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




                      FEDERAL RESERVE PERSPECTIVES
                        ON FINANCIAL REGULATORY
                            REFORM PROPOSALS

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 1, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-83





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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel












                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 1, 2009..............................................     1
Appendix:
    October 1, 2009..............................................    55

                               WITNESSES
                       Thursday, October 1, 2009

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

                                APPENDIX

Prepared statements:
    Garrett, Hon. Scott..........................................    56
    Bernanke, Hon. Ben S.........................................    58

              Additional Material Submitted for the Record

Bernanke, Hon. Ben S.:
    Written responses to questions submitted by Representative 
      Bean.......................................................    68
    Written responses to questions submitted by Representative 
      Foster.....................................................    69
    Written responses to questions submitted by Representative 
      Miller.....................................................    71

 
                      FEDERAL RESERVE PERSPECTIVES
                        ON FINANCIAL REGULATORY
                            REFORM PROPOSALS

                              ----------                              


                       Thursday, October 1, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 9 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Gutierrez, Velazquez, Watt, Sherman, Meeks, Moore of Kansas, 
Hinojosa, Baca, Lynch, Miller of North Carolina, Scott, Green, 
Cleaver, Ellison, Klein, Wilson, Foster, Carson, Speier, 
Minnick, Kosmas, Grayson, Himes, Peters, Maffei; Bachus, 
Castle, Royce, Manzullo, Jones, Biggert, Miller of California, 
Capito, Hensarling, Garrett, Price, McHenry, Campbell, 
Bachmann, McCotter, Posey, Jenkins, Lee, Paulsen, and Lance.
    The Chairman. The hearing will come to order. The 
photographers will disburse.
    This hearing convenes with Chairman Bernanke. We had a 
hearing earlier with the regulators. We had Treasury Secretary 
Geithner, and then we had the other regulators, the bank 
regulators. We were not able to have Chairman Bernanke at that 
time because the Federal Open Market Committee was meeting. And 
so this now completes the--oh, I don't know--30th or 40th round 
of hearings that we have had in general.
    We will be proceeding to more legislative hearings. We had 
one, as members know, yesterday on consumer affairs, and then 
Mr. Kanjorski convened one on various aspects of the Capital 
Markets Subcommittee's jurisdiction, including the rating 
agencies.
    We will be going forward on Tuesday with a hearing on a 
draft that will be released today on enhanced investor 
protections and market integrity protections for the SEC. It 
will deal with requirements of hedge funds and private equity 
and other pools of capital to register.
    Let me say in advance, because I like to avoid flurries, if 
there can be, we on the Majority side, and I believe members on 
the Republican side as well, are fully supportive of the law of 
venture capital, and we do not plan to treat venture capital 
the same way we treat hedge funds. There are, obviously, 
definitional differences. But I think members will see in the 
draft an appropriate regard for the role of venture capital, 
and we are working in consultation with people in the venture 
capital field. I do not think there will be anything in there 
that they will regard as hindering them and that will 
interfere.
    Otherwise, there will be significant increases in consumer 
protections in terms of registration requirements, in terms of 
duties imposed on broker dealers, etc. That will be a 
legislative hearing, but this is the last of the hearings in 
which we will hear in general from the regulators.
    Mr. Bernanke, we welcome you, and, as I noted previously, 
this is probably, I guess, the 39th time in this Congress that 
we have had representation from senior members of the Federal 
Reserve, yourself more than anyone else, but the Vice Chair and 
other members of the Board of Governors, Ms. Duke, for 
instance, and Mr. Cohen and Mr. Alvarez and others. So we 
appreciate it.
    I now want to begin the clock, please. I will take 4 
minutes. The gentleman from North Carolina will take 4 minutes. 
We have an 8-minute time rule for Cabinet-level people.
    I want to talk about what seems to be an anomaly in some of 
the discussion on the Consumer Protection Agency. The Federal 
Reserve has been subject to a lot of criticism, much of which I 
think has been unfair, because I think they stepped in at the 
request of, first, the Bush Administration, and now the Obama 
Administration to fill some gaps.
    Going forward with the support of Chairman Bernanke and 
others, we will be filling some of those gaps so that the role 
that the Federal Reserve has played over the past year will 
change--not that this is a criticism of what they did, although 
people don't have to agree with every aspect of how they did 
it--but it is a recognition that there are better structural 
ways to do it. It is the not the Federal Reserve's fault that 
it was the only institution that could do certain things. That 
means we will be putting some limitations, as the Chairman has 
agreed should be done, not, as you know, that is necessary for 
us to go forward, but it is helpful when we can be working in a 
cooperative way on the powers under section 13(3). We will make 
explicit that auditing will be fairly complete, with a couple 
of exceptions that protect market integrity.
    We have had debate and will have further debate about 
exactly what the role of the Federal Reserve will be in 
systemic risk regulation. There were some, myself included, who 
earlier this year thought the Federal Reserve would have a 
larger role than it looks like it will have, that it will be 
part of a conciliar structure.
    But there was one area which I am puzzled by. Because many 
of those who have been the most vociferous in their criticism 
of the Federal Reserve are resisting the bigger shift of power 
away from the Federal Reserve currently on the table, and that 
is in the consumer area. Those who object to the creation of a 
Consumer Protection Agency and insist on leaving consumer 
protection exactly where it now is statutorily, perhaps putting 
those who now have the power, the Federal bank regulators, into 
some kind of conciliar structure, but essentially leaving that 
distribution of power in place, are the great defenders of the 
Federal Reserve's power. Because the largest loser of authority 
when we take consumer affairs away from the existing bank 
regulators and put it in the consumer agency is the Federal 
Reserve.
    We don't do that out of criticism of them, although I must 
say, prior to Mr. Bernanke, the record of the Federal Reserve 
on consumer protection was dismal. There has been an 
improvement, although I do know that in every case, actions 
taken by the Federal Reserve in the consumer area followed 
actions that were initiated in Congress, and in particular this 
committee, once we became the Majority in 2007. That is true 
with credit cards, it is true with subprime mortgages, it is 
true with overdrafts, and it is true with formulating a code of 
unfair and deceptive practices.
    But the fact is that if you look at the current arrangement 
of power involving consumer protection in terms of mortgages 
under HOEPA, in terms of credit cards, in terms of overdrafts, 
the largest single agency in the bank regulator field doing 
consumer protection is the Federal Reserve. And those who 
resist taking consumer protection powers and putting them into 
a separate agency are de facto the greatest defenders of the 
Federal Reserve power now around. Because we have a consensus 
on auditing, I believe. Some details might be debated. We have 
a consensus on limiting the powers under 13(3). I think we will 
have a consensus on the role or a very large degree of 
agreement on its role in systemic risk.
    So the one issue that now appears to be debated between us 
is, do we leave the Federal Reserve with the single largest 
chunk of consumer protection powers or do we move it, as I 
think is appropriate, to a better agency?
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    First of all, Mr. Chairman, let me respond to say that we 
do not object to consumer protection being removed from the 
Federal Reserve. What we do object to and what we strenuously 
think would be a mistake is what you do with consumer 
protection, and that is you vest it in a new government agency 
and you give it tremendous power not only to protect the 
consumer, but you also give it power to design financial 
products. You give it power to dictate terms on financial 
agreements. You give it power to limit choice. You give it 
power to restrict competition. And by giving it the power to 
approve new products, you completely stifle innovation.
    America didn't get to be the largest economy in the world, 
3 times bigger than the next biggest economy, by taking away 
individual choice, by stifling innovation, and by putting 
government in the business of managing financial services and 
making choices for both institutions and individuals.
    So I am sorry that we have had a miscommunication, but our 
objection is that you have a tremendous shift of responsibility 
from individuals and institutions to the government.
    We also object and, Chairman Bernanke, we have strenuously 
objected to something else, and that is vesting in the Federal 
Reserve the right to bail out individual non-bank financial 
institutions. We believe that the FDIC has the power to resolve 
banks through their statutory authority, but we think that is 
to protect depositors and not to protect the bank, its 
shareholders, or to protect it from risky investors.
    Now in the remaining time I have left, let me tell you 
something else that we have a great unease about.
    I believe it was in March of last year, not September, that 
I had conversations with you and Secretary Paulson; and at that 
time, you actually expressed tremendous concern about the 
overextension of debt and of leverage. And I think there was a 
real concern on the part of a lot of people, whether this 
deleveraging and constriction of debt could be done in an 
orderly way. So there was some forewarning of what we saw in 
September, I think, starting with Bear Stearns.
    But, I am not sure that even until this very day we have 
identified exactly what caused the events of last year and how 
to address it. Instead, we have had, almost with light speed, 
the Obama Administration propose a sweeping change in financial 
regulation, which includes and continues to include as late as 
this month the possibility that the Treasury would spend a 
trillion dollars to bail out another non-bank financial 
institution.
    Chairman Volcker--former Chairman Volcker--said he had 
extreme concern over that. He felt like it was a mistake; and 
we, as Republicans, do, too. We simply do not believe the 
government ought to be in the bailout business of 
nonfinancial--non-bank financial institutions.
    The Chairman. The gentleman's time--
    Mr. Bachus. Thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina is 
recognized for 4 minutes.
    Mr. Watt. Thank you, Mr. Chairman, and welcome back, 
Chairman Bernanke.
    I want to first express delight at the change of just some 
basic things related to the Federal Reserve under your 
chairmanship. I quite often tell the story that after being on 
this committee ever since I came to Congress and seeing it have 
jurisdiction over the Federal Reserve, not only did I not 
understand anything the former Chairman said in his testimony, 
but I couldn't tell my constituents where the Federal Reserve 
was located until you became the Chairman of the Federal 
Reserve and invited a number of us over to a discussion with 
you. That, in and of itself, was an indication to me that it 
was a new day at the Federal Reserve, and I would have to say 
that since that time, there has been an ongoing willingness to 
open the Federal Reserve from the mystique that both the 
language and the appearance the Federal Reserve had under the 
prior Chair and the actual operations of the Federal Reserve.
    And in that connection, I want to compliment the witness, 
Mr. Alvarez, who is sitting behind you, whom you sent to the 
last hearing about the proposed bill that Mr. Paul has authored 
regarding the audit of the Federal Reserve. I think we made 
substantial progress toward putting information in a public 
record based on that hearing that will both educate the public 
about what the Federal Reserve does and the changes that have 
been made in transparency and accountability at the Federal 
Reserve and what needs to be done legislatively as part of 
regulatory reform to memorialize that in legislation. And I 
think we will come to a resolution that I am honored to say 
that the Chair has given me the primary authority for in my 
subcommittee. So I think we are going to work through a 
resolution of that.
    I hope we can also work through a resolution in regulatory 
reform of this whole consumer protection issue. Because I think 
there are some things in your testimony this morning that when 
I get back to question you about will help us really put that 
issue in perspective in a much more public and transparent way. 
And so I welcome you back to this hearing and I look forward to 
working with you on both the audit issue and on the consumer 
protection issue, as well as the systemic risk and other issues 
that we are trying to resolve during this regulatory reform 
debate.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas is recognized for 2 
minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Over the past couple of weeks, the media has been replete 
with 1-year anniversary stories of historic bailouts or economy 
recovery actions by our Federal Government. Before deciding on 
how we best proceed with financial markets reform, we would do 
well to learn the lessons of the good, the bad, and the ugly.
    First, the good: Within months of intervention, there is no 
doubt that credit spreads returned to more normal levels. 
Equity markets have clearly risen appreciably, and the panic we 
felt last September has subsided.
    Then, the bad: Our economy continues to contract in the 
face of massive government intervention. Too much private 
capital remains on the sidelines. After the passage of the 
Administration's $1.2 trillion stimulus bill, 3 million of our 
fellow countrymen lost their jobs, and our Nation suffers from 
the highest unemployment rate in a quarter of a century. And I 
remind all there is no such thing as a jobless recovery. No 
jobs, no recovery.
    And finally, the ugly: This orgy of spending has brought 
our Nation its first trillion dollar deficit, and our national 
debt will triple in the next 10 years. According to the Special 
Inspector General for the TARP program, the taxpayer is now on 
the hook for up to $23.7 trillion or $202,940 per household.
    The government's continued bailouts of Fannie Mae, Freddie 
Mac, AIG, Chrysler, GM--the list goes on--now hamper our 
economic recovery and threaten to institutionalize us as a 
``bailout nation'' with no visible exit strategy in sight.
    There remains a huge difference between adding emergency 
liquidity to a panicked financial system and bailing out 
individual non-bank firms fortunate enough to be designated 
``too-big-to-fail.'' Under the latter policy, the big get 
bigger, the small get smaller, the taxpayer gets poorer, and 
our children get saddled with the mother of all debts.
    Clearly, there is a better way. Reforms are needed. But the 
best way to end taxpayer bailouts is to end taxpayer bailouts.
    The Chairman. The gentleman from New Jersey is recognized 
for 2 minutes.
    Mr. Garrett. I thank the chairman for holding this hearing, 
and I welcome Chairman Bernanke back again to the committee.
    I note in the Chairman's testimony you continue to advocate 
that the Federal Reserve should be given authority for 
consolidated oversight for all ``systemically important 
financial institutions.'' And, quite candidly, I do have a 
number of concerns about this proposal, many that I have 
expressed before. Among them, first of all, specifically 
designating institutions as systemically critical leads to 
unfair competitive agendas, disadvantages, increased moral 
hazard, and makes it more likely such institutions will be 
considered ``too-big-to-fail.''
    Secondly, the Federal Reserve already has consolidated 
supervision over many of the large bank holding companies, 
including Citi and Bank of America, which the Federal 
Government has pumped billions of dollars into due to the fact 
that such consolidated supervision apparently failed in the 
past.
    Furthermore, Fed policy itself--that is, keeping interest 
rates too low for too long, primarily before you were here--was 
one of the major factors leading to this crisis.
    I am not alone in my concerns about the Fed as a systemic 
regulator. There seems to be a universal distaste for the Fed 
in such a role on the Senate Banking Committee. Such a 
political reality would seem to make it less likely that the 
House would confer such new powers on the Fed either. And as 
has been stated previously, rather than give the Fed additional 
powers, Republicans on the committee have proposed as part of a 
reform plan that the powers of the Fed be focused primarily on 
monetary policy and others be reduced.
    So preventing future taxpayer-funded bailouts is a primary 
aim of the GOP plan and is also the primary aim of a piece of 
legislation I plan to introduce later today that will call for 
raising the minimum downpayment for the FHA loans as well as a 
study to examine what is an appropriate leverage ratio for the 
FHA. There have been increasing reports of a likely necessity 
of a taxpayer-funded bailout for the FHA, and this legislation 
aims to implement--
    The Chairman. The gentleman's time has expired.
    Mr. Garrett. I appreciate your comments on that.
    The Chairman. I want to begin, Mr. Bernanke, with some of 
the issues of history that were raised.
    It was--the gentleman from Texas listed the bailouts he has 
found damaging: Fannie Mae; Freddie Mac; AIG; the automobile 
companies; and the banks, all of which were, of course, 
initiated by the Bush Administration. And I do think it is 
appropriate to note that the Obama Administration inherited all 
of these. It has carried some out more or less in a number of 
cases. But every single one of those was initiated by the Bush 
Administration, suggesting that it was not part of some 
ideological agenda but a reaction to reality. And, indeed, much 
of what we are talking about today was first articulated by 
Secretary Paulson in April of 2008.
    So that doesn't make them right or wrong. It ought to make 
them nonpartisan.
    Secondly--
    Mr. Bachus. Mr. Chairman, your time has expired. Now if you 
want to give additional time--
    The Chairman. Excuse me. I am in my 5 minutes.
    Mr. Bachus. You have an opening statement of Chairman 
Bernanke.
    The Chairman. Oh, I forgot about that. I apologize. You are 
quite right.
    So I will take whatever time I used in that opening 
statement, and it will be deducted from my 5 minutes, and the 
Chairman is recognized.

