly. It
is not chasing any goods. So as long as those bank reserves are
sitting idly, broader measures of money that measure the
circulation of money--
Mr. Posey. But it won't sit there idly forever.
Mr. Bernanke. Right.
Mr. Posey. The purpose is not to sit there idly forever.
Mr. Bernanke. Right.
Mr. Posey. And while there may be a time lapse, certainly
unless that money gets sucked back in and out of circulation,
it is going to cause inflation. There is no denying it.
Mr. Bernanke. If it is not sucked back in. But as I was
describing, we have ways of sucking it back in.
Mr. Posey. How?
Mr. Bernanke. Well, one way to do it is by raising the
interest rate we pay on those reserves, which induces banks to
keep the money with us instead of lending it out or circulating
it through the economy. Another way to do it is through various
open market operations that we can do that essentially pull
those reserves out and bring them back into the Fed. So we do
have a number of tools to do it. And we are quite aware of this
issue, and we will not allow the broad measures of money
circulating in the economy to rise at a rate rapid enough that
would cause inflation eventually.
Mr. Posey. I would appreciate if you could maybe give the
members of this committee a little memo and more extensive
explanation on how you plan to do that without damaging the
economy that we are trying to fix now.
Mr. Bernanke. There is a chapter in the policy report that
covers it.
Mr. Posey. Thank you. The second question was in response
to the audit of the Fed. As you well know, the statutes are
this thick of exemptions to Federal audit, of audit to the Fed.
Just about every agency can be audited. I think I heard the
gentleman from Texas say, if it wants, a citizen can find out
more about the operations of the CIA than it can the Fed. And I
don't know that I am denying that, or that you would really
want to deny that. But he is talking about post facto audit,
not interfering with daily decisionmaking, much like we do with
many confidentiality exemptions where you say, no. What they do
now, when they negotiate this contract it is secret, but when
the contract is over it should be opened up to public scrutiny.
And I think really the public does have a right to know
historically how we determined the monetary policy of this
country, for better or for worse. I mean, I don't expect it to
be 100 percent on target all the time, but I think it is a
matter of transparency. I think it is a matter of
accountability. And I would like your thoughts on that.
Mr. Bernanke. Well, first of all, on things outside
monetary policy, we are open and very willing to work with you.
The GAO right now is doing an audit of our annual financial
statement, it is doing an audit of our information security
controls, it is doing an audit of our assistance to AIG and
many other things. So let me answer your question.
Mr. Posey. These are the policymaking decisions. The
minutes of the meetings that any government body might want to
have off the record while they are having critical decisions,
but eventually should be put open to the public.
Mr. Bernanke. Eventually. Well, we put out a whole
transcript in 5 years. I think that is fine. But if it is done
within days or even weeks of the decision, it is going to look
like Congress is saying we disagree with that decision.
Mr. Posey. I agree with that. It shouldn't interfere with
daily decisionmaking, but I don't know how after the fact
auditing and all the exemptions that are there being eliminated
for a period of time, and it could say 6 months, a year
afterwards, I just don't see why there shouldn't be 100 percent
crystal clear transparency of every single function of the Fed
after the fact.
Mr. Bernanke. Because we have to be extraordinarily careful
that the markets and the public don't think that Congress is
trying to influence monetary policy decisions.
Mr. Posey. If we do it a year, if we do it in a year in
arrears, we don't know really whether the best decisions made a
year ago or 2 years ago or 5 years ago or 20 years ago, we
don't know if they are the best decisions. We don't know who
the Fed picked to be winners and losers. And I think the public
really has a right to know that some day.
Mr. Bernanke. On issues relating to our 13(3) authority,
those sorts of things, where we are putting out money and
lending money and so on, we can work that out. I agree with you
that where we are putting out taxpayer money, there should be
ways for the Congress to be assured that we are doing it in a
safe way that has appropriate financial controls and so on and
so on. So I agree with that. Monetary policy is a very specific
element, though, of that.
The Chairman. The gentleman's time has expired. The
gentlewoman from Ohio.