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

    Mr. Bernanke. Thank you.
    Chairman Frank, Ranking Member Bachus, and other members of 
the committee, I appreciate the opportunity to discuss ways of 
improving the financial regulatory framework to better protect 
against systemic risk.
    In my view, a-broad based agenda for reform should include 
at least five key elements:
    First, legislative change is needed to ensure that 
systemically important financial firms are subject to effective 
consolidated supervision, whether or not the firm owns the 
bank.
    Second, an oversight council made up of the agencies 
involved in financial supervision and regulation should be 
established, with a mandate to monitor and identify emerging 
risk to financial stability across the entire financial system, 
to identify regulatory gaps, and to coordinate the agencies' 
responses to potential systemic risks. To further encourage a 
more comprehensive and holistic approach to financial 
oversight, all Federal financial supervisors and regulators--
not just the Federal Reserve--should be directed and empowered 
to take account of risks to the broader financial system as 
part of their normal oversight responsibilities.
    Third, a new special resolution process should be created 
that would allow the government to wind down a failing 
systemically important financial institution whose disorderly 
collapse would pose substantial risks to the financial system 
and the broader economy. Importantly, this regime should allow 
the government to impose losses on shareholders and creditors 
of the firm.
    Fourth, all systemically important payment, clearing, and 
settlement arrangements should be subject to consistent and 
robust oversight and prudential standards.
    And fifth, policymakers should ensure that consumers are 
protected from unfair and deceptive practices in their 
financial dealings.
    Taken together, these changes should significantly improve 
both the regulatory system's ability to constrain the buildup 
of systemic risks as well as the financial system's resiliency 
when serious adverse shocks occur.
    The current financial crisis has clearly demonstrated that 
risk to the financial system can rise not only in the banking 
sector but also from the activities of other financial firms--
such as investment banks or insurance companies--that 
traditionally have not been subject to the type of regulation 
and consolidated supervision applicable to bank holding 
companies. To close this important gap in our regulatory 
structure, legislative action is needed that would subject all 
systemically important financial institutions to the same 
framework for consolidated prudential supervision that 
currently applies to bank holding companies. Such action would 
prevent financial firms that do not own a bank but that 
nonetheless pose risk to the overall financial system because 
of the size, risks, or interconnectedness of their financial 
activities from avoiding comprehensive supervisory oversight.
    Besides being supervised on a consolidated basis, 
systemically important financial institutions should also be 
subject to enhanced regulation and supervision, including 
capital, liquidity, and risk-management requirements that 
reflect those institutions' important roles in the financial 
sector.
    Enhanced requirements are needed not only to protect the 
stability of individual institutions and the financial system 
as a whole but also to reduce the incentives for financial 
firms to become very large in order to be perceived as ``too-
big-to-fail.'' This perception materially weakens the incentive 
of creditors of the firm to retrain the firm's risk-taking, and 
it creates a playing field that is tilted against smaller firms 
not perceived as having the same degree of government support.
    Creation of a mechanism for the orderly resolution of 
systemically important non-bank financial firms, which I will 
discuss later, is an important additional tool for addressing 
the ``too-big-to-fail'' problem.
    The Federal Reserve is already the consolidated supervisor 
of some of the largest, most complex institutions in the world. 
I believe that the expertise we have developed in supervising 
large, diversified, interconnected banking organizations, 
together with our broad knowledge of the financial markets in 
which these organizations operate, makes the Federal Reserve 
well suited to serve as the consolidated supervisor for those 
systemically important financial institutions that may not 
already be subject to the Bank Holding Company Act. In 
addition, our involvement and supervision is critical for 
ensuring that we have the necessary expertise, information, and 
authorities to carry out our essential functions as a central 
bank of promoting financial stability and making effective 
monetary policy.
    The Federal Reserve has already taken a number of important 
steps to improve its regulation and supervision of large 
financial groups, building on lessons from the current crisis. 
On the regulatory side, we played a key role in developing the 
recently announced and internationally agreed-upon improvements 
to the capital requirements for trading activities and 
securitization exposures; and we continue to work with other 
regulators to strengthen the capital requirements for other 
types of on- and off-balance sheet exposures.
    In addition, we are working with our fellow regulatory 
agencies toward the development of capital standards and other 
supervisory tools that will be calibrated to the systemic 
importance of the firm. Options under consideration in this 
area include requiring systemically important institutions to 
hold aggregate levels of capital above current regulatory norms 
or to maintain a greater share of capital in the form of common 
equity or instruments with similar loss-absorbing attributes, 
such as ``contingent'' capital that converts to common equity 
when necessary to mitigate systemic risk.
    The financial crisis also highlighted weaknesses in 
liquidity risk management at major financial institutions, 
including an overreliance on short-term funding. To address 
these issues, the Federal Reserve helped lead the development 
of revised international principles for sound liquidity risk 
management, which had been incorporated into new interagency 
guidance now out for public comment.
    In the supervisory arena, the recently completed 
Supervisory Capital Assessment Program (SCAP), properly known 
as the stress test, was quite instructive for our efforts to 
strengthen our prudential oversight of the largest banking 
organizations. This unprecedented interagency process, which 
was led by the Federal Reserve, incorporated forward-looking, 
cross-firm, aggregate analyses of 19 of the largest bank 
holding companies, which together control a majority of the 
assets and loans within the U.S. banking system.
    Drawing on the SCAP experience, we have increased our 
emphasis on horizontal examinations, which focus on particular 
risks or activities across a group of banking organizations; 
and we have broadened the scope of the resources that we bring 
to bear on these reviews.
    We are also in the process of creating an enhanced 
quantitative surveillance program for large, complex 
organizations that will use supervisory information, firm-
specific data analysis, and market-based indicators to identify 
emerging risk to specific firms as well as to the industry as a 
whole. This work will be performed by a multidisciplinary group 
composed of our economic and market researchers, supervisors, 
market operation specialists, and other experts within the 
Federal Reserve System. Periodic scenario analysis will be used 
to enhance our understanding of the consequences of the changes 
in the economic environment for both individual firms and for 
the broader system.
    Finally, to support and complement these initiatives, we 
are working with the other Federal banking agencies to develop 
more comprehensive information-reporting requirements for the 
largest firms.
    For purposes of both effectiveness and accountability, the 
consolidated supervision of an individual firm, whether or not 
it is systemically important, is best vested with a single 
agency. However, the broader task of monitoring and addressing 
systemic risks that might arise from the interaction of 
different types of financial institutions and markets, both 
regulated and unregulated, may exceed the capacity of any 
individual supervisor. Instead, we should seek to marshal the 
collective expertise and information of all financial 
supervisors to identify and respond to developments that 
threaten the stability of the system as a whole. This objective 
can be accomplished by modifying the regulatory architecture in 
two important ways.
    First, an oversight council--composed of representatives of 
the agencies and departments involved in the oversight of the 
financial sector--should be established to monitor and identify 
emerging systemic risks across the full range of financial 
institutions and markets. Examples of such potential risks 
include: rising and correlated risk exposures across firms and 
markets; significant increases in leverage that could result in 
systemic fragility; and gaps in regulatory coverage that arise 
in the course of financial change and innovation, including the 
development of new practices, products, and institutions.
    A council could also play useful roles in coordinating 
responses by member agencies to mitigate emerging systemic 
risks, in recommending actions to reduce procyclicality and 
regulatory and supervisory practices, and in identifying 
financial firms that may deserve designation as systemically 
important.
    To fulfill its responsibilities, a council would need 
access to a broad range of information from its member agencies 
regarding the institutions and markets they supervise; and when 
the necessary information is not available through that source, 
they should have the authority to collect such information 
directly from financial institutions and markets.
    Second, the Congress should support a reorientation of 
individual agency mandates to include not only the 
responsibility to oversee the individual firms or markets 
within each agency scope of authority but also the 
responsibility to try to identify and respond to the risks that 
those entities may pose, either individually or through their 
interactions with other firms or markets, to the financial 
system more broadly. These actions could be taken by financial 
supervisors on their own initiative or based on a request or 
recommendation of the oversight council.
    Importantly, each supervisor's participation in the 
oversight council would greatly strengthen that supervisor's 
ability to see and understand emerging risk to financial 
stability. At the same time, this type of approach would vest 
the agency that has responsibility and accountability for the 
relevant firms or markets with the authority for developing and 
implementing effective and tailored responses to systemic 
threats arising within their purview. To maximize 
effectiveness, the oversight council could help coordinate 
responses when risks cross regulatory boundaries, as will often 
be the case.
    The Federal Reserve already has begun to incorporate a 
systemically focused approach into our supervision of large, 
interconnected firms. Doing so requires that we go beyond 
considering each institution in isolation and pay careful 
attention to interlinkages and interdependencies among firms 
and markets that could threaten the financial system in a 
crisis. For example, the failure of one firm may lead to runs 
by wholesale funders of other firms that are seen by investors 
as similarly situated or that have exposures to the failing 
firm. These efforts are reflected, for example, in the 
expansion of horizontal reviews and the quantitative 
surveillance program that I discussed earlier.
    Another critical element of the systemic risk agenda is the 
creation of a new regime that would allow the orderly 
resolution of failing, systemically important financial firms. 
In most cases, the Federal bankruptcy laws provide an 
appropriate framework for the resolution of non-bank financial 
institutions. However, the Bankruptcy Code does not 
sufficiently protect the public's strong interest in ensuring 
the orderly resolution of a non-bank financial firm whose 
failure would pose substantial risks to the financial system 
and to the economy. Indeed, after the Lehman Brothers and AIG 
experiences, there is little doubt that we need a third option 
between the choices of bankruptcy and bailout for those firms.
    A new resolution regime for non-banks, analogous to the 
regime currently used by the FDIC for banks, would provide the 
government the tools to restructure or wind down a failing 
systemically important firm in a way that mitigates the risks 
to financial stability and the economy and that protects the 
public interest. It also would provide the government a 
mechanism for imposing losses on the shareholders and the 
creditors of the firm. Establishing credible processes for 
imposing such losses is essential to restoring a meaningful 
degree of market discipline and addressing the ``too-big-to-
fail'' problem.
    The availability of a workable resolution regime also will 
replace the need for the Federal Reserve to use its emergency 
lending authority under 13(3) of the Federal Reserve Act to 
prevent the failure of specific institutions.
    Payment, clearing, and settlement arrangements are the 
foundation of the Nation's financial infrastructure. These 
arrangements include centralized market utilities for clearing 
and settling payments, securities, and derivative transactions, 
as well as the decentralized activities through which financial 
institutions clear and settle transactions bilaterally. While 
these arrangements can create significant efficiencies and 
promote transparency in the financial markets, they also may 
concentrate substantial credit, liquidity, and operational 
risks and, absent strong risk controls, may themselves be a 
source of contagion in times of stress.
    Unfortunately, the current regulatory and supervisory 
framework for systemically important payment, clearing, and 
settlement arrangements is fragmented, creating the potential 
for inconsistent standards to be adopted or applied. Under the 
current system, no single regulators is able to develop a 
comprehensive understanding of the interdependencies, risks, 
and risk-management approaches across the full range of 
arrangements serving the financial markets today.
    In light of the increasing integration of global financial 
markets, it is important that systemically critical payment, 
clearing, and settlement arrangements be viewed from a 
systemwide perspective and that they be subject to strong and 
consistent prudential standards and supervisory oversight. We 
believe that additional authorities are needed to achieve these 
goals.
    As the Congress considers financial reform, it is vitally 
important that consumers be protected from unfair and deceptive 
practices in their financial dealings. Strong consumer 
protection helps preserve household savings, promotes 
confidence in financial institutions and markets, and adds 
materially to the strength of the financial system. We have 
seen in this crisis that flawed or inappropriate financial 
instruments can lead to bad results for families and for the 
stability of the financial sector. In addition, the playing 
field is uneven regarding examination and enforcement of 
consumer protection laws among banks and non-bank affiliates of 
bank holding companies on the one hand and firms not affiliated 
with banks on the other. Addressing this discrepancy is 
critical both for protecting consumers and for ensuring fair 
competition in the market for consumer financial products.
    Mr. Chairman, Ranking Member Bachus, thank you again for 
the opportunity to testify in these important matters. The 
Federal Reserve looks forward to working with the Congress and 
the Administration to enact meaningful regulatory reform that 
will strengthen the financial system and reduce both the 
probability and the severity of future crises.
    Thank you.
    [The prepared statement of Chairman Bernanke can be found 
on page 58 of the appendix.]
    The Chairman. Thank you, Mr. Chairman.
    I apologize again for my outburst, and I begin with 4 
minutes and 30 seconds. I used up 30 seconds before the 
gentleman from Alabama correctly interrupted me. So make that 4 
minutes and 30 seconds, please.
    Just to recap, the need to intervene in the economy was 
regrettable. I think it was caused by past failures. But we do 
want to note that every item that the gentleman from Texas 
mentioned as a regrettable bailout was initiated by President 
Bush and his advisors, carried on by President Obama. Our job 
is to try and prevent this, we think, from happening again.
    One other historical reference I want to make to the 
Chairman, and I think it is fair to note again, we are trying 
to get bipartisanship. The Chairman has been a high economic 
official appointed first by President Bush to a couple of 
positions and now by President Obama. There has been reference 
to the economic recovery plan. It was noted in what would seem 
to me to be fairly simplistic economics, the plan was passed, 
but even after the plan passed, unemployment went up. The 
assumption that a plan being passed could instantly undo things 
that had been built into the economy seems to me questionable. 
But I would--like you said before, what is your estimate of the 
employment impact of the economic recovery plan that was passed 
earlier this year, Mr. Chairman?
    Mr. Bernanke. Mr. Chairman, I don't have an immediate 
number for you.
    Part of the issue here I think is only about 20 percent of 
the monies that were appropriated have been put into the 
system, and I think it still remains to be seen what the net 
effect will be. The estimated employment impact is very 
difficult because you have to compare it to what would have 
been the case in the absence. Of course, that is very 
difficult.
    I do believe that fiscal policy can have positive effects 
on growth and employment based on a large literature looking at 
previous episodes, the effects on consumer spending on State 
and local spending and the like. But I would have to concede 
that at this point, again because it is early in the process 
and because it is difficult to assess the counter factors.
    The Chairman. But the report did mention a number of areas 
where you thought it had some positive impact.
    Mr. Bernanke. Yes, based on our analysis, which largely 
reflects studies of previous episodes, there is a presumption 
that we saw, for example, in the last--in the early 2000's that 
consumers did respond to income transfers by increasing 
spending over a period of time.
    The Chairman. Let me move on. I appreciate that, and we do 
have more to be spent.
    I want to respond to the ranking member's denial of my 
assertion that the Republicans want to leave full consumer 
power to the Federal Reserve; yes, they do. The proposal to 
create a consumer agency takes more powers from the Federal 
Reserve than from the other agencies. And the counter has been 
to leave the powers where they are and to perhaps enhance their 
enforcement. So the largest defense of existing Federal power, 
Federal Reserve power that we now have, is coming from those 
who oppose a consumer protection agency.
    Now the gentleman from Alabama said he objected to some 
other things which are not in the bill that we circulated last 
week. We are not talking about doing some of those things. I 
think they were interpretations of the Administration's bill. 
We have already substantially rewritten it to talk about what 
we are talking about.
    But, again, let's be very clear. The position that the 
Republicans have talked about, as I understand it, is to leave 
consumer protection with the bank regulatory agencies, not to 
separate, as they say, safety and soundness and consumer 
protection. Of the bank regulatory agencies--the FDIC, the 
Comptroller of the Currency, the Office of Thrift Supervision, 
and the Federal Reserve--more consumer protection statutes are 
lodged in the Federal Reserve than anywhere else; and if you 
preserve that status quo, you preserve the powers of the 
Federal Reserve.
    I have seen no proposal from my Republican colleagues that 
would in any way diminish the consumer protection powers of the 
Federal Reserve. They say we want the Federal Reserve to 
concentrate only on monetary policy, but under their approach, 
the Federal Reserve would continue to be the major consumer 
protector of all of the other Federal agencies.
    I think that is a mistake, and that is why we have proposed 
a change. If there is a proposal to diminish the very large 
repository of Federal Reserve consumer powers, I haven't seen 
it yet, and I would look forward to it. The notion even of a 
council, which was proposed by the witness the Republicans 
asked us to have the other day, it would be a council of the 
existing Federal regulators; and he said they would retain 
their power. So that is where we are.
    The gentleman from Alabama.
    Mr. Bachus. Thank you.
    Chairman Bernanke, I guess you didn't know you were being 
invited to a debate between the chairman and me. I would like 
to get back to your testimony.
    I think, as you know, what the Republicans have proposed is 
consolidating financial regulation within a single agency and 
not bifurcating safety and soundness from consumer protection. 
You have actually, in a letter to me on July 29th, agreed that 
bifurcation had tremendous risk. Am I correct in that regard?
    Mr. Bernanke. I think there are some costs to separating 
enforcement and rule-writing.
    Mr. Bachus. Thank you.
    And the chairman, also, although I am not sure he has read 
our plan--what we have proposed is very similar to what Senator 
Dodd and Senator Warner in the Senate have proposed, and that 
is consolidation of some of the bank supervision.
    Now, Chairman Bernanke, as you have heard from Mr. 
Hensarling and others, we are deeply concerned over the Obama 
Administration's failure to abandon an option to use taxpayer 
money to bail out ``too-big-to-fail'' non-bank financial 
institutions. I am sure you are aware or are you aware that 
former Chairman Volcker expressed his strong concern for that, 
also? Do you share our concern that you do create, as I think 
Mr. Garrett said, moral hazard and also the question of 
fairness--
    And I will end with this. There are too many questions.
    But, as you know, you probably heard Secretary Geithner say 
he wouldn't take a trillion dollar intervention off the table. 
I would ask you to maybe start with that and work back. Would 
you endorse his statement?
    Mr. Bernanke. Let me address the key issue which was raised 
by Mr. Hensarling. I do not in any way support ``too-big-to-
fail.'' I think it is a huge problem. I think whatever we do 
must address that problem. Big companies must be allowed to 
fail, but they must be allowed to fail safely so they don't 
bring down the system.
    So I see the resolution regime, for example, as having 
three objectives.
    Objective number one is to avoid damage--collateral damage 
to the broad financial system, and for that reason some 
flexibility is needed for the Treasury or whomever is running 
that to bridge to a new company or take whatever actions are 
needed to intervene at that point.
    I think there are two other objectives. The second one is 
to get rid of ``too-big-to-fail.'' And for that purpose, I 
think the ability to wind down the firm should be there; and I 
think we ought to make it a very, very strong presumption that 
whenever there is an intervention that not only shareholders 
but also creditors lose money. And that will create the market 
discipline that will take away the biggest advantage of being 
``too-big-to-fail''.
    And then the third objective is to protect taxpayers. I 
want to stress very strongly that I do not support government 
or taxpayer investments such as TARP as a means of preventing 
these failures. What I propose is something similar to what we 
have now for the FDIC, which is that, even if there are short-
term extensions of credit from the government, that ultimately 
the full cost will be borne either by the creditors of the 
company or by the rest of the industry.
    So, I do very much want to address your concerns. At the 
same time, I do think that we need to have a system for 
avoiding chaos. The Lehman Brothers failure is still not 
resolved. There is still an enormous amount of monies tied up 
and confusion and uncertainty about claims, and that is just 
because the bankruptcy process can't deal with this in an 
orderly way.
    Mr. Bachus. Let me close by asking this. The Consumer 
Protection Agency, the chairman said today that we were talking 
about pure vanilla products. He said he has taken that off the 
board.
    The New York Times, in an editorial on September 30th, says 
the agency still has the ability to create incentives that 
would encourage the provisions of plain vanilla products, 
including charging reduced oversight fees to firms that offer 
simpler loans. Do you agree with the provision where the 
Federal Government would actually tax or charge fees if banks 
did not offer plain vanilla services or plain vanilla products?
    Mr. Bernanke. Congressman, I addressed this in an earlier 
testimony; and the point I made was that there is some case for 
vanilla products which relates to what behavioral economics 
says about the ability of consumers to deal with very 
complicated processes or products. But I did also say I thought 
the basic design ought to come from the firms. The agency 
should not be designing the products.
    I think I would add also that simplicity is sometimes in 
the eye of the beholder. One-size-fits-all doesn't always work. 
There may be some products that are simple and appropriate for 
some but not necessarily for all consumers.
    The Chairman. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you, Mr. Chairman. Welcome back, 
Chairman Bernanke.
    And, first, may I take the opportunity to congratulate you. 
From what I have heard, you have now determined that you are 
not supportive of greater powers for the Federal Reserve but 
would prefer the council in systemic risk regulation. Is that a 
reasonable conclusion from what you have said?
    Mr. Bernanke. Well, only that there is not really a change. 
We have supported--I think there has been some 
misunderstanding. We have never supported, and the 
Administration has never supported, a situation in which the 
Fed would be some kind of untrammeled superregulator over the 
entire system. That was never contemplated.
    The original Administration proposal proposes a council, 
and we support the council. We think it has a very valuable 
role to play. And we think that underneath the council, each of 
the agencies, including the Fed but also the SEC and others, 
should be looking at the systemic implication of their actions 
and working together through the council to look at the whole 
system. So we have never objected.
    Mr. Kanjorski. Well, whether I interpreted it correctly or 
not, anyway, congratulations. I think we are on a course to now 
perhaps put together something that can be accomplished here.
    The only thing that I did not hear you talk about is a 
factor that came to our attention when we held the hearings on 
General Motors, Ford, and Chrysler. The testimony was quite 
clear there, and including the foreign manufacturers, that they 
all concluded that if we allowed Chrysler to fail it would 
cause systemic risk and bring down all of the other automobile 
industry because of the intertwined nature of their dealers and 
their suppliers; and that was a major consideration in what the 
Congress did in supporting the bailout of General Motors.
    Now my question is, I heard you only talk about financial 
institutions in relationship to systemic risk. Does that mean 
you see no other systemic risk in our system beyond the 
financial institutions? Or is it because that happens to be the 
flavor of the day and we should wait until there is a failure 
or systemic risk in other industries?
    Mr. Bernanke. Well, no doubt the failure of the auto 
companies would have been disruptive, particularly in the areas 
where employment is concentrated in that area; and it was 
particularly troublesome given the state of the general economy 
when these decisions were made. But I would draw a strong 
distinction I think between financial institutions, 
particularly large, complex, international, interdependent 
financial institutions and any other kind of firm. I think only 
those large financial institutions have the ability to bring 
down the entire global system. So the failure of Lehman 
Brothers affected not only the United States economy but every 
economy in the world.
    Now, clearly, damage would have been done by other kinds of 
firms, but I would personally--my focus is on financial firms.
    Mr. Kanjorski. I understand that is your specialty and that 
is your focus, but are you having someone do analysis and study 
to find out whether we should worry, for instance, about the 
world energy problem or transportation, particularly aircraft, 
where we have very limited manufacturers? What would happen to 
the world if there were a failure in one of those industries? 
Is that something we should think about or worry about?
    Mr. Bernanke. Well, we should certainly think about it. But 
if you look at the airline industry, for example, every major 
airline has been through bankruptcy at one point or another. 
And it has been a process--
    Mr. Kanjorski. I am probably a little bit more worried 
about the manufacturers than the operators. I realize there are 
just really a few left in the world; and if there were failure 
there, it could be, I would think, systemic.
    Mr. Bernanke. There are tough questions there. I guess I 
would--it is not just a question of specialization. 
Unfortunately, financial crises, booms and busts are a long-
standing problem of capitalism; and they have, I think, a 
special role in the broader--
    Mr. Kanjorski. I agree. And that being the case, are you 
planning to come forth with a proposal to the Congress of how 
not only we can have a systemic regulator that can identify 
``too-big-to-fail'' but how we start winding them down and 
preventing them from getting that large? Are we going to go 
into an industrial plan or financial plan in America where we--
once identified, we establish a way of taking these 
institutions down to a controllable size where their failure 
would not cause systemic risk?
    Mr. Bernanke. I don't think it's possible to reduce all 
financial institutions to a size so small that there would not 
be any systemic consequences without losing some very 
substantial benefits of international financial flows, for 
example.
    I think the best way to do this is by making it costly, 
removing the advantages of being ``too-big-to-fail.'' So, on 
the one hand, by increasing the oversight regulation capital 
requirement, making it less profitable, ``too-big-to-fail,'' 
and making it much more constrained; and, on the other hand, by 
having the resolution authority which would tell the creditors 
that they will lose money if this company fails and, therefore, 
they will not benefit the company by providing resources or 
funds at below-market rates.
    So I think those two things will remove a lot of the 
incentives that the firms have to become too large and that 
they will naturally tend to shrink.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Chairman Bernanke, yesterday, we had a hearing in our 
committee on the CFPA that many of us view as a financial 
services product approval agency. The language that we have 
seen from our chairman still would allow this agency to have 
sweeping draconian powers to outlaw financial products that it 
subjectively believes to be ``unfair or abusive.'' Again, 
fairly subjective terms.
    As part of that hearing, we heard testimony from the U.S. 
Chamber of Commerce. They submitted a study they did, and let 
me quote from that: ``The CFPA credit squeeze would likely 
result in business closures, fewer startups, and slower growth. 
Overall, this would cost a significant number of jobs that 
would either be lost or not created.''
    As you have viewed the CFPA, even through the 
Administration's White Paper or to the extent you have 
knowledge of the chairman's bill, could the CFPA indeed lead to 
further job losses or did the Chamber of Commerce just get it 
wrong?
    Mr. Bernanke. Well, I think would depend on the execution.
    I will make two comments. The first is that the Federal 
Reserve, in our consumer regulation, works within a statutory 
context, a set of laws, TILA, TISA, others that define the 
parameters of what we are supposed to do, and we do things in 
the context of what Congress has told us is the appropriate set 
of objectives and constraints. So that is how we operate. I 
think there should be a statutory context for whatever agency 
is making those decisions.
    It is always the case, though, in making specific decisions 
about trying to balance the benefits of protecting consumers 
versus the cost of restraining credit availability--and I will 
just speak for the Federal Reserve--which is that in our 
efforts we have brought together not only lawyers and experts 
on the minutia of consumer law but economists and financial 
people and so on to try to look at the full implications for 
the credit markets of the decisions we have taken. I would say 
it would be important for the agency to take that view as well. 
One mechanism I think is that the board of this agency should 
include some other agencies, which I believe is the plan. But 
it is important to balance those two--
    Mr. Hensarling. Is the summary of that answer ``maybe?''
    Mr. Bernanke. It depends. It depends on how--
    Mr. Hensarling. We will turn it into a two-word answer.
    Clearly, you are familiar with the incredible financial 
commitment of the taxpayer to the Government-Sponsored 
Enterprises, Fannie Mae and Freddie Mac. I believe that the Fed 
has purchased roughly $130 billion of their debt; another 
roughly $700 billion of their MBS; and I think FHFA and the 
Treasury is up to about $100 billion. So we are looking at 
almost $1 trillion of taxpayer commitment here.
    The legislation that the Administration and the Democratic 
Majority has brought before us is almost silent on the issue of 
any reforms for the GSEs. And the legislation before us will 
apparently regulate pawn shops and payday lenders. To the best 
of my knowledge, they had no role in our economic turmoil.
    Many economists believe that Fannie and Freddie were 
central to our economic turmoil. I don't believe pawn shops and 
payday lenders have taken any taxpayer funds, and now we are 
looking at an almost $1 trillion commitment.
    In your testimony, you said that your reform, any reform 
agenda, should include at least five key elements. If our 
reform agenda is silent on reforming Fannie and Freddie, did we 
meet your test?
    Mr. Bernanke. I think, in the near future, we need to have 
a plan for Fannie and Freddie. I didn't include it because I 
was focused essentially on the Treasury's proposal and on the 
systemic risk aspects. But you are absolutely right; I think 
the GSEs need to be discussed in the near term. Not just for 
systemic risk reasons, but because we have a lot of uncertainty 
about housing and what is going to happen to the housing 
structure, housing finance system. So I hope that in the very 
near future, and I believe that is the intention, I hope in the 
very near future, we will have some proposals on that.
    Mr. Hensarling. In the small time I have remaining, could 
you discuss the pros and the cons? What might the Federal 
Reserve look like if it was strictly engaged in monetary 
policies? We did achieve some version of the resolution 
authority that you seek, and the Federal Reserve retains its 
13(3) powers, otherwise shedding its responsibilities for bank 
supervision, consumer protection, payment systems and the like. 
Might that be good or bad public policy and why?
    Mr. Bernanke. That would make us look very much like the 
Bank of England and some other central banks that have been 
brought back to monetary policy-making. I think the experience 
of the recent crisis is that, and this is the case in the U.K., 
that the fact that the bank did not have the information it 
needed about the crisis, about what was happening in the 
banking system and so on, was a real drawback in terms of the 
ability of the Central Bank to help stabilize the system. So, 
of course, you could have a central bank that was focused only 
on monetary policy, absolutely. But I think that it is very 
important for the Central Bank to have the information, the 
expertise, the insight about the banking system in order to 
both make better monetary policy and to be able to play an 
appropriate role whenever there is a crisis.
    Mr. Hensarling. Thank you.
    Mr. Kanjorski. [presiding] The gentleman's time has 
expired.
    The gentlelady from California, Ms. Waters.
    Ms. Waters. Thank you very much.
    Mr. Bernanke, I am very pleased that you are here with us 
once again. And I would like to thank you very much for your 
responsiveness to the requests that we have made to you several 
times and the discussion that we had at the recent ALC that was 
sponsored by the Congressional Black Caucus. I really do 
appreciate that.
    Let me just say that I believe that the presentation that 
you have made here this morning, where you discussed your 
agenda for reform and pointed out the five key elements, makes 
a lot of sense. I just want to ask about the oversight council. 
You talk about the oversight council being able to monitor and 
identify emerging risk to financial stability across the entire 
financial system. And I wondered if this would include taking a 
close look at credit default swaps, naked credit default swaps 
in particular, because I consider them a risk to the stability 
across the entire financial system.
    And I am focused somewhat on the fact that the taxpayers, 
in bailing out AIG, had to pay for that gamble to Goldman Sachs 
and, I don't know, maybe some others. How would you deal with 
that? With this council, how would you see the potential for 
risk to the system that is presented by these transactions.
    Mr. Bernanke. I think that credit default swaps are an 
almost perfect example of the kind of thing that the council 
would be focused on. The CDS market cut across so many 
different jurisdictions. AIG was under the AG of the Office of 
Thrift Supervision. Some of the clearing mechanisms were not 
regulated at all. The New York Fed was trying informally to get 
them working better since they were regulated. You had the SEC 
and the CFTC involved in that process to some extent. Partly it 
was an issue of bank regulation, because banks were also 
involved in these transactions, and they were not adequately 
capitalized to do that. So it is a classic example of something 
that went across a whole bunch of different areas in which no 
one regulator had a holistic view of what was going on.
    And I think this would be a really good example of how by 
sitting today in a serious way and having a staff and reviewing 
developments, issues, new instruments, new markets and so on, 
that this is the kind of thing where maybe working together, it 
might have been--you know, of course we are human beings and we 
won't be infallible, but there would have been a much better 
chance of identifying it earlier in this kind of council 
context than the way the system we currently have.
    Ms. Waters. As you know, I do not share the opinion of many 
who work in this whole financial services industry about 
regulation of any product that comes on the market. I believe 
that there are some products that are just too risky and should 
be eliminated. They just should not be there. Have you ever 
thought about how, perhaps, we could identify such risk and 
say, this just can't work, we just can't do this?
    Mr. Bernanke. The Federal Reserve has taken this position. 
For a very long time, the Fed was focused on transparency and 
disclosures on the theory that if people could read the 
information, that they would make good decisions. But, for 
example, in our recent credit card work, which became the basis 
for a lot of the legislation here, we identified through 
consumer testing and other kinds of means that there were a 
number of practices and products and so on that did not benefit 
the consumer and which could not reasonably be understood by a 
typically educated consumer to understand the full implications 
of what that practice was. And based on that, we said that in 
some cases transparency is not enough, and we employed the 
Unfair or Deceptive Acts or Practices provisions simply to ban 
those practices.
    So I think, in situations where there is no benefit to the 
consumer and where disclosures are not adequate, there are 
grounds for banning a product or a practice. And the consumer 
agency or whomever is in charge would look at that, and the 
council could look at those thinks as well.
    Ms. Waters. I am very pleased to hear that. And I thank you 
very much.
    I yield back the balance of my time.
    The Chairman. The gentleman from California.
    Mr. Royce. Thank you.
    Chairman Bernanke, I have a question for you. Last month, 
the Federal Housing Administration acknowledged that a new 
audit that HUD did there found that the FHA's cash reserve fund 
is rapidly depleting. It might drop below the congressionally 
mandated 2 percent by the end of the year. And so the leverage 
there, the ratio was 50 to 1 for FHA. And it will soon have a 
smaller capital cushion than Bear Stearns had on the eve of its 
crash. At 50 to 1, it is about halfway to where Fannie Mae and 
Freddie Mac were at 100 to 1 leverage ratio. And the 
delinquency rate for the FHA is now above 14 percent, so that 
is about 3 times higher than unconventional mortgages.
    In many respects, the reason for this financial 
deterioration is that the FHA is underwriting record numbers of 
high-risk mortgages. Between 2006 and the end of next year, the 
FHA's insurance portfolio will have expanded to $1 trillion 
from about $410 billion. The FHA's very low, I would say 
absurdly low, 3.5 percent downpayment policy in combination 
with other policies to reduce upfront costs for new home buyers 
means that the home buyers can move into their government-
insured home with an equity stake of about 2.5 percent. So, in 
essence, the private market for loans with little or no money 
down has shifted onto the books of the Federal Government.