Ms. Kilroy. Thank you, Mr. Chairman.
And thank you, Chairman Bernanke, for being here. I had
questions for you as well about the Federal Reserve's role and
the need for accountability and transparency versus the
conflicting need for independence and to be free of political
pressures. And it seems to me what the public is more concerned
about is not the Federal Reserve's role on monetary policy but
the Federal Reserve's role in bailing out certain entities like
AIG and Bear Stearns, and questions about how decisions get
made about who is saved or who is allowed to fail. So maybe you
could help me with what kind of transparency and
accountability, the maximum that we can give our taxpayers that
would still leave the Federal Reserve with the appropriate
amount of insulation from political pressure and the
appropriate independence that you need to carry out your
essential mission.
Mr. Bernanke. On the issue you mentioned, Congress has
already acted. Congress passed and the President signed a law
which allows the GAO to audit all loans made to specific
companies in rescue operations, including AIG and Bear Stearns.
That has been done. And we are quite open to discussing any
kind of extraordinary lending that we do in terms of making
sure that Congress is comfortable that we are taking all the
steps necessary to protect the taxpayer and to do the
appropriate thing with those loans.
So that one area, and to go back to our previous
conversation, the one area where it is particularly sensitive
is about the Congress second-guessing in the very short period
of time the monetary policy decisions being made by the Federal
Reserve with the sense that displeasure from the Congress would
put pressure on the Fed to try to anticipate the political
preferences of the Congress.
Ms. Kilroy. There was other discussion this morning about
when inflation might begin to rear its head and some concerns
about that. As I understand the answer, inflation is not
presently a worry that you are concerned about. But--and
certainly I think housing and unemployment are much bigger
worries for the greater economy right now than concern about
inflation. But I was wondering what your judgment--whether fear
of inflation is holding back banks, some of which have seem to
be recovered. They want to give their TARP money back. Goldman
Sachs is showing profits, and bonuses are being offered to some
players in the financial services markets. But whether the fear
of inflation is keeping banks from making the kind of loans
that are needed for small business and others to help us
restore the economy, particularly out on Main Street, so to
speak.
Mr. Bernanke. I don't think that is a major factor. For one
thing, if you look in the financial markets, interest rates
like long-term government interest rates are still quite low.
If the financial markets were really worried about inflation,
those rates would be much higher. So I don't think that the
financial markets are indicating a great deal of concern about
inflation. And from the banks' perspective, they are much more
concerned about credit worthiness, the state of the economy,
and losses they have already taken than they are about
inflation, I think.
Ms. Kilroy. In terms of the state of the economy, what
steps can the Fed take to address the unemployment rates that
we are seeing going up? I certainly share your view that the
recovery money has not fully had its impact in the greater
economy and we will see some gains there. But still, we want to
see some places where Americans can actually make things in
this country and that we can generate those kind of jobs in our
economy as well.
Mr. Bernanke. Well, the Fed is being very aggressive. We
are trying very hard to support the economy. We have lowered
interest rates almost to zero, and we have a whole set of other
programs to try and get credit markets working. So we are doing
our best to provide support to this economy.
Ms. Kilroy. Do you think we have sufficiently addressed the
issue of certain risky behaviors that help do damage to the
economy, like the credit default swap, naked default swaps?
Mr. Bernanke. No. Not yet. We have to do I think a very
substantial reform of the financial regulatory system to
address all the problems that were revealed by the crisis.
Ms. Kilroy. Thank you. I yield back.
The Chairman. The gentlewoman from Florida.
Ms. Kosmas. Thank you, Mr. Chairman. And thank you for
being here. As the chairman said, I represent the Central
Florida area, and have been sort of raising the flag for quite
a few months since Florida is one of the highest in mortgage
foreclosures and also one of the highest now in unemployment.