    Are you concerned with the long-term consequences of this 
trend and the rapidly deteriorating capital cushion of the FHA? 
And are you confident this will not turn into another Fannie-
Freddie situation, which could have been easily prevented had 
we listened to the Fed in 2004 and 2005, but ends up costing 
taxpayers billions of dollars? I remember when the Fed came to 
us in 2004 and said, we need to be able to regulate for 
systemic risk, the leverage is 100 to 1. Basically, what you 
are doing in government is that the Congress has forced us into 
a position where half of the portfolio has to be subprime and 
Alt-A; this represents a systemic risk. We need the ability for 
the regulators to slowly bring down this over-leveraging and 
bring down the portfolio size by giving us the ability to 
regulate for systemic risk. Are you worried that we are going 
through that kind of a cycle again here?
    Mr. Bernanke. Well, I should say first that we don't 
directly evaluate the FHA's position, and I think they disagree 
somewhat with this outside view, and so I won't try to 
adjudicate between that. But it is true that the FHA de facto 
has replaced the riskier part of the mortgage market. It has a 
very high share now of new mortgages because it is the only 
source of mortgages where downpayments can be less than 
basically 20 percent. And so it is providing mortgage access to 
a large number of people who could not otherwise buy homes.
    So I guess you have two conflicting public policy goals 
here. On the one hand, it is providing support to the housing 
market and housing homeownership. On the other hand, clearing, 
I think it is fair to say, that given the low downpayments, 
there is certainly greater risk of loss there, which would be 
ultimately borne by the taxpayer, than under a policy of higher 
downpayments and higher FICO scores and so on. So I think that 
is a tradeoff that Congress has to look at.
    Mr. Royce. Let me ask you another question. Some economists 
are arguing that the Fed not only lost control, but its policy 
actions have unintentionally become procyclical--encouraging 
financial excesses instead of countering the extremes. And this 
gets to the point that has been argued by many economists. In 
fact, Friedrich Hayek won the Nobel Prize in 1974 for arguing 
that artificially low interest rates lead to the misallocation 
of capital and the bubbles which then lead to bursts. Looking 
back, do you agree that the negative real interest rate set by 
central banks from 2002 to 2006 had a dramatic impact on the 
boom and the subsequent bust, especially when you take into 
consideration what was already an inflating housing bubble with 
the drastic steps taken by the Federal Government to encourage 
less creditworthy borrowers to get into loans they could not 
afford? Do you think those combinations could have had an 
impact on that boom-bust?
    Mr. Bernanke. We are actually looking very carefully at 
this question because it is very important for policy going 
forward, and I think we need to keep an open mind. Having said 
that, I think that the very strong way you stated it is 
probably an overstatement. I think there are a lot of reasons 
to think that there were other factors involved in the housing 
boom and bust besides monetary policy. And I would say secondly 
that a strong, well-regulated financial system should not have 
been crashed by an increase and decrease in house prices. I 
think the failures of regulation, supervision and oversight 
allowed this to become as big a deal as it was. So I think that 
is a very high priority right now.
    The Chairman. The gentlewoman from New York.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Chairman, what are some considerations that a systemic 
regulator should look for to determine what activities and what 
institutions should be subject to its oversight?
    Mr. Bernanke. So, again, we may be talking about a 
coordinated effort of the systemic risk council, the Fed and so 
on, so it is not clear exactly how that process would work. But 
there are a number of considerations, not just size. For 
example, what is called interconnectedness, the number of 
counterparties the firm has around the world, the complexity of 
its operations, whether it provides critical services like 
providing market making or other utilities to the financial 
system. So there are a lot of considerations you would take 
into account.
    Ms. Velazquez. Is it conceivable that private equity funds, 
firms or venture capital funds could fall under a systemic risk 
regulator?
    Mr. Bernanke. Well, my view at this point is that I would 
not think that any hedge fund or private equity fund would 
become a systemically critical firm individually. However, it 
would be important for the systemic risk council to pay 
attention to the industry as a whole and make sure that it 
understood what was going on so there wouldn't be kind of a 
broad-based problem that might cut across a lot of firms.
    Ms. Velazquez. As we continue to see fallout from this 
recession, one result has been even greater consolidation in 
the banking and financial sector. Our largest banks are now 
bigger than ever, and events from the past year have 
demonstrated that some financial institutions are indeed ``too-
big-to-fail.'' What steps could a systemic regulator take to 
mitigate the continued concentration of risk in a few very 
large institutions?
    Mr. Bernanke. Well, this was a very undesirable side effect 
of the steps we had to take to protect the system in the short 
run. And as I was discussing earlier, I think it is extremely 
important to address this ``too-big-to-fail'' problem, and I 
see several ways to do that. One would be, again, to--in the 
recognition that these firms if they fail threaten not only 
their own stability and their own creditors, but the whole 
system--I think they should be subject to extraordinary 
oversight, including higher capital and liquidity requirements, 
tougher risk-management rules, and basically stronger 
supervision.
    Secondly, one of the big concerns about these large firms 
is that as ``too-big-to-fail'' firms, they are not subject to 
the discipline of the market because lenders do not believe 
that the firm would be allowed to fail. I think that has to be 
eliminated and fixed. I would not be satisfied with any 
resolution authority that did not have a strong presumption and 
a strong mechanism for allowing these firms when being taken 
over by the government to impose significant losses on not only 
shareholders but also creditors.
    I guess a final comment is that the Federal Reserve, in 
approving mergers and the like, looks at the monopoly issues 
and the concentration issues. And our view is that at least in 
retail services, those are most important at the local level 
rather than at the national level. So we always examine 
whenever there is a merger or expansion of a company, we always 
look at each of the market areas, SMSAs and try to make sure 
that there is not a domination of that region by one or two 
companies.
    Ms. Velazquez. Mr. Chairman, I would like to go again back 
to my first question about institutions and activities where 
you said that, depending on size, but that is kind of vague. 
What do you have in mind in terms of size? Or when you talk 
about risks how much risk? And when you talk about 
interconnectedness, if that means to 5, 100, 1,000; I am not 
clear on that.
    Mr. Bernanke. Well, there has been some research in the Fed 
system and elsewhere trying to lay out criteria. But to some 
extent, there would have to be a set of principles that the 
Congress would enumerate in terms of what we would be looking 
at. One of the issues is that which firms are systemically 
critical may depend to some extent on the state of the broad 
economy. So, for example, it might have been possible to let 
certain firms fail if the rest of the economy had been in a 
healthy condition and the financial system in a healthy 
condition. But in a situation where we are in a panic and a 
recession and so on, that may lower the bar in some sense. So I 
can't give you precise numbers. I do think we would owe the 
Congress some careful studies of what the considerations would 
be, recognizing that they might change over time depending on 
the state of the economy and the state of the financial system.
    Ms. Velazquez. Thank you.
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    And thank you, Chairman Bernanke, for being here. During 
the previous hearings I have asked you about the status of the 
Fed's work with HUD on harmonizing RESPA and TILA efforts. So I 
think it is particularly important to ensure that the consumers 
have simplified information disclosures. How are things going 
with that task?
    Mr. Bernanke. We agree with you 100 percent on that, and we 
have been trying to work this out for some time. We have 
recently, as you may know, released some new rules on mortgage 
disclosures, yield spread premiums and some of these related 
issues which bear on the documents that consumers sign when 
they take out a mortgage. And we are in conversations now with 
HUD, and I think there is a lot of good will on both sides, to 
try to come to some agreement that will allow us to eliminate 
duplication and to create a more consistent set of rules 
between the two institutions. So we are trying, we are in 
conversations. It has taken a long time because the commitment 
has waxed and waned, but we are working very hard to do that 
and we hope to have some results.
    Mrs. Biggert. Do you think that you will finalize the 
regulations before RESPA takes effect?
    Mr. Bernanke. We will try to do so. I can't promise.
    Mrs. Biggert. Under the proposed legislation, the CFPA is 
given authority to write RESPA and TILA rules. If you finalize 
the rules, if this new agency were to come into effect, I worry 
then that the new agency would probably start all over again 
and look at those rules.
    Mr. Bernanke. Well, that would be up to the new agency. If 
they thought that the rules that were in existence were not 
adequate for some reason, they would obviously have the right 
to do that. If I were running this new agency, I would try to 
address what I perceived as the biggest gaps and not revisit a 
lot of old rulemakings, but that would be up to that person.
    Mrs. Biggert. Thank you.
    If Congress overreacts to this crisis and overregulates, 
for example, with derivatives regulation, requiring all 
customized and standardized transactions to be conducted on an 
exchange, could U.S. businesses and jobs move overseas?
    Mr. Bernanke. I think in general, it is very important not 
to overreact but to create, maybe not more regulations, but 
smarter regulations, is the way I have put it before. On the 
case you are talking about, I think there is a case from both 
market efficiency and from systemic safety to use 
clearinghouses of central counterparties for standardized 
contracts. But at the same time, I think there is also scope 
for leaving a part of the industry in a more bilateral or 
noncustomized basis. I think there is a good economic reason 
for that. And so an appropriate balance between those two 
things would be welcome.
    Mrs. Biggert. I hope we don't overreact as we have in some 
other cases.
    there is one other issue that I have heard some concerns 
about, and that is with the CFPA, that there is fear that every 
company really will be included under that. And I know you 
talked about the statutory authority that you have for dealing 
with the issue. But every company that has any financial 
transaction at all, even a plumber or a baker or whatever, 
would be under this regulation. Do you believe that could 
happen or would there have to be legislation to make sure what 
is actually defined?
    Mr. Bernanke. I think the legislation would define that. I 
understand the chairman has dropped that from his current 
version of the bill. But certainly the Federal Reserve does not 
have that kind of authority, so it would have to be 
specifically granted to the new agency.
    Mrs. Biggert. Thank you.
    I yield back, Mr. Chairman.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    Chairman Bernanke, let me just make this opening comment 
because sometimes we send subtle messages that obviously are 
unintended, and I have two this morning that kind of reinforce 
the concern that I have been expressing throughout this 
process.
    You talked about five different areas that you wanted to 
comment on. You gave us five sentences on consumer protection, 
and then you referred, in response to a question, to the 
minutia of consumer laws. We keep sending this message to the 
public that this whole issue of consumer protection is 
secondary to everything else that we are here involved with. 
And we need to be very careful about that.
    I am not looking for a response from you, but five 
sentences on consumer protection when everything else that we 
talked about this morning gets substantially more space is just 
not a good message to send. Referring to consumer laws as the 
minutia of consumer protection laws is just not a good message 
to send.
    Now, let me get to the real question. On page 9, you make 
this comment on consumer protection: ``The playing field is 
uneven regarding examination and enforcement of consumer 
protection laws among banks and non-bank affiliates of bank 
holding companies on the one hand and firms not affiliated with 
banks on the other hand. Addressing this discrepancy is 
critical both for protecting consumers and for the other parts 
of the system.'' Now, my question is, Mr. Hensarling was asking 
about these non-banks. What are the non-bank parts of this that 
we are referring to? Let's get some of those on the record.
    Mr. Bernanke. Sure. But first I just have to say that--
    Mr. Watt. No, no. That was not intended to draw a response 
from you, Mr. Bernanke, and I have a limited amount of time.
    Mr. Bernanke. I disagree with your implication on that.
    On non-bank firms, there are many firms that are not--
    Mr. Watt. Such as?
    Mr. Bernanke. Mortgage companies, consumer finance 
companies, brokers.
    Mr. Watt. Check writing, check cashing?
    Mr. Bernanke. Yes.
    Mr. Watt. Payday loans?
    Mr. Bernanke. For example.
    Mr. Watt. Okay. And if we give the regulation on the 
consumer side to a Consumer Protection Agency of those and we 
retain the regulation of consumer issues in other regulators 
with the regulated banks, tell me how that doesn't do exactly 
what you just described here as a problem. I don't understand 
that. Tell me that.
    Mr. Bernanke. There is a big problem that currently exists, 
and it would be hard to fix, which is that many types of 
companies are State-chartered and are supervised by the States.
    Mr. Watt. All right. So it is okay to create, to have a 
consumer protection agency that deals with the States, but it 
is not okay to have a consumer protection agency whose sole 
primary--they come to work every day looking at consumer 
issues, and it is not okay when some other Federal agency is 
involved, is that what you are saying?
    Mr. Bernanke. No, not at all. I am just saying that--
    Mr. Watt. Now, let me just go back and ask this question. 
You coordinate with other agencies on safety and soundness. 
Other agencies do safety and soundness on various institutions. 
But they don't come back and answer to the Federal Reserve, 
right?
    Mr. Bernanke. We coordinate very closely.
    Mr. Watt. You coordinate very closely. And we presume that 
this consumer protection agency would coordinate very closely, 
too. They would be on this council that you keep referring to, 
wouldn't they, if we created this agency?
    Mr. Bernanke. Yes, and we certainly would coordinate with 
them.
    Mr. Watt. Okay. So how is that any different than the 
coordination that would take place on safety and soundness? Why 
is it terrible to put this responsibility on the consumer 
protection agency and allow it to coordinate when there is a 
conflict?
    Mr. Bernanke. Because there are different issues here. 
Currently, the OCC does both consumer compliance and safety and 
soundness--
    Mr. Watt. They aren't doing much consumer compliance, I can 
tell you that.
    Mr. Bernanke. Well, in theory at least, they are supposed 
to do consumer compliance and safety and soundness for a bank, 
but they do both, and this would break it up. That is all.
    The Chairman. The gentleman from New Jersey.
    Mr. Garrett. Thank you, Mr. Chairman.
    Just a couple of questions on areas I know are outside of 
your regulatory area, but goes to the macroeconomic. One Mr. 
Royce brought up before; he gave you all the stats and what 
have you, the dire prediction with regard to the FHA. And I 
just want to delve into that just a little bit more. I heard 
your answers on that.
    I mean, what some of us are suggesting, the legislation I 
threw out at the very beginning, is to say that maybe we should 
treat them with some of the same requirements that we are 
asking the rest of Wall Street and the rest of the financial 
markets to have some skin in the game and to have proper 
capital level rate aspects and also leverage ratios.
    I think from your answer, you are saying, well, there are 
two issues here. What does Congress want to do with regard to 
housing and getting that going on the one hand, but what do you 
want also to do to protect, which is your job in part, to 
protect the taxpayer? How should we or how can we come down on 
the one side without harming the other side?
    Mr. Bernanke. Well, first, the difference between the FHA 
and the GSEs is the GSEs had private debt and private 
shareholders, and that made it more complex in terms of the 
overall financial system.
    I think it is undeniable that the FHA loans, because of the 
low downpayments and so on, are riskier than other mortgages 
being made and therefore have greater chance of loss, which 
would be made up by the taxpayer. And that tradeoff is your 
tradeoff in terms of what you think is worth--you know, what 
risk you think the government should be willing to take in 
order to support the housing market and homeownership. You made 
the same decision on things like in first-time home buyers tax 
credit. You know, it is a cost to the government, but it 
supports the housing market. I don't know how to tell you that.
    Mr. Garrett. Can we do it in a way, do you think, by just 
raising it up just a smidge--our bill would say 5 percent 
down--without having a dramatic impact?
    Mr. Bernanke. I don't know how much effect it would have. 
That would require more study. I think it is the same tradeoff, 
though. You can make the conditions tougher and tougher, and 
that reduces the risk to the taxpayer, absolutely, but it also 
reduces the number of people who can get mortgages.
    Mr. Garrett. Another area outside of yours but on the macro 
issue is the FDIC and the other issues. I don't have to tell 
you what they are facing right now, and one of their proposals 
I am reading about is going to the banks and saying, help us 
out here. The same sort of dilemma there, isn't it, is that the 
banks are going to push back and say, well, if you are asking 
us to do that, we just are not going to be able to make as 
many--our capital level is going to go down; we are going to 
have a harder time of it, and we are not going to be able to 
make the loans. So where is the tradeoff in that situation?
    Mr. Bernanke. Well, the FDIC has some tough choices because 
they are trying to replenish the fund without creating a 
``procyclical effect,'' that is, without hurting the banking 
system in a way at a bad time when we want the banking system 
to be lending. The solution they have, as I understand it, is 
that even though there would be prepayments by the banks, that 
those prepayments would be treated as assets on the bank 
balance sheets, and therefore capital would not, at least in 
the a regulatory sense, be affected. And that is the solution 
they have chosen.
    Mr. Garrett. I thought I was reading it that way, but I 
wasn't really sure, quite honestly, that they were going to 
treat it that way. And if you treat it that way, then really 
what you are doing, aren't you, is just like getting a loan 
from the bank, because you are really not taking the assets off 
the balance sheet of the bank?
    Mr. Bernanke. It is like making a loan.
    Mr. Garrett. It is like making a loan. And so, really, 
instead, the way I think of it is, instead of the FDIC coming 
back to Congress or using that line of credit that they have 
taking a loan from the American public; instead, they are 
saying, we are going to sort of kick the can down the road and 
just borrow it from the banks instead and spread it over to 
them. Is that the right way to interpret it?
    Mr. Bernanke. It is a loan from the banks, but it is not a 
loan that requires capital to back it up. And therefore, in 
that sense, it doesn't crowd out other lending. But there are 
no good solutions there, and I know the FDIC has really 
struggled with the right approach.
    Mr. Garrett. But my understanding, is that a correct 
analysis of it? It is just a loan from them, and it is really 
just--and one way of looking at it is they are really sort of 
creating money at the same time because you are able to count 
that dollar twice: once when the FDIC is able to take it and 
hand it over to this bank over here, I am bailing you out with 
that one, which is what they want to do with it; and the second 
time, they are going to count that dollar when it is still 
sitting in the original bank that loaned the money because they 
are still going to be treating it as capital in that bank so 
they can loan it out to somebody else. So you are really 
counting that dollar twice, aren't you?
    Mr. Bernanke. Well, I don't think it is creating money 
technically, but it is basically a loan from the banking system 
to the FDIC which will have to be replaced eventually by actual 
assessments on the rest of the banking system.
    Mr. Garrett. And I can't see the clock. Speaking on the 
actual assessment, really quick on the aspect of the resolution 
authority and who actually pays, I still haven't gotten a clear 
picture on who actually would pay if, heaven forbid, you have 
this next scenario, and then you assess it out to everybody. 
Can you tell us who that would be? How broad is the group of 
banks that you would be going after or financial institutions 
that you would actually assess, and is there potential that 
they would just not be large enough to pay because it is small?
    Mr. Bernanke. I think, to answer quickly, there are a lot 
of unresolved issues that we need to talk about. I think it 
should be fairly broad. It should be the financial industry. 
But it should exclude insured deposits, which are already 
assessing the size of liabilities that you are going to tax in 
some sense, you should exclude those which are already paying 
deposit insurance premiums.
    The Chairman. The gentleman from New York, Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Mr. Chairman, let me ask, I think what we have to get right 
is this resolution, a resolution authority, and it is 
absolutely key. And just listening to some of the testimony 
yesterday, some of the rating agencies, for example, it became 
abundantly clear to me that they would rate everybody triple-A 
because they just felt the government would bail everybody out. 
But if we get this resolution authority correct, then everyone 
will know that the government will not bail these folks out. 
And I think that is absolutely one of the most critical pieces 
that we have to work on to make sure that we get right.
    That being said, you know, what I have been also focused on 
and concerned about when we deal with resolution authority, for 
example, the Lehman Brothers situation with all of the money 
that is caught up in the U.K. So how and what do we do when we 
come up with a resolution authority to deal on capital firms 
like Lehman who have operations headquartered in various places 
of the world so that if they go into bankruptcy, the process 
can be quick, transparent and efficient? I am not hearing how 
we are really going to do that in this regard.
    Mr. Bernanke. That is an excellent, very important 
question. And you are absolutely right; it is much tougher than 
a lot of these bank resolutions because of the global nature. 
There are companies who are in the 120 countries around the 
world. There are some working groups in international bodies 
which are looking at the cross border issues. And I think what 
we need to do is have some international agreements or at least 
some working frameworks that explain how we are going to work 
together to address this. If we don't do that, then what will 
happen is that every country will ring-fence the assets of the 
bank or the failing institution within their country, and 
ultimately, we may have a situation where every country will 
demand its own capital requirements for the subsidy within its 
own country, and that would be a very inefficient way, no 
doubt, to run the system and no doubt will reduce the global 
financial flows in an important way.
    So you have your finger on a very important issue, and we 
need to keep working on that. But it is something that has to 
be done in collaboration with our major partners, particularly 
those like the U.K. and Europe.
    Mr. Meeks. Do you know of any dialogue that has begun, 
anything where people are talking? I know that we just finished 
G-20. Is that part of that conversation?
    Mr. Bernanke. Yes. This is being discussed in a lot of 
contexts, including, as I said, some working groups within the 
bank regulator groups that meet internationally.
    Mr. Meeks. And also, I know that President Obama and other 
leaders are calling for a more stable and sustainable global 
trade system, where countries like China and Germany are less 
dependent on export-driven growth, and the United States is 
less dependent on cheap international capital to finance their 
deficit-driven consumption.
    Now, there is talk of the IMF playing a more crucial role 
in monitoring global trade balances in global financial 
institutions. But given the strong incentives to sustain the 
system as it is, however unsustainable and volatile it is in 
the long run, how do we get there from here? How do we--you 
know, I don't understand; how do we get there?
    Mr. Bernanke. It is a difficult problem, and we haven't 
made much progress in 15 years, basically. The IMF was given 
the authority to counsel, you know, to look at the situation in 
different countries and make recommendations, but with no 
binding power. And that didn't really have much effect on 
getting a more balanced growth across different countries.
    It has also been an issue for bilateral discussions. In the 
strategic economic dialogue with China, for example, it has 
been a central issue that we have discussed. I wasn't part of 
the G-20 meetings in Pittsburgh last week, but my understanding 
is there was discussion of sort of a peer review system whereby 
countries would agree to let other countries evaluate whether 
or not they were making progress. If that is the case, that 
would perhaps strengthen the mechanism, but it is a very 
important issue.
    Mr. Meeks. Let me just get this question in really quick 
because of the big issue that is starting to happen in New 
York, and that is dealing with commercial real estate. Could 
you give us a quick update on the state of the commercial real 
estate market and whether it would be a drag on the recovery 
going forward, or is it another potential systemic risk crisis 
brewing? And which parts of the market do you expect would be 
the most affected by any pending crises in the commercial real 
estate area?
    Mr. Bernanke. Commercial real estate remains a very serious 
problem. It depends, to some extent, as you point out, by 
category. Construction loans, for example, are particularly 
weak. Within other categories, you know, hotels and office 
buildings and apartment buildings, there are differences in the 
situation. But we are concerned both because the fundamental is 
weakening and because the financing situation is bad.
    For example, the commercial mortgage-backed securities 
market is still not really open. It could provide a source of a 
lot of stress, particularly for small and regional banks that 
have a very heavy concentration in commercial real estate. So 
we are working hard to work with the banks. And we have, as you 
know, our TALF program which is going to try to restart the 
commercial mortgage-backed securities.
    Mr. Meeks. A crisis brewing?
    Mr. Bernanke. I hesitate to answer. I don't think so, but 
we will have to watch it carefully.
    Mr. Watt. [presiding] The gentleman from Georgia, Mr. 
Price.
    Mr. Price. Thank you, Mr. Chairman.
    Welcome once again, Chairman Bernanke. I appreciate you 
joining us today.
    I want to follow up on the old issue of tier-one financial 
institutions. I think the American people are sick and tired of 
governmental bailouts. I think that we need to respond to that 
concern and fear and anger on the part of the American people 
and assure them that there won't be any more. Secretary 
Geithner said that there will be no fixed list for companies 
that will be bailed out. Are you in agreement with that?
    Mr. Bernanke. Well, there is nobody more sick and tired of 
bailouts than me. I think the way the system has to be set up 
is that, when there is a resolution, as we have been 
discussing, that people lose money and that the company can be 
wound down, but done so in a safe way.
    As far as tier-one is concerned, the idea there would be 
to--if you do that, if you designate firms, and there may be 
other ways to do it--that those would be the firms that would 
be subject to particularly tough capital liquidity and other 
requirements to make their failure and bailout much less 
likely. But we don't want any bailouts. We want to have a 
system that puts the cost on the industry and allows 
creditors--
    Mr. Price. The question is, do you agree or disagree with 
the Secretary of the Treasury that there should be no fixed 
lists of companies that would be ``too-big-to-fail?''
    Mr. Bernanke. That is a change, I think, from the 
Administration's earlier position. I have no problem with sort 
of a sliding scale in the sense that the largest firms have--
    Mr. Price. Should there be a fixed list of companies that 
are identified?
    Mr. Bernanke. I am willing to say ``no,'' except I have one 
concern, which is that outside of bank holding companies, if 
there are firms which are systemically critical and they are 
not designated as systemically critical, how do we know that 
they received special attention, that is my question.
    Mr. Price. The concern that I have is that if we are going 
to identify tier-one financial holding companies as being 
somehow special, and we are going to say that we are not going 
to identify companies that are ``too-big-to-fail'' so that they 
have an unfair advantage in the market, aren't those two 
statements contradictory?
    Mr. Bernanke. No, because what I am saying is that no 
company--you can have a tier-one company, which means they get 
tougher oversight, but it is still not ``too-big-to-fail'' 
because we will have methods to make sure that the problem of 
``too-big-to-fail'' is no longer with us because we will have 
ways of winding those firms down, and they will fail.
    Mr. Price. Let me just urge you to carry your disgust for 
bailouts to having no more bailouts, and we would support you 
on that.
    I want to follow up on the comments about the FDIC and the 
comments made by Mr. Garrett. It does seem to me as well that 
they are counting a dollar twice; the prepayment that the FDIC 
is now requiring, and then continuing to use that dollar on 
their books for assets. Is that not some kind of accounting 
gimmick?
    Mr. Bernanke. Well, the banks would have to make this 
payment at some point in the future anyway, so they are 
agreeing to make the payment earlier. So, essentially, from now 
until the time where they would actually have to make the 
assessment, they are essentially making a loan to the FDIC.
    Mr. Price. But they can still use that dollar for other 
aspects of their own private business, correct?
    Mr. Bernanke. Yes.
    Mr. Price. So they are counting it twice. Now, my concern 
about all of that is, and I think that is probably not the 
wisest thing to do, but you have said that you would like to 
use the model of the FDIC for your own resolution authority. 
Isn't that a flawed model to begin with?
    Mr. Bernanke. No, I don't think so. You know, an 
alternative, the FDIC made a decision about how they wanted to 
fund this. Of course, an alternative would have been to borrow 
from the Treasury and pay the Treasury back with interest.
    Mr. Price. Wouldn't that have been more honest, more open?
    Mr. Bernanke. They made the decision based on what they 
thought would be the least negative effect on the banking 
system, and I don't want to second guess that.
    Mr. Price. Any time I can count a dollar twice on my books, 
if I were allowed to do that by law, that would be a wonderful, 
wonderful thing, but it certainly wouldn't be more healthy for 
the economy.
    There was discussion about the banning of products. There 
are products out there that--in fact, a statement was made 
there are some products that are just too risky. You talked a 
lot about process in that, the transparency that Americans 
ought to be able to receive when they are evaluating a product, 
but you never talked about a product that was too risky. Are 
you willing to say that there are--well, are you willing to 
identify a product that is too risky?
    Mr. Bernanke. No-doc loans.
    Mr. Price. And so how long does that list get?
    Mr. Bernanke. Well, it depends on what the industry is 
proposing. But the criteria would be that here is a product 
that is not in the consumers' interest and that--
    Mr. Price. Is it the government's role to determine what is 
in the consumer's interest?
    Mr. Bernanke. In some cases, I think that we have--for a 
long time, the Federal Reserve believed that transparency and 
disclosure was all that was needed, and we have been very much 
proponents of that point of view. But I do think there are some 
circumstances where the benefits to the consumer are 
overwhelmed by the complexity and other aspects that just are 
not worth whatever benefits.
    Mr. Price. Mr. Chairman, I would just suggest that there 
continues to be a process question as opposed to a product 
question.
    The Chairman. If people ask you a question, it has to get 
answered later. They can't come back again. We have a lot of 
members who deserve consideration in having the time observed.
    The gentleman from Illinois.
    Mr. Gutierrez. Mr. Bernanke, it is good to see you here 
again this morning.
    Mr. Chairman, this week, the FDIC passed another special 
assessment on our Nation's banks to help shore-up the Deposit 
Insurance Fund. It is true that most of the losses to this Fund 
have been the result of failures of small lending institutions. 
These community banks have also suffered from severe decreases 
in the values of housing and commercial real estate markets 
caused by loans financed by some of the largest banks in our 
system.
    I have legislation in front of the committee, H.R. 2897, 
and I would appreciate if you could take a look at it and kind 
of write us a note back on your more expansive opinion on it. I 
would appreciate that. And it would require the riskiest banks 
in our financial system to pay more, not only into the Deposit 
Insurance Fund, but also into the systemic risk fund. My goal 
is to create a more efficient pricing regime that would 
disincentivize banks from becoming or remaining ``too-big-to-
fail.'' What are your recommendations for creating a system 
that would prevent or discourage banks from becoming ``too-big-
to-fail'' and what relationship do you think they should have 
to paying into a fund? Do you think there should be 
differences?
    Mr. Bernanke. Well, I discussed a number of methods to 
avoid ``too-big-to-fail,'' and not to repeat, but to include 
tougher supervision and regulation and being subject to this 
resolution regime. But you point out another dimension, which 
is the assessments that would go into the fund either for 
deposit insurance or for paying for any intervention that does 
occur. The FDIC currently risk-adjusts the premiums that they 
charge to banks for deposit insurance. Perhaps it is time to 
revisit that. Maybe they are not sufficiently differentiated, I 
don't know. It certainly is always worth considering that. And 
I think the same principle would apply to assessments for 
addressing the special resolution regime, those type of 
interventions, of firms that are larger, more risky, more 
interconnected, presumably would pay disproportionately 
relative to small banks, for example. So I think that would be 
a sensible approach.
    Mr. Gutierrez. Thank you. Then I would appreciate it if you 
and your staff could review it, because it is one of the ways I 
am looking at making sure--it is kind of like if you--I just 
kind of thought when I get my insurance, if I was speeding or 
drinking and I had risky behavior in terms of driving my car, I 
am going to pay more in insurance. And it seems to me that we 
have seen different kinds of behaviors on different components 
of our financial system. And maybe everybody should not pay the 
same. So I would like to see how we can do that.
    Just one other question. So, you know, I have--you know the 
Federal Reserve, you are the Chairman. You have these huge 
responsibilities. You come with this wealth of knowledge to the 
job that we appreciate as a public servant. And although you 
have all of these wonderful responsibilities, right, and this 
wonderful talent that you bring to the job, I would just like 
to ask you, what do you think about what we should be looking 
at in terms of compensation and executive compensation of 
people. Do you think this Congress should do anything about it? 
How do you look at it? Because there is a lot of anger out 
there as they look at large financial institutions and 
executive compensation. Can you give me your sense? I went 
through Europe. And as I went from city to city, it was in late 
August with Mr. Kanjorski, and we were talking to the EU 
members. And it was the most important thing that they were 
bringing up. Can you give us your view?
    Mr. Bernanke. Well, as you may know, the Federal Reserve is 
about to issue guidance for comment on executive compensation, 
which will apply not only to the top, you know, 5 or 10 
executives, but way down into the organization to traders or 
anybody whose activities can affect the risk profile of the 
company. We view this as a safety and soundness issue. And that 
is what we have heard, in fact, even from the institutions 
themselves. They believe that the incentive structures affect 
safety and soundness.
    So I think there are two principles: first, that the 
structure of executive compensation should not be such as to 
incentivize excessive short-termism or risk-taking; and second, 
that there be a reasonable connection between actual 
performance and pay. The American people don't care if a star 
baseball player gets paid a lot of money as long as he earns 
the money. The same applies, I think, in the financial sector. 
But they are upset if somebody earns a lot of money and their 
company fails. So, from a safety and soundness perspective, it 
is important that there be those appropriate links between 
performance and pay.
    The Federal Reserve is following some international 
standards that have been set forth by the Financial Stability 
Board, which is a group of more than 20 countries that looks at 
these issues. And again, we are looking at the structure of 
pay, not so much absolute amounts, but how pay is structured 
and how pay and performance are related. So that is our 
approach.
    And also there are issues related to transparency which we 
are working on with the SEC. I don't know whether Congress 
wants to do additional things, but we are addressing that 
question.
    The Chairman. The gentlewoman from Minnesota.
    Mrs. Bachmann. Mr. Chairman, thank you.
    I just wanted to note for the record that at the beginning 
of this hearing, the chairman had said not once, but twice, 
that President Obama had inherited the current financial mess 
that we are dealing with now. And while that is true, that is 
true also of every other President who has ever been here. But 
also, it is true that in the case of Senator Obama, he 
supported all of the spending initiatives, all of the bailouts, 
and all of the stimulus plans while he was Senator as well.
    So this is an ongoing effort that this committee can again 
look at and try and turn around for the better of our country 
in the future.
    And so on with my question to Mr. Bernanke. On Monday, the 
president of the World Bank, Robert Zoellick, said, ``The 
United States would be mistaken to take for granted the 
dollar's place as the world's predominant reserve currency. 
Looking forward there will increasingly be other options to the 
dollar.''
    I found this statement astounding when I heard him make it 
on Monday. A statement of this magnitude should concern 
everyone, I think, because replacing the dollar's favored role 
in the global marketplace with another country's currency or 
with a new international currency of some sort would be 
devastating to the soundness of our dollar and to our Nation's 
currency and our economy.
    Mr. Zoellick also claimed that the value of the dollar will 
depend heavily on U.S. choices. He asked, ``Will the United 
States resolve its debt problems without a resort to inflation? 
Can America establish long-term discipline over spending and 
its budget deficit?''
    And I would note that, Mr. Bernanke, I heard you say before 
that you are very concerned about inflation; you are not 
willing to invite inflation. I derive great comfort from your 
statement saying that.
    But I do think that Mr. Zoellick's comments are very 
serious questions that he is asking. And I think that Congress 
just needs to act to address our Nation's long-term budget 
deficit.
    That is why I joined with my colleague Paul Hodes, a 
Democrat, I was one of 7 joining with 21 Democrats in a letter 
that stressed our concern about the lack of TARP transparency 
and the billions of tax dollars that will remain at risk under 
the program because we believe that no more funds should be 
used for the bank bailouts.
    I would like to get your comments on Mr. Zoellick's 
comments. Also, the fact that this isn't just the first time. I 
think, last week, the UN came out and called for a new 
international currency to replace the dollar. China has. Russia 
has. Brazil has. South America has. It is a new refrain. It is 