But I have been concerned about what I saw as a deeper problem
in the economy looming over Florida as well as the Nation with
regard to commercial lending and the renewing or rolling over
of commercial loans for larger businesses. Some are smaller
businesses. But when we look at our economy in Florida and we
recognize that it is a $70 billion tourism trade, and we have
situations where resorts, hotels, timeshares, cruise ships, and
even our leisure parks are relying of course on commercial
credit lines in order to function, and the numbers of people
that they employ and the factor of the potential for them to be
in jeopardy is quite frightening to me.
So I have been trying to raise that red flag for several
months here and talking to people about it, while at the same
time people are dealing with other issues.
I know that the TALF program was intended to provide an
opportunity for increased securitized debt in those markets.
And I was wondering whether you might be--and some of this I
think was addressed by an earlier question but I will ask mine
anyway. Do you feel that the TALF program is large enough and
sufficient enough? Is it working? And is it working quickly
enough, that we could consider that it might alleviate some of
these looming credit problems for commercial real estate?
Mr. Bernanke. It is a bit early to say on commercial real
estate, because we have just opened up the program to that, and
we have not yet seen a number of deals coming through. So ask
me again in another month or two.
But I do think that what we have seen in the consumer ABS
area is it doesn't take an enormous amount of capacity to
actually have a difference, because it is really a question of
breaking the ice. Right now, nobody is bringing commercial
mortgage-backed securities to market. If this creates more
activity in the market, then it creates more interest and you
can get things going again. So I don't think we need to have an
enormous program to stimulate the improvement in the CMBS
market. But exactly how effective our program will be, I think
we need to wait just a bit longer. But a number of your
colleagues have raised this issue, and it is certainly a very
important one.
Ms. Kosmas. And I apologize if I am repeating a question
that was asked by someone else. But I think it was mentioned
that up to $400 billion of CRE loans are coming due in this
year to mature and over $1 trillion by 2012. That represents a
very huge potential, as I say, for--and I am talking
specifically to business people who are having trouble with
perfectly performing lines of credit that have met all their
terms and obligations, and their lenders are refusing that
rollover, if you will, or renegotiation of the mortgage, and
that is a very serious problem that I see looming.
So I am hoping that you are going to be taking a very, very
close look at it. Are you considering other problems beyond
what is currently on the plate for TALF? That will be one
question. And then with the lag time in getting things going in
that marketplace, would you expect that that might be extended
beyond year's end?
Mr. Bernanke. We have already included both new CMBS and
legacy CMBS in the TALF. We are looking at some other asset
classes, but as I mentioned, they are more complex than the
ones we have already included. We will give the markets plenty
of notice about the extent of the program. We have to make
judgments about whether markets are normalizing. If things
return to normal, which I don't expect in the very near term,
then we would have to think about scaling it down. But,
otherwise, we will try to give plenty of notice to the markets
about the time frame for these programs.
Ms. Kosmas. Okay. I appreciate it. Thank you very much.
The Chairman. The gentleman from Florida.
Mr. Grayson. Thank you, Mr. Chairman.
Chairman Bernanke, I am looking at the report that you
handed out this morning. And I was wondering if you could take
your copy and turn to page 26.
Mr. Bernanke. Okay.
Mr. Grayson. There is a table on page 26 which consists of
your balance sheet. And one of the entries on the balance sheet
is, under assets, ``central bank liquidity swaps,'' which shows
an increase from the end of 2007 from $24 billion to $553
billion and change at the end of 2008.
What is that?
Mr. Bernanke. Those are swaps that were done with foreign
central banks. Many foreign banks are short dollars. And so
they come into our markets looking for dollars and drive up
interest rates and create volatility in our markets.
What we have done with a number of major central banks like
the European Central Bank, for example, is swap our currency,
dollars, for their currency, euros. They take the dollars, lend
it out to the banks in their jurisdiction. That helps bring
down interest rates in the global market for dollars. And,
meanwhile, we are not lending to those banks; we are lending to
the central bank. The central bank is responsible for repaying
us.
Mr. Grayson. So who got the money?
Mr. Bernanke. Financial institutions in Europe and other
countries.
Mr. Grayson. Which ones?
Mr. Bernanke. I don't know.