almost like every day there is another article.
    And I think, at this point now, in light of the comments 
that were made on Monday, we should take this very seriously. 
So I would like you to respond to that.
    Also another question I have for you, Mr. Bernanke, under 
the chairman's proposal, the consumer protection authority will 
be transferred from other regulatory agencies to the CFPA, 
including authority from the CTF. Section 4 and 5 of the Act 
provides the commission with jurisdiction only over persons, 
partnerships, or corporations organized to carry on business 
for their profit or that of their members, which means that the 
FTC can't currently regulate nonprofits for unfair and 
deceptive practices.
    So here is my question: Would the CFPA have broad authority 
to regulate all entities that provide a financial service or 
product regardless of their tax status, meaning if they are 
nonprofit? And here is my specific concern in light of what we 
have seen in the last couple of weeks. For example, it is my 
understanding that ACORN provides education service and 
financial advice to consumers. So would ACORN then be regulated 
under the CFPA? Because this is on ACORN's Web site. They are a 
national nonprofit housing organization that opened HUD-
certified Fannie Mae-approved housing counseling offices across 
the United States. And here is a quote from their Web site: 
``ACORN housing provides one-on-one mortgage loan counseling, 
first-time home buyer classes and helps clients obtain 
affordable mortgages through our unique lending partnerships. 
We look at your savings and credit history to see if you 
qualify for a mortgage. We can help you with credit problems 
and to create a downpayment savings plan. When you qualify, we 
can help arrange a mortgage with lower interest rates, lower 
downpayments, and lower settlement costs than what banks 
usually offer.''
    It seems to me, Mr. Bernanke, from what ACORN claims, that 
they would come under this CFPA. And I am wondering if you 
would comment on that.
    So if you would first comment for me on Mr. Zoellick's 
comments, what your feelings are about replacing the dollar's 
international currency of potentially a new currency. And then 
if you would comment also on whether or not, in your opinion, 
ACORN would be covered by the new CFPA.
    The Chairman. Well, I would just point out, there are only 
3 seconds remaining.
    Mrs. Bachmann. If I could have my time reclaimed, so that 
my time--will this come from my time, Mr. Chairman?
    The Chairman. No, your time has--there were only 3 seconds 
left in your time when you got to him. I can let him go on for 
a little while, but I don't think he can give full answers to 
both questions. This practice of going right up to the end and 
then taking another minute or two is unfair to other members. I 
will give Mr. Bernanke 30 seconds to answer as much as he can 
and then answer the rest in writing. There were only 3 seconds 
left to answer two big questions when the gentlewoman yielded 
to him.
    Mr. Bernanke, for 30 seconds.
    Mr. Bernanke. I agree with two things Mr. Zoellick said. 
The first is, I believe he said that there is no immediate risk 
to the dollar; it is a relatively long-term issue. I also agree 
with him, though, that if we don't get our macro house in 
order, that will put the dollar in danger, and that the most 
critical element there is long-term fiscal stability, which you 
referred to.
    I can't answer your second question. I don't know what the 
legal status of that is. I just don't know.
    The Chairman. The gentleman from Kansas is recognized.
    Mr. Moore of Kansas. Mr. Chairman, ``too-big-to-fail,'' I 
don't know if you had a chance to review the recent proposal 
offered by President Tom Hoenig and his colleagues at the 
Kansas City Fed. But I would like your views on it, either now 
or in writing, if you would as soon as possible, sir, after the 
hearing. Their proposal on resolution authority lays out more 
explicit rules than the Administration's proposal of how a 
large financial institution like Lehman Brothers or AIG could 
be resolved so the debt holders, shareholders, and management 
would be held accountable before taxpayers step in. As we think 
of ending ``too-big-to-fail,'' would providing more clarity on 
resolution authority to all stakeholders create the right mix 
of incentives to put pressure on these firms to behave 
responsibly and not get overleveraged and keep to a manageable 
size? And what about the question of making public the tier-one 
list? I know some people argue that making it public will 
create competitive disadvantages. But doesn't the marketplace 
really already know more or less who these large firms are?
    Mr. Bernanke. There are two elements of the Hoenig 
proposal. I can reply in writing in more detail, but there are 
two with which I fully agree. One is, and I have said before, 
one is that there should be a very strong presumption that a 
failing firm, that the creditors of a failing firm will lose 
money; that should be known in advance. There should be a 
strong commitment to doing that. And that will be a very 
important way of reducing the ``too-big-to-fail'' problem.
    The other is that the taxpayer should not bear this cost, 
that it should be borne by the industry. So if you do those two 
things, then I think that dangers of naming a firm as a tier-
one firm, which would not be acceptable if you didn't do those 
things because you would be memorializing ``too-big-to-fail,'' 
but if you do those things, then I think that the tier-one 
designation is not nearly so worrisome.
    Mr. Moore of Kansas. And Mr. Chairman, what steps could be 
taken to ensure Federal bank regulators do their job on 
consumer protection? FDIC Chairman Sheila Bair proposed that 
the CFPA could be given back-up authority where they could 
intervene case-by-case if they saw lack of enforcement by bank 
regulators. Another idea I might suggest is a stronger use-it-
or-lose-it authority requiring bank regulators to either 
enforce consumer protection laws or lose that authority. After 
being graded by the CFPA or the GAO, if a bank regulator fails 
to fully enforce consumer protection laws, should they lose 
that authority to CFPA, would this use-it-or-lose-it approach 
ensure regulators do a better job?
    Mr. Bernanke. I am not sure that the use-it-or-lose-it 
approach makes sense in the sense that the agency--what check 
would there be on the agency making that determination? One 
direction would be back-up authority, I guess, where if the 
agency was unsatisfied with a specific resolution, that it 
could do that. But that would require them to have the 
resources and the information to do that.
    Mr. Moore of Kansas. Thank you, sir.
    I yield back my time, Mr. Chairman.
    The Chairman. Would the gentleman yield to me then his 
remaining time? I just want to make a couple of points.
    First, Mr. Bernanke, you correctly, I think, talked about 
banning some products, but I think we ought to expand on the 
rationale. For instance, you talk about no-doc loans. My own 
view is we do not ban things totally, primarily for consumer 
protection. I am in favor of letting people be stupid in a 
number of other areas. The problem is that, in some of these 
areas, there is a spill-over to the system, that the problem 
with no-doc loans was not simply an individual within that 
position, but those accumulate into a systemic position. So I 
think, as we talk about whether or not you prohibit certain 
practices, the argument for doing that gets stronger when there 
is a systemic overlap. Is that an accurate assessment?
    Mr. Bernanke. Yes, and that is why you would want to have 
this as part of the systemic risk council.
    The Chairman. Second, I do want to address a couple of the 
fears of the gentlewoman from Illinois because I don't like it 
when things are put out there and people get nervous. The 
gentlewoman from Illinois said she hoped there would be no 
banning of OTCs. I know of no proposal to do that. There is 
zero chance of it happening. No one is talking about it. The 
legislation that we are raising doesn't do that. The chairman 
was correct that you try to get it as much sanitized as 
possible. No one is talking about banning the over-the-counter 
efforts.
    And finally, I did want to respond to the gentleman from 
California, who is not here, Mr. Royce, who said that Congress 
led to Fannie and Freddie being 50 percent in Alt-A and 
subprime. Actually, it was the Bush Administration that did 
that in 2004. The Bush Administration promulgated that. As was 
noted in an amendment offered by the gentleman from Texas, Mr. 
Hensarling, and adopted by the House, the Bush Administration 
in 2004 ordered Fannie and Freddie to go from the 40s into 54 
percent, I think from 42 percent to 54 percent, and 
specifically to give some loans to people below the median, and 
I, for one, objected.
    The gentleman from Florida, Mr. Posey.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Bernanke, I will just follow up a little bit on the 
line that the Congresswoman from Minnesota was discussing. I 
had read the same comment by the IMF president. And I hope that 
you and I can both agree that the ultimate consumer protection 
would be for us to have a strong dollar, and then Americans 
would have faith in their currency, and their purchasing power 
would not be eroded by the stealth tax known as inflation. Do 
you agree with that?
    Mr. Bernanke. Absolutely.
    Mr. Posey. Question number one would be what you think the 
impact on Americans, and I mean the average guy on the street, 
the average family, the retiree, the investor, what the impact 
would be on the dollar if it were to lose its currency of 
choice as some of these other world leaders are calling for 
now? You know, the Russian president is calling for a super 
currency. If China and South America and everybody went along 
with that, what do you think the impact would be on our 
country?
    Mr. Bernanke. Well, it would weaken the dollar, clearly, 
and we would have to watch for any inflationary consequences 
from that. But, again, I want to reiterate that I don't see 
this as a near-term risk so long as we as a country take the 
appropriate steps to manage our fiscal position and keep 
inflation low.
    Mr. Posey. I hope we will. We know that Secretary Geithner 
will to go to China to give them some reassurance. And I think 
they are also calling for this alternative currency. It is not 
just Russia, and it is not just South America, but China is 
also very interested. And of course, you know the role they 
play in buying our paper, and that can be pretty devastating.
    What do you think the United States should do in response 
to the concerns that they have? How are we going to give them 
assurances that we are not going to start going to an 
inflationary level that would spur them forward?
    Mr. Bernanke. Well, there are two key issues, I think. One 
is inflation, and the Federal Reserve is responsible for 
inflation. We are confident that we can manage our policies to 
support the economy without inducing inflation in the medium 
term. So we will--we are committed to low inflation, and we 
believe--we fully believe that we have the tools and the 
political will necessary to achieve that.
    The second issue is about foreign borrowing, which is the 
current account and trade deficit. As someone mentioned 
earlier, we need to have a better balance whereby the United 
States saves more, imports less, and other countries, including 
China, rely more on their domestic demand rather than exports 
for their growth. And so that is a mutual process where both 
sides have to accommodate that.
    But from our perspective, the best way we have to raise our 
national saving rate over the medium term is to manage our 
fiscal position, because the government deficit is a net 
subtraction from our national saving. By reducing the deficit, 
we increase our national saving.
    So that, again, I think that this year and next year, given 
the state of the economy and all the things that have happened, 
I don't think that a budget balance is just at all feasible. 
But certainly, over the medium term, we need to have a credible 
plan for returning to budget discipline.
    Mr. Posey. And the next question was going to be, what is 
the plan?
    Mr. Bernanke. Well, obviously, that is Congress' 
responsibility, fortunately for me. Certainly I would say that, 
as you look at these very important issues relating to health 
care, which are incredibly important and affect people's lives 
in many ways, that as part of that, you take a close look at 
health care costs, which are a very big part of the expected 
expansion of the deficit, particularly a decade from now.
    Mr. Posey. Very good, thank you very much.
    The Chairman. The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    There is a thinking on Wall Street that $700 billion was 
necessary and may be needed in some future emergency as well 
that we put $700 billion or some much larger amount at 
significant risk. And there is a thinking on Wall Street that 
Congress cannot be trusted to grant extraordinary powers in 
some future crisis, and so we need to modify the statutes now, 
so that the Executive Branch can deploy $700 billion or $1.7 
trillion or whatever it is at significant risk.
    Section 13(3) has been discussed here. In your testimony, 
you indicate that if there was proper resolution authority, 
that could replace section 13(3). Do I understand it correctly 
that if we get resolution authority right, you don't need 13(3) 
or should there be two separate avenues by which the Executive 
Branch can deploy hundreds of billions of dollars?
    Mr. Bernanke. If the resolution authority is passed and is 
a workable plan, then I don't think the Fed would need to have 
13(3) authority for the purpose of rescuing failed firms. I 
think there might be other contexts where it might be useful, 
but in the context of bailing out firms, no.
    Mr. Sherman. What statutory restriction would you want on 
section 13(3) since you are saying it shouldn't be repeale? How 
would it be restricted?
    Mr. Bernanke. The Federal Reserve should not be empowered 
to use the 13(3) authority to prevent the failure of a 
financial firm.
    Mr. Sherman. But to perhaps prevent a systemic problem for 
the economy, it might end up also putting hundreds of billions 
of dollars at risk for some other purpose?
    Mr. Bernanke. Well, we have other programs, for example, 
when we stepped in to stabilize the commercial paper market, 
which wasn't directed at any individual firm but which was very 
helpful to the economy as a whole.
    Mr. Sherman. Looking at 13(3), we have discussed the idea 
of limiting the dollar amount that you could spend; perhaps 
facetiously, we discussed $12 trillion. As you know, section 
13(3) basically allows you to loan money to anyone as long as 
there are unusual and exigent circumstances. And the key phrase 
in 13(3) is that you be secured to the satisfaction of the 
Federal Reserve Bank.
    To your credit, you have testified that secured to the 
satisfaction of the Federal Reserve Bank is not some illusory 
requirement, but instead is the equivalent of Triple-A rated 
investment. Your General Counsel testified last week to a 
somewhat lesser standard, and who knows who will be holding 
your position or his in the years to come.
    From your General Counsel's testimony, I would gather that 
some future Administration might well extend hundreds of 
billions of dollars of credit under 13(3) and feel that they 
were adequately secured as long as they are more likely than 
not to be repaid. That is a junk bond standard.
    And since we don't know who is going to hold your position 
in the future and I can't question them, would you oppose 
legislation that would define what ``secured to the 
satisfaction of the Federal Reserve Bank'' meant to say that 
those voting would have to believe that there was a 99 percent 
chance that the Federal Government was going to be fully 
repaid?
    Mr. Bernanke. We are certainly open to discussing that. I 
would just like to point out that the only case where it has 
been in any way risky has been in these individual bailouts, 
and I would like to get rid of those. I think that is a step in 
the right direction.
    Mr. Sherman. I would point out we have been blessed to have 
you at the Federal Reserve. If someone with the attitude 
towards statutory construction that we have seen in other parts 
of the Executive Branch were in charge of the existing 13(3), 
they never would have had to have brought TARP to the Floor of 
the House; 13(3) could have fully financed the full $700 
billion, but not on your watch. It would have to be on the 
watch of someone with an aggressive approach to statutory 
construction. We have seen that aggressive approach at the 
Treasury Department, and we better modify the statutes, unless 
we can assure that all of your successors will be as 
conservative in their statutory interpretation as you have 
been.
    You talk about section 1204 not costing the taxpayer money. 
The provision for that involves an assessment on institutions 
as low as $10 billion to repay the cost of bailing out a 
systemically significant firm. I would think that would mean 
that the medium-sized banks are hit two ways. First, their 
bigger competitors get some sort of implicit Federal guarantee 
of some help to competitors, and if it ever comes to pass, they 
are the ones who pay for it.
    The Chairman. The gentleman's time has expired.
    Mr. Sherman. I ask you to respond for the record.
    The Chairman. We have a vote.
    We can go to Mr. Paulsen. I intend, on the Democratic side, 
we will come back, and those members who are here will be 
recognized for a while until we finish up, but no new members 
will be recognized. So on the Democratic side, we will begin 
with Mr. Hinojosa. Those members who were here will get to ask 
questions as long as you can stay. I will yield to my 
Republican colleague as to who he wants us to recognize on his 
side.
    And the gentleman from Minnesota is now recognized.
    Mr. Paulsen. Thank you, Mr. Chairman.
    Chairman Bernanke, yesterday, we heard from bankers and the 
members of the financial services industry in general. They 
still have indicated now the current problems with consumer 
financial protection was due primarily to a lack of focus by 
regulators like the Federal Reserve.
    Apart from the recent credit card regulations that had been 
released, 800-and-some pages, what is the Federal Reserve doing 
right now to sort of refocus, if you will, its efforts and 
duties on consumer protection efforts more specifically?
    Mr. Bernanke. Well, first of all, we have had, in the last 
3 or 4 years, we just had a huge number of rulemakings that we 
have put out in the mortgage area, in the credit card area. We 
have one coming out on overdraft protection. We have just done 
something on student loans. So we have been extremely active, 
and so we have really elevated our focus on this area. And we 
have strengthened the leadership of the division to make this a 
very effective part of our activities.
    I have made some suggestions in the past; if the Congress 
wanted to strengthen the focus of the Federal Reserve further 
on these matters, there would be various ways to do that. For 
example, the chairman should be required to testify on consumer 
matters the same way I testify on monetary matters.
    Another thing that would be useful, we currently have a 
Consumer Advisory Council which by law consists of both the 
industry folks and the consumer advocates. The consumer 
advocates feel this is unfair because the bankers have several 
other councils and several other forums for meeting with the 
Federal Reserve, and we can't change that because of the 
legislation. One possibility would be to create a stronger 
Consumer Advisory Council to meet with us periodically and 
evaluate what we are doing.
    There are other ways to do it, such as a regular program of 
hearings and so on. And we are interested and willing to make 
institutional changes that would strengthen our commitment if 
that is the direction the Congress wants to go.
    Mr. Paulsen. So just to follow up then, if the Federal 
Reserve is refocusing its efforts in this manner and you are 
looking at the council potentially, from your perspective then, 
is the CFPA really necessary as being proposed by the 
Administration, to have that specific CFPA organization?
    Mr. Bernanke. Well, you know, I think the issue which 
Congress has to make a judgement about is the reason that--I 
think the motivation behind the CFPA is the concern that the 
Federal Reserve has not been sufficiently focused on this 
issue. And I certainly concede that, until recently, we have 
not done what we should have done in this area. So that is the 
concern.
    I think that is Congress' judgment about whether the 
Federal Reserve could be sufficiently focused, and I think we 
are very competent. We have the skills and the mix of talents 
and experience to do a good job here. And I think the issue is 
essentially the confidence that Congress has in our focus going 
forward.
    I personally think we can do that, and we would be willing 
to strengthen the institutional factors that affect our focus, 
but I understand the concerns, and I think Congress will have 
to make that judgment.
    Mr. Paulsen. And Mr. Chairman, earlier you had mentioned, 
and I believe, Congress often does not look at things until 
they are brought to our attention. But you said you would be 
okay, it would be valuable if the Federal Reserve or someone 
from the Fed came to testify to Congress or to us periodically 
on consumer protection as opposed to just monetary policy.
    Mr. Bernanke. Yes, by statute, as is the case with monetary 
policy.
    Mr. Paulsen. And if I could just switch gears then.
    Let me ask another question, the Federal Reserve's approach 
to managing monetary policy in advance of the last two 
recessions, if you go back in time, seems to be a little bit 
unstable. In other words, by waiting for an asset bubble to 
build up and then rescuing the economy after the bubble bursts, 
you know, it appears that you can create other problems.
    And just maybe give some comments on, why can't the Federal 
Reserve show a little bit more restraint in the monetary policy 
in advance when we are faced with what looks like a risky asset 
bubble coming down the pike? Would it ultimately be better to 
protect job loss or inflation down the road if we are able to--
it is not often popular, for instance, to do it, but is that 
going to make more sense than--given the recent experience we 
have had recently, does that make more sense to look more in 
advance on that?
    Mr. Bernanke. In principle, it would be great. But there 
are two practical problems that we have to try to confront. One 
is actually identifying the bubble. And when the policies in 
question were taking place in 2003, 2004, there really was 
substantial disagreement among experts about whether this was a 
bubble and how big it was.
    The other problem is that by using monetary policy, which 
is a very blunt tool, to try to pop bubbles, you may have a 
side effect of having bad effects on the rest of the economy, 
because you can't just target one sector.
    That is why, even though, as I say, I am open-minded about 
the role of monetary policy in bubbles, in affecting bubbles, I 
do think that the first line of defense needs to be a stronger 
regulatory system that would, on the one hand, prevent 
excessive build-ups of risk in the first place; and if they do 
pop and if there is a problem like that, would make the system 
strong enough that it wouldn't create such an enormous crisis 
as we have seen recently.
    The Chairman. Last question, the gentleman from Texas, Mr. 
Hinojosa, and then we will return and start right away. The 
gentleman from North Carolina will be the Chair.
    The gentleman from Texas.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    And I thank you also, Chairman Bernanke, for coming to 
speak with members of our committee.
    At a recent congressional hearing at which Secretary of the 
Treasury Timothy Geithner testified, I noted that I met with 
Treasury Assistant Secretary for Financial Institutions Michael 
Barr, and we discussed some of the concerns that I have with 
the proposed Consumer Financial Protection Agency we have been 
debating for quite some time.
    During that conversation, I expressed some concern about 
the negative impact the CFPA as proposed would have on the 
local economies across the country, and the negative impact it 
would have on community banks, regional banks, and credit 
unions. Community banks and regional banks and credit unions 
played no significant role in the current economy crisis, both 
domestic and global.
    And Secretary Barr stated that Treasury wants a level 
playing field. Therefore, he stated, that Treasury wants to put 
all financial institutions in the same box and wants all those 
institutions to be examined and enforced by the CFPA. I think 
that the community banks, the regional banks, and the credit 
unions should be exempted from the CFPA umbrella. Thus, tell 
me, what are your conclusions on exempting those groups that I 
mentioned from the CFPA umbrella?
    Mr. Bernanke. Well, I don't think I would want to exempt 
fully any lender, including non-bank lenders, from appropriate 
consumer protection laws. That would invite those practices to 
migrate out of the big banks to other institutions.
    But on the enforcement side, the Federal Reserve takes what 
we call a risk-focused approach, jargon for saying that we put 
more resources where there are greater dangers. So we would 
spend a lot more time in a national credit card company, for 
example, than we would in a local community bank that makes 
standard consumer loans or mortgages, for example.
    So I do think it would be appropriate to have some 
differences in the level of intensity of enforcement, depending 
on the nature of the business and the kinds of risks that are 
inherent in the products that the company is involved with.
    Mr. Hinojosa. Thank you for sharing your thoughts with me.
    My time has expired, and I yield back.
    The Chairman. The hearing will recess. And I appreciate the 
indulgence of the Chairman.
    We will return on our side with questions from Mr. Clay, 
Mr. Scott, Mr. Green, Mr. Cleaver, Ms. Speier, Mr. Minnick and 
Ms. Kosmas if they wish to do so, and I will be guided by my 
colleagues on the other side. The hearing is recessed.
    [recess]
    Mr. Watt. [presiding] The hearing will come back to order.
    The chairman has asked me to preside in his absence, and I 
think the next person to be recognized is the gentleman from 
California, Mr. Miller.
    Mr. Miller of California. Thank you.
    Mr. Chairman, it is good to have you back.
    I am glad you decided to stay and were reappointed. I think 
you are doing a very difficult job, but I think you are doing 
the best anybody could do in this country.
    I would be interested in your comments, and we talked 
about, you said you are trying to increase the national savings 
rate on the part of individuals and such, which is a goal. I 
believe you said that earlier. Yet I am looking at what is 
happening with the banks. The interest rates are so low that 
people are saying, I have to find some better investment for my 
money rather than putting it in a savings account. And then, on 
the other hand, banks aren't lending money still. It is an 
unusual anomaly we have. It is not as bad as it was last 
September when they stopped lending to each other. But for 
individuals with good credit, they are having trouble even 
going out and getting a loan to keep a business operating. How 
do you see those in conflict with each other?
    Mr. Bernanke. Well, it is first certainly true that we are 
better off than we were with the system in crisis. It is also 
true that the banks have not returned to normal lending by any 
means. I think the low interest rates do have positive effects 
on the economy, for example, operating through other markets, 
like the mortgage market or the corporate bond market.
    But getting the banking system back into a lending mode is 
very important. We continue to work with the banks to encourage 
them to raise equity so they have sufficient capital to support 
their lending. We have provided them with an enormous amount of 
liquidity so they are able to have the funds to lend. We are 
encouraging them to lend, in that going back to November, the 
bank regulators had a joint statement encouraging banks to lend 
to creditworthy borrowers as being in the interest both of the 
banks and of the economy. And we continue to try to follow up 
on all those things.
    In addition, as you may know, we have some programs, 
including the Term Asset-Backed Securities Loan Facility, which 
is trying to open up sources of funding from the capital 
markets, for example, for consumer loans and small business 
loans. I would add, I guess, that there are also some efforts 
taking place from the Treasury to support small-business 
lending. It is a difficult problem, but we are trying it attack 
it in a number of fronts. Just to conclude, I would say that it 
is true that as long as the banks are as reluctant to lend as 
they are, to some extent, it weakens the effect of our 
stimulative policies.
    Mr. Miller of California. You recall last September, we 
were having a very lengthy debate, and you and I had some 
conversations requiring the $700 billion to going to buy 
mortgage-backed securities, which we approved the first $350 
billion. But it seems like we went through a tremendous amount 
of debate to make that decision; yet the Federal Reserve last 
week decided to buy a trillion and quarter dollars of mortgage-
backed securities. And your previous comments, we have talked 
about the Fed's role in injecting liquidity in the marketplace 
and being able to fight inflation as needed, but you can't do 
that with assets you are buying. They are not liquid. Unless 
you are going to have a barn sale and just get rid of them for 
liquidity, how can you justify those two? They seem to be--
    Mr. Bernanke. Well, the purchases of the asset-backed 
securities?
    Mr. Miller of California. How do you justify the ability to 
do that when we were requested to authorize the Treasury to do 
that originally?
    Mr. Bernanke. Well, under open-market operations, we 
normally transact in these markets. We buy and sell both 
treasuries and agencies; we are authorized to do that. And 
given the situation we are in with interest rates close to 
zero, it is now becoming a recognized approach of monetary 
policy to expand assets and a balance sheet as an additional 
way of providing support to the economy. And I think it is 
justified, not only narrowly by the authorizations for open-
market operations but by the mandate that Congress gave us to 
try to maximize employment and achieve price stability. These 
are the only tools we have to try to achieve those objectives. 
I want to assure you that we have every means of exiting from 
the situation and avoiding inflation, even if we do not sell 
any of these assets.
    Mr. Miller of California. You can do it in other ways, 
then.
    Mr. Bernanke. I am sorry?
    Mr. Miller of California. You can do it in other ways.
    Mr. Bernanke. Yes.
    Mr. Miller of California. HVCC, as you recall, we passed a 
new policy, Congress did, that is the ability of appraisers to 
appraise local units and such. We changed it. And the Federal 
Reserve, you went through a lengthy process regulating on 
appraisals recently, and you determined that they could do 
certain things, and certain requirements were made. Do you 
support the current policy because it seems to be having a very 
negative impact on the valuation of homes in a given industry 
today?
    Mr. Bernanke. Well, we have policies that try to create 
adequate independence of the appraiser.
    Mr. Miller of California. You did that. I think your 
policies you approached it with were good, but we decided to go 
a different direction, and that is my problem, the direction we 
went.
    Mr. Bernanke. Could I answer that in a letter?
    Mr. Miller of California. You sure may, sir.
    Mr. Watt. The gentleman's time has expired.
    Mr. Miller of California. I would appreciate that.
    Mr. Watt. The gentleman from Missouri, Mr. Clay, is 
recognized.
    Mr. Clay. Thank you, Mr. Chairman.
    And thank you, Mr. Chairman, for being back here with us. I 
just want to cover one area, consumer protection, that I would 
like your insights on. What do you think is best for consumer 
protection, given the record of the Federal Reserve, given the 
record of other regulatory agencies that kind of dropped the 
ball in the last decade on consumer protection? Are you one who 
advocates expanding the authority of the Federal Reserve to 
actually, I guess, put some teeth into consumer protection or 
beef-up consumer protection, or do you think we need a separate 
Federal agency?
    Mr. Bernanke. Well, Congressman, I continue to think that 
the debate here has to do with the Congress' view about whether 
or not a new agency is needed in order to sufficiently 
prioritize consumer protection. In other words, I think many of 
those who support a new agency feel that the Federal Reserve 
does not place sufficient priority or attention on this topic. 
I have tried to point out that while I certainly agree that the 
Federal Reserve did not do enough in this area for many years, 
that in the past 3 years or so, we have been quite active and 
aggressive in this area. And I think we have been very 
effective and made use of our particular strengths and 
economics and finances to compliment our consumer protection 
authorities.
    But I am not going to tell Congress or I wouldn't presume 
to tell Congress what to do. I think it is Congress' decision 
whether they think that the Federal Reserve's commitment can be 
made sufficient, or if not, then presumably you want to have a 
new agency. I think that is the issue.
    Mr. Clay. Well, going along those lines of thinking, then, 
how does the Federal Reserve repair the damage that has been 
done to communities like the one I represent which had a 
disproportionate number of subprime loans when really the 
consumer probably should have had a prime loan, but yet now it 
has caused them to go into foreclosure? It has damaged those 
communities. Now you have all of these vacant properties 
sitting there destroying those communities. How can the Federal 
Reserve at least help repair that damage?
    Mr. Bernanke. Well, in several ways. First, again, I agree 
that we didn't do enough at an earlier stage, but over the last 
3 years or so, we have put some tough rules in place in a 
variety of areas. We are also trying to address the situation 
through other mechanisms.
    To give one example, we have a partnership with 
NeighborWorks America where we are trying to work to help 
stabilize communities where there have been a lot of 
foreclosures. We recognize foreclosures hurt not only the 
borrowers; they also hurt the community and the broader housing 
market for that matter. So we are doing the best we can in the 
current situation to try to address the problems.
    If Congress decides they want to leave it with the Fed, I 
think we would have to take steps to reassure Congress that we 
would in fact, even beyond my tenure and into the future, have 
sufficient commitment to this area, and I have suggested some 
ways of doing that, including, as I mentioned, mandatory 
testimony by the Chairman, various kinds of review processes, 
strengthening the Consumer Advisory Council, and other things 
that can be done just to assure Congress that the Fed will not 
repeat the mistake and let this ball drop, as you put it.
    Mr. Clay. Thank you for your response, Chairman Bernanke.
    Mr. Chairman, may I yield the rest of my time to my friend 
from Georgia, Mr. Scott?
    Mr. Watt. Mr. Scott is next, but he can use the rest of 
your time, too.
    Mr. Clay. Thank you.
    Mr. Watt. Thirty seconds.
    Mr. Scott. So that means I have 5 minutes and 30 seconds 
when I come. I will come back to that.
    Mr. Watt. You just used the 30 seconds.
    The gentleman from Delaware, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman.
    And Chairman Bernanke, I would like to concentrate on your 
written testimony, which I have here, in which you indicate an 
oversight council made up of the agencies involved in financial 
supervision regulations should be established. And then you say 
further on, in the same paragraph of the first page of your 
testimony, all Federal financial supervisors and regulators, 
not just Federal Reserve, should be directed and empowered to 
take account of risk to the broader financial systems as part 
of their council oversight and responsibility.
    Then, on page 5, you mention first an oversight council, 
same thing, composed of representatives of the agencies and 
departments involved in the oversight of the financial sector 
should be established to monitor and identify emerging systemic 
risk across a full range of financial institutions and markets.
    I am not sure I understand. I think I understand here what 
you are saying; I am not totally sure what you said before or 
where we are on this. I think what you are saying here is we 
should have a council made up of all regulators who would make 
decisions with respect to systemic risk. Is that correct?
    Mr. Bernanke. To coordinate the regulators to monitor the 
system, to look for gaps, a variety of things to try to be the 
oversight of the whole system, but of course, I think each 
individual agency would also have a responsibility within their 
own sphere to look out for potential problems.
    Mr. Castle. With respect to that council, do you have any 
ideas about the structure of it? Are you saying the Federal 
Reserve should be the head of it, and the others should be on 
it? Or just a general counsel, a separate person being the head 
of it?
    Mr. Bernanke. The Administration proposed that the Treasury 
be the permanent Chair, and we are fine with that.
    Mr. Castle. So the permanent Chair, with the other 
regulators on it?
    Mr. Bernanke. Yes.
    Mr. Castle. Is what you are talking about?
    Mr. Bernanke. The Treasury would be the Chair, and the 
other major regulators would be on the council.
    Mr. Castle. Yes.
    And apart from what the White House said, what is your 
argument, if there is one, for the Treasury being the head of 
it versus, say, you or another regulator or somebody 
independently from the outside? I am not saying it is wrong--
    Mr. Bernanke. Obviously, because the Treasury has the 
broadest responsibilities for the economy in general, has the 
broadest responsibilities for any fiscal implications and 
financial implications, and frankly because the Treasury would 
probably be better placed to mediate any differences among 
agencies that might arise for whatever reason.
    Mr. Castle. Has this been your position consistently from 
the beginning of the proposal of the systemic risk?
    Mr. Bernanke. It has, yes. My position has not changed at 
all.
    Mr. Castle. Okay. Do you disagree with what some of the 
other regulators, Comptroller Dugan and Chairman Bair, have 
been saying about this?
    Mr. Bernanke. I think there are two parts here. I think one 
question is whether, underneath the systemic regulatory 
council, should the Federal Reserve be the consolidated 
supervisor of the large financial holding companies? And my 
impression, based on conversations and also based on the 
testimony at the end of July, where I was here with the other 
regulators, is that there is pretty broad support--I know for--
well, I think it is very broad support for the Federal Reserve 
playing that role as the supervisor of these large financial 
firms.
    I think there is a bit of difference about exactly where 
the authorities of the Systemic Risk Council would end and 
where the authorities of the individual agencies would begin. 
And I think they are within the range of negotiation, but our 
position has been that, for the purposes of both expertise, 
accountability and responsibility, that the council should not 
be involved in micromanaging any part of the system; rather it 
should be a broad, take a broad perspective, which brings 
together the perspectives of the individual regulators. So I 
would not at this point recommend the Systemic Risk Council get 
into the weeds of setting detailed capital requirements, for 
example.
    Mr. Castle. I think I agree with you, but I know enough to 
know I don't really understand it completely. I would hope that 
you and the Administration and all the regulators could sit 
down and work out something of which we could have unanimity. I 
don't think there is any disagreement at all on this committee 
that we need some sort of a Systemic Risk Council, regardless 
of what it is and who heads it, the way it is organized.
    The details are beginning to confound us a little bit. I 
would hope that we would get good guidance from you since there 
seems to be unanimity of opinion about where we should go, but 
I think it is a very, very important subject as far as the 
future of the financial world is concerned. So, hopefully, we 
can resolve it soon. I appreciate your testimony on that.
    I yield back, Mr. Chairman.
    Mr. Watt. The gentleman yields back.
    The gentleman from Georgia is recognized, Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Welcome again, Chairman Bernanke. There are two 
constitutional statute requirements for the Federal Reserve, 
one of which is monetary policy controlling inflation. The 
other one, which we don't touch upon enough, is unemployment 
and employment, which is a charge. You gave your assessment of 
how well the economy is doing when you said that you believe 
the recession is very likely over. Those are your comments. I 
want you to review your statements in light of the fact that we 
have ravaging, ravaging, staggering unemployment rates right 
now.
    The major systemic risk to our economy is not within the 
credit markets right now, not within Wall Street or the banks; 
it is these individuals who are losing record numbers of jobs 
every single day. They can't pay their mortgages; 26,000 every 
week are getting into foreclosures now. Unemployment levels are 
staggering at the rate of 11.5 percent in my home State of 
Georgia. And in many other States, it is really at double 
digits, and across the country now it is hovering right at 10 
percent.
    So I think it would be very important to examine what I 
consider the weak link in the Obama Administration's response 
to this economy. There is no clear-cut jobs policy. There is no 
direct mission to deal with this problem of rising 
unemployment. Our only answer to it has been, we throw whatever 