Mr. Grayson. Half a trillion dollars and you don't know who
got the money?
Mr. Bernanke. The loans go to the central banks, and they
then put them out to their institutions to try to bring down
short-term interest rates in dollar markets around the world.
Mr. Grayson. Well, let's start with which central banks got
the money?
Mr. Bernanke. There are 14 of them, which are listed in our
reports.
Mr. Grayson. All right. So who actually made that decision
to hand out a half a trillion dollars that way? Who made that
decision?
Mr. Bernanke. The Federal Open Market Committee.
Mr. Grayson. Okay. And was it done at one time or in a
series of meetings?
Mr. Bernanke. Series of meetings.
Mr. Grayson. And under what legal authority?
Mr. Bernanke. We have a longstanding legal authority to do
swaps with other central banks. It is not an emergency
authority of any kind.
Mr. Grayson. Do you happen to know anything specific about
it?
Mr. Bernanke. My counsel says section 14 of the Federal
Reserve Act.
Mr. Grayson. All right. We actually looked at one of the
arrangements, and one of the arrangements is $9 billion for New
Zealand. That works out to $3,000 for every single person who
lives in New Zealand.
Seriously, wouldn't it have been better to extend that kind
of credit to Americans rather than New Zealanders?
Mr. Bernanke. It is not costing Americans anything. We are
getting interest back--it is not at the cost of any American
credit. We are extending credit to Americans.
Mr. Grayson. Well, wouldn't it necessarily affect the
credit markets if you extend half a trillion dollars in credit
to anybody?
Mr. Bernanke. We are lending to all U.S. financial
institutions in exactly the same way.
Mr. Grayson. Well, look at the next page. The very next
page has the U.S. dollar nominal exchange rate, which shows a
20 percent increase in the U.S. dollar nominal exchange rate at
exactly the same time that you were handing out half a trillion
dollars to foreigners.
Do you think that is a coincidence?
Mr. Bernanke. Yes.
Mr. Grayson. All right. Well, the Constitution says, ``No
money shall be drawn from the Treasury but in consequence of
appropriations made by law.''
Mr. Bernanke. This money was not drawn from the Treasury.
Mr. Grayson. Well, let's talk about that. Do you think it
is consistent with the spirit of that provision in the
Constitution for a group like the FMOC to hand out half a
trillion dollars to foreigners without any action by this
Congress?
Mr. Bernanke. Congress approved it in the Federal Reserve
Act.
Mr. Grayson. When was that?
Mr. Bernanke. Quite a long time ago. I don't know the exact
date.
Mr. Grayson. A hundred years ago?
The Chairman. The original Act is 1914, I believe.
Mr. Bernanke. I don't know whether this provision was in
1914 or not, but the Federal Reserve Act was in 1913.
Mr. Grayson. All right. And at that time the entire gross
national product of this country was well under half a trillion
dollars, wasn't it?
Mr. Bernanke. I don't know.
Mr. Grayson. Is it safe to say that nobody in 1913
contemplated that your small little group of people would
decide to hand out half a trillion dollars to foreigners?
Mr. Bernanke. This particular authority has been used
numerous times over the years.
Mr. Grayson. Well, actually, according to the chart on page
28, virtually the entire amount that is reflected in your
current balance sheet went out starting in the last quarter of
2007. And before that, going back to the beginning of this
chart, the amount of lending was zero to foreigners. Is that--
Mr. Bernanke. It was zero before the crisis, yes. This was
part of the process, working with other central banks, again,
to try to get dollar money markets working normally in the
global economy.
Mr. Grayson. All right. My time is very limited.
The Chairman. The gentleman's time has expired.
The gentleman from New York.
Mr. Maffei. Thank you very much, Mr. Chairman.
And thank you, Chairman Bernanke, for being here and for
indulging all of the members. I am the most junior member, so I
presume I am the last to question.
I am sure that you have seen some of the reports about
credit card companies increasing their rates and charges in
anticipation of the upcoming new credit card laws and Federal
Reserve regulations taking effect. This seems to me to run
counter to, certainly, the intent, if not the letter of the
recently enacted regulations by your group and laws.
We have heard that the credit card companies have asked--
they asked us when we were putting the bill together, as they
asked you, for a delay so that they could implement these sort
of things. And instead, they seem to be using these delays to
generate more profits on the backs of the consumers.
Is there anything that you can do, from your perspective at
the Federal Reserve, to speed up the regulations to try to take
care of these people?
Mr. Bernanke. Yes. We just announced the first tranche of
regulations under the credit card act that was passed by
Congress and signed by the President. And it sets, as required
by law, a deadline of August 20th. After August 20th, in order
to raise interest rates on a customer, the company has to give
the customer 45 days' notice. And then the customer has the
right to opt out of that increase by paying back his balance.
So that first step has been taken for August.
Mr. Maffei. Is there anything you can do to communicate to
these companies that it would not be in their best interests to
try to, you know, raise these rates and charges right up to the
deadline?
Mr. Bernanke. There is another provision in the law passed
by Congress that requires revisiting interest rate increases
back to the 1st of January of 2009. So, at some point, there
will have to be some looking again at those rates.
Mr. Maffei. Thank you.
I have one quick question about the TALF. I have heard
reports in my congressional district about the smaller
investment firms, more locally owned investment firms that
don't have a preexisting relationship with any sort of
``primary dealer'' having difficulty getting access to the
program, which of course would give the larger firms a market
advantage, if that were true.
Has anything been done or could anything be done to
increase the access to the TALF for these smaller investment
firms, say, you know, 10 to 30 employees?
Mr. Bernanke. Yes, and we have done so in two ways. First,
we have encouraged more investors. And the minimum investment
is half a million dollars, which is within the scope of many
investment firms.
Secondly, working with Congresswoman Waters, we have
expanded our set of agents who are putting together the deals,
to include six to eight smaller firms, many of which are
minority- or women-owned.
So we are trying to expand both the investors and the
agents in this program.
Mr. Maffei. And how can local firms apply for this? Is
there a Web site or a procedure?
Mr. Bernanke. Yes, there are Web sites.
Mr. Maffei. All right. So they should just get on the Web
site. Well, could your staff communicate with us and let us
know?
Mr. Bernanke. We will do that.
Mr. Maffei. Because I know a lot of firms in my district
who have felt that they have gotten no advantage to any of
these bailouts would very much appreciate access to these
funds, and particularly given that they now have to compete
with other firms that have gotten other advantages from the
TARP and TALF programs.
Mr. Bernanke. Okay.
Mr. Maffei. Thank you very much, Mr. Chairman.
The Chairman. Thank you.
Any further comments in closing?
If not, I thank the chairman for his indulgence.
Does the gentleman from Alabama have a--
Mr. Bachus. I would just like to say something.
The Chairman. Sure.
Mr. Bachus. Chairman Bernanke, I think I speak for others
as well as myself. It is not, I know, my nature to criticize,
because I think you have done an exemplary job, and I admire
your abilities and your intellect. But it is time, it is
necessary as part of our job to--because we all, in the future,
we want to try to avoid these things. And so I think, you know,
that is simply a part of trying to make sure that we build the
best system we can.
The Chairman. I thank the gentleman.
I thank the Chairman.
And the hearing is adjourned.
Mr. Bachus. Mr. Chairman, if I could ask unanimous consent
to introduce a document?
The Chairman. Without objection, all members will have the
right to submit any further documentation of any sort that they
wish, and to submit further questions to the Chairman to be
answered in writing.
Mr. Bachus. Mr. Chairman, if I could, just because this is
a little unusual, I think you and I, we were both shared a copy
of this document from 16 different real estate groups,
concerning--it is a consensus principle-based policy statement
on the commercial real estate market.
The Chairman. Fine. We will enter it into the record.
Mr. Bachus. Thank you.
[Whereupon, at 1:06 p.m., the hearing was adjourned.]
A P P E N D I X
July 21, 2009
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