has been out there for the stimulus; that depends on local and 
State governments to create. But there is nothing there. There 
is no manpower training act, as it responded to in the 1960's 
and 1970's. There is no National Recovery Act that Franklin 
Delano Roosevelt responded to in the Depression.
    What are we going to do to address this issue of rising 
unemployment, particularly in view of the fact that it is your 
second or your other charge of responsibility to the Federal 
Reserve?
    Mr. Bernanke. Well, Congressman, first, I would ask you to 
read my whole statement. The question that I answered in public 
was to say that technically the recession may be ending in the 
sense that the economy is no longer falling and is starting to 
come back. However, I was very clear that unemployment remains 
very high and is a continuing problem and that the growth is 
unlikely to be fast enough to bring it down at the pace we 
would like to see. And so I completely agree with everything 
you just said.
    In terms of our mandate, which I agree is both price 
stability and maximum employment, of course, that explains why 
we are currently not only having our interest rate close to 
zero, but we are using extraordinary additional tools, as I was 
talking about before, about the acquisition of mortgage-backed 
securities and so on to try to stimulate the economy and get 
people back to work. We think that is very important, 
consistent with maintaining price stability as well.
    Obviously, there are a lot of ways to address unemployment 
from a fiscal perspective. Unemployment insurance is one of 
course. I guess one point I would make at least to bring to 
your consideration, is one of the real concerns that I have is, 
not only is unemployment high, but the number of people who 
have been out of work for 6 months or a year is really 
exceptionally high. And folks who are out of work for that long 
tend to lose skills. They tend to lose attachment to the labor 
market. And even when the economy comes back, they may either 
not be able to find work or they may not ever become a regular 
part of the labor market again.
    So I think there is certainly some scope for trying to 
ensure that people who do want to come back to work and who 
have been out of work for a time, that they keep their skills 
fresh, that they have additional education or training. I can 
see that as being particularly important in a situation like 
now when unemployment is both so high and unemployment spells 
are so lengthy.
    Mr. Scott. Would you agree that we should approach this 
serious unemployment and joblessness problem in this country 
with the same energy, policy directive, and legislative 
directive to address this issue as we have done in previous 
downturns in the economy? I mean, unemployment now is 10 
percent. It is devastating in many other parts of the country, 
particularly in the Midwest. It just seems to me that we ought 
to get packages of tax incentives of tax cuts to businesses 
that we know will stimulate the economy, direct training acts 
and job training acts in which we can get money directly into 
the hands of the unemployed to begin to get retrained for these 
positions.
    I think that the laissez-faire attitude that we have while 
we throw this up to Wall Street and the big banks to unfreeze 
the credit and we kind of look at that, I would just hope that, 
and I have such great respect for you and your knowledge, and 
moving in this area that you could use your position and your 
charge in this unemployment area to put greater emphasize to 
this Administration to do more direct action to address the 
unemployment problem.
    Mr. Watt. The gentleman's time has expired.
    I know he was entitled to 30 seconds more, but we just got 
an e-mail saying that there are going to be 3 more votes 
shortly. So I want to try to get to the other members who 
haven't been recognized.
    Mr. Manzullo is recognized.
    Mr. Manzullo. Thank you, Mr. Chairman.
    Chairman Bernanke, thank you again for coming and spending 
a good portion of time with us and for your availability 
outside of the hearings. I have a couple of questions.
    First of all, with regard to the oversight council, I think 
it is on page 2 of your testimony, made up of the agencies 
involved in financial supervision and regulation, and the 
mandate is to monitor and identify emerging risks to financial 
stability across an entire financial system, identify regulator 
gaps and coordinate agencies' responses to potential systemic 
risks. I guess another word for systemic risk is moral hazard. 
To me, a moral hazard is a teetotaler with a beer. But I--even 
without this group, this is something that is has gone on any 
way; isn't that correct?
    Mr. Bernanke. Well, for example, we have had the 
President's Working Group, which is also a group of regulators. 
But I would have to say that the focus on the system as a whole 
is lacking.
    Mr. Manzullo. Right.
    Mr. Bernanke. For example, this council, unlike the 
President's Working Group, would have its own dedicated staff 
and would have more regular meetings and be very focused, 
perhaps writing reports and so on, on the gaps in the system 
leading to systemic risk.
    Mr. Manzullo. At this point, I know from prior testimony 
and visiting with other groups, you are already doing this as 
part of your job.
    Mr. Bernanke. We are moving very much in that direction.
    Mr. Manzullo. Right.
    Mr. Bernanke. But the Federal Reserve's authorities don't 
extend to all the different markets and instruments in the 
system.
    Mr. Manzullo. Correct. How do you balance, if that is the 
work that the oversight council would do, with a new consumer 
financial protection agency, especially if it comes to a 
dispute over instruments, products? You may think that a 
particular product may pose a systemic risk, such as the whole 
rotten subprime market, when people were allowed to get 3/27 
and 2/28 mortgages and teaser rates and things like that and 
were allowed to get loans without written proof of their 
income. What happens if you have a conflict with the oversight 
council and a new consumer financial protection agency?
    Mr. Bernanke. Well, first, there are several governance 
mechanisms which is, of course, on the one hand, the agency 
part of the council would have to talk to its colleagues; on 
the other hand, it would be on the board of the agency, as I 
understand it, some of the regulators would be part of the 
board. But I think what the most powerful weapon would be if 
the council believed that actions taken by any of the members 
of the council were not consistent with a safe financial 
system, I would think one of their best methods would be to 
provide a report or recommendation that would be public and 
that would be a very powerful tool because the agency that 
ignored that would certainly be going against their peers and 
taking the risk on themselves that they are making a mistake in 
being too lax, for example. So I do think that there would be a 
certain amount of peer pressure that would affect the ability 
of the council to get cooperation with the members.
    Mr. Manzullo. By the time you came in office 3\1/2\ years 
ago, the die had been cast. It was pretty late for you to do 
anything to turn around the train, and you tried to.
    Looking back with seasoned eyes over the last 10, 12, 14 
years, what do you see now that you think should have been seen 
back then?
    Mr. Bernanke. Well, you know, it is not a single smoking 
gun, but there are lots of different problems where, again, 
there were gaps that arose because we didn't take enough of a 
systemic viewpoint. I talked about consumer protection and the 
problem of subprime, those things that you talked about. I 
think that is important. But if you look across the whole range 
of financial institutions, not just banks but investment banks 
and others, it seems clear that the strength and consistency of 
the oversight was not adequate; that there were many individual 
financial instruments, like the CDS and others, where again the 
oversight was fragmented and not sufficiently consistent and 
powerful. So it would take me some time frankly--I am sure you 
appreciate how complex the whole crisis has been. It would take 
me some time to go through all the different elements. But I 
think what we learned is that the system which seemed to be 
working fine as long as the economy and financial stresses were 
not too great; when things got much worse, then the system 
wasn't able to stand up to it. We learned a great deal from 
this crisis. I very much hope that this Congress and the 
agencies together will make use of those lessons.
    Mr. Manzullo. I thank the gentleman.
    Mr. Watt. The gentleman's time has expired.
    The gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    Thank you, Chairman Bernanke, for appearing again. I trust 
that all is well with you and your family.
    Mr. Chairman, I sense a hint of exasperation with you in 
terms of your having to continually express that you are 
opposed to ``too-big-to-fail.'' Trying to get that message out 
has been quite a challenge for me, too, in that I am opposed to 
``too-big-to-fail.'' And the temptation is there to use what I 
call a pneumonic device, a memory-aiding device. However, 
pneumonic devices will only help a person have a better sense 
of memory. It won't force the person to use memory. And I 
suspect that a lot of the people who continually misunderstand 
my position are doing so with a certain amount of design as 
opposed to a lack of memory. But for the record, I, too, am 
opposed to ``too-big-to-fail'' for the nth time.
    Now, having said this, some of my colleagues on the other 
side are also talking about jobs and the recovery as though 
jobs are a leading indicator. I think it is fairly well-
documented that jobs are a lagging indicator. But, for the 
record, Mr. Chairman, have we ever had a recovery from a 
recession wherein jobs were a leading indicator?
    Mr. Bernanke. I am not aware of any. As you point out, it 
is normally a lagging indicator, because it takes time for 
firms to bring people back to work after recovery begins.
    Mr. Green. Exactly.
    The market, stock prices are, generally speaking, 
procyclical, but unemployment is, generally speaking, 
countercyclical. So I want to talk for just a quick moment 
about countercyclicality. When a policy is countercyclical, it 
will cool down an economy that is in an upswing, and it will 
stimulate an economy this is in a downturn.
    If this is the case, when we require banks to increase that 
capital ratio in a recession, while it may be a good thing to 
do, it can also prove to be procyclical in that it can offset 
some of the lending that might take place. Would you just 
kindly give a quick comment on this, the capital requirement, 
because, if you recall, we started out with a TARP fund that 
became a capital purchase program that dealt with capital 
requirements, and that may have had some impact on the lending 
side of banking, if you would, please?
    Mr. Bernanke. No, you are absolutely right. Banks do have 
various ways to raise capital. They can go to the public 
markets, for example. But one of the tensions we face now in 
this and other spheres is that there certainly is a desire, 
both in the United States and abroad, to raise bank capital 
levels so that they will be safer in the future, but 
recognizing though that, in the short run, raising capital 
levels may cause banks to reduce their assets and to reduce 
lending. We need to find a way to phase that in, sufficiently 
gradually that it doesn't impede the recovery. So we face that 
problem in a lot of cases. We want people to save more, but not 
immediately because the economy is in a recession. So it is the 
timing that is very important.
    Mr. Green. In fact, this is one of the reasons why Basel II 
has been criticized, because it advocates this, but moving on.
    ``Dark liquidity,'' an interesting term, it has to deal 
with a term that I call ``quiet money'' that is placed in the 
market. Did dark liquidity have an impact on the circumstance 
that we are dealing with currently?
    Mr. Bernanke. Do you mean ``dark pools?'' Is that what you 
are referring to?
    Mr. Green. Yes, sir.
    Mr. Bernanke. Well, the SEC is looking at that.
    I think there are interesting questions about whether the 
market is served by having more transparency about those pools. 
I don't really have a firm position on that.
    I am not aware that those dark pools were an important 
factor in the crisis as a whole. I mean, I may be mistaken, but 
transparency in general is very important, but again, on this 
particular area, I know the SEC is looking at it and trying to 
make some determination.
    Mr. Green. Final comment, with reference to small banks and 
community banks, I want to thank you for your efforts to avoid 
having them become--bear the burden, if you will, of a lot of 
what has happened when they in fact were, in the main, not the 
cause of this downturn that we are suffering from. I have had 
an opportunity to meet with many of the community bankers, and 
one of the things they continually say to me is, look, don't 
have us punished for the sins of others. We have been here. We 
are doing a good job, and we are maintaining a lot of loans in 
our portfolios, so please don't let it happen to us. And I 
thank you for your efforts in this area.
    I yield back, Mr. Chairman.
    Mr. Watt. The gentleman from New Jersey, Mr. Lance.
    Mr. Lance. Thank you, Mr. Chairman.
    Good afternoon, Mr. Bernanke.
    We are all obviously concerned about the levels of 
unemployment. Traditionally, this is a lagging indicator. My 
concern is that, given the state of the workforce in this 
country, post-industrial in many ways, do you believe long 
term, over the course of the next year perhaps, that the 
unemployment rate will be lowered significantly?
    Mr. Bernanke. I would be fooling myself and you if I said I 
knew with any certainty. But most forecasters, including the 
Fed, are currently looking at growth in 2010, but not growth so 
rapid as to substantially lower the unemployment rates.
    Mr. Lance. So, at the moment, we are at 9.7 percent. If we 
may technically get out of the recession the fourth quarter or 
perhaps the first quarter of next year, could we expect a 
significant lowering any time next year, Mr. Chairman, of the 
unemployment rate?
    Mr. Bernanke. Well, if we--just to explain the arithmetic, 
we have to grow faster than the underlying potential in order 
to make a dent in the unemployment rate. So it depends entirely 
on how quickly the economy grows. There are some who think it 
could grow at a fast clip, but if it only grows at 3 percent, 
say, which is not much faster than the underlying potential 
growth rate, then, unfortunately, the unemployment rate would 
still probably be above 9 percent by the end of the year.
    Mr. Lance. Above 9 percent by the end of 2010?
    Mr. Bernanke. That is right, by the end of 2010, if growth 
is about 3 percent.
    Mr. Lance. This is as I understand it different from more 
typical recoveries in the past, perhaps exacerbated by the 
workforce as it now exists, fewer manufacturing jobs, 
manufacturing jobs going to other parts of the world.
    I can't imagine the American people will consider the 
country to be in recovery if the unemployment rate is at 
roughly 9 percent or in the high 8 percent area a year and 3 
months from now. Based upon your great expertise and given your 
extremely expansive knowledge as to what has happened in the 
past, particularly in the Great Depression, is there anything 
else we should be doing to make sure that we bring the 
unemployment rate down more quickly than may now be anticipated 
is the case.
    Mr. Bernanke. I don't have any magic bullets to offer. If I 
did, I would have offered them by now.
    But I think, as I was saying, and again, these are areas 
that Congress needs to decide and not the Federal Reserve, but 
one way to mitigate the long-term damage is to try to make sure 
that those who are out of work for an extended period don't 
lose attachment to the labor force and that they do get 
opportunities to improve their skills and remain employable.
    Mr. Lance. Thank you.
    Let me say in conclusion that I think we are all concerned 
about the unemployment rate, Congress as well as, of course, 
the Federal Reserve Board. And this is the indicia by which the 
American people determine whether or not we are out of a 
recession, even though that might not be the technical 
definition. And certainly we want to work with you on this 
issue.
    I yield back the balance of my time.
    Mr. Watt. I thank the gentleman for yielding some of his 
balance and recognize Mr. Cleaver as the final questioner.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Chairman, I want to juxtapose two speeches, one by 
Governor Duke, and there have been some references to his 
speech; the other is World Bank President Bob Zoellick.
    Let me first deal with Governor Duke. When he testified 
before this committee, he surprised me a little when he 
suggested that consumer protection should become one of the 
Fed's core missions. Are there other central banks in the 
industrialized world that hold the responsibility of consumer 
protection as a core mission? Do you know of any?
    Mr. Bernanke. Well, the consumer protection function varies 
a lot across countries, where it is located and how it is 
managed, but I can't give you a good example.
    Mr. Cleaver. I am sorry.
    Mr. Bernanke. I don't have a good example to give you, no.
    Mr. Cleaver. So does that mean that you agree with me that 
consumer protection should be performed by a single agency that 
has only consumer protection as its core responsibility?
    Mr. Bernanke. I think the main argument for a single agency 
is the focus core mission aspect that you are talking about. 
But again, I reiterate that, given the historical accident or 
whatever that gave this authority to the Federal Reserve, that 
in the recent years, we have been very aggressive at pursuing 
it.
    Mr. Cleaver. Secretary Clinton wanted me to correct myself 
calling Governor Duke a ``he.''
    Let's go back to the World Bank president. In a speech 
earlier this week, he said that the Fed should not be given the 
responsibility for regulating systemic risk and he said that 
the Treasury Department should have that responsibility. And 
the reason behind his statement was that Treasury is 
responsible to the President and to Congress. And this doesn't 
mean that I have joined in with the ``eliminate the Fed'' 
movement, but that the Fed does not answer to Congress. And so 
that the American public should have some participation in this 
and that the Treasury is the likely spot for this 
responsibility. Do you agree with Mr. Zoellick?
    Mr. Bernanke. Well, without commenting on his speech in 
particular, I think I do agree that there should be a systemic 
risk council and that the head of that should be the Treasury, 
so in that respect, I agree with that. I think the Federal 
Reserve is the appropriate body to do the consolidated 
supervision of large financial companies that may be 
systemically critical. But that would be underneath the AG of 
the systemic risk council. And I would dispute the claim that 
the Fed is less responsive to Congress than the Treasury is, 
for example. I am here today, and we testify frequently, and of 
course, we are subject to congressional oversight.
    Mr. Cleaver. Well, yes, but not to the degree that the 
Treasury--I mean, you would agree that Treasury, that the 
Secretary of the Treasury can be fired rather easily. I don't 
think you are going to see a lot of mass firing in the Fed 
initiated by Congress. And you are probably not mad about it, 
but you would agree with me, right?
    Mr. Bernanke. Well, it would be the President who would 
fire the Treasury Secretary, not the Congress.
    Mr. Cleaver. Yes, I understand. That is the whole point, he 
can be fired easily, I mean, one person.
    Mr. Bernanke. But again, I think--again, I don't know 
exactly what Mr. Zoellick had in mind. But I do agree the 
Treasury, I said this just a few minutes ago, I thought the 
Treasury ought to be a Chair of the council and the council 
ought to have the overarching responsibility. But underneath 
the council, you still have agencies to perform specific tasks. 
You need the SEC to monitor credit-rating agencies and money 
market mutual funds. You need the CFTC to monitor exchanges. So 
the Federal Reserve, this is not a new power for the Federal 
Reserve, the Federal Reserve since the last decade has been the 
consolidated supervisor of large--all bank holding companies, 
in fact. And I am just saying that we should retain that, what 
we already have, and that we should cooperate with the other 
agencies to create a more systemic orientation in our 
oversight.
    Mr. Cleaver. Thank you. You do come and sit through this 
torturous session with us, so I want to express appreciation.
    Mr. Watt. The gentleman's time has expired.
    I want to express my appreciation for the gentleman sitting 
and sitting through the torturous process also. And thank you 
very much for being here and being as eloquent as you always 
are. The hearing is adjourned.
    [Whereupon, at 12:40 p.m., the hearing was adjourned.]




                            A P P E N D I X



                            October 1, 2009

